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economic development of any country depends upon the existence of a well organized financial system. It is the financial system which supplies the necessary financial inputs for the production of goods and services which in turn promote the well being and standard of living of the people of a country.
Financial System The financial system is a broader term which brings under its fold the financial markets and the financial institution which support the system. The major assets traded in the financial system are money and monetary assets.
.Financial System Definition-A set of institutions. instruments and markets which promote savings and channel them to their most efficient use.
Funds Financial Institutions Commercial Banks Insurance Companies Funds Deposits/Shares Loans agreement Mutual Funds Provident Funds Non Banking Financial Companies Suppliers of Funds Individuals Funds Demanders of Funds Businesses Governments Private Placement Individuals Securities Businesses Governments Financial Markets Funds Securities Money Market/ Capital Markets Funds Securities .
Importance of Financial System Mobilize the savings Facilitates the free flow of funds Provides the intermediation .
Financial assets b. Financial intermediaries c.Components / Organization of financial system a. Financial instruments . Financial markets d.
for ex. Shares.Financial Instruments & Assets It refers to those documents which represent financial claim on assets. Debentures . Bills of exchange. Promissory notes.
Financial assets: the basic product of any financial system is the financial assets. A financial asset is one. which is used for production or consumption or for further creation of assets .
FINANCIAL INTERMEDIARIES Financial intermediaries are firms that provide services and products that customers may not be able to get more efficiently by them in financial markets. .
FINANCIAL MARKETS A financial market is a market for creation and exchange of financial assets. . you will participate in financial markets in some way or the other. If you buy or sell financial assets.
Functional of Financial Markets Financial markets facilitate price discovery Financial markets provide liquidity to financial assets Financial markets considerably reduce the cost of transacting .
There are mainly two types of Financial Capital Unorganized Markets.Main Classification of Financial Market Financial markets can be referred to those centers and arrangement which facilitate buying and selling of financial assets and services. Organized Markets .
Organized markets These organized markets can be further classified into two they are: Capital Market Money Market .
.Capital Market Capital market may be defined as a market for borrowing and lending long-term capital funds required by business enterprises. Capital market is the market for financial assets that have long or indefinite maturity. Capital market offers an ideal source of external finance.
. Like any market. It refers to all the facilities and the institutional arrangements for borrowing and lending medium-term and long-term funds. the capital market is also composed of those who demands funds (borrowers) and those who supply funds (lenders).
Capital Market: The capital market is a market for financial assets. which have a long or indefinite maturity. Capital market may be further divided into three namely: Industrial securities market Government securities market Long term market . which have a maturity period of more than one year.
Industrial Securities Market: As the name implies. Preference shares. it is a market for industrial securities namely Equity shares or ordinary shares. . and Debentures or bonds.
It is a market where industrial concerns raise their capital or debt by issuing appropriate instruments. . It can be further sub-divided into two: Primary market or New issue market Secondary market or stock exchange.
Term loans market – IDBI. LIC.Long-Term Loans Market Development banks and commercial banks plan a significant role in this market by supplying long-term loans to corporate customers. . Long-term loans market may further be classified into. Land Development Banks Financial guarantees market. IFCI Mortgage market – HUDCO.
A company. while raising its capital through issues in the capital market must comply with the guide the guidelines & clarifications issued by SEBI and the provisions of the companies Act.Primary Market Primary market also known as New issues Market (NIM) is a market for raising fresh capital in the form of shares & debentures. 1956. .
Primary Market There are three ways by which a company may raise capital in a primary market. They are: Public Issue Rights issue – (Issue of additional shares to existing shareholders) Private placement – selling of securities privately to a small group of investors. .
Types of Issue:
A company can raise its capital through issue of shares & debentures by means of
Public Issue Rights Issue Private placement Bought-out deal Euro Issue
PUBLIC ISSUE: Companies issue securities to the public in the primary market . The public issue can be through a „fixed price‟ route or through „bookbuilding‟ route. RIGHTS ISSUE: When a company issues additional equity capital, the existing shareholders have a preemptive right on such capital issue on a prorate basis. The rights offer is to be kept open for a period of 60 days.
