STUDY MATERIAL - Financial Instruments & Markets

UNIT- 1

Financial System in India

Introduction – Meaning of Financial System– Financial concepts - Constituents of
Financial System – Structure of Financial System – Role of Financial system- Functions of
Financial System – Development of Financial System in India. Financial Sector Reforms -
Financial System and Economic Development – Weakness of Indian financial system.

Introduction:
The financial system enables lenders and borrowers to exchange funds. India has a financial
system that is controlled by independent regulators in the sectors of insurance, banking, capital
markets and various services sectors. Thus, a financial system can be said to play a significant
role in the economic growth of a country by mobilizing the surplus funds and utilizing them
effectively for productive purposes.

Meaning:
A financial system is an economic arrangement wherein financial institutions facilitate the
transfer of funds and assets between borrowers, lenders, and investors. Its goal is to efficiently
distribute economic resources to promote economic growth and generate a return on investment
(ROI) for market participants.

Definition:

“A set of markets and institutions to facilitate the exchange of assets and risk”

Features:
 It plays a vital role in the economic development of the country as it encourages both
savings and investment
 It helps in mobilizing and allocating one’s savings
 It facilitates the expansion of financial institutions and markets
 Plays a key role in capital formation
 It helps form a link between the investor and the one saving

Constituents of Financial System:

2. Financial intermediaries: A financial intermediary refers to an institution that acts as a
middleman between two parties in order to facilitate a financial transaction. The institutions that
are commonly referred to as financial intermediaries include commercial banks, investment
banks, mutual funds, and pension funds.

3. Financial Markets: Financial Market is referred to space, where selling and buying of
financial assets and securities take place. It allocates limited resources in the nation’s economy.
It serves as an agent between the investors and collector by mobilizing capital between them.
4. Financial Rate of Return:

5 Financial instrument: is defined as a contract between individuals/parties that holds a

monetary value. They can either be created, traded, settled, or modified as per the involved parties'
requirement.

Financial concepts:

1. Networth: The net worth of an individual or business describes how much a company or
personis financially worth.

2. Inflation: Inflation describes the decline in purchasing power of a given currency over
time and refers to the sustained increase in the price of goods and services.

3. Liquidity: Liquidity refers to the accessibility of money or the ease with which you can
convert assets into cash. When referring to assets, the most liquid of all assets is cash itself,
whereas tangible items are less liquid.

4. Bear market: A bear market shows that the market is declining, indicated by high
unemployment and falling share prices over an extended period.

5. Bull market: A bull market indicates the market is on the rise, indicated by an increase in
stockprices and a low level of unemployment over an extended period.

6. Asset allocation and diversification: Asset allocation means categorizing an investment

 portfolio into items such as stocks, fixed-income investments, cash and cash equivalents,
futures, and alternative assets.

7. Risk tolerance is the threshold of risk an individual is willing to take with their
investments. Investors with a high tolerance typically make higher-stakes investments in the
short term.
8. Simple interest: Interest refers to the reward of using capital. Simple interest is interest
that's calculated on the principal portion of a loan or the original contribution to a savings
account.
9. Compound interest can be calculated compound interest on both the principal amount and
its accumulated interests, rather than just the principal amount.

10. 10. Capital asset pricing model (CAPM): Financial professionals use the capital asset
pricing model (CAPM) to price investments based on the expected return rate. The model
evaluates the relationship between risks and the expected return for assets, specifically stocks

Structure of Financial System

1. Financial Institutions • 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. • This means financial institutions mobilize the savings of savers and give
credit or finance to the investors. On the basis of the nature of activities, financial institutions
may be classified as:

1. Banking financial institutions • Banking institutions mobilize the savings of the people. • They
provide a mechanism for the smooth exchange of goods and services. • They extend credit while
lending money. • They not only supply credit but also create credit.

2. Non-banking financial institutions • The non-banking financial institutions also mobilize

financial resources directly or indirectly from the people. • They lend funds but do not create
credit. Companies like LIC, GIC,UTI, Development Financial Institutions. • Non-banking
financial institutions can be categorized as investment companies, housing companies, leasing
companies, hire purchase companies, specialized financial institutions

2. Financial Markets: Financial Markets • Financial markets are the centers or arrangements
that provide facilities for buying and selling of financial claims and services. they create
financial assets. • 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 savingsaccount etc.

Classification on the basis of the type of financial claim:

1. Debt market: The debt market is the financial market for fixed claims like debt instruments

2. Equity Market: The equity market is the financial market for residual claims i.e., equity
instruments Classification on the basis of maturity of claims:

1. Money markets • 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.

2. Capital Markets • 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.

Classification on the basis of seasoning of claim

1. Primary markets • 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.

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.

Classification on the basis of structure

1. Organized markets • these are financial markets in which financial transactions take place
within the well-established exchanges or in the systematic and orderly structure.

2. Unorganized markets. • These are financial markets in which financial transactions take place
outside the well-established exchange or without systematic and orderly structure or
arrangements. Financial Instruments

3. Financial Instruments: The instruments used for raising resources for corporate activities
through the capital market are known as ‘capital market instruments’. ⮚ Example: Preference
shares, equity shares, warrants, debentures and bonds. The instruments used for raising resources
for corporate activities through the capital market are known as ‘capital market instruments’.
Example: Preference shares, equity shares, warrants, debentures and bonds.
4. The instruments used for raising and supplying money in short period not exceeding one
year are called ‘money market instruments’. ⮚Example: treasury bills, gilt-edge securities, state
 government and public sector instruments, commercial paper, certificate of deposit, commercial
bills etc.
Financial Services • The new sector in the matured financial system is known as financial
services sector. Its objective is to intermediate and facilitate financial transactions of individuals
and institutional investors. • The financial institutions and financial markets help the financial
system through financial instruments and financial services

The financial services include all activities connected with the transformation of savings into
investment. • Important financial services include lease financing, hire purchase, installment
payment systems, merchant banking, factoring, mutual funds, credit rating, stock broking etc

Functions/Importance/Objectives/Advantages of Financial System

1. Provision of liquidity
2. Mobilization of savings
3. Size transformation/Capital formation
4. Maturity transformation
5. Risk transformation
6. Lowering of cost of transaction
7. Payment mechanism
8. Assisting new projects
9. Enable better decision making
10. Meet short and long term financial needs
11. Provide necessary finance to the Government
12. Accelerate the process of economic growth of the country

GROWTH/DEVELOPMENT OF FINANCIAL SYSTEM IN INDIA

Until independence in the year 1947, there was no strong financial system in India. Private sector
and unorganized financial intermediaries were playing the key role of financing the industry.
They were not following any justifiable way in financing the trade and commerce. On the whole,
the financial system was facing a chaotic condition. The growth of financial system in India
since independence is discussed below:
Nationalization of Financial Institutions - After independence, with the adoption of
mixed economy, the government started creating new financial institutions for the supply of
finance for both industrial and agricultural purposes.
Establishment of Unit Trust of India – The Unit Trust of India (UTI) was established
in the year 1964 to strengthen the Indian financial system and supply institutional credit to
industries. It was entrusted with the work of mobilization of the savings of the public and
provision of credit facility to institutions for productive purposes.
Establishment of Development Banks –
Establishment of Agriculture Financing Institutions – Agricultural Refinance and
Development Corporation (ARDC) was established in the year 1963 to finance major
development projects like minor irrigation, farm mechanization, land development, horticulture,
dairy development, etc. However, National Bank for Agriculture and Rural Development
(NABARD) was established in the year 1982 and the ARDC was merged with it. Now the whole
sphere of agricultural finance has been entrusted with NABARD
 Establishment of Export and Import Bank of India (EXIM Bank) – The Export and
Import Bank of India (EXIM Bank) was established in the year 1982 to take over the operations
of the International Finance Wing of IDBI..
Establishment of National Housing Bank (NHB) – The National Housing Bank was
established in the year 1988 as an apex institution to mobilize resources for the housing sector
and to promote housing finance institutions both at regional and local levels.
Establishment of Stock Holding Corporation of India Ltd., (SHCIL) – The Stock
Holding Corporation of India Ltd., (SHCIL) was established in the year 1987 to tone up the stock
and capital markets in India. It provides quick share transfer facilities, clearing services,
depository services, management information services and development services to both
individual and corporate investors.
Encouraging Mutual Funds Industry – Both private and public sector financial
institutions are being encouraged to float mutual funds.
Encouraging Venture Capital Industry – Both private and public sector financial
institutions are being encouraged to finance through venture capital.
Establishment of Credit Rating Agencies – Credit rating agencies like Credit Rating
and Information Services of India Ltd., (CRISIL), Investment Information and Credit Rating
Agency of India Ltd., (ICRA) and Credit Analysis and Research Ltd., (CARE) are being
established to help investors make decision of their investment and also to protect them from
risky ventures.
Introduction of new financial instruments – New and different types of financial
instruments like public sector bonds, national savings certificates, post office savings scheme,
different variety of shares and debentures, different schemes of insurance, different types of bank
deposits, are being introduced to cater to the needs of different investors.
Legislative support – Over a period of time many legislative measures were taken up to
protect the interests of investors and streamline the financial functioning of various institutions.
Capital Issues Control Act, 1947.

ROLE OF FINANCIAL SYSTEM IN THE ECONOMIC DEVELOPMENT OF THE

COUNTRY
An effective financial system in the country offers a variety of financial products and services to
suit the different requirements of the investing public and corporate. The financial system plays
the following role in the economic development of the country & provides the following
benefits:
1. Help to form huge financial resources through mobilization of savings of the public and
corporate
2. Promote investment in agriculture, manufacturing and service industries by providing the
necessary finance for the cultivation of land, production of goods and provision of services
3.Transfer surplus funds from one part of the economy to another keeping in mind the national
priorities
4. Encourage people to divert their physical assets into financial assets and make it available for
balanced growth of trade, commerce, agriculture, manufacturing and service industries
5. Provide mechanism to control the risk and uncertainties
6.Multiply the monetary resources by the process of credit creation
7. Provide a variety of financial assets to suit the different needs of investing public and
corporate
8.Encourage entrepreneurial skills among the public
9. Increase the growth rate of the economy.
Financial Sector Reforms:

1. Narasimham Committee report (1991)

 It was established to give reforms pertaining to the financial sector of India including the
capital market and banking sector.
 Some of its major recommendations have been mentioned below:
 It recommended reducing the cash reserve ratio (CRR) to 10% and the statutory liquidity
ratio (SLR) to 25% over the period of time.
 It suggested fixing at least 10% of the credit for priority sector lending to marginal
farmers, small businesses, cottage industries, etc.
 In order to provide required independence to the banks for setting the interest rates
themselves for the customers, it recommended de-regulating the interest rates.
2. Reforms in the Banking Sector
 Reduction in CRR and SLR has given banks more financial resources for lending to the
agriculture, industry and other sectors of the economy.
 The system of administered interest rate structure has been done away with and RBI no
longer decides interest rates on deposits paid by the banks.
 Allowing domestic and international private sector banks to open branches in India, for
example, HDFC Bank, ICICI Bank, Bank of America, Citibank, American Express, etc.
 Issues pertaining to non-performing assets were resolved through Lok adalats, civil
courts, Tribunals, The Securitization And Reconstruction of Financial Assets and the
Enforcement of Security Interest (SARFAESI) Act.
 The system of selective credit control that had increased the dominance of RBI was
removed so that banks can provide greater freedom in giving credit to their customers.
3. Reforms in the Debt Market
The 1997 policy of the government that included automatic monetization of the fiscal deficit was
removed resulting in the government borrowing money from the market through the auction of
government securities.
 Borrowing by the government occurs at market-determined interest rates which have
made the government cautious about its fiscal deficits.
 Introduction of treasury bills by the government for 91 days for ensuring liquidity and
meeting short-term financial needs and for benchmarking.
 To ensure transparency the government introduced a system of delivery versus payment
settlement.
4. Reforms in the Foreign Exchange Market
 Market-based exchange rates and the current account convertibility was adopted in 1993.
 The government permitted the commercial banks to undertake operations in foreign
exchange.
 Participation of newer players allowed in rupee foreign currency swap market to
undertake currency swap transactions subject to certain limitations.
 Replacement of foreign exchange regulation act (FERA), 1973 was replaced by the
foreign exchange management act (FEMA), 1999 for providing greater freedom to the
exchange markets.
 Trading in exchange-traded derivatives contracts was permitted for foreign institutional
investors and non-resident Indians subject to certain regulations and limitations.
LIMITATIONS OR WEAKNESSES OF INDIAN FINANCIAL SYSTEM
The measures taken by the government over the years to develop a strong financial system has
definitely resulted in a considerable amount of consistency and growth in the economy.
However, some of the weaknesses or limitations of Indian Financial System are that are still to
be addressed are:
1. Lack of coordination between different financial institutions
2. Monopolistic market structures
3. Dominance of development banks in industrial financing
4. Inactive and erratic capital market
5. Imprudent & immoral financial practice

Question Bank:

2Marks
1. Give the meaning of Finance.
2. Give the meaning of financial System?
3. State the components of the financial system.
4. What is the financial system?
5. Mention the constituents of Financial of financial system.
6. Give the meaning of capital asset pricing
7. Mention any 2 roles of Financial System.

