PRESENTED By: PRESENTED To:

Ajeesh Moosakutty - Roll No. 4 Nadeer SirSharanya K S - Roll No.Sahir A- Roll No.Sruthi

Date: 3-June-2015

Seminar on

INDIAN FINANCIAL SYSTEM

Financial Structure and Institution

By: Sharanya K S

STRUCTURE OF INDIAN FINANCIAL SYSTEM

Financial structure refers to shape, components and their order in the financial system. The Indian financial system can be broadly classified into formal (organized) financial system and the informal (unorg anised) financial system. 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

DIAGRAMMATIC REPRESENTATION OF INDIAN FINANCIAL SYSTEM

The formal financial system comprises financial institutions, financial markets, financial instruments an d financial services

FINANCIAL INSTITUTIONS

Financial institutions are the participants in a financial market. They are business organizations dealing in financial resources. They collect resources by accepting deposits from individuals and institutions and lend them to trade, industry and others. They buy and sell financial instruments.

Financial institutions classified as:-a) Regulatory and financial institutions :

The two major Regulatory and Promotional Institutions in India are Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI).

Both RBI and SEBI administer, legislate, supervise, monitor, control and discipline the entire financial system.

RBI is the apex of all financial institutions in India. All financial institutions are under the control of RBI .

The financial markets are under the control of SEBI.

b) Banking institutions :--Banking institutions mobilize the savings of the people.-They provide a mechanism for the smooth exchange of goods and services.-Basic categories of banking institutions are commercial banks, co-operative banks, developmental banks

c) Non banking financial institutions:-- Nonbanking financial institutions also mobilize financial resources directly or indirectly from the people.-They lend funds but not create credit-Companies like LIC, GIC, UTI, Development Financial Institutions, Organisation o Funds etc. fall in this category.-Nonbanking financial institutions can be categorized as investment companies, housing companies, leasing companies, hire purchase companies, specialized financial institutions (EXIM Bank etc.) investment institutions, state level institutions etc

FINANCIAL MARKETS

By: Ajeesh Moosakutty

FINANCIAL MARKETSFinancial market deals in financial securities (or financial instruments) and financial services. Financial markets are the centers or arrangements that provide facilities for buying and selling of financial claims and services. These are the markets in which money as well as monetary claims is traded in. Financial markets exist wherever financial transactions take place. Financial transactions include issue of equity stock by a company, purchase of bonds in the secondary market, deposit of money in a bank account, transfer of funds from a current account to a savings account etc.

FUNCTIONS OF FINANCIAL MARKETS

•To facilitate creation and allocation of credit and liquidity.• To serve as intermediaries for mobilization of savings• To help in the process of balanced economic growth• To provide financial convenience•To cater to the various credits needs of the business organizations.•To provide information and facilitate transactions at low cost

• Financial market can be classified in 2 on basis of maturity of claims1. Money Market and 2. Capital Market

3. Money Market: A market where short term funds are borrowed and lend is

called money market. It deals in short term monetary assets with a maturity period of one year or less. Liquid funds as well as highly liquid securities are traded in the money market.

Examples of money market are Treasury bill market, call money market, commercial bill market etc.

2. Capital Market:Capital market is the market for long term funds. This market

deals in the long term claims, securities and stocks with a maturity period of more than one year. The stock market, the government bond market and derivatives market are examples of capital market.

• Financial market can be classified in 2 on basis of seasoning of claim

1. Primary Market and 2. Secondary Market

3. Primary Market:Primary markets are those markets which deal in the new

securities. Therefore, they are also known as new issue markets. These are markets where securities are issued for the first time. In other words, these are the markets for the securities issued directly by the companies.

2. Secondary Market:Secondary markets are those markets which deal in existing

securities. Existing securities are those securities that have already been issued and are already outstanding. Secondary market consists of stock exchanges.

• Financial market can be classified in 2 on basis of timing of delivery:

1. Cash / Spot market and2. Forward/Future market

3. Cash / Spot market: This is the market where the buying and selling of

commodities happens or stocks are sold for cash and delivered immediately after the purchase or sale of commodities or securities.

4. Forward/Future market: This is the market where participants buy and sell

stocks/commodities, contracts and the delivery of commodities or securities occurs at a pre-determined time in future.

• Financial Market is further classified into 2.1. Foreign exchange market:

Foreign exchange market is simply defined as a market in which one country’s currency is traded for another country’s currency. It is a market for the purchase and sale of foreign currencies.2. Derivatives market:

The derivatives are most modern financial instruments in hedging risk. The individuals and firms who wish to avoid or reduce risk can deal with the others who are willing to accept the risk for a price. A common place where such transactions take place is called the derivative market.