PRIVATE PLACEMENT: It involves direct selling of securities to a limited number of institutional or high net worth investors. BOUGHT-OUT DEALS (BOD): It is a process where by an investor or a group of investor‟s buy-out a significant portion of the equity of an unlisted company with a view to sell the equity to public within an agreed time frame. It is very useful for small projects, which may find it very costly to go for a public issue. EURO-ISSUES: Indian companies have been permitted to float their stocks in foreign capital markets. The instruments, which a company can issue are Global Depositary Receipts (GDRs), American Depository Receipts (ADRs), Euro-Convertible Bonds (ECBs), Foreign Currency Convertible Bonds (FCCBs).
1956. The stock exchanges in India are regulated under the securities controls (Regulation) Act. securities which have already passed through the new issue market are traded in this market. In other words.Secondary Market: It is a market for secondary sale of securities. This market consists of all stock exchange recognized by government of India. .
All these exchanges operate with due recognition from the govt. OTCEI (Over the Counter Exchange of India) & ISE (Inter – Connected Stock Exchange of India). 1956. For the efficient growth of the market. . Currently 23 stock exchanges are in India of which 4 are national & 19 are regional exchanges. It is also called the stock exchange or the Share Market. A market. and SEBI (Securities & exchanges Board of India) by an act of parliament in 1992. NSE. under the securities & contracts (Regulations) Act. is known as the secondary market. a Sound secondary market is an essential requirement. The 4 national level exchanges are BSE. which deals in securities that have been already issued by companies.
1956 a stock exchange has been defined as follows “It is an association. regulating and controlling business in buying. . established for the purpose of assisting. selling and dealing in securities”.Stock Exchanges-Definition As per the SCRA. organized or body of individual whether incorporated or not.
Functions/Services of SEs. . Continuous market for securities Supply of Long-term Funds. Safety of Funds. Liquidity and Marketability of Securities. Reflection of Business Cycle. Promotion of Investment. Flow of Capital to Profitable Ventures. Motivation for Improved Performance. House of business information.
they may be summarized as follows. and to the economic as a whole .Functions/services of stock exchanges The stock market occupies an important position in the financial system .It performs several economic functions and renders valuable services to the investors . . companies. (1)Liquidity and marketability of securities:Stock exchanges provide liquidity to securities since securities can be converted into cash at any time according to the discretion of the investor by selling them of the listed price.
(2)Safety of Funds: Stock exchanges give safety to the funds because they have to function under strict rule‟s & regulations of government & SEBI (securities exchange board of India). . This would enhance the investor‟s confidence and promote larger investment. Speculation is prevented through carefully designed set of rules.
(4) Flow of Capital to profitable ventures: The profitability and popularity of companies are reflected in their stock prices. The market price of the share shows the relative profitability and performance of Companies . (3) Supply of long term Funds: The securities traded in the stock market are negotiable and transferable in character and such they can be transformed with minimum of formalities from one person to another . .so when a security is transacted one investor is substituted by another.Funds are generally attracted towards securities of profitability companies and this facilitates the flow of capital into profitable channels. but the company is assured of long term availability of funds .
Investors are motivated to invest in the stock market. (6) Promotion of investment: Stock exchanges mobilize the savings of the public and promote investment through capital formation . . This public exposure makes a company conscious of its status in the market and it acts as a motivation to improve its performance further. (5) Motivation for improved performance: The performance of a company is reflected on the prices quoted in the stock market .These prices are more visible in the eyes of the public.
they are. So. readily acceptable to the public . . costs of underwriting such issues would be less. (8) Marketing of new issues: When the new issues are listed. a stock market helps in the marketing of new issues also. public response to such new issues are also relatively high.