5 marks:
1. Explain the constituents of financial system.
2. Explain the functions of financial system.
3. Explain the reforms in financial system.
4. Explain the limitations /weakness of Financial System.
5.Explain the structure of Financial System

Skill development Question:

1. List any 6 recent Financial Reforms in India.

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 Module -2 (Capital Market & Money Market)

Capital Market : Meaning – Structure – Importance – Functions – Players in Capital

Market – Instruments of Capital Market – Components of Capital Market – Recents
Trends in Capital Market.
Money Market: Meaning – Structure – Functions – Importance – Functions –
Instruments of Money Market – Recent trends in Money Markets.
Difference between Capital Market Vs Money Market.

Introduction Capital Market -

Capital Markets are financial markets that bring buyers and sellers together to trade stocks,
bonds, currencies and other financial assets. Capital markets include the stock market and
bond market. They help people with ideas become entrepreneurs and help small business
grow into big companies.
Is a financial market where long – term debt or equity backed securities are bought and sold.

Benefits of Capital Market:

 Mobilization of Savings
 Helps in raising long term capital
 Providing funds for development of backward areas.

IMPORTANCE OF CAPITAL MARKET

• It serves as a vital source for the productive use of the economy’s savings.

• Provides incentives to saving and facilitates capital formation by offering

suitable rates ofinterest as the price of capital

• Provides an avenue for investors

• Lower cost of transactions and information
• Improvement in operational efficiency.

• Facilitates increase in production and productivity in the economy and

hence enhances the economic welfare of the society.
 Functions of Capital Markets:
1. It facilitates the movement of capital to be used more profitability and
productively to boost the national income.
2. To protect the rights and interest of investors and to guide and educate them.
3. To develop and enforce a code of conduct and fair practices for intermediaries to
make them competitive and professional
4. To prevent trading malpractices like price and rigging, insider trading etc.
5. Absence of entry and exit barriers – the speed of technology has virtually made
the investors using their mobile devices just as quickly as they entered.
6. Capital liquidity – People with money can invest it owing to the financial markets.
They receive the ownership of a bond or stock in exchange. However they cannot
use a bond certificate to purchase a car, food or other assets.

Players in Capital Market

The key market players include individuals, organizations and institutions. Learn about them
and their respective roles in the functioning of securities markets around the world.
1. Bond Holders: Bondholders own the debt securities (or bonds) issued by governments
and corporations by lending to the bond issuers. In return, bondholders agree to be repaid
their initial investment (principal) at maturity and collect coupon interest until that time.
Bondholders differ from shareholders in status, earnings, voting rights, and repayment
priority.
2. Traders: Traders buy and sell financial instruments and can work for institutions or
trade on their own behalf. Traders employ different strategies to buy and sell securities
and manage risk in order to maximize their returns, and may use market analysis,
research and connections to improve their trading outcomes.
3. Index Providers: They are called credit rating agencies. Firms that create and calculate
the indices used to track the performance of securities and markets around the globe.
Financial professionals and investors rely on indices for information about performance,
and use index data as a basis for investment and financial planning decisions.
4. Market Dealers: Dealers are involved with a variety of securities, including stocks,
bonds, commodities and currencies. Market dealers seek to maximize profit from
the spread between the bid and ask prices, while also enhancing liquidity. These firms
execute orders to benefit from the different prices (spread) at which they complete the
buy and sell transactions.
5. Stock Exchanges : A stock exchange, securities exchange, or bourse is an exchange
where market participants, like traders, portfolio managers and individual investors, can
buy and sell securities, such as shares of public company stock, bonds and other financial
instruments. There are stock exchanges around the world, which provide companies with
an important means to raise capital.
Instruments of Capital Markets:
There are three main instruments in the capital market: equities (stocks,
shares), bonds, and. derivatives.
1. Equity Shares: Equity Shares: Equity shares are part ownership where the
shareholders are fractional owners and initiate the maximum entrepreneurial
liability related to a trading concern. Equity shareholders reserve the right to vote.
2. Preference Shares: Preference shares are issued by corporate bodies, and its
having some preferences at the time of winding up of the company. hey do not
confer voting rights to the holders. They also have a dividend payment structured
like a coupon or interest paid for bond issues.
3. Debt Securities: Debt securities are financial assets entitling the owners to a
stream of interest payments. Borrowers must repay the principal borrowed and are
classified into bonds and debentures. Typically, bonds carry a fixed lock-in
period, and on the maturity date, bond issuers must repay the principal amount to
the bondholders.
4. Derivatives: Are capital market financial instruments. Their values are
determined by underlying assets like stocks, currency, stock indexes and bonds.
The most common types of derivative instruments are:
  Forward: It is a contract between two parties in which the exchange occurs at
the end of the contract at a specific price.
 Future: It is a derivative transaction involving the exchange of derivatives on
a determined future date at a predetermined price.
Options: It is an agreement between two parties. Here, the buyer has to right to
buy or sell a specific number of derivatives at an exact price for a particular period.
Components of Capital Markets
The Capital Market serves as medium and long term funds for the business. It
includes:

Public Issue through Prospectus – A document issued by the company to invite the
public and the investors for subscribing the securities is called prospectus. A public
company can issue the prospectus to offer its shares and debentures, where as a private
company cannot issue prospectus.
Offer for Sale - A offer for sale is a simplest method wherein promoters in public
companies can sell their shares and reduce their holdings in a transparent manner
through bidding platform for the exchange.
Private Placement – A private placement is a sale of stock, shares and bonds to pre-
selected investors and institutions rather than publicity on the open market. It is an
alternative to an initial public offering (IPO) for a company seeking to raise capital for
expansion.
Right Issue – A right share issue is an offering of rights given to a company’s existing
shareholders allowing them to purchase additional shares directly from the company
at a discounted price, rather than buying them through the secondary market.
E-IPO – Electronic initial public offerings have been considered an important source
of financing establishing companies as well as increasing company’s capital,
enhancing its successful growth, and improvement of the corporate image as a whole.

Recent Trends in Indian Capital Market

1. The market infrastructure of the future is going to be nothing but more digital.
2. With the optimization of more faster robotic process automation in the future,
and smaller transaction times.
3. Capital growth, or capital appreciation, is an increase in the value of an asset or
investment over time.
4. Capital growth is measured by the difference between the current value, or
market value, of an asset or investment and its purchase price, or the value of
the asset or investment at the time it was acquired.
5. Capital growth investments vary depending on the level of risk tolerance for each
investor involved.

Introduction to Money Market

Meaning – Money Market

The money market involves the purchase and sale of large volumes of very short-term debt
products, such as overnight reserves or commercial paper. An individual may invest in the
money market by purchasing a money market mutual fund, buying a Treasury bill, or
opening a money market account at a bank.
The money market is an organized exchange market where participants can lend and borrow
short-term, high-quality debt securities with average maturities of one year or less.

Structure of Money Market:

The Indian monetary market has two broad categories – the organized sector and the
unorganized sector. Organized Sector: This sector comprises of the governments, the RBI,
the other commercial banks, rural banks, and even foreign banks. The RBI organizes and
controls this sector.

The money market is defined as dealing in debt of less than one year. It
is primarily used by governments and corporations to keep their cash flow
steady.
Functions of Money Market
1. Money serves several function - a medium of exchange, a unit of account, a store of
value, and a standard of deferred payment.
2. It also includes to finance trade, finance industry, invest profitably, enhance
commercial banks' self-sufficiency, and lubricate central bank policies.
 3. Price evaluation in short term debt investment – trading of short term assets. Maximum
tenure 365 days, whole sale transactions, high liquidity, less risk and low earnings.
4. Providing information and lower transaction cost.
5. Mobilization of Financial resources not only in deciding the prices but also the required
return on the investor’s capital required.
Instruments on Money Market
Financial institutions, banks, brokers and money dealers trade for a short period. T
Bills, commercial bills, certificate of deposit, trade credit, bills of exchange,
promissory notes, call money, etc. are some of the examples of money market
instruments.
T – Bills : Treasury Bills are money market instruments issued by the Government of
India as a promissory note with guaranteed repayment at a later date.
Commercial Bills : is an instrument that helps companies to get advance payment
for the invoices they raise after making sales to their customers.
Certificate of Deposits : (CD) is a savings account that holds a fixed amount of
money for a fixed period of time, such as six months, one year, or five years, and in
exchange, the issuing bank pays interest.
Bills of Exchange : is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay on demand or at fixed or
determinable future is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay on demand or at fixed or
determinable future.
Promissory Note: A promissory note is a financial instrument that contains a written
promise by one party (the note's issuer or maker) to pay another party (the note's payee) a
definite sum of money, either on demand or at a specified future date.

Call Money – A short term loan that payable on demand with in a maturity varying
from 1 to 14 days.
Recent trends in Money Market
1. There has been an exponential increase in digital finance in India over
recent years. This is further backed by various measures under the
'Digital India' visionof the government.
2. Mutual Funds have been granted permission to invest abroad.
3. the payments mode of Unique Payment interface is one of the
biggest recenttrends in Indian capital market.
4. Investment banking has been taking the AI (Artificial Intelligence)
wave with astorm.
5. The market infrastructure of the future is going to be nothing but more
digital.
6. With the optimization of more faster robotic process automation in
the future,and smaller transaction times.

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 MODULE 5
Banking and Development Financial Institutions
[Banking: Introduction - meaning -role and functions of Banks.
Development financial institutions - - structure, role & functions of
EXIM BANK, NABARD, SIDBI, MUDRA, NHB, LIC & GIC, UTI,
SFCs, NBFCs.]
Banking : The term ‘bank’ is derived from the French word ‘Banco’
which means a Bench or Money exchange table. In olden days,
European money lenders or money changers used to display (show)
coins of different countries in big heaps (quantity) on benches or tables
for the purpose of lending or exchanging.
Banking System – Definitions Banking systems refer to a structural
network of institutions that provide financial in a country. It deals with
the ownership of banks, 2023 the structure of banking system, functions
performed and the nature of business. The elements of the banking
system include: a) Commercial banks b) Investment banks c) Central
bank.
The commercial banks accept deposits and lend loans and advances; the
investment banks deal with capital market issues and trading; and the
central bank regulates the banking system by setting monetary policies
besides many other functions like currency issue.
Oxford Dictionary defines a bank as “an establishment for custody of
money, which it pays out on customer’s order.”
According to Prof. Sayers, “A bank is an institution whose debts are
widely accepted in settlement of other people’s debts to each other.” In
this definition Sayers has emphasized the transactions from debts which
are raised by a financial institution.”

