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Indian Financial System Module 1
An institutional framework existing in a country to enable financial transactions Three main parts
Financial assets (loans, deposits, bonds, equities, etc.) Financial institutions (banks, mutual funds, insurance companies, etc.) Financial markets (money market, capital market, etc.)
Regulation is another aspect of the financial system (RBI, SEBI, IRDA, )
Enable channelising funds from surplus units to deficit units There are instruments for savers such as deposits, equities, mutual fund units, etc. There are instruments for borrowers such as loans, overdrafts, etc. Like businesses, governments too raise funds through issuing of bonds, Treasury bills, etc.
borrowers . mutual funds. industrial and trading companies. insurance companies.promote/mobilise savings Individual investors.Financial Institutions Includes institutions and mechanisms which Affect generation of savings by the community Mobilisation of savings Effective distribution of savings Institutions are banks.
Financial Markets Money Market.for short-term funds (less than a year) Capital Market.for long-term funds Primary Issues Market Stock/secondary Market .
Money Market Definition – “ money market is a collective name given to the various forms of and institutions that deals with various grades of near money” .Geoffrey Crowther .
Money Market Instruments Commercial Bills Treasury Bills Call and short notice money Certificate of deposit Commercial paper Repurchase agreement ADR’s/ GDR’s .
or order of certain person. . or to the bearer of the instrument at a fixed time in the future or on demand. directing a certain person to pay certain sum of money only to.Commercial bills Commercial bill or bill of exchange is a written document signed by the drawer.
Reasons for poor development of CB’s Preference to cash to bills Lack of uniform practices with regard to bills Lack of specialised discount houses Preference of cash credit and overdraft from commercial banks .
Treasury bills Treasury bill represents short term borrowings of the governments.weekly auction 91 days treasury bills a) Ordinary treasury bills b) Adhoc TB’s . Treasury bill market refers to the market where treasury bills are bought and sold Types of treasury Bills 14 day treasury bill.
monthly issue 364 treasury bills.fortnight . 182 treasury Bills.
Call and short notice money Call money refers to a money given for a very short period of time. It may be taken for a day or overnight but not exceeding seven days in any circumstance Another variation of call money is notice money which is for a period up to 14 days .
Certificate of Deposit (CD’s) Certificate of deposits are marketable receipts in bearer form of funds deposited in a bank for a specified period of time at a specific interest rate. They are freely transferable Can be traded in the secondary market They are liquid and riskless in terms of default of payment of interest and principal RBI launched a scheme in june 1989 permitting banks to issue CDs .
The minimum denomination of CD is 5 lakh Maturity period.varies from 91 days to 1 year CD’s to be issued on discounting basis CD’ are transferable after a lock-in period of 45 days All scheduled banks other than RRBs are allowed to issue CD without any ceiling CD’s cannot to bought back nor any loan can be given against CDs by the issuing institutions .
issued in bearer form and issued at such discount on face value as may be determined by the issuing company . negotiable by endorsement and delivery.Commercial papers A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI.
primary dealers (PDs) and the AllIndia Financial Institutions (FIs) are eligible to issue CP. Corporate. .RBI guidelines Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note It was introduced in India in 1990.
the tangible net worth of the company. company has been sanctioned working capital limit by bank/s or all-India financial institution/s. as per the latest audited balance sheet. . 4 crore b. is not less than Rs.A corporate would be eligible to issue CP provided – a.
CP can be issued in denominations of Rs. .5 lakh or multiples thereof. Only a scheduled bank can act as an IPA for issuance of CP. The company should have a minimum credit rating of p2 from CRISIL and A2 from ICRA CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue.
NonResident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. Individuals. can invest in CPs . banking companies. other corporate bodies (registered or incorporated in India) and unincorporated bodies.
It can be held as dematerialized form Underwriting not allowed .
The forward price set in advance at a level different from the spot rate by considering the RBI repo rate . a holder of securities sells them to investor with an agreement to purchase it at a later date and a rate.REPO(Repurchase Agreement) Repo is a money market instrument which enables collateralized short-term borrowing and lending through sale and purchase of this instrument Under repo.
supplier of funds/ buyer point of view .seller point of view Reverse repo. Regulated by SCR act 1956 and RBI Repo.
