Name: Ketaki Dilip Nikam

Class: MBA –I Year

Specialisation: Finance
Roll No: 2019-20-098
Subject: Financial Management & Banking Operations
Assignment No: 01
 Q.1.a) State the four components of Indian Financial System.

Ans.

 Financial Institutions: Financial institutions are the business enterprise which avails

various services regarding management of funds ( investment or lending, borrowing).

 Financial Markets: The financial market is a venture where actual transactions (sales

and purchase) of financial instruments such as shares, bonds, commodities or government
securities happens between seller and purchaser.

 Financial Services: The services offered by the different financial institutions for the
management, lending, borrowing and for the investment of funds is called as financial services. 

 Financial Regulators: Financial Regulators refers to the government bodies which are

accountable to regulate, inspect, monitor the functions of various financial institutions like
banks, insurance companies, business enterprises, Non-banking financial companies (NBFCs)
etc.

Q.1.b) List any four types of Banking.

Ans:

 Commercial Banks: Commercial Banks are regulated under the Banking Regulation Act,
1949 and their business model is designed to make profit. Their primary function is to
accept deposits and grant loans to the general public, corporate and government.

 Small Finance Banks: This is a niche banking segment in the country and is aimed to
provide financial inclusion to sections of the society that are not served by other banks.
 The main customers of small finance banks include micro industries, small and marginal
farmers, unorganized sector entities and small business units. 

 Payments Banks: This is a relatively new model of bank in the Indian Banking industry.
It was conceptualised by the RBI and is allowed to accept a restricted deposit. 

 Co-operative Banks: Co-operative banks are registered under the Cooperative Societies
Act, 1912 and they are run by an elected managing committee. These work on no-profit
no-loss basis and mainly serve entrepreneurs, small businesses, industries and self-
employment in urban areas.

Q.1.c) What is MICR?

Ans. In MICR technology the information is printed on the instrument with a special type of ink
which is made up of magnetic material. On insertion of the instrument in the machine, the
printed information is read by the machine. MICR system is beneficial as it minimizes chances
of error, clearing of cheques becomes easy and transfer of funds becomes faster in order to
facilitate operations.
Q.1.d) Define Non-Banking Finance Companies.

Ans. A Non-Banking Financial Company (NBFC) is a company registered under the Companies
Act, 1956 engaged in the business of loans and advances, acquisition of
shares/stocks/bonds/debentures/securities issued by Government or local authority or other
marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business
but does not include any institution whose principal business is that of agriculture activity,
industrial activity, purchase or sale of any goods (other than securities) or providing any services
and sale/purchase/construction of immovable property. 

Q.1.e) List any four Money Market Instruments.

Ans.

 Certificate of deposit – Time deposit, commonly offered to consumers by banks, thrift

institutions, and credit unions.
 Repurchase agreements – Short-term loans—normally for less than one week and
frequently for one day—arranged by selling securities to an investor with an agreement to
repurchase them at a fixed price on a fixed date.
 Money market mutual funds- it means it's a short term investment debt, operated by
professional institutions. In other words 'money market mutual funds are the investment
fund, here number of investors invest their money in mutual fund institutions and they
diversify the funds in various schemes.
 Commercial paper – Short term instruments promissory notes issued by company at
discount to face value and redeemed at face value
Q.2. Answer the following.

a) Differentiate between Money Market & Capital Market.

Basis Money Market Capital Market

Meaning A random course of financial A kind of financial market where the
institutions, bill brokers, money company or government securities
dealers, banks, etc., wherein dealing are generated and patronised for the
on short-term financial tools are being intention of establishing long-term
settled is referred to as Money Market. finance to coincide the capital
necessary is called as Capital
Market.
Nature of Informal Formal
Market

Financial Tools Commercial Papers, Treasury Bonds, Debentures, Shares, Asset

Certificate of Deposit, Bills, Trade Securitization, Retained Earnings,
Credit, etc Euro Issues, etc.,
Risk Factor Low High
Liquidity High Low
Purpose To achieve short term credit To achieve long term credit
requirements of the trade. requirements of the trade.
Time Horizon Within a year More than a year
Merit Rises liquidity of capitals in the Mobilization of Economies in the
market. market.

b) Write a brief note on American Depository Receipts.