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According to the Indian Banking Company Act 1949, “A banking
company means any company which transacts the business of
banking”.
Banking means accepting for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or other wise
and with drawable by cheque, draft or otherwise.”This definition throws
light on the three major functions of a bank. They are:
(i) Accepting of deposits and lending loans
(ii) Issue and pay cheques,
(iii) Collect cheques on behalf of the customers.
A bank is a financial institution that provides banking and other financial
services to their customers. A bank is an institution which provides
fundamental banking services such as accepting deposits and lending
loans. As financial intermediaries, banks stand between depositors who
supply capital and borrowers who demand capital. When banks accept
deposits its liabilities increase and it becomes a debtor, but when it
makes advances its assets increases and it becomes a creditor.
Banks are a subset of the financial services industry. The banks are the
main participants of the financial system in India. All the banks
safeguard the money and valuables and provide loans, credit, and
payment services, such as money orders, and cheque. The banks also
offer investment and insurance products.
The following are the major steps taken by the Government of India to
Regulate Banking institutions in the country
➢➢ 1949: Enactment of Banking Regulation Act.
➢➢ 1955:Nationalization of State Bank of India.
➢➢ 1959: Nationalization of SBI subsidiaries.
➢➢ 1961: Insurance cover extended to deposits.
➢➢ 1969:Nationalization of 14 major Banks.

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➢➢ 1971: Creation of Credit Guarantee Corporation.
➢➢ 1975: Creation of Regional Rural Banks.
➢➢ 1980:Nationalization of seven banks with deposits over 200
Crores.
The functions of commercial banks can be broadly categorized into
a) Primary functions
b) Secondary functions.
Primary Functions
1. Accepting of Deposits : The primary function of commercial banks is
to accept money from the people in the form of deposits which are
usually repayable on demand or after the expiry of a fixed period. For
these deposits, the banks pay a rate of interest, which is called as interest
expenditure. Thus, banks act as a custodian of depositors’ funds. The
deposits may be of various types such as savings deposits, current
deposits, fixed deposits and recurring deposits.
Savings deposits encourage customers to save money and promote
banking habit among the public. Savings Bank accounts provide a low
rate of interest and they have restrictions on the number of withdrawals
by the customers
Current Deposit accounts are opened by business people. These
accounts have no restrictions on the number of withdrawals and are
subject to service changes. There is no interest payment but current
account holders can also avail the benefits such as overdraft and cash
credit facilities.
Fixed deposits accounts can be opened by any person who wants to
deposit a lump sum funds at one time for a specific time period. These
accounts provide higher rate of interest depending on the time period for

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which it is deposited. These accounts do not allow withdrawal before the
expiry of the period.
Recurring deposit accounts are normally opened and operated by
persons who get regular income such as salary class and petty shop
owners. A specific amount of money is deposited periodically, say,
monthly for a specific period, say, one year. These accounts provide
higher rate of interest and do not allow withdrawal before the expiry of
the period.
Lending Loans and Advances : The second primary function of
commerce bank is to lend loans and advances to the corporate sector and
households. Normally, the rate of interest levied on these loans and
advances is higher than what it pays on deposits. The interest income is
the major source of income for commercial banks.
Over Draft (OD) is a facility extended by banks to the current account
holders who maintain their accounts for business purposes. In this
facility, the current account holders can withdraw more money from
their accounts than what they maintain as balance.
Cash Credit (CC) is a facility extended by banks to current account
holders and other who do not have account. Loans are normally
sanctioned for a short term period (say one year) or medium term (say
three to five years). At present, banks lend long term loans also.
Repayment of loan will be made in various installments (say monthly,
quarterly, semiannually, annually) over a specific period of time or in a
lump sum.
Discounting of Bill of Exchange is another method of granting
advances to the traders. The banks can advance funds by purchasing or
discounting the bills from traders which arise from trade. Trade bills are
those bills which emerge due to credit sale to customers.

5
Secondary Functions
Besides the primary functions of accepting deposits and lending loans
and advances, banks perform various other functions, which are called
secondary functions. They include agency functions and utility
functions.
Agency Functions : The banks act as agent of their customers and
perform a number of agency functions which include transfer of funds,
collection of cheques, periodic payment, periodic collections, portfolio
management and other agency functions.
Transfer of Funds is made by banks from one branch to another or
from one place to another for customers. At present, banks use
technology and telecommunication systems to facilitate these transfers.
Example: Electronic fund transfers (EFT). For this service, banks collect
service charges.
Collection of Cheques is facilitated by banks through clearing section.
Thus, the cheque deposited or presented for collection are credited to the
customers’ account once they collect the same through clearing process.
Periodic Payments such as payment of public utility bills, rent, interest,
etc. are made by banks on behalf of the customers based on their
standing instructions. A specific example: Payment of housing loan
interest from salary account.
Periodic Collections such as receipt of salary, pension, dividend,
interest, rent, etc. are made by banks on behalf of the customers based
on their standing instructions. A specific example: Receipt of dividend
from investments.
Portfolio Management services are offered by banks to guide the
customers or clients on their investment decisions to buy or sell the
securities (shares and debentures) to achieve optimal portfolio for
getting maximum returns.
6
Other Agency Functions like acting as trustee, administrator, adviser,
executor, etc. on behalf of the customer or client are provided by banks.
General Utility Functions/Financial Services:
Safety Locker Facility
Issue of Drafts, Traveller Cheques and Letter of Credits
Underwriting of Shares and debentures
Dealing in Foreign Exchange
Project Reports
Social Responsibility Programme
Other Utility Functions
Types of Banks :
A. Based on structure
1) Unit brand Bank
2) branch bank
3) group Bank
4) chain Bank
5) correspondence Bank
B .based on Ownership
1)Public Bank2)private bank3)foreign bank
4) cooperative Bank
C. based on functions
1) Savings bank
2)commercial bank
7
3) industrial or investment bank
4) Agriculture land Development Bank
5) cooperative Bank
6) regional rural Bank
7) exchange Bank
8) indigenous Bank
9) consumer Bank Central Bank
Unit Bank is a type of bank under which the banking operations are
carried by a single branch with a single office and they limit their
operations to a limited area.
Branch Bank is a type of banking system under which the banking
operations are carried with the help of branch network and the branches
are controlled by the Head Office of the bank through their zonal or
regional offices.
Group Bank is a system of banking under which there will be holding
company controlling the subsidiary companies which carry out banking
business.
Chain Bank is a system under which different banks come under a
common control through common shareholders or by the interlocking of
directors.
Correspondent Bank is a bank which link two banks of different
stature or size. Many Indian banks act as correspondent banks for many
foreign banks.
Private Sector Banks are those banks which are owned by group of
private shareholders. They elect board of directors which manages the
affairs of the banks. Some examples of private banks in India include
8
The Lakshmi Vilas Bank Ltd., The Karur Vysya Bank Ltd., The City
Union Bank Ltd., HDFC Bank, Axis Bank and son.
Foreign Banks are those banks which belong to foreign countries and
have their incorporated head office in foreign countries and branch
offices in other countries. The share capital of the foreign banks will be
fully contributed by the foreign investors. Some examples of foreign
banks in Indian include ABM Amro bank, Standard Chartered Bank, JP
Morgan Chase Bank and so on.
Cooperative Banks are those banks which are run by following
cooperative principles of service motive. Their main motive is not profit
making but to help the weaker sections of the society
Based on the Functions Saving Banks are established to encourage
savings habit among the people. There are no separate banks called
savings banks but postal department perform the functions of savings
bank.
Commercial Banks are established to help the people who carry out
trade and commerce, i.e., businessmen. They mobilize deposits from
public and lend short-term loans to businessmen in the form of
overdrafts, cash credit, etc for their commercial activities
Industrial Banks / Investment Banks are those banks which provide
long term loans to industries for the purpose of expansion and
modernization. They raise capital by issue of shares and debentures and
provide long term loans to industries.
Agricultural/and Development Banks are those banks which are
known as Land Mortgage or Agricultural Banks as they provide finance
to agricultural sector.
Co-operative Banks are those banks which are registered under the
Cooperative Societies Act 1912. These banks collect share capital from
the public and lend to economically weaker sections.
9
Regional Rural Banks are those banks which are established by the
Government under the Regional Rural Banks Act of 1976 with a
specific purpose to provide credit and other facilities to the small and
marginal farmers, agricultural labour, artisans and small entrepreneurs
in rural areas. Each RRB operates within the specified local areas.
Exchange Banks are also called as foreign exchange banks and they are
incorporated outside the country but carry out business in India.
Indigenous Banks refer to money lenders and Sahukars. The money
lenders using their own funds and deposits mobilized from public, grant
loans to the needy people. Consumers Banks operate only in advanced
countries like USA and Germany. The primary objective of these banks
is to provide loans to customers to purchase consumer durable like Car,
TV, Washing Machine, Furniture, etc. The consumers repay the loans in
easy installments.
Central / Federal / National Bank is a leader of all the banks in a
country. Every county has a central bank. The prime responsibility of a
Central Bank is to regulate the banking system and control monetary
policy.
Development Financial Institutions
A Development Financial institution (DFi) is defined as “an institution
endorsed or supported by Government of india primarily to provide
development/Project finance to one or more sectors or sub-sectors of the
economy. the institution differentiates itself by a thoughtful balance
between commercial norms of operation, as adopted by any financial
institution like commercial bank and developmental responsibilities.
Objectives of Development banks:
• To serve as an agent of development in various sectors.
• To accelerate the growth of the economy.
10
• To allocate resources to high priority areas.
• To foster rapid industrialization.
• To develop entrepreneurial skills.
• To promote the development of rural areas.
FUNCTIONS OF DEVELOPMENT BANKS
- Provide long term loans.
- Accept deposits from commercial banks, Central and State
governments.
- Provide refinancing facilities to commercial banks.

- Play an important role in hire purchase, lease finance, housing loan.