It provides an avenue for investors to invest in financial assets. . It provides incentives to savings and facilitates capital formation by offering suitable rates of interest.Importance Of Capital Market It serves as an important source for the productive use of the economy‟s saving.
enhances the economic welfare of the society. A healthy capital market consisting of expert intermediaries promotes stability in values of securities. It serves as an important source for technological up gradation in the industrial sector by utilizing the funds invested by the public . It facilitates increase in production and productivity in the economy and thus.
Money Market Money market is a market for dealing with financial assets and securities which have a maturity period of up to one year. In other words. . it is a market for purely short term funds.
. It meets the short-term requirements of borrowers and provides liquidity or cash to lenders.Money Market Money market is a market for shortterm loans or financial assets. It is a market for lending and borrowing of short term funds.
. It deals with financial assets having a maturity period up to one year only. It deals with only those assets which can be converted into cash readily.Features of Money Market It is a market purely for short term funds or financial assets called near money.
Commercial banks generally play a dominant role in this market. The components of a money market are the central bank. NBFC. discount houses. commercial bank. . Generally transactions takes place through phone and relevant documents and written communication can be exchanged subsequently. Transactions have to be conducted without the help of brokers.
Important of money market Development of trade and industries Development of Capital Market Smooth functioning of Commercial banks Effective central bank control Formation of suitable monetary policy .
Commercial bills market or Discount market. Treasury bill market. Short-Term Loan Market .Types of Money Market Call money market.
Call Money Market The call money market refers to the market for extremely short period loans. . These loans are repayable on demand at the option of either the lender or the borrower. say one day to fourteen days. .
The demand for call money is the highest in the month of March of every year. The day to day surplus funds of commercial banks are traded in the market. . Because it is the time to meet year end and tax payments and withdrawals of funds by financial institutions to meet their statutory obligations. The loans made in call market are of short-term nature .
e. The buyer accepts it immediately agreeing to pay the amount mentioned therein after a certain specified date. As soon as goods are sold on credit.. It is drawn always for a short period ranging between 3 months and 6 months. i.Commercial Bill Market or Discount Market A commercial bill is one which arises out of a genuine trade transaction. credit transaction. the seller draws a bill on the buyer for amount due. .
Treasury Bill Market A TBs is nothing but a promissory note issued by the govt. The period does not exceed a period of one year. It is purely a finance bill since it doesn‟t arise out of any trade transaction TBs are issued only by the RBI on behalf of govt . with discount for a specified period stated therein.
Money Market Instruments Commercial Papers Certificate of Deposit (CD) Inter-Bank Participation Certificate Repo Instrument .
Promissory Notes As per negotiable instrument act 1881 . .A promissory note is a written document in which the maker (buyer) promises to pay a specific sum of money either on demand or at a specified future date.
Bills of Exchange According to sec 5 Negotiable Instrument Act 1881. directing a person to pay a certain sum of money only to or to the order of a certain person or to the bearer of the instruments” .” a bill of exchange is an instrument in writing containing an unconditional order. signed by the maker.
It used for financing working capital requirements of corporate enterprises. negotiable by endorsement and delivery. . A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI.Commercial Papers Commercial paper is a new instrument introduced in India on 27th March. 1989.
Commercial paper is issued at a discount to face value basis but it can also be issued in interest bearing form.Features of Commercial Paper Commercial paper is a short-term money market instrument comprising promissory notes with a fixed maturity. It is a certificate evidencing an unsecured corporate debt of short-term maturity. .
to guarantee that promise. Commercial paper can be issued directly by a company to investors or through banks/merchant bankers. only his liquidity and established earning power.The issue promises to pay the buyer some fixed amount on some future period but pledges no assets. .
Advantages of Commercial Paper Simplicity Flexibility Diversification High Returns Movement of Funds: .
