Prof.

Parveen Sultana

FINANCE

FINANCE MEANS
y The Science Of The Management Of Money

And Other Assets. y The Management Of Money, Banking Investment And Credit. y Finances Monetary Resources, Funds Especially Those Of A Govt Or Corporate Body y The Supplying Of Funds Or Capital.

SYSTEM

SYSTEM MEANS
y A Body That Allows The Free Flow Of Transaction In Systematic Manner. y THE WORDS SYSTEM IN THE TERMS OF FINANCIAL SYSTEM , IMPLIES A SET OF COMPLEX AND CLOSELY CONNETED OR INTERLINED INSTITUTIONS, AGENTS PRACTIES, MARKETS TRANSACTIONS CLAIMS AND LIABLITIES IN THE ECONOMY .THE FINANCIAL SYSTEM IS CONCERNED ABOUT MONEY, CREDIT AND FINANCIAL THE 3 TERMS ARE INTIMATELY RELATED YET ARE SOMEWHAT DIFFERENT FROM EACH OTHER

FINANCIAL SYSTEMS

FINANCIAL SYSTEM
y A System that allows the transfer of money between service or borrowers, it channels household saving to the corporate sector. y Allows assets-liabilities transformation . It helps in risk transformation by diversification

Evolution of financial system
y Barter y Money lender y Chit funds y Indigenous Banking y Cooperative movements y Societies, Banks, Joint stock y Investment Banks y Development Financial

institutions

y Investment / Insurance

companies

y Stock exchange y Market operations y Specialized Financial

banks

y Consolidation y Commercial Banks y Nationalization

institutions

y Merchant Banking y Universal banking

Financial system
y Inter-relation of financial systems

Financial systems
Saving

Finance

Inter-relationship between varied segments of the economy
p
Goal Economic growth system Financial system

financial Financial Financial

System

Financial system
y Flow of funds

Flows of financial services Seeking of funds Namely, business, firms or govt etc Incomes & Financial claims Suppliers of funds Namely, household saving, tax etc

Inter-relation financial system & economy
Financial system
Households foreign sector

Saver, lenders

Cooperator Sector Govt sector Investors borrowers

Unorganized sector

Economy

y Christy has opined that the objective of financial

system is to supply funds to various sectors and activities of the economy in ways that promoters the fullest possible utilization of resources without the destabilizing consequence of price level changes or unnecessary interference with individual desires .
y Robinson , the primary function of the system is to

provide a link between savings & investment for the creation of new wealth & to permit portfolio, adjustment in the composition of the existing wealth.

Indian financial systems
y

INDIAN FINANCIAL MARKETS

CAPITAL MARKETS

IFS

MONEY MARKETS

BANKING MARKETS

Indian financial system
y Supply of borrowing & lending funds y Demand & supply of funds of all individuals

institution , companies and govt. Consist of two parts: 1. Indian money market. 2. Indian capital market.

Functions of Indian financial systems
y Provision of liquidity y Mobilizations of saving

Landmark in Growth IFS
y Nationalization of financial institution of insurance sector. y Establishment of financial institutions.

Development
y y y y y y y

.

RBI was nationalized in 1948. 1948 industrial finance corporation was established. July 1st state bank of India established. 1969, 14 commercial bank were nationalized. LIC was established. 1972 govt of nationalized general insurance business. National industrial development corporation refinance corporation for industry ltd IDBI, SIDC, NABARD . y 1991 LPG transferred closed economy to open economy. y Private sector was allowed in insurance sector. y Introduction of derivative instrument like /index/ stock/ interest/ futures/ swaps/ etc

Concepts/components used in Indian financial systems
y Financial assets. y Financial intermediaries y Financial markets y Financial rate of return y Financial instruments

Financial assets
y Financial assets are those which are used for

production or consumption or for further creation of assets. Financial assets are different from physical assets as physical assets are not useful for further production of goods or for earning income. y Classification of financial assets Marketable Non- Marketable y Shares Bank deposits y Govt securities Provident funds y Bonds LIC Schemes y Mutual funds PO certificates

Financial intermediaries
y These are the organizations which intermediate and

facilitates financial transaction for both individuals & companies. Therefore financial intermediaries are financial institutions and investing institutions to facilities financial transactions in financial markets which may be organized or unorganized. y Classification of financial intermediaries:Capital markets intermediaries------- financial corporations/ LIC etc. Money market intermediaries----- commercial banks/ co operative banks etc.

Financial markets
place . Therefore, financial markets may be centre or arrangement which facilitates buying and selling of financial assets. y Classification of financial markets 1) Unorganized market 2) Organized market Organized market:- in this market, standardized rules & regulation exist to govern the financial dealings of participants . These markets are under direct control of RBI and other regulatory bodies. Classification of organized markets:1. Capital markets 2. Money markets
y The places where financial transactions take

Organized Indian Financial System
Organized IFS
Financial Instruments Financial markets Financial Intermediaries

Regulators

Money Market Instrument

Forex market Capital market Money market Credit market Primary market & Secondary market

Capital market Instrument

capital markets
y This is the markets for financial assets which have

along & indefinite maturity. Hence this market deals with long term securities . Capital market is again divided into 3 types, y 1. Industrial securities markets. y 2. Govt securities market. y 3. Long term loan market.