- Central and Statement governments contribute capital.
- They promote economic growth of the country.
Export–Import Bank of India
- It is a finance institution in India, established in 1982 under Export-
Import Bank of India Act 1981.
-EXIM Bank of India has been both a catalyst and a key player in the
promotion of cross border trade and investment.
Functions of the EXIM Bank are:
1. Financing of export and import of goods and services both of India
and of outside India.
2. Providing finance for joint ventures in foreign countries.
3. Undertaking merchant banking functions of companies engaged in
foreign trade.
4. Providing technical and administrative assistance to the parties
11
engaged in export and import business.
1. Export Financing: EXIM Banks provide financial assistance to
domestic companies engaged in export activities. They offer various
credit facilities such as per-shipment and post-shipment financing to
support exporters.
2. Import Financing: They also facilitate import activities by
providing financing options to importers. This helps in securing the
necessary funds for importing goods and services.
3. Credit Insurance: EXIM Banks offer credit insurance to protect
exporters from the risk of non-payment by overseas buyers. This
encourages companies to explore new markets without the fear of
financial losses.
4. Guarantees and Letters of Credit: EXIM Banks issue guarantees
and letters of credit, which act as a commitment to pay on behalf of their
clients. This helps in reducing the payment risks associated with
international trade transactions.
5. Market Research and Information: They conduct market research
and provide valuable information to businesses, helping them make
informed decisions about potential export markets, products, and
strategies.
6. Promotion of Export-Oriented Industries: EXIM Banks play a role
in promoting and developing export-oriented industries by offering
financial and advisory support. This contributes to economic growth and
enhances a country's global trade presence.
National Bank for Agriculture and Rural Development (NABARD)
12 July 1982
-Apex Development Financial Institution in India.
- The Bank has been entrusted with "matters concerning Policy Planning
12
and Operations in the field of credit for Agriculture and other Economic
activities in Rural areas in India".
- NABARD is active in developing Financial Inclusion policy.
- It undertakes monitoring and evaluation of projects refinanced by it.
- NABARD refinances the financial institutions which finances the
ruralsector.
- NABARD partakes in development of institutions which help the rural
economy.
- NABARD also keeps a check on its client institutes.
- It regulates the institutions which provide financial help to the rural
economy
Role and Functions of NABARD :
1. Agricultural Credit: NABARD plays a crucial role in providing
credit to agriculture and rural development. It refinances financial
institutions that lend to farmers and rural enterprises, ensuring a steady
flow of credit to the agriculture sector.
2. Rural Infrastructure Development: NABARD supports the
development of rural infrastructure by financing projects related to
irrigation, roads, bridges, and other essential facilities. This contributes
to overall rural development and improved living standards.
3. Promotion of Microfinance: NABARD fosters the growth of
microfinance institutions, promoting financial inclusion in rural areas.
This empowers small and marginalized farmers by providing them
access to financial services.
4. Rural Innovation and Research: The organization focuses on
promoting innovation and research in agriculture and rural development,
encouraging sustainable practices and technology adoption in the rural
sector.
13
5. Rural Employment Generation: NABARD supports programs and
projects that aim to generate employment opportunities in rural areas.
This includes initiatives related to agriculture, ago-processing, and rural
industries.
6. Development of Rural Financial Markets: NABARD works
towards strengthening and developing rural financial markets by
promoting cooperative banks, regional rural banks, and other financial
institutions catering to the rural population.
7. Water Resource Management: It plays a role in the sustainable
management of water resources by supporting projects related to
watershed development, water conservation, and efficient water use in
agriculture.
8. Capacity Building: NABARD engages in capacity-building activities
by providing training and support to various stakeholders in the
agriculture and rural development sectors, including farmers,
cooperatives, and rural institutions.
9. Monitoring and Evaluation : NABARD monitors and evaluates the
impact of its initiatives, ensuring that the allocated funds are effectively
utilized and projects meet their intended objectives.
10. International Cooperation: NABARD collaborates with
international agencies and institutions to facilitate knowledge exchange,
technology transfer, and financial support for rural development
projects, fostering global partnerships for sustainable agriculture.
The Small Industries Development Bank of India (SIDBI) is a
financial institution focused on the development and promotion of small
and medium enterprises (SMEs). Here are key aspects of SIDBI's role
and functions:

14
1. Financial Assistance to SMEs: SIDBI provides various financial
products and services, including term loans, working capital, and project
finance, to support the growth and development of small and medium-
sized enterprises.
2. Refinancing Institutions: SIDBI acts as a refinancing agency for
banks and financial institutions, encouraging them to lend to SMEs by
refinancing a portion of their loans. This ensures a more extensive reach
of credit to the small-scale sector.
3. Promotion of Entrepreneurship: SIDBI promotes entrepreneurship
by offering financial and non-financial assistance to new and existing
entrepreneurs. This includes support for technology adoption, skill
development, and capacity building.
4. Venture Capital and Equity Participation: SIDBI provides venture
capital and takes equity participation in small enterprises, helping them
raise funds for expansion and innovation. This enhances the risk-taking
ability of SMEs.
5. Credit Guarantee Schemes: SIDBI operates credit guarantee
schemes to mitigate the risk for lenders, encouraging them to extend
credit to SMEs. This improves the accessibility of finance for small
businesses.
6. Development of Industrial Infrastructure: SIDBI supports the
development of industrial infrastructure by financing projects related to
industrial parks, technology centers, and common facilities that benefit
SMEs.
7. Microfinance and Micro, Small, and Medium Enterprises
(MSME) SIDBI focuses on the development of the entire MSME sector,

15
including micro-enterprises. It supports microfinance institutions and
initiatives targeting the smallest businesses.
8. Technology Upgradation and Modernization: SIDBI
encourages SMEs to adopt modern technologies by providing
financial assistance for technology upgradation and modernization of
their operations.
9. Training and Development: SIDBI conducts training programs and
workshops to enhance the skills and knowledge of entrepreneurs and
professionals associated with SMEs, fostering a culture of continuous
learning.
10. International Cooperation: SIDBI collaborates with international
organizations and financial institutions to facilitate knowledge exchange,
access to global markets, and financial support for SMEs with global
aspirations.
MUDRA (Micro Units Development and Refinance Agency) is an
initiative by the Government of India aimed at providing financial
support to micro-enterprises in the country. Here are the key roles and
functions of MUDRA:
1. Micro-Credit Provision: MUDRA provides financial assistance to
micro-enterprises, including small businesses, vendors, and artisans,
through various lending institutions such as banks, NBFCs, and
microfinance institutions.
2. Refinancing Institutions: Similar to SIDBI, MUDRA acts as a
refinancing institution, extending financial support to banks and
financial institutions that lend to micro-enterprises. This helps in
ensuring a steady flow of credit to the smallest businesses.
3. Three Categories of Loans: MUDRA provides loans under three
categories :
Shishu (up to ₹50,000),
16
 Kishore (₹50,001 to ₹5,00,000), and Tarun (₹5,00,001 to
₹10,00,000), catering to the diverse financial needs of micro-
businesses.
4. Promotion of Micro-Entrepreneurship: MUDRA aims to promote
entrepreneurship at the grassroots level by supporting individuals in
establishing and expanding micro-enterprises, fostering economic
development.
5. Financial Inclusion: MUDRA contributes to financial inclusion by
extending credit to those who may not have access to traditional banking
channels, especially in rural and underserved areas.
6. Monitoring and Evaluation: MUDRA monitors and evaluates the
impact of its lending programs to ensure effective utilization of funds
and to assess the success and challenges faced by micro-entrepreneurs.
7. Credit Guarantee Schemes: MUDRA operates credit guarantee
schemes to reduce the risk for lenders, making it easier for them to
provide loans to micro-businesses and individuals.
8. Skill Development: MUDRA supports skill development initiatives
to enhance the capabilities of individuals engaged in micro-enterprises,
enabling them to manage their businesses more efficiently.
9. Technology Adoption: The agency encourages the use of modern
technologies in micro-enterprises by providing financial assistance for
the adoption of technology and innovation in their operations.
10. Awareness and Outreach Programs: MUDRA conducts
awareness and outreach programs to educate micro-entrepreneurs about
its schemes and to promote financial literacy, empowering them to make
informed financial decisions.
The National Housing Bank (NHB) is a financial institution in India
that operates as the apex institution for the housing finance sector. Here
are the key roles and functions of NHB:
17
1. Regulator of Housing Finance Companies (HFCs): NHB acts as the
regulatory authority for Housing Finance Companies, overseeing and
regulating their activities to ensure stability and transparency in the
housing finance sector.
2. Promotion of Housing Finance: NHB plays a pivotal role in
promoting and developing housing finance markets in India. It provides
refinancing facilities to HFCs, encouraging them to extend credit for
housing-related activities.
3. Refinancing of Housing Loans: NHB refinances housing loans
provided by banks and HFCs, ensuring a continuous and affordable flow
of credit to the housing sector. This facilitates home ownership and
promotes real estate development.
4. Setting Prudential Norms: NHB establishes prudential norms and
guidelines for HFCs to maintain the financial health of these institutions
and safeguard the interests of borrowers in the housing finance market.
5. Resource Mobilization: NHB mobilizes resources for the housing
sector by issuing bonds and debentures, raising funds from the market
to support its refinancing activities and promote the growth of housing
finance.
6. Developmental Functions: NHB undertakes various developmental
functions, including research and development activities, to foster
innovation, efficiency, and sustainability in the housing finance sector.
7. Risk Mitigation: NHB works towards mitigating risks associated
with housing finance, ensuring that the sector remains resilient to
economic fluctuations and challenges, thereby promoting stability in the
housing market.
8. Housing Policy Advocacy: NHB collaborates with the government
and other stakeholders to advocate and contribute to the formulation of
housing policies that address the needs of various segments of the
18
population.
9. Capacity Building: NHB engages in capacity-building initiatives for
HFCs, providing training and support to enhance their skills and
capabilities in effectively managing housing finance operations.
10. Information Dissemination: NHB disseminates information related
to the housing finance sector, including market trends, regulatory
changes, and best practices. This helps in creating awareness and
promoting transparency in the industry.
Unit Trust of India (UTI) has undergone significant changes over the
years. Here is a brief overview of its history, roles, and functions:
Brief History:
1. Establishment: UTI was established on February 1, 1964, through
an Act of Parliament. It was created with the objective of mobilizing
savings from the public and channelizing them into the capital market
toencourage economic growth.
2. Monopoly Period: UTI operated as a monopoly in the mutual fund
industry in India for several years, managing a diverse range of
investment schemes.
3. Reforms and Restructuring: In 2002, UTI underwent a major
restructuring. It was divided into two separate entities – UTI Asset
Management Company (UTIAMC) and UTI Trustee Company
(UTITC). This move aimed to bring more efficiency, accountability, and
transparency to its operations.
Roles and Functions:
Mutual Fund Management: UTI plays a crucial role in managing
mutual funds, offering a variety of investment schemes to cater to the
diverse needs of investors. These funds cover equity, debt, hybrid, and
other asset classes.

19
Investment Mobilization: UTI mobilizes funds from the public by
offering various mutual fund schemes. It acts as an intermediary
between investors and the capital market, providing them with
opportunities for investment in a diversified portfolio.
Financial Intermediation: UTI acts as a financial intermediary, pooling
funds from a large number of investors and investing them in a
professionally managed portfolio of securities. This allows small
investors to access a diversified investment portfolio.
Investment Research: UTI conducts thorough research to identify
investment opportunities and manage risk in its portfolios. This involves
analyzing market trends, economic indicators, and company
performance to make informed investment decisions.
Wealth Creation: UTI aims to create wealth for its investors over the
long term by generating returns through its investment strategies. This
helps individuals achieve their financial goals, such as retirement
planning, education funding, and wealth accumulation.
Financial Inclusion: UTI provides a platform for retail investors to
participate in the capital market, promoting financial inclusion by
offering investment opportunities to a wide spectrum of the population.
Regulatory Compliance: UTI complies with regulations set by the
Securities and Exchange Board of India (SEBI) and other relevant
authorities. It ensures transparency, fairness, and investor protection in
its operations.
Customer Education: UTI engages in customer education initiatives to
enhance financial literacy and awareness about mutual funds. This helps
investors make informed decisions regarding their investment portfolios.
Corporate Social Responsibility (CSR): UTI may also contribute to
social causes and community development as part of its CSR initiatives.