Significance of money market Economic development Profitable investment Borrowings by the government Importance of central bank Mobilization of funds Self-sufficiency of commercial banks Savings and investment .
The institutions of money market Commercial banks Central bank Acceptance houses/ bill brokers Non banking financial intermediaries .
rate structure .Characteristics of a developed money market Developed commercial banking system Presence of central bank Near money assets Availability of ample resources Integrated interest.
capital market refers to the institutional arrangements for lending and borrowing of long term funds It consists of series of channels through which the savings of the community are made available for industrial and commercial enterprises and public authorities .Capital market Meaning.
Functions of capital market Mobilsation of financial resources on a nation wide scale Securing the foreign capital to fill up the deficit in the required resources for economic growth at a faster rate Effective allocation of the mobilized financial resources .
Components of Capital market New issue market/ primary market Stock market/ secondary market Financial institutions .
Capital market instruments Ownership securitiesCreditorship securities .
Financial Services Fund based Non fund based .
Fund based Fund based activities / services are those where funds of financial institutions are involved such as: Underwriting of investments in shares. debentures Equipment leasing Hire purchase Bill discounting Venture capital .
... Housing finance Insurance services Factoring etc.
Non fund based Non-Fund based activities/services are those where funds are not involved and financial institution gets income in the form of fee such as Issue management Portfolio management Loan syndication .
Credit rating Stock broking .
Secondary Market Definition“security exchanges are market places where securities that have been listed thereon may be bought and sold for either investment or speculation” -pyle .
Characteristics It is a place where securities purchased and sold A stock exchange is an association of persons The trading in stock exchange is strictly regulated and rules and regulations are prescribed for various transactions Both genuine and speculators buy and sell shares .
are allowed to be dealt in stock exchange . The securities of corporations. trusts.. municipal corporation etc.. governments.
Functions of a stock exchange Ensure liquidity of capital Continuous market of securities Evaluations of securities Mobilizing surplus funds Safety in dealings Listing of securities Platform for public debt Clearing house of business information .
the stock exchange fix certain standards which the company must fulfill before getting listed .Listing of securities Meaning.listing of securities means permission to quote shares and debentures officially on the trading floor of the stock exchange.
Requirements for listing MOA & AOA Copies of all prospectus and statement inlieu of prospectus Copies of B.brokers Letter on consent from controller of capital issues. underwriters. audited accounts. now replaced by SEBI Details of shares and debentures forfeited . agreements with promoters.S.
Details of bonuses and dividends declared History of company in brief An undertaking regarding the compliance with the provisions of companies act 1956 and securities contracts regulation act of 1956 .
Objectives of listing To ensure proper supervision and control in the dealings in securities The protect the interest of the investors To avoid concentration of economic power To assure marketing facilities for securities To ensure liquidity of securities .
Advantages of listing Publicity of securities Protection of investors interest Ensures liquidity Better goodwill .
Criteria for listing At least 60% of each class of securities listed must be offered to public for subscription and the minim um issued capital should be 3 crores It must be offered through advertisement in newspaper at least for a period of 2 days The company should be of a fair size having broad based capital structure and public interest in its securities .
There must be at least 10 public shareholders for every Rs 1 lakh shares of fresh issue of capital and it is 20 in case of subsequent issue of shares A company having its paid up share capital of more than 5 crores must list its securities in more than one recognized stock exchange The co must pay interest on the excess application money received at the rates ranging between 4% and 15% depending on the delay beyond 10 weeks from the date of closure of subscription .
the existing companies must adhere to the ceiling in expenditure of public issues A certificate to the effect that shares from promoters quota are not sold or transferred for a period of 3 years must be submitted .
Players in stock market Jobbers Taraniwalas Commission brokers Sub-Brokers/remisiers Authorized clerks .
Method of Trading in a Stock Exchange Choice of broker Placement of order a) At best order b) Limit order c) Immediate or cancel order d) Discretionary order e) Limited discretionary order f) Open order g) Stop loss order .