Long term loan market

y Term loan market. y Market for mortgage. y Market for financial guarantees.

Industrial securities markets
y Primary markets y Secondary markets

Primary markets
y It is new issue market which deals with those securities

, which are issued to the public for the first time and borrower issues new securities for long term funds . This markets facilities capital formations. company raises capital in primary markets in 3 ways:y Public issue. y Right issue. y Private placements.

Instrument in primary markets
y Secured premium notes. y Equity shares. y Preference shares. y Debentures. y Zero interest bonds. y Deep discount bonds. y Option bond. y Bonds with warrants.

Players in the primary markets
y Merchant bankers. y Registrars. y Collecting & coordinating bankers. y Underwriters & brokers. y Advertising agencies.

Function of new issue market
y Origination y Underwriting y Distribution

Regulation of new issue markets
1. 2. 3. 4. 5. 6.

Company must have been registered under the company act 1956. Company must have obtained the permission from the controller of capital issue. Company must have appointed bankers and underwriter for the issue. Company must have been listed in the recognized stock exchange in India. Company must have raised the minimum within the prescribed period. Company will have to attach the prospects with every application for share subscription.

y Company shall have to return the share money deposited by the public in the collection centre if share are not allotted within the prescribed period. y Allotment shall have to be made as per the direction of SEBI. y Issue of share will be only at par if the company is completely new one. y Issue of share by new company established by existing company (with 5 yrs track record) can freely issue share at premium. y Private and closely had company shall be permitted to price their issue freely. y Existing listed company will be allowed to raise fresh capital by freely pricing issue provided promoter s contribution is 50% on 1st 100 crores , 30% on next 100 crores and 15% on the balance issue.

Secondary market
y The market where existing securities are traded is

referred to secondary market or stock market. In this market , purchases and sales of securities of govt, semi-govt, public sectors, private sectors, shares & debentures of joint stock companies are effected.
y The securities of govt are traded in the stock markets

as a separate component called Guilt edged market. Another component of stock market deals with stock and share of joint stock companies called market for stock & share or stock market.

Definition of stock exchange
y The market in which existing securities are traded

among investors through an intermediaries. OR y It is a financial market where previously issued securities & financial instrument such as stock , bonds, are bought and sold.

Function of stock market
y The price of stock is totally guided by the force of

demand & supply. The share price of liquid stock with wide participation keep changing through out the trading hours. They can be tracked continuously on trading screens. y Protection of investor interest y Protection the investor from the frauds & protecting the saving of the investor.

Reforms in the primary market .
y Merit based regime to disclosure based regime y Disclosure & investor protection guidelines issued y Pricing of public issues determined by the market. y A system of proportional allotment of shares introduced. y Banks , FI s & PSU s allowed to raise funds from the primary market. y Accounting Standard are close to close to the inner national standard. y Corporate governance guidelines issued. y discretionary allotment system to QIB s withdrawn.

y FII s allowed to invest in primary issues within the sectoral limit ( including g-sec). y Mutual funds are encouraged , both in public & private sector and they have been. y Guidelines for private placements of debt issued. y SEBI promoted self-regulatory organization (SRO S). y Allocation to retail investors increased from 25% to 35%. y Separate allocation of 5% to domestic mutual funds with in the QIB category. y Freedom to fix face value of shares below Rs 10 per share only in cases where the issue price is Rs 50 or more. y Shares allotted on a preferential basis as well as the preallotment holding are subject to a lock in period of 6 month to prevent sales of shares.

MAJOR REFORMS IN THE SECONDARY MARKETS
y Mandatory registration of market intermediaries. y Capital adequacy norms specified for the brokers.

Sub-brokers of stock exchange. y Guidelines issued on listed agreement between stock exchange & corporate. y Shortening of settlement cycle to T+2. y Regular inspection of stock exchanges and other intermediaries including mutual funds put in place. y Regulation of substantial acquisition of share and takeovers. y FII s allowed to invest in Indian capital since 1992.

y Order driven , fully automatic anonymous screens y y y y y y y

based trading introduced. Depositories act enacted Guidelines on corporate governance issued. SEBI has prohibited fraudulent and unfair trade practices, including insider trading. Straight through processing introduced and made mandatory for institutional trades. Margin trading short selling and securities lending and borrowing schemes introduced. Separate trading platform, namely indo-next for SME sector launched. Corporatization and demutualization of stock market notified.

y Settlement & trade guarantee fund/investor

protection fund set up. y Comprehensive surveillance system. y Securities appellate tribunal (SAT) set up, y Introduction of exchange traded derivatives. y Mutual funds &FII to enter the unique client code . (UCC) pertaining to the parent entity at the order entry level, and enter the UCC s for the individual schemes/ sub- accounts on the post closing session. y Comprehensive risk management system (capital adequacy , trading & exposure limit margin requirement , index-based market-wide circuit breaker , online position monitoring, automatic disablement of terminals ) put in place.