20
Adaptation to Market Dynamics: UTI continuously adapts its
strategies to changing market dynamics, aiming to maximize returns for
investors while managing risks effectively in the dynamic investment
landscape.
State Financial Corporations (SFCs):
-They are an integral part of institutional finance structure of a country.
In 1951 the State Financial Corporations Act was passed.
- First Corporation by Punjab Government was set up in 1953.
- At present there are 18 such corporations. SFC helps in
ensuring balanced regional development, higher investment,
more employment generation and broad ownership of various
industries.
-SFC provides loans mainly for the acquisition of fixed assets like land,
building, plant, and machinery
Industrial Development Bank of India/ IDBI Bank Limited
-Established in 1964 by an Act to provide credit and other financial
facilities for the development of the fledgling Indian industry.
-It is operated as a subsidiary of Reserve Bank of India and later RBI has
transferred it to Government of India.
-On June 29, 2018 Life Insurance Corporation of India (LIC) has got a
technical go-ahead from Insurance Regulatory and Development
Authority of India (IRDAI) to increase stake in IDBI Bank up to 51%.
LIC completed acquisition of 51% controlling stake on January 21,2019.
- Re-categorized as a Private Sector Bank for regulatory purposes with
effect from January 21, 2019.
IFCI (Industrial Finance Corporation of India):

21
- It is a Non-Banking Finance Company in the public sector.
- Established in 1948 as a statutory corporation,
- It is currently a company listed on BSE and NSE. IFCI has seven
subsidiaries and one associate.
- It provides financial support for the diversified growth of Industries
across the spectrum. The financing activities cover various kinds of
projects such as airports, roads, telecom, power, real estate,
manufacturing, services sector and such other allied industries.
ICICI BANK LIMITED
- Was established as a wholly-owned subsidiary of Industrial Credit and
Investment Corporation of India (ICICI) an Indian Financial Institution
in1994.-The bank was founded as the Industrial Credit and Investment
Corporation of India Bank, before it changed its name to the abbreviated
ICICI Bank. The parent company was later merged with the bank.
-ICICI Bank Limited is an Indian multinational banking and financial
services company headquartered in Mumbai, Maharashtra with its
registered office in Vadodara, Gujarat. As of 2018, ICICI Bank is the
second largest bank in India in terms of assets and market capitalization.
-ICICI Bank is one of the Big Four banks of India
- The bank has a network of 5,275 branches and 15,589 ATMs across
India and has a presence in 17 countries including India.
NON BANKING FINANCIAL INSTITUTIONS
The Reserve Bank Of India has defined NBFC as the Companies which
are registered under the Companies Act, 1956 and are 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 they does not include any institution whose
22
principal business is that of agriculture activity, industrial activity,
purchase or sale of any goods (other than securities) or providing any
services related to it and sale/purchase/construction of immovable
property are known as Non-Banking Financial Company.
• A non bank financial institution (NBFI) is a financial institution that
does not have a full banking license and cannot accept deposits from the
public.
• Examples of non bank financial institutions include insurance firms,
venture capitalists, currency exchanges, some microloan organizations,
and pawn shops.

Functions of NBFC
• Hire Purchase Services : Hire purchase service is a way through which
the seller delivers the goods to the buyer without transferring the
ownership of the goods. The payment of the goods is made in instalments.
Once the buyer pays all the instalments of the goods, the ownership of the
good is automatically transferred to the buyer.
• Retail Financing Companies that Provides short term funds for Loan
against shares, gold, property, primarily for consumption purposes.
• Trade finance Companies dealing in Dealer/distributor finance so that
they can for working capital requirements, vendor finance, and other
business loans.
• Infrastructural Funding • This is the largest section where major
NBFCs deal in. A lot of portion of this segment alone makes up a major
portion of funds lent, amongst the different segments. This majority
includes Real Estate, railways or Metros, flyovers, ports, airports, etc.
• Asset Management Company: Assets management companies are
those companies consists of fund managers (who invest in equity shares
to gain handsome gains) who invest the funds pooled by small investors
and actively manage it.
• Leasing Services The companies that deals in leasing or for a better
understanding of this word we can understand it in such a way that the
23
way we rent property or flat for living similary these companies provide
property to small businesses or sometime even larger ones who cannot
afford it for whatsoever reason. The only difference between renting and
leasing is that in leasing contracts are made for fixed period of time.
• Venture Capital Services The companies that invest in the small
businesses which are at their initial stage but their success rate is high and
are promising enough of sufficient return in coming time. Eg: Projects.
• Micro Small Medium Enterprise (MSME) Financing
MSME is one of the roots of our economy and millions of livelihood
depends on this sector that is why government announced such luring
schemes for MSME sector to promote its growth.

STRUCTURE:
• VI.1 Non-banking financial institutions (NBFIs) comprise a
heterogeneous group of financial intermediaries.
• Those under the regulatory purview of the Reserve Bank consist of all-
India financial institutions (AIFIs), non-banking financial companies
(NBFCs)1and primary dealers (PDs) (Chart VI.1).
• AIFIs are apex institutions established during the development planning
era to provide long-term financing/refinancing to specific sectors such as
(i) agriculture and rural development; (ii) trade; (iii) small industries; and
(iv) housing.
• NBFCs are dominated by joint stock companies, catering to niche areas
ranging from personal loans to infrastructure financing.
• PDs play an important role as market makers for government securities.
• The Reserve Bank regulated NBFI sector grew by 15.8 per cent in 2017-
18; by the end of March 2018, it was 19.8 per cent of the scheduled
commercial banks (SCBs) taken together in terms of balance sheet size.
• Within the NBFI sector, AIFIs constituted 23 per cent of total assets,
while NBFCs represented 75 per cent and standalone PDs accounted for
2 per cent.
From the FY 2011-12, Ministry of Finance, Government of India has
designated National Housing Bank (NHB) as the Common Nodal Agency
for both Schedule Commercial Banks (SCBs) and Housing Finance
Companies (HFCs) for implementation & disbursement of subsidy under
the Scheme.
Export-Import Bank of India (EXIM Bank) is a specialized financial
institution, wholly owned by Government of India, set up in 1982, for
financing, facilitating and promoting foreign trade of India.

The standalone primary dealers are either subsidiaries of scheduled

commercial banks Indian subsidiaries of entities incorporated abroad or
companies incorporated under companies act 1956 and are registered as
Non-Banking Financial Company (NBFC).
A primary dealer (PD) is an RBI registered entity that is authorized in
buying and selling government securities. There are two types of primary
dealers in India. Standalone primary dealers and bank primary dealers.
The standalone primary dealers are either subsidiaries of scheduled
commercial banks Indian subsidiaries of entities incorporated abroad or
companies incorporated under companies act 1956 and are registered as
Non-Banking Financial Company (NBFC)
In terms of liability structure, NBFCs are classified into two categories –
deposit taking NBFCs or NBFCs-D, which accept and hold public
deposits and non-deposit taking NBFCs or NBFCs-ND, which do not
accept public deposits.
LIC : • Life Insurance Corporation of India (abbreviated as LIC) is an
Indian state owned insurance and investment corporation owned by the
Government of India. The Life insurance Corporation of India was
founded on September 1, 1956, when the Parliament of India passed the
Life Insurance of India Act that nationalized the insurance industry in
India. Over 245 insurance companies and provident societies were
merged to create the state-owned Life Insurance Corporation of India.
What are the benefits of LIC?
• Unlike any term plan, it also offers Maturity Benefits to the surviving
policyholder.
• Death Benefit- In case of sudden death of the policyholder within the
policy tenure, the nominee gets the assured sum.
• Maturity Benefits- A total of 110% of the premium paid is paid to the
live policyholder at the time of maturity.
Functions:
• The main function of LIC is to collect the savings of the people through
a life insurance policy and invest that money in various financial markets.
• One of the main functions of LIC is to invest fund into government
securities so as to protect the capital of the people who have given their
money to LIC.
Objectives: • Objectives of LIC of India
• The LIC was established with the following objectives:
• Spread life insurance widely and in particular to the rural areas, to the
socially and economically backward Claris with a view to reaching all
insurable persons in the country and providing them adequate financial
cover against death at a reasonable cost.
• Maximization of mobilization of people’s savings for nation building
activities.
• Provide complete security and promote efficient service to the policy-
holders at economic premium rates.
• Conduct business with utmost economy and with the full realization that
the money belong to the policy holders.
• Act as trustees of the insured public in their individual and collective
capacities.
• Meet the various life insurance needs of the community that would arise
in the changing social and economic environment
• Involve all people working in the corporation to the best of their
capability in furthering the interest of the insured public by providing
efficient service with courtesy.
Types of plans:
1. Children plans :-Children’s life goals
2. Retirement plans:- Retire grace fully
3.Term insurance plans: Pure risk cover
4. Endowment plans: Insurance + savings
5. Money back plans: periodic returns
6. Whole life insurance:- life coverage to the life assured to the whole life
7. U LIP plans: Insurance + Investment opportunity
GIC: General insurance industry in India was nationalized and a
government company known as General Insurance Corporation of
India was formed by the central government in November, 1972. General
insurance companies have willingly catered to these increasing demands
and have offered a plethora (a large excess amount of something) of
insurance covers that almost cover anything under the GIC.

Objective of the GIC:

• To carry on the general insurance business other than life, such as
accident, fire etc.
• To aid and achieve the subsidiaries to conduct the insurance business
and
• To help the conduct of investment strategies of the subsidiaries in an
efficient and productive manner.
Role and Functions of GIC
• Carrying on of any part of the general insurance, if it thinks it is desirable
to do so.
• Aiding, assisting and advising the acquiring companies in the matter of
setting up of standards of conduct and sound practice in general insurance
business.
• Rendering efficient services to policy holders of general insurance.
• Advising the acquiring companies in the matter of controlling their
expenses including the payment of commission and other expenses.
Advising the acquiring companies in the matter of investing their fund.
• Issuing directions and encouraging competition among the acquiring
companies in order to render their services more efficiently.
 Public Sector :
• These insurance companies are wholly owned by the Government of
India(subsidiaries of GIC). There are totally 4 PSUs in India namely:
• National Insurance Company Ltd-Head Office- Kolkata
• Oriental Insurance Company Ltd- Head Office- New Delhi
• The New India Assurance Company Ltd- Head Office-Mumbai
• United India Insurance Company Ltd- Head Office-Chennai
Private Insurance Companies
There are mainly 12 private General Insurance companies in India namely
• Apollo DKV Health Insurance Ltd
• Bajaj Allianz General Insurance Co. Ltd
• Cholamandalam MS General Insurance Co. Ltd
• Future General Insurance Company Ltd
• HDFC Ergo General Insurance Co Ltd
• ICICI Lombard General Insurance Ltd
• Iffco Tokio General Insurance Pvt Ltd
• Reliance General Insurance Ltd
• Royal Sundaram General Insurance Co Ltd
• Star Health and Allied Insurance
• Tata AIG General Insurance Co Ltd
• Universal Sompo General Insurance Pvt Ltd
•
•
•
•
•
 Module No. 3:
Primary Market & Secondary Market

Primary Market: Meaning, features, players of primary market. Instruments in primary

market. Merits and Demerits of primary markets- Methods of floating new issues: Public
issue-Offer for sale-Right Issue
- Private placement - Shortcomings of Indian Primary Markets in India.

Secondary Market: Meaning, structure, functions, players in Stock Market, Merits and
Demerits of stock markets. Methods in Stock Markets - Recognition of stock exchanges -
Function of stock exchanges of BSE-NSE - OTCEI - Listing of securities - Trading and
Settlement Procedure in the Stock Market-Problems of Indian Stock Market.

Primary market:

Meaning:

In financial terms, the primary market is the capital market segment, where companies
issue fresh securities directly to investors. It provides the initial platform for companies
seeking to raise capital, be it for expansion, meeting operational expenses, or funding new
projects. For instance, when a company decides to go public, it does so via the primary
market, launching what we commonly refer to as an Initial Public Offering (IPO).

The primary market is where securities are created and first sold to investors. It’s a
marketplace where companies, governments, and other entities can raise capital by issuing
new securities such as stocks, bonds, or shares of mutual funds.
Features:

1. In the primary market, investors directly purchase securities from the company, aiming
to raise funds. In the secondary market, investors trade securities among themselves,
providing liquidity.
2. Pricing is fixed in the primary market but determined by supply and demand in the
secondary market. Regulatory oversight by SEBI ensures fairness in both markets.
3. The primary market involves one-time transactions, while the secondary market
allows multiple transactions.
4. Brokers play a minimal role in the primary market but a significant role in the
secondary market.
Functions of Primary Market

The primary market performs several important functions in the

economy, including:
1. Raising capital
The new issue market is a vital source of capital for companies looking to expand their
operations, invest in new projects, or pay off existing debt. By issuing new securities in
the primary market, companies can raise the funds they need to grow their businesses.
2. Price discovery
The primary market helps to establish the fair market value of newly issued securities by
setting the initial price through the IPO or other mechanisms. This process helps to ensure
that investors are paying a fair price for the securities they are buying.