Execution of orders Preparation of contract notes Settlement of transactions a) Spot delivery b) Hand delivery system- DoA or 14 days WEE c) Clearing settlement d) Special settlement
Depository - A depository is a provider for holding and transacting securities in electronic form. National Securities Depository Limited (NSDL), and Central Depository Service Limited (CDSL)
Depository Participant- A Depository Participant (DP) is an agent of the depository and provides depository services to investors. To avail the services of the depository, the investors has to open an account with a DP
Beneficial Owner -is a person in whose name a demat account is opened with CDSL for the purpose of holding securities in the electronic form and whose name is recorded with CDSL. Issuer -means any entity making an issue of securities .
This is a significant step in the direction of achieving a completely paper-free securities market. Dematerialisation: The model adopted in India provides for dematerialisation of securities. Dematerialization is a process by which physical certificates of an investor are converted into electronic form and credited to the account of the depository participant .
. The complete process of dematerialization is outlined below: ⇒ Bullet Surrender certificates for dematerialization to your depository participant. In order to dematerialise physical securities one has to fill in a DRF (Demat Request Form) which is available with the DP and submit the same along with physical certificates one wishes to dematerialise.. Separate DRF has to be filled for each ISIN no.
Registrar updates accounts and informs depository of the completion of dematerializations. ⇒ After dematerializing certificates. Depository participant submits the certificates to the registrar. ⇒ Registrar confirms the dematerialization request from depository. ⇒ Depository participant intimates Depository of the request through the system. .
⇒ Depository participant updates the accounts and informs the investor. . ⇒ Depository updates the accounts and informs the depository participant.
.Rematerialisation If one wishes to get back your securities in the physical form one has to fill in the RRF form (Remat Request Form) and one request your DP for rematerialisation of the balances in your securities account. The process of rematerilisation outlined below: One makes a request for rematerialisation. Depository Participant intimates depository of the request through the system.
Depository updates accounts and downloads details to depository participant. Registrar updates accounts and prints certificates. . Registrar dispatches certificates to the investor. Depository confirms rematerialisation request to the registrar.
Benefits of depository system Elimination of bad deliveries Elimination of all risks associated with physical certificates No stamp duty Immediate transfer and registration of securities Faster settlement cycle – T+2 Elimination of problems related to change of address of investor .
Elimination of problems related to transmission of demat shares .
SEBI(April 12 1988) Objectives To protect the interests of investors so that there is a steady flow of savings into the capital market To regulate the securities market and ensure fair practices by the issuers of the securities so that they can raise resources at minimum cost .
To promote efficient services by brokers. merchant bankers and other intermediaries so that they become competitive and professional .
Functions Regulatory functions Developmental functions .
merchant bankers.Regulatory functions Regulation of stock exchange Registration and regulation of stock brokers. sub-brokers. portfolio managers and such other intermediaries. registrar to all issue. underwriters. who are associated with securities market Registration and regulation of working of collective investment schemes including mutual funds .
Prohibition of fraudulent and unfair trade practices relating to securities market Prohibition of insider trading Regulating substantial acquisition of shares and take over a company .
Code of conduct in the stock exchange Promotion of self-regulatory orgainsations Association of Merchant Bankers of India (AMBI) Association of Mutual Funds of India (AMFI) .Developmental functions Promoting investor’s education Training of intermediaries Conducting research and published information useful to all market participants Promotion of fair practices.
Powers Power to call periodical returns from recognised stock exchange Power to call any information or explanation from recognised stock exchange and their members Power to direct enquiries to be made in relation to affairs of stock exchange or their members Power to grant approval to bye-laws of recognised stock exchange .
Power to make or amend bye-laws of recognised stock exchanges Power to compel listing of securities by public companies Power to control and regulate stock exchange Power to grant registration to market intermediaries .
Organisation 6 members A chairman and two members are appointed by central government One member is appointed by RBI Two members having experience in the securities market appointed by the central government .
Organisational departments of SEBI Primary market department Issue management and intermediaries department Secondary market department Institutional investment department .
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