The important types of derivatives are forwards, futures, options, swaps, etc.

COMPONENTS OF MONEY MARKET

1. Call money:Call Money is required mostly by banks. Commercial banks

borrow money without collateral from other banks to maintain a minimum cash balance known as cash reserve ratio (CRR). This interbank borrowing has led to the development of the call money market.

Call money market is the market for very short period loans. If money is lent for a day, it is called call money. If money is lent for a period of more than one day and upto 14 days is called short notice money.• Participants or Players in the Call Money Market are Scheduled

commercial banks and RBI, Non-Scheduled commercial banks, Co-operative banks, Foreign banks, Discount and Finance House of India, Primary dealers

2. Commercial bill market: Commercial bill market is another segment of money market.

It is a market in which commercial bills (short term) are bought and sold.

Commercial bill are widely used in both domestic and foreign trade to discharge the business obligations.

There are specialized institutions known as discount houses for discounting commercial bills accepted by reputed acceptance houses.

3. Treasury Bills Market:Treasury bill market is a market which deals in treasury bills. In

this market, treasury bills are bought and sold. Treasury bill is an important instrument of short term borrowing by the Govt.

Treasury Bills are the promissory notes or a kind of finance bill issued by the Govt. for a fixed period not extending beyond one year. Treasury bill is used by the Govt. to raise short term funds for meeting temporary Govt. deficits.

FUNCTION OF PRIMARY MARKET1. Origination: Origination refers to the work of investigation, analysis and processing of new project proposals. The function of origination is done by merchant bankers who may be commercial banks.

2. Underwriting: The act of ensuring the sale of shares or debentures of a company even before offering to the public is called underwriting. It is a contract between a company and an underwriter (individual or firm of individuals) by which he agrees to undertake that part of shares or debentures which has not been subscribed by the public.

3.Distribution: This is the function of sale of securities to ultimate investors. This service is performed by brokers and agents. They maintain a direct and regular contact with the ultimate investors.

METHODS OF RAISING FUND IN THE PRIMARY MARKET (METHODS OF FLOATING NEWISSUES)

• Public Issue:Under this method, the company invites subscription

from the public through the issue of prospectus (and issuing advertisements in news papers). On the basis of offer in the prospectus, the investors apply for the number of securities they are willing to take.

Initial Public Offering (IPO): This is an offering of either a fresh issue of securities or an offer for sale of existing securities or both by an unlisted company for the first time in its life to the public.

Follow-on Public Offering (FPO): This is an offer of sale of securities by a listed company.

• Offer for Sale Method:Under this method, instead of offering shares directly to

the public by the company itself, it offers through the intermediary such as issue houses / merchant banks / investment banks or firms of stock brokers.

The issuing company sells the shares to the intermediaries such as issue houses and brokers at an agreed price. And then the intermediaries resell the securities to the ultimate investors at a market related price. This price will be higher. The difference between the purchase price and the issue price represents profit for the intermediaries.

• Private Placement of Securities:Private placement is the issue of securities of a company

direct to one investor or a small group of investors. Generally the investors are the financial institutions or other existing companies or selected private persons such as friends and relatives of promoters.

Thus, private placement refers to the direct sale of newly issued securities by the issuer to a small number of investors through merchant bankers.

• Right IssueRight issue is a method of raising funds in the market by an existing company. Under this method, the existing company issues shares to its existing shareholders in proportion to the number of shares already held by them.

CHARACTERISTICS OF A STOCK EXCHANGE

1. It is an organized capital market.2. It may be incorporated or non-incorporated body (association or body of individuals).3. It is an open market for the purchase and sale of securities.4. Only listed securities can be dealt on a stock exchange.5. It works under established rules and regulations.6. The securities are bought and sold either for investment or for speculative purpose.

DISTINGUISH BETWEEN MONEY MARKET AND CAPITAL MARKET

Capital market1. Long term funds2. FC/PC requirements3. Shares, debentures, bonds etc., aremain instruments in capital market4. Small face value of securities5. Development banks, investmentinstitutions are major players6. Formal place, stock exchanges7. Brokers playing a vital role

Money market 1. Short term funds2. Operational/WC needs3. Instruments are: bills, CPs,T-bills, CDs etc.,4. Huge face value for single instrument5. Central and coml. banks are majorplayers6. No formal place for transactions7. Usually no role for brokers

Financial InstrumentsBy: Sahir A

FINANCIAL INSTRUMENTS

• Financial instruments are the financial assets, securities and claims. • They may be viewed as financial assets and financial liabilities. 1. Financial assets:

represent claims for the payment of a sum of money sometime in the future (repayment of principal) and/or a periodic payment in the form of interest or dividend.