3. Facilitating the transfer of risk

In the primary market, the risk is transferred from the company to the investors who
purchase the newly issued securities. This allows companies to reduce their financial
risk. Additionally, it allows them to transfer it to investors who are willing to take on that
risk in exchange for the potential for higher returns.

4. Providing investment opportunities

The new issue market offers a range of investment opportunities to investors, including
equity shares, bonds, and other debt instruments. These securities can be purchased by
individuals, institutional investors, and other market participants who are looking to
diversify their portfolios and achieve their investment objectives.

5. Regulating securities issuances

The new issue market is regulated by government bodies such as the Securities and
Exchange Board of India (SEBI) in India and the Securities and Exchange Commission
(SEC) in the United States. These regulatory bodies are responsible for ensuring that
issuances are conducted in a fair, transparent, and efficient manner. Also, the investors are
protected from fraud and other abuses.

Process of issuing securities in the primary market

The process of issuing securities in the primary market involves several steps, they are:
A. Preparation of Prospectus: A prospectus is a legal document. It provides details
about the securities such as the terms and conditions, risks, and financial information of
the issuer. It is prepared by the company and filed with the securities regulator.
B. Appointment of lead managers and underwriters: The Company appoints lead
managers and underwriters to manage the issue. They help price the securities,
market the issue to investors, and ensure regulatory compliance.

C. Pricing of securities: The lead managers and underwriters determine the price of the
securities based on market demand and the issuer’s financial health. The price is set in
consultation with the company and the regulatory authorities.
D. Allotment of securities: After finalizing the price, investors can subscribe to the
securities. They will get securities based on their subscriptions and the availability of
securities.
E. Listing on the stock exchange: After the allotment of securities, the securities are
listed on the stock exchange for trading. This enables investors to buy and sell securities
in the secondary market.
PLAYERS IN THE PRIMARY MARKET
Some important players in the primary market are:
1. Merchant Bankers
Merchant bankers are responsible for determining the capital structure of a company, as
well as drafting a prospectus. These forms are then submitted to SEBI for approval to list
stocks on stock exchanges.

Merchant Bankers are responsible for all compliance formalities.

1. They also appoint registrars. They look at the listing and placing of securities, the
arrangement for underwriting, placing of issues, selections of brokers, bankers to issue,
publicity and advertising agencies, printers, etc. When a company approaches the public
for funds, merchant bankers manage the process of public issue. They perform in the
capacity of issue managers, lead managers and co- managers.
2. Registrars
Primary market issues have registrars (registered to SEBI). These registrars are
responsible for collecting investor applications and keeping track of these applications.
The registrars keep track of any money received from investors, as well as money paid to
sellers, and assist companies to determine the allocation of shares through consulting
stock exchanges. The process of allotting shares to those who have applied and sending
out allotment letters is also overseen by registrars.
3. Underwriters and Brokers
The role of the underwriters is important when a company is listed. In case the company
does not meets the minimum subscription and there are not enough subscribers, the
underwriter agree to purchase all securities They ensure that all shares are subscribed to
by them or others. The companies appoint underwriters after consulting with merchant
bankers
Underwriters subscribe to a certain amount of capital in the issue. They have to fill the
gap, if any, due to the failure of subscription as planned. Brokers place the new issue in
the market through their wide network and through sub-brokers.
4. Collecting and Coordinating Bankers
Collecting bankers collect the money in the form of cash, cheques, etc., for the
subscriptions and the coordinating bankers correlate the collection information on
subscriptions and convey the same to the underwriters and merchant bankers. A collecting
 banker may double up as coordinating bankers too.
5. Other Agencies
Other agencies like printers, advertisers and mailing agencies are also involved for
providing publicity to the new issue.
Instruments in primary market
A. Traditional instruments
1. Equity Shares
2. Preference Shares
3. Debentures' and Bonds
B. Modern Instruments
(i) Secured Premium Notes (SPN) with detachable warrants
Secured Premium Notes are issued along with a detachable warrant. The warrants
attached to it ensure the holder’s right to apply and get equity shares after a notified
period provided the SPN is fully paid- up
(ii) Equity shares with detachable warrants: In this instrument, along with fully paid-
up equity shares, detachable warrants are issued which entitle the warrant holder to apply
for a specified number of shares at a determined price. Detachable warrants are registered
separately with the stock exchange and traded separately.
(iii) Preference shares with warrants: This instrument shall carry a certain number of
warrants entitling the holder to apply for equity shares 'at premium' at any time in one
or more stages between the third and fifth year from the date of allotment. From the
date of allotment, the preference shares with warrants should not be transferred or sold
for a period of three years.
(iv) Non-convertible debentures with detachable equity warrants: The holder of the
instrument is given an option to buy a specified number of shares from the company at a
predetermined price with a definite time- frame. There is a specific lock-in period after
which the holder can exercise his option to apply for equity shares.
(v) Fully convertible cumulative preference shares: This instrument has two parts-A and
B. Part A is convertible into equity shares automatically on the date of allotment without
application by the allot Part B will be redeemed at par/converted into equity after a lock-
in period, at the option of the investors.
(vi) Zero interest Fully Convertible Debentures (FCDs): No interest will be paid to the
holders of this instrument till the lock-in period. After a notified period, this debenture
will be automatically and compulsorily converted into shares. Before the conversion of
FCDs into equity, if the company issues rights, it would be available to the holders is
proportion decided by the company.
(vi) Fully Convertible Debentures (FCDs) with interest: This instrument carries no
interest for a specified period. After this p option is given to apply for equities at premium
for which no additional is payable However, interest on FCDs is payable at a determined
rate frons date of first conversion to second/final conversion and equity will be a lieu of it
interest amount.
 (viii) Zero interest partly Convertible Debentures (PCDs) with detach and separately
tradable warrants. This partly convertible debenture has two parts - A and B. Part A
convertible into equity shares at a fixed amount on the date of allotment Part is non-
convertible and redeemed at par at the end of a specific period. Fret will also carry a
detachable and separately tradable warrant. It also give option to the holder to receive
equity share for every warrant
(ix) Zero interest bonds: Zero interest bonds are sold at a discount from their eventual
maturity and bear no interest. In India, zero interest convertible bonds are issued by
company. These bonds do not carry any interest till the date of conversion and are
converted into equity shares at par or premium on the expiry of a fixed period
(x) Deep discount bonds: These bonds are sold at a large discount to their nominal value.
There no interest payments on these bonds and the investors get return as accretion to the
par value of the instrument over its life.
(xi) Option bonds: Option bonds may be cumulative or non-cumulative as per the optional
the holder of the bonds. In case of cumulative bonds, interest is accumulated and is
payable on maturity only In case of non-cumulative bonds, the interest is paid
periodically The option is to be exercised by the investor at the time of investment. The
Industrial Development Bank of India issued option bonds in January 1992
(xii) Bonds with warrants: A warrant allows the holder to buy a number of equity shares at a
pre-specified price in future. The warrants are usually attached to debentures or
preference shares.
Methods of floating new issues
There are various methods of floating new issues in the primary market:
(i) Public issue or Offer through Prospectus: This involves inviting subscription from
the public through issue of prospectus. A prospectus makes a direct appeal to investors
to raise capital, through an advertisement in the newspapers and in the magazines. The
issues may be underwritten and also are required to be listed on at least one recognised
stock exchange. The contents of the prospectus have to be in accordance with the
provisions of the Companies Act and SEBI Disclosure and Investor Protection
Guidelines.
(ii) Offer for Sale: Under this method, securities are not issued directly to the public but
are offered for sale through the intermediaries like issuing houses or stock brokers. In
this case, a company sells securities in bulk at an agreed price to brokers who, in turn,
resell them to the investing public.
(iii) Rights Issue: This is a privilege given to existing shareholders to subscribe to a
new issue of shares according to the terms and conditions of the company. The
shareholders are offered the ‘Right’ to buy new shares in proportion to the number of
shares they already possess.
(iv) Private Placement: Private Placement is the allotment of securities by a company to
institutional investors and some selected individuals. It helps to raise capital more
quickly than a public issue. Access to the primary market can be expensive on account of
various mandatory and non-mandatory expenses. Some companies, therefore, cannot
afford a public issue and choose to use private placement.

Primary Market – shortcomings / Limitations

1. Limited access to information: Since unlisted companies are not subject to the
Securities and Exchange Board of India's regulatory and disclosure requirements,
investors may have limited access to information prior to investing in an IPO.
2: No Historical Data: Since the company is offering its shares to the public for the first
time through an initial public offering, there is no historical trading data in a primary
market for analyzing IPO shares.
3. Difficult for Small Investors: Small investors may find it unfavorable in some cases.
They may not receive share allocation if a share is oversubscribed.

Secondary Market
The secondary market refers to the market where previously issued financial
instruments, such as stocks, bonds, and derivatives, are bought and sold by investors. It
is distinct from the primary market, where new securities are issued and sold to the
public for the first time. It is also called as stock market.
The secondary market is where investors buy and sell securities from other investors.
The secondary market, also known as the aftermarket, is where previously issued
securities are bought and sold among investors.

Its structure typically includes:

1. Exchanges: These are centralized platforms where securities, such as stocks and
bonds, are traded. Examples include the New York Stock Exchange (NYSE) and
NASDAQ. Exchanges have specific trading hours and rules.
2. Over-the-Counter (OTC) Market: Securities not listed on exchanges are traded in
the OTC market. It's decentralized, and trading occurs electronically or over the counter.
The OTC Bulletin Board (OTCBB) and the OTC Markets Group are examples.
3. Brokers and Dealers: These are the intermediaries who facilitate trades. Brokers
connect buyers and sellers, while dealers buy and sell securities directly, often making
markets for specific securities.
4. Regulatory Bodies: Securities and financial markets are regulated by government
agencies, such as the SEBI in India, U.S. Securities and Exchange Commission (SEC) in
the United States, to ensure fair and transparent trading.
5. Investors: Individuals, institutions, and traders participate in the secondary market
to buy and sell securities. They can be classified as retail investors or institutional
investors.
6. Clearing and Settlement: After a trade is executed, there is a process of clearing
and settlement to ensure the transfer of securities and funds between parties. Central
clearinghouses may be involved.
7. Price Discovery: Prices in the secondary market are determined through the forces
of supply and demand. This process leads to the valuation of securities and their
market prices.
8. Order Types: Investors can place various types of orders, including market orders,
limit orders, and stop orders, to specify how and when their trades should be executed.
9. Market Data and Information: Real-time market data and information about
securities, such as stock quotes, trading volumes, and financial reports, are widely
available to participants.
10. Regulations and Reporting: Market participants must adhere to rules and
regulations to ensure transparency, prevent fraud, and protect investor interests.
The secondary market plays a crucial role in providing liquidity to investors by allowing
them to buy and sell securities they own, and it influences the pricing and valuation of
these securities.
Players or Market Participants In Stock Market
Market Participants in Stock Market can be broadly categorized into individual investors,
institutional investors, brokers, market makers, regulators, and government entities.

