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Module 1 - Syllabus
Fin. Fin.
Institutions Instrument
Fin.
Market
FUNCTIONS OF FINANCIAL SYSTEM
Financial
Assets
Financial Financial
Instruments Intermediaries
Financial
Concept
• Other Types
Foreign exchange market
Derivatives market
a) UNORGANISED MARKETS
In these markets there are a number of money lenders, indigenous bankers, traders
etc., who lend money to the public.
Indigenous bankers also collect deposits from the public. There are also private
finance companies, chit funds etc., whose activities are not controlled by the RBI.
Recently the RBI has taken steps to bring private finance companies and chit funds
under its strict control by issuing non-banking financial companies (Reserve Bank)
Directions, 1998.
The RBI has already taken some steps to bring the unorganized sector under the
organized fold. They have not been successful. The regulations concerning their
financial dealings are still inadequate and their financial instruments have not
been standardized.
b) ORGANISED MARKETS
In the organized markets, there are standardized rules and regulations governing
their financial dealings. There is also a high degree of institutionalization and
instrumentalisation. These markets are subject to strict supervision and control by
the RBI or other regulatory bodies.
These organized markets can be further classified into two. They are :
ORGANISED MARKETS
• Mobilisation of savings
• Capital formation
• Economic development
• Integrates different parts of the financial system
• Promotion of stock market
• Foreign capital
• Economic welfare
• Innovation
Importance of Capital Market
(i) The capital market serves as an important source for the productive use of the economy’s savings. It
mobilizes the savings of the people for further investment and thus avoids their wastage in
unproductive uses.
(ii) It provides incentives to saving and facilitates capital formation by offering suitable rates of interest
as the price of capital.
(iii) It provides an avenue for investors, particularly the household sector to invest in financial assets
which are more productive than physical assets.
(iv) It facilitates increase in production and productivity in the economy and thus enhance the
economic welfare of the society. Thus, it facilitates “the movement of stream of command over
capital to the point of highest yield” towards those who can apply them productively and profitably to
enhance the national income in the aggregate.
(v) The operations of different institutions in the capital market induce economic growth. They give
quantitative and qualitative directions to the flow of funds and bring about rational allocation of
scarce resources.
(vi) A healthy capital market consisting of expert intermediaries promotes stability in values of
securities representing capital funds.
(vii) Moreover, it serves as an important source for technological up gradation in the industrial sector by
utilizing the funds invested by the public.
Structure of Capital Market
Capital Market
Primary Market
Secondary Market
1. Industrial Securities Market
As the very name implies, it is a market for shares and debentures of existing
and new Corporate firms. Buying and selling of such instruments take
place in the market.
Eg. Equity shares or ordinary shares,
Preference shares, and
Debentures or bonds.
It is a market where industrial concerns raise their capital or debt by issuing
appropriate instruments.
Subdivided into two. They are :
There are three ways by which a company may raise capital in a primary market.
They are :
Public issue
Rights issue
Private placement
1.2 Secondary Market/ Stock Market
• Secondary market is a market for old issues. It deals with the buying and
selling existing securities i.e. securities already issued. In other words,
securities already issued in the primary market are traded in the secondary
market.
Other Objectives
• The following are the important objectives of a money market:
• To provide a parking place to employ short-term surplus funds.
• To provide room for overcoming short-term deficits.
• To enable the Central Bank to influence and regulate liquidity in the economy through
its intervention in this market.
• To provide a reasonable access to users of Short-term funds to meet their requirements quickly,
adequately and at reasonable costs.
Types of money market
Money
Market
3 Types:-
1. 91 Days T-Bills
2. 182 Days T-Bills
3. 364 Days T-Bills
Short-Term Loan Market
• It is a market where short-term loans are given to corporate customers
for
meeting their working capital requirements.
• Commercial banks play a significant role in this market.
• Commercial banks provide short term loans in the form of cash credit and
overdraft.
• Overdraft facility is mainly given to business people whereas cash credit
is given to industrialists.
• Overdraft is purely a temporary accommodation and it is given in the
current account itself. But cash credit is for a period of one year and it is
sanctioned in a separate account.
The Commercial Paper Market:
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Capital Market Instrument
• Shares
Equity and Preference Shares
• Debenture
• Bond
EQUITY
SHARES:
Equity shares were earlier known as ordinary shares
• Equity shareholders have to share reward and risk associated with
ownership of company.
• Equity shareholders are the owners of the company who have control over
working of the company.
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FEATURES :
• Permanent capital:
• Voting rights
• Actual owners of the company
• They bear the highest risk.
• Equity shares are transferable
• Right to control the affairs of the company
• The liability of equity shareholders is limited to the extent of
their investment
• They do not have any obligation regarding payment of dividend.
• In case of high profit, they get dividend at higher rate
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PREFERENCE SHARES
• Preference shares are long-term source of finance.
• Get fixed rate of dividend irrespective of the volume of profit
• Preference dividend is not tax deductible expenditure.
• Do not have any voting rights.
• Have the preferential right for repayment of capital in case of winding up of
the company.
• Preference shareholders also enjoy preferential right to receive dividend.
• The dividend payable on preference shares is generally higher
than debenture interest
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Classification of Preference Shares:
1. Convertible and Non Convertible Preference Shares:
2. Redeemable and Irredeemable Preference Shares:
• Redeemable preference shares can be redeemed or repaid after the expiry of a
fixed period or after giving the prescribed notice as desired by the company.
• Irredeemable preference shares can not be redeemed during the life time of
the company
3. Participating and Non Participating Preference Shares:
• Participating preference shares have the right to participate in profits of the company
apart from the fixed dividend.
4. Cumulative and Non Cumulative Preference Shares:
Dividend of cumulative preference shares will have to be paid as long as the company
earns profit in any year. Whereas, for non cumulative preference shares, a company can
skip the dividend in the year, the company has incurred losses.
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DEBENTURES
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BOND
• A debt instrument issued for a period of more than one year with the
purpose of raising capital by borrowing.
• Generally, a bond is a promise to repay the principal along with interest
(coupons) on a specified date (maturity). Some bonds do not pay interest, but
all bonds require a repayment of principal.
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MONEY MARKET INSTRUMENTS
• Treasury Bills
• Certificates of Deposits
• Commercial Paper
• Repurchase Agreement
• Banker’s Acceptance
Banker’s
Acceptance:
• A banker’s acceptance (BA) is a short-term credit
investment created by a non-financial firm.
• BA’s are guaranteed by a bank to make payment.
• Acceptances are traded at discounts from face value in
the secondary market.
• BA acts as a negotiable time draft for financing imports, exports
or other transactions in goods.
• This is especially useful when the credit worthiness of a foreign
trade partner is unknown.
Reca
Financial System p
Definition, Functions, Role, Objectives
Financial Concept
Financial Asset,
Financial Intermediaries,
Financial Market,
Financial Instruments,
Financial Rate of Return
Indian Financial System
• The Indian financial system can be broadly formal
(organised) financial system classified into and (unorganised)
the informal financial
system.
• The financial system comprises financial institutions, financial
formal
markets, financial instruments and financial services.
The formal financial system comprises of Ministry of Finance, RBI, SEBI and
other regulatory bodies.
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, and non-banking financial intermediaries such
as finance, investment and chit fund companies.
Structure of Indian Financial System
Growth and Development of Indian Financial System