Reforms in Banking sector
y Prudential measures. y Competition enhancing measures. y Portfolio & business activities. y Institutional & legal measures. y Supervisory measures. y Technology reloading measures.

Prudential measures
y Introduction & phased implementation of

international best practices and norms on risk weighted capital adequacy requirements accounting income recognition, provisioning and exposure. y Measure of strengthen risk management through recognition of different components of risk assignment of risk weights to various asset classes , norms on connected lending risk concentration , application of marked to market, principles for investment portfolio and limits on development of funds in sensitive activities.

Competition enhancing measures
y Granting of operation autonomy to public sector banks

reduction of public ownership in public sector banks by allowing them to raise capital from equity market up to 49% of paid up capital. y Transparent norms for entry of Indian private sector , foreign and joint vendor banks and insurance companies permission for foreign investment in the financial sector in the form of FDI as well as portfolio investment permission to banks to diversity product.

Portfolio & Business activities
y Measures exchange in pre emption through reserve

requirement , market determined pricing for govt securities disbanding of administered interest rates with a few exception and enhanced transparency and disclosure norms to facilities market discipline. y Measures enhancing role of market forces. y Introduction of pure inter bank call money market , auction based repo s reserve repo s for short term liquidity management facilitation of improved payment & settlement mechanism.

Institutional & legal measures
y Setting up of Lok-adulates, debt recovery tribunals , asset reconstruction companies settlement advisory committees corporate debt restructuring mechanism etc for quicker recovery (restructuring promulgation of securitization & reconstruction of financial assets & enforcement of securities & interest (SARFAESI) act and its subsequent amendment to ensure creditor rights. y Setting up of credit information Bureau for information sharing on defaulters as also other borrowers. y Setting up credit information bureau for information sharing on defaulters as also on there borrowers. y Setting up clearing corporation of India limited (CCIL) to act as central counter party for facilitating payment and settlement system relating to fixed income securities and money market instruments.

Supervisory measures
y Establishment of the board for financial supervision as

the apex supervisory authority for commercial banls , financial institutions & non- banking financing companies. y Introduction of camels supervisory rating system move towards rise based supervision , consolidation supervision of financial conglomerates , strengthening off site surveillance through control return. y Recasting of the role of statutory auditors increased internal control through strengthening of internal audit. y Strengthening corporate governance enhanced due diligence on important shareholders fit & proper test for directors

Technology measures
y Setting up of INFINET as the commication backbone

for the financial sector , introduction of negotiated dealing system (NDS) for screen based trading in govt securities & real time gross settlement (RTGS) system.

SEBI regulations & guidelines in force
Regulations:1. SEBI- Stock brokers & sub-brokers regulations. 2. SEBI- Prohibition of insider trading regulations. 3. SEBI- Merchant bankers Regulation . 4. SEBI Portfolio managers regulation. 5. SEBI- Registrars to an issue & share transfer agents regulations. 6. SEBI- underwriters regulations. 7. SEBI- debentures trustees regulations. 8. SEBI- bankers to an issue regulations. 9. SEBI- Foreign institutional investors regulations. 10. SEBI- custodian of securities regulation. 11. SEBI- central listing authority regulation. 12. SEBI-ombudsman regulation. 13. SEBI-central database of market participants regulation. 14. SEBI-securitized debt instrument regulation 2008.

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

SEBI- depositories & participants regulation. SEBI-venture capital funds regulations. SEBI-mutual funds regulations. SEBI- substantial acquisition of share & takeovers regulation. SEBI- buy back of securities regulations. SEBI- credit rating agencies regulation. SEBI-collective investment schemes regulations. SEBI- foreign venture capital investors regulation. SEBI-procedure for board meeting regulations. SEBI- issue of Sweat equity regulation. SEBI- procedure for holding enquiry by enquiry officer & imposing penalty regulation. SEBI- prohibition for fraudulent & unfair trade practice relating to securities markets regulations. SEBI-self regulatory organization regulation. SEBI-intermediaries regulation 2008 act. SEBI-issue & listing of debt instruments regulations 2008.

SEBI - Schemes & Guidelines
Schemes:y Securities lending y SEBI-scheme-informal guidelines. Guidelines:y SEBI- employee stock option schemes & employee stock purchase scheme guidelines. y Guidelines for opening of trading terminals abroad. y SEBI-disclosure & investor protection guidelines. y SEBI-delisting of securities guidelines. y SEBI- STP centralized Hub &STP service providers guidelines. y Comprehensive guidelines for investor protection funds/ customer protection funds at stock market.

Financial innovation in India
Causes for financial innovation :y National differences in the approach to financial

innovation. y The main causes of financial innovation is future outlook- India Vs developed countries . y Cost benefit aspects of innovation.

Assignment Modern activates of financial innovation after LPG & Present Indian scenario

THE END

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