1. Individual Investors: Individual investors are private individuals who invest their
personal capital in various financial instruments like stocks, bonds, mutual funds, and
real estate. They typically have diverse investment goals, ranging from wealth
accumulation to retirement planning. Individual investors may vary widely in their risk
tolerance, investment strategies, and financial knowledge.
2. Institutional Investors: Institutional investors are organizations that invest large
sums of money on behalf of others. They include:
3. Mutual Funds: These pool money from many investors to invest in a diversified
portfolio of stocks, bonds, or other securities.
4. Pension Funds: These manage investments to provide retirement income for employees.
5. Insurance Companies: They invest premiums collected from policyholders to
generate returns and meet future claim obligations.
6. Brokers: Stockbrokers are licensed entities who connect investors to the financial
markets. They play a pivotal role in buying and selling stocks for individual and
institutional investors.
7. Regulators: Regulators, such as SEBI in India, supervise financial markets to
guarantee transparent, fair, and lawful operations. These regulators not only set market
guidelines but also conduct audits and implement measures to counteract fraud and
ensure market stability. Their primary objective is to shield investors and uphold the
integrity of the market.
8. Clearing Corporation: This organization, linked with a stock exchange, manages the
verification, completion, and transfer of stocks. Essentially, it ensures smooth buying
and selling processes on either side of a deal.
Functions of Secondary Market: The secondary market serves several important
functions, including:
1. Liquidity: It provides a platform for buying and selling previously issued securities,
making it easier for investors to convert their investments into cash.
2. Price Discovery: It helps determine the market price of securities through the forces
of supply and demand. This information is crucial for both investors and issuers.
3. Risk Reduction: It allows investors to diversify their portfolios by trading a
variety of securities, reducing risk by spreading investments across different assets.
4. Capital Allocation: The secondary market helps allocate capital to companies and
government entities. Efficient secondary markets can attract more investors and capital.
5. Market Efficiency: It contributes to market efficiency by providing continuous
trading opportunities, ensuring that securities are priced fairly and accurately.
6. Exit Strategy: Investors can use the secondary market to exit their investments when
they choose, offering flexibility and an exit strategy for those who want to sell their
holdings.
7. Investor Confidence: A well-regulated and transparent secondary market can
increase investor confidence, as they know they can easily buy or sell assets when
needed.
8. Price Stabilization: It can help stabilize prices by providing liquidity and
reducing large price fluctuations.
9. Transfer of Ownership: It facilitates the transfer of ownership of securities from
one investor to another, making it easy to buy and sell assets.
10. Access to Capital: Companies can use the secondary market to raise additional
capital by issuing more shares or bonds to the public.
Overall, the secondary market plays a crucial role in the functioning of the broader
financial system by providing a marketplace for the trading of existing securities, which
in turn benefits investors, issuers, and the economy as a whole.

Advantages of Secondary Market

Secondary market offer several advantages for investors, issuers, and the overall
financial system. Here are some of the key advantages:
1. Liquidity
The secondary market provides liquidity for investors by allowing them to easily buy and
sell previously issued securities. This makes it easier for investors to adjust their
portfolios in response to changing market conditions and allows them to access cash, if
needed, quickly.
2. Price discovery
The secondary market facilitates price discovery by allowing investors to trade securities
based on the supply and demand dynamics of the market. This helps to ensure that
securities are priced efficiently and that investors receive fair value for their investments.
3. Transparency
Secondary market transactions are often transparent, with information about the securities,
the issuers, and the trading volume readily available to investors. This helps to ensure that
investors are well- informed and can make informed decisions about their investments.
4. Risk transfer
The secondary market allows investors to transfer risk by buying and selling securities. For
example, an investor who owns a stock and is concerned about a potential market
downturn can sell the stock to another investor, thereby transferring the risk to the new
owner.
5. Capital raising
It can also facilitate capital raising by allowing companies to issue new securities to raise
funds from investors. This can be done through follow-on offerings or secondary offerings.
6. Diversification:
It provides investors with a wide range of investment opportunities, which allows them to
diversify their portfolios and potentially earn higher returns.
Disadvantages of the Secondary Market

While there are many advantages to the secondary market, there are also some potential
disadvantages that investors should be aware of.
1. Volatility : The secondary market can be volatile, with prices of securities
fluctuating rapidly in response to changes in market conditions, investor sentiment,
and other factors. This can create uncertainty and make it difficult for investors to
predict the value of their investments.
2. Market manipulation : The secondary market is vulnerable to market manipulation,
such as insider trading or other fraudulent activities, which can distort prices and harm
investors.
3. Counterparty risk: In secondary market transactions, investors are exposed to
counterparty risk, which is the risk that the other party to the transaction will not
fulfil their obligations. This can be particularly problematic in over-the-counter
(OTC) markets where there is no central clearinghouse to guarantee trades.
4. Limited access: Some secondary markets may be limited to certain types of
investors, such as accredited investors or institutional investors, which can limit
access for individual investors.
5. Regulatory risk: Secondary market transactions are subject to regulation by
government authorities, and changes in regulations can affect the functioning of the
market and the value of securities.
6. Price discrepancies: The price of a security on the secondary market may not always
accurately reflect its underlying value or prospects, which can create discrepancies and
misalignments between market prices and fundamental values.

RECOGNITION OF STOCK EXCHANGES

Section 3 lays down that any stock exchange, desirous of being recognized for the
purposes of this Act may make an application in the prescribed manner to the Central
Government. Every application shall contain
i. particulars as per the prescribed law
ii. shall be accompanied by a copy of the bye-laws of the stock exchange for the
regulation and control of contracts and
iii. a copy of the rules relating in general to the constitution of the stock exchange and in
particular to –
(a) the governing body of such stock exchange, its constitution and powers of
management and the manner in which its business is to be transacted;
(b) the powers and duties of the office bearers of the stock exchange;
(c) the admission into the stock exchange of various classes of members, the
qualifications, for membership, and the exclusion, suspension, expulsion and re-
admission of members therefrom or thereinto;
(d) the procedure for the registration of partnerships as members of the stock exchange in
cases where the rules provide for such membership; and the nomination and
appointment of authorized representatives and clerks
GRANT OF RECOGNITION TO STOCK EXCHANGE

Section 4 lays down that if the Central Government is satisfied (powers are
exercisable by SEBI also) after making such inquiry as may be necessary in this
behalf and after obtaining such further information, if any, as it may require; that the
rules and bye-laws of a stock exchange applying for registration are in conformity
with such conditions as may be prescribed with a view to ensure fair dealing and to
protect investors;

(a) that the stock exchange is willing to comply with any other conditions (including
conditions as to the number of members) which the Central Government, after
consultation with the governing body of the stock exchange and having regard to the
area served by the stock exchange and its standing and the nature of the securities dealt
with by it, may impose for the purpose of carrying out the objects of this Act; and

(b) that it would be in the interest of the trade and also in the public interest to grant
recognition to the stock exchange;

It may grant recognition to the stock exchange subject to the conditions imposed upon
it as aforesaid and in such form as may be prescribed.

The conditions which the Central Government (powers are exercisable by SEBI also)
may prescribe for the grant of recognition to the stock exchanges may include, among
other matters, conditions relating to,—

(i) the qualifications for membership of stock exchanges;

(ii) the manner in which contracts shall be entered into and enforced as between members;

(iii) the representation of the Central Government on each of the stock exchange by
such number of persons not exceeding three as the Central Government may nominate
in this behalf; and

(iv) the maintenance of accounts of members and their audit by chartered accountants
whenever such audit is required by the Central Government.

Every grant of recognition to a stock exchange under this section shall be published in
the Gazette of India and also in the Official Gazette of the State in which the principal
office of the stock exchange is situated, and such recognition shall have effect as from the
date of its publication in the Gazette of India.

No application for the grant of recognition shall be refused except after giving an
opportunity to the stock exchange concerned to be heard in the matter; and the reasons
for such refusal shall be communicated to the stock exchange in writing.

WITHDRAWAL OF RECOGNITION

Section 5 lays down that if the Central Government is of opinion that the recognition
granted to a stock exchange should in the interest of the trade or in the public interest, be
withdrawn, the Central Government may serve on the governing body of the stock
exchange a written notice that the Central Government is considering the withdrawal of
the recognition for the reasons stated in the notice and after giving an opportunity to the
governing body to be heard in the matter, the Central Government may withdraw, by
notification in the Official Gazette, the recognition granted to the stock exchange;

Types of Secondary Market

Secondary markets are primarily of two types –

A. Stock exchanges and
B. over-the-counter markets.
Stock exchanges are centralised platforms where securities trading take place, sans any
contact between the buyer and the seller. National Stock Exchange (NSE) and Bombay
Stock Exchange (BSE) are examples of such platforms.
Transactions in stock exchanges are subjected to stringent regulations in securities trading.
A stock exchange itself acts as a guarantor, and the counterparty risk is almost non-
existent. Such a safety net is obtained via a higher transaction cost being levied on
investments in the form of commission and exchange fees.
Over-the-counter markets are decentralised, comprising participants engaging in
trading among themselves. OTC markets retain higher counterparty risks in the absence
of regulatory oversight, with the parties directly dealing with each other. Foreign
exchange market (FOREX) is an example of an over- the-counter market.
In an OTC market, there exists tremendous competition in acquiring higher volume.
Due to this factor, the securities’ price differs from one seller to another.
Apart from the stock exchange and OTC market, other types of secondary market
include auction market and dealer market.
The former is essentially a platform for buyers and sellers to arrive at an understanding of
the rate at which the securities are to be traded. The information related to pricing is put
out in the public domain, including the bidding price of the offer.

Dealer market is another type of secondary market in which various dealers indicate prices
of specific securities for a transaction. Foreign exchange trade and bonds are traded
primarily in a dealer market.

BOMBAY STOCK EXCHANGE

BSE was first diagnosed in 1986 in Great Britain. Since that time, more than 190,000
cases have been confirmed world-wide. The number of cases peaked in 1992, and has
declined continuously since that time, with only 29 cases worldwide in 2011. Shri
Ashishkumar Chauhan is the MD & CEO of BSE (Bombay Stock Exchange), the first
stock exchange of Asia. He is one of the founders of India's National Stock Exchange
("NSE") where he worked from 1992 to 2000.

MEANING:
The Bombay Stock Exchange (BSE) is the first and largest securities market in India and
was established in 1875 as the Native Share and Stock Brokers' Association. Based in
Mumbai, India, the BSE lists close to 6,000 companies and is one of the largest
exchanges in the world, along with the New York Stock Exchange (NYSE), NASDAQ,
London Stock Exchange Group, Japan Exchange Group, and Shanghai Stock Exchange.

The BSE has helped develop India's capital markets, including the retail debt market, and
has helped grow the Indian corporate sector. The BSE is Asia's first stock exchange and also
includes an equities trading platform for small-and-medium enterprises (SME). BSE has
diversified into providing other capital market services including clearing, settlement, and
risk management.

Functions of BSE

1. The price determination in the secondary market depends upon the demand and
supply of the securities. Bombay Stock Exchange helps in the process of valuation by
constantly valuing all the listed securities.

2. They provide high liquidity.

SENSEX:

The term Sensex is a portmanteau of Sensitive and Index. The Sensex is an index that
reflects the Bombay Stock Exchange (BSE). The Sensex Index comprises 30 stocks on
BSE.

These stocks are the largest and most actively traded stocks on the BSE. The criteria for
selecting stocks are as follows:
1. It should be a large to mega-cap stock.
2. Relatively liquid stocks
3. Revenue generated from core activities

NATIONAL STOCK EXCHANGE -

National Stock Exchange of India Limited (NSE) is the leading stock exchange of India,
located in Mumbai, Maharashtra. It is under the ownership of diversified group of
Financial Institutions, Banks, and Insurance companies. NSE was established in 1992 as
the first dematerialized electronic exchange in the country. NSE was the first exchange in
the country to provide a modern, fully automated screen-based electronic trading system
that offered easy trading facilities to investors spread across the length and breadth of the
country.