Ans.
 An American depositary receipt (ADR) is a negotiable certificate issued by a U.S.
depository bank representing a specified number of shares—or as little as one share—
investment in a foreign company's stock.

 The ADR trades on markets in the U.S. as any stock would trade.

 ADRs represent a feasible, liquid way for U.S. investors to purchase stock in companies
abroad. Foreign firms also benefit from ADRs, as they make it easier to attract American
investors and capital—without the hassle and expense of listing themselves on U.S. stock
exchanges.

 The certificates also provide access to foreign listed companies that would not be open to
U.S. investment otherwise.

 ADRs are denominated in U.S. dollars, with the underlying security held by a U.S.

financial institution overseas. ADR holders do not have to transact the trade in the foreign
currency or worry about exchanging currency on the forex market. These securities clear
through U.S. settlement systems.

 To offer ADRs a U.S. bank will purchase shares on a foreign exchange. The bank will
hold the stock as inventory and issue an ADR for domestic trading. ADRs list on either
the New York Stock Exchange (NYSE), American Stock Exchange (AMEX), or the
Nasdaq, but they are also sold over-the-counter (OTC).
c) Explain in brief Primary & Secondary Market operations:

Ans. Primary Market

 The primary market is where securities are created. It's in this market that firms sell

(float) new stocks and bonds to the public for the first time. An initial public offering, or

IPO, is an example of a primary market. These trades provide an opportunity for

investors to buy securities from the bank that did the initial underwriting for a particular

stock. An IPO occurs when a private company issues stock to the public for the first time.

 A rights offering (issue) permits companies to raise additional equity through the primary

market after already having securities enter the secondary market. Current investors are

offered prorated rights based on the shares they currently own, and others can invest

anew in newly minted shares.

 Other types of primary market offerings for stocks include private placement and

preferential allotment. Private placement allows companies to sell directly to more

significant investors such as hedge funds and banks without making shares publicly

available. While preferential allotment offers shares to select investors (usually hedge

funds, banks, and mutual funds) at a special price not available to the general public.

 Similarly, businesses and governments that want to generate debt capital can choose to

issue new short- and long-term bonds on the primary market. New bonds are issued with

coupon rates that correspond to the current interest rates at the time of issuance, which

may be higher or lower than pre-existing bonds.

 The important thing to understand about the primary market is that securities are

purchased directly from an issuer.

 Secondary Market:

 For buying equities, the secondary market is commonly referred to as the "stock market."

This includes the New York Stock Exchange (NYSE), Nasdaq, and all major exchanges

around the world. The defining characteristic of the secondary market is that investors

trade among themselves.

 That is, in the secondary market, investors trade previously issued securities without the

issuing companies' involvement. For example, if you go to buy Amazon (AMZN) stock,

you are dealing only with another investor who owns shares in Amazon. Amazon is not

directly involved with the transaction.

 In the debt markets, while a bond is guaranteed to pay its owner the full par value at

maturity, this date is often many years down the road. Instead, bondholders can sell

bonds on the secondary market for a tidy profit if interest rates have decreased since the

issuance of their bond, making it more valuable to other investors due to its relatively

higher coupon rate.

 The secondary market can be further broken down into two specialized categories:
 Auction Market

 In the auction market, all individuals and institutions that want to trade securities

congregate in one area and announce the prices at which they are willing to buy and sell.

These are referred to as bid and ask prices. The idea is that an efficient market should

prevail by bringing together all parties and having them publicly declare their prices.

Thus, theoretically, the best price of a good need not be sought out because the

convergence of buyers and sellers will cause mutually agreeable prices to emerge. The

best example of an auction market is the New York Stock Exchange (NYSE).