Certificate of Deposit (CD) The banks in the USA in 1960s introduced CDs which are freely negotiable and marketable any time before maturity. Banks sold CDs direct to investors or through dealers who subsequently traded this instrument in secondary market. The CDs were issued by big banks in the USA in units of $ 1 million at face value bearing fixed interest with a maturity generally ranging from 1 to 6 months. .
. On the recommendations of the Vaghul Committee. the RBI formulated a scheme in June 1989 permitting scheduled commercial banks (excluding RRBs) to issue CDs.
Meaning Certificate of Deposits are short term deposit instruments issued by banks and financial institutions to raise large sums of money. .
Freely transferable by endorsement and delivery. Repayable on a fixed date without grace days. Issued at discount to face value.Features of CD Document of title to time deposit. . Subject to stamp duty like the usance promissory notes.
CDs also offer maximum liquidity as they are transferable easily. The holder can resell his certificate to another.Advantages of CD Certificate of Deposits are the most convenient instruments to depositors as they enable their short-term surpluses to earn higher return. .
From the point of view of issuing bank. it is a vehicle to raise resources in times of need and improve their lending capacity. This is an ideal instrument for banks with short-term surplus funds to invest at attractive rates. .
The treasury bills transactions are carried out by RBI on behalf of central government .TREASURY BILLS MARKET : A treasury bill is a promissory note issued by Government . The interest rate is administered and fixed by the RBI. .
Ordinary treasury bills Ad-hoc treasury bills . Treasury bills in India is available in two kinds.
ordinary TBs are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be bought and sold at any time and they have secondary market also. .
Financial Institutions like LIC. GIC. However. the holders of these bills can always sell them back to the RBI. They are not sold through tender or auction. State Governments. Participants in the TBM RBI & SBI. IDBI etc. Commercial banks. On the other hand „ad hocs‟are always issued in favour of the RBI only. UTI. .
14 days treasury bills 91 days treasury bills 182 days treasury bills 364 days treasury bills . There are 4 kinds of treasury bills available in India . .
Money Market Mutual Funds Money Market Mutual Funds (MMMFs) enable small investors to participate in the money market . Only individuals can subscribe to MMMFs . . commercial banks. MMMFs can be set up by Mutual Funds. public financial institutions and private sector. The minimum lock-in period is 15 days .
MMMFs cannot deploy their funds in capital market . The portfolio of MMMFs consists of short term money market instrument . Banks and FIs were required to seek clearance from RBI for setting up MMMFs. . MMMFs cannot be offered for a guaranteed return to the holders . The private sector MMMFs are required to get clearance from SEBI .
. 1988 had informed the bank Chief about a proposal to authorize banks to fund their short-term needs from within the system through issuance of InterBank Participations.Inter-Bank Participation Certificate The Governor of the RBI while dealing with credit policy measures in Oct. This announcement by the RBI was in line with the recommendation made by the Working Group on the Money Market.
Features Inter-Bank Participation Certificate provides them an additional instrument for even out short-term liquidity within the perimeter of the banking system. . particularly at times when there are imbalances affecting the maturity mix assets in bankers‟ books.
The without risk type participants is confined to a tenure of 90 days only. . The scheme is confined to scheduled commercial banks only and the period of participation is restricted to minimum 91 days and maximum 180 days. Participants permitted are of two types namely with and without risk to lender.
. with an agreement to resell the same to the seller on an agreed date and at a predetermined price. with an agreement to repurchase the same at a mutually decided future date and price.Repo Instrument A repo/reverse repo/repurchase is a transaction in which two parties agree to sell and repurchase the same security. the buyer purchases the securities. The seller sells specified securities. Like wise.
ii) RBI repos. . Generally. repo transactions take place in market lots of Rs. 5 crores. There are two types of repos namely. Repos are usually entered into with a maturity of 1-14 days. The difference between the price at which the securities are bought and sold is the lender‟s profit/interest earned for lending money. i) inter-bank repos.
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