2. Financial liabilities:are the counterparts of financial assets. They represent promise to pay some portion of prospective income and wealth to others.

TYPES OF FINANCIAL INSTRUMENTS

• The financial instruments may be capital market instruments or money market instruments or hybrid instruments.• Capital Market Instruments:

Financial instruments that are used for raising capital through the capital market. It includes include equity shares, preference shares, warrants, debentures and bonds.•Money Market Instruments:

financial instruments that are used for raising and supplying money in a short period not exceeding one year through money market are called money market instruments. It includes treasury bills, commercial paper, call money, short notice money, certificates of deposits, commercial bills, money market mutual funds.

MONEY MARKET INSTRUMENTS1. Call and Short Notice MoneyThese are short term loans. Their maturity varies between one day to fourteen days. If money is borrowed or lent for a day it is called call money or overnight money. When money is borrowed or lent for more than a day and up to fourteen days, it is called short notice money.2. Commercial BillsA bill of exchange contains a written order from the creditor (seller) to the debtor (buyer) to pay a certain sum, to a certain person after a certain period.According to Negotiable instruments Act, 1881, a bill of exchange is ‘an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument’.

3. Treasury BillTreasury bills are credit instruments used by the Govt. to

raise short term funds to meet the budgetary deficit. Treasury bills are popularly called Tbills. These are negotiable instruments. Hence, these are freely transferable.

4. Certificate Of Deposit CD is a certificate in the form of promissory note issued

by banks against the short term deposits of companies and institutions, received by the bank. It is payable on a fixed date. It has a maturity period ranging from three to twelve months.

5. Commercial Paper• It is a finance paper like Treasury bill. It is an

unsecured, negotiable promissory note.• It has a fixed maturity period ranging from three to

six months. It is generally issued by leading, nationally reputed credit worthy and highly rated corporations.• It is quite safe and highly liquid. • It is issued in bearer form and on discount. It is also

known as industrial paper or corporate paper.

CAPITAL MARKET INSTRUMENTS

• DEEP DISCOUNT BONDS A bond that sells at a significant discount from par value

and has no coupon rate or lower coupon rate than the prevailing rates of fixed-income securities with a similar risk profile. They are designed to meet the long term funds requirements of the issuer and investors who are not looking for immediate return and can be sold with a long maturity of 25-30 years at a deep discount on the face value of debentures.

• SWEAT EQUITYSweat equity usually takes the form of giving options to

employees to buy shares of the company, so they become part owners and participate in the profits, apart from earning salary.

• FOREIGN CURRENCY CONVERTIBLE BONDS(FCCBs) A convertible bond is a mix between a debt and equity

instrument. It is a bond having regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock. FCCB is issued in a currency different than the issuer's domestic currency.

• DERIVATIVESA derivative is a financial instrument whose

characteristics and value depend upon the characteristics and value of some underlying asset typically commodity, bond, equity, currency, index, event etc.

• GLOBAL DEPOSITORY RECIEPT / AMERICAN DEPOSITORY RECIEPT

A negotiable certificate held in the bank of one country (depository) representing a specific number of shares of a stock traded on an exchange of another country. GDR facilitate trade of shares, and are commonly used to invest in companies from developing or emerging markets. However a company may get listed on these stock exchanges indirectly – using ADRs and GDRs. If the depository receipt is traded in the United States of America (USA), it is called an American Depository Receipt, or an ADR. If the depository receipt is traded in a country other than USA, it is called a Global Depository Receipt, or a GDR.

• EQUITY SHARES WITH DETACHABLE WARRANTS A warrant is a security issued by company entitling the

holder to buy a given number of shares of stock at a stipulated price during a specified period. These warrants are separately registered with the stock exchanges and traded separately. Warrants are frequently attached to bonds or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends. • FULLY CONVERTIBLE DEBENTURES WITH INTEREST

This is a debt instrument that is fully converted over a specified period into equity shares. The conversion can be in one or several phases. When the instrument is a pure debt instrument, interest is paid to the investor. After conversion, interest payments cease on the portion that is converted.