MEANING:

The National Stock Exchange (NSE) is a stock exchange in India It allows for new
listings, initial public offers (IPOs), debt issuances and Indian Depository Receipts (IDRs)
by overseas companies raising capital in India. S&P CNX Nifty is the benchmark index
introduced by NSE.
The National Stock Exchange of India Limited (NSE) is a financial exchange in India
that provides automated trading facilities across the nation. NSE trading is driven by
market orders, and the buyers and sellers remain anonymous.
The NSE offers trading and investment in debt, equity, equity derivatives, mutual
funds, IPOs, currencies, and exchange traded funds (ETFs).
FUNCTIONS:
1. To establish a trading facility for debt, equity, and other asset classes accessible to
investors across the nation.
2.To act as a communication network providing investors an equal opportunity to
participate in the trading system.
3. To meet the global standards set for financial exchange markets.
4. To provide a shorter trade settlement period and enable the book-entry settlement

NIFTY:
Just like the Sensex, Nifty is also an index. Nifty reflects the National Stock Exchange.
The name Nifty comes from the combination of National and Fifty. The Nifty 50 also
is a benchmark index, and it comprises the top 50 stocks traded on the National Stock
Exchange NSE. The selection of the top 50 stocks is from 12 different sectors,
including information technology, financial services, consumer goods,
telecommunications, automobiles, etc.
To be part of Nifty 50, the companies require to meet the following parameters and
criteria:
• Liquidity: Over the last six months, the stock should have been traded at an average
cost of 0.50% or less.

• Float Adjustment: the Company’s float-adjusted market capitalization has to be at

least twice the current smallest index composition.

• Domicile: The company should be listed on the NSE and be an Indian company.

OTCEI

The OTCEI has some special features that make it a unique exchange in India as well as a
growth catalyst for small- to medium-sized companies. The following are some of its
unique features:
1. Stock Restrictions: Stocks that are listed on other exchanges will not be listed on
the OTCEI and, conversely, stocks listed on the OTCEI will not be listed on other
exchanges.
2. Minimum Capital Requirements: The requirement for the minimum issued equity
capital is 30 lakh rupees, which is approximately $40,000.
3. Large Company Restrictions: Companies with issued equity capital of more than 25
crore rupees ($3.3 million) are not allowed to be listed.
4. Member Base Capital Requirement: Members must maintain a base capital of 4 lakh
rupees ($5,277) to continue to be listed on the exchange

The function of Over the Counter Exchange of India (OTCEI) are:-

1. The main function is to help smaller companies to generate capital, which is not
possible at the National Exchanges because of their incapability to meet the
requirements.
2. It delivers an opportunity to generate funds through capital market instruments
which are priced relatively. The companies can mediate the issue price.
3. It also stimulates transactions to be completed promptly and investors to finalize the
deals in a course of a few days.
4. It increases the liquidity and marketability of the shares which are traded. The two-
way prices are cited regularly to deliver adequate opportunities for investors to exit.

The OTCEI makes it easier for small- to mid-cap sized companies to be listed, although
there are still some requirements that companies must meet before being allowed to be
listed.
Meaning of Listing of securities:

Listing of securities means that the securities admitted for trading on recognized stock
exchange. Transactions in the securities of any company cannot be conducted on stock
exchange unless they are listed by them. So listing is the basis of stock exchange
operations.
Listing Process:
Listing securities on the Indian stock market involves several steps and procedures.
Here's an overview of the process:

1. Selection of Stock Exchange: Choose the stock exchange where you want to list
your securities. In India, the two primary stock exchanges are the National Stock
Exchange (NSE) and the Bombay Stock Exchange (BSE).

2. Eligibility Criteria: Ensure that your company meets the eligibility criteria set by the
chosen stock exchange. This typically includes financial stability, minimum net worth,
and compliance with regulatory requirements.

3. Appoint Professionals: Appoint professionals such as legal advisors, underwriters,

and merchant bankers to assist with the listing process.

4. Due Diligence: Conduct due diligence on your company's financials, operations, and
compliance with regulatory requirements.

5. Draft Offer Document: Prepare an offer document, which could be a Draft Red
Herring Prospectus (DRHP) or a Letter of Offer. This document provides information
about your company and the securities being offered.
6. Filing with SEBI: If you're doing an Initial Public Offering (IPO), you'll need to file
the offer document with the Securities and Exchange Board of India (SEBI) for their approval.

7. Roadshows and Marketing: Promote your IPO to potential investors through

roadshows and other marketing activities.

8. Price Discovery: Determine the price at which your securities will be offered to
the public. This is usually done through a book-building process.

9. Allotment of Securities: After the IPO, allot the securities to the investors.

10. Listing Application: Submit an application to the stock exchange for listing of your
securities. This should include all required documents and fees.

11. Listing Approval: Wait for the stock exchange to approve the listing of your securities.

12. Trading Commencement: Once your securities are listed, they can be traded on the
stock exchange.

Trade Settlement is the process of transferring securities to a buyer’s account and cash
to a seller’s account. Trade settlement is a two-way process in the final transaction stage
relating to trading stocks, bonds, futures, or other financial assets.

Types of settlements:

There are two broad categories of Trade settlements:

1. Spot settlement is that settlement that takes place immediately following the
rolling settlement principle of T+2.

2. Forward settlement is the settlement that takes place when one agrees to settle the
trade at a future date, T+5 or T+7.
Participants in trading and settlement

1. Stock exchange

2. Clearing House

3. Depository

4. Clearing Bank

5. Custodians / Clearing members

Trading and settlement procedure in stock exchange

1. Trade Details are transferred from Stock Exchange to National Securities Clearing
Corporation Limited (NSCCL).

2. NSCCL notifies the details of trade to clearing members or custodians who affirm
back. Based on the affirmation, it determines obligations.

3. Download of obligation and pay-in advice of funds or securities are sent by

NSCCL to clearing members or custodians.

4. Instructions sent to clearing banks to make funds available by pay-in time.

5. Instructions to depositories to make securities available by pay-in-time.

6. Pay-in of securities (NSCCL directs to debit pool account of custodians or Clearing

members and credit its account to depository and depository do it)

7. Pay-in of funds (NSCCL directs to the debit account of custodians or Clearing

members and credit its account to Clearing Banks and clearing bank do it)

8. Pay-out of securities (NSCCL directs to credit pool account of custodians or

Clearing members and debit its account to depository and depository do it)

9. Pay-out of funds (NSCCL directs to credit account of custodians or Clearing

members and debit its account to Clearing Banks and clearing bank do it)

10.Depository informs custodians

11. Clearing Banks inform custodians or Clearing members.

Problem of Indian stock market

The Indian stock market, like many other stock markets, faces various challenges and
problems. Some of the key issues include:

1. Volatility: The Indian stock market can be highly volatile, influenced by global
economic factors, domestic political events, and external shocks.

2. Lack of Investor Awareness: Many potential investors in India lack proper

knowledge and understanding of stock market investments, leading to
uninformed decisions.
3. Regulatory and Compliance Issues: Regulatory changes, corporate governance
concerns, and compliance issues can impact investor confidence.

4. Insider Trading and Market Manipulation: Instances of insider trading and market
manipulation can undermine the integrity of the market.

5. Liquidity Concerns: Some stocks in the Indian market may lack liquidity, making it
challenging to buy or sell them at desired prices.

6. Infrastructure and Technology: Technological infrastructure issues can result in

trading glitches and system failures.

7. Political and Economic Factors: India's stock market is influenced by government

policies, economic conditions, and geopolitical events, which can introduce
uncertainty.

8. Lack of Diversification: Many Indian investors tend to have concentrated

portfolios, which can be risky. Diversification is often overlooked.

9. Lack of Long-Term Investing: Short-term speculation is prevalent, which can

lead to market inefficiencies and instability.

10. Lack of Risk Management: Many investors do not employ proper risk management
strategies, which can lead to significant losses.

It's important to note that the Indian stock market also has many strengths and
opportunities. Despite these challenges, it remains a significant avenue for investment
and wealth creation. Investors should educate themselves, seek professional advice, and
practice risk management to navigate these challenges effectively.
 Module 4

Security Exchange Board of India

SEBI: introduction, meaning of regulation. Types of financial regulators.
Organization structure of SEBI, objective of SEBI, Role of SEBI in regulating primary
Market, capital market, mutual funds, intermediaries, stock exchange.
Insider trading meaning causes of insider trading and remedies to overcome in the problems
of insider trading.
Financial regulation in India is governed by a number of regulatory bodies. Financial
regulation is a form of regulation or supervision, which subjects financial institutions to
certain requirements, restrictions and guidelines, aiming to maintain the stability and
integrity of the financial system.
Financial regulation refers to the rules and laws firms operating in the financial industry,
such as banks, credit unions, insurance companies, financial brokers and asset managers
must follow.
Several bodies set up the regulatory framework of the Indian financial system. They are
all there to ensure parity and responsibility among participants in that particular sub-
sector.
Every regulator is instrumental in making sure that the interests of the investors and all
other parties are not compromised and that there is fairness in the financial system of India.

Financial Regulators In India

The market regulator in the Indian capital market is the Securities and Exchange Board
of India (SEBI). The Insurance Regulatory and Development Authority (IRDA) does
the same for the insurance sector. Reserve Bank of India (RBI) conducts the country’s
monetary policy.

 Pension Funds Regulatory and Development Authority (PFRDA) regulates

pensions.
 Ministry of Corporate Affairs (MCA) regulates the corporate sector
 NABARD National Bank for Agriculture and Rural Development
 RERA Real Estate Regulating Authority
RBI

The RBI’s primary responsibility is to ensure price stability in the economy and control
credit flow in the various sectors of the economy.
Commercial banks and the non-banking financial sector are most affected by the RBI’s
pronouncements since they are at the forefront of lending credit. The RBI is the money
market and the banking regulator in India.
Its functions include:

Printing and circulating currency throughout the country Maintaining banking sector
reserves by setting reserve ratios. Inspecting bank financial statements to keep an eye on
any stresses in the financial sector Regulating payments and settlements as well as their
infrastructure. Instrumental in deciding interest rates and maintaining inflation rates in the
country managing the country’s foreign exchange (FX) reserves. Regulating and controlling
interest rates, which affects money market liquidity.
SEBI

Established in 1992, SEBI was a response to increasing malpractices in the capital

markets that eroded investors’ confidence in the market back then. As a statutory body,
its functions include protective as well as regulatory ones.
Protection: To protect investors and other participants by preventing insider trading, price
rigging, and other malfeasances
Regulation: To implement codes of conduct and guidelines for the various market
participants; auditing various exchanges, registering brokers, and investment bankers;
deciding on the various fees and fines.

SEBI has the power to supervise the stock exchanges’ functioning.

 It regulates the business of exchanges.

 It has complete access to the exchanges’ financial records and the companies
listed on the exchange.
 It oversees the listing and delisting process of companies from any exchange in
the country.
 It can take disciplinary action, including fines and penalties
against malpractices. It also promotes investor education.
 It undertakes inspections, and conducts audits and inquiries when it spots any wrong
doing.
IRDA
Set up in 1999, the IRDA regulates the insurance industry and protects the interests of
insurance policyholders. Since the insurance sector is a constantly changing scene, IRDA
advisories are critical for insurance companies to keep up with changes in rules and
regulations.
 The IRDA has strict control over insurance rates, beyond which no insurer can go.
 The IRDA specifies the qualifications and training required for insurance agents
and other intermediaries, which then have to be followed by the insurer.
 It can levy fees and modify them as well, as per the IRDA Act. It regulates and
controls premium rates and terms and conditions that insurers are allowed to
provide. Any benefit provided by an insurer has to be ratified by the IRDA.
 This regulator also provides the critical function of grievance redressed in an
 industry where claims can be disputed endlessly.
PFRDA

The PFRDA was set up in 2013 as the sole regulator of India’s pension sector. Its services
extend to all citizens, including non-resident Indians (NRIs). Its main objective is to ensure
income security for senior citizens. To this end, it regulates pension funds and protects
pension scheme subscribers.
PFRDA regulates the pension schemes: NPS and Atal Pension Yojana. PFRDA Act is
applicable to these schemes.
The PFRDA scope includes:

 Setting up guidelines for investing in pension funds

 Settling disputes between intermediaries and pension fund subscribers Increasing

awareness about retirement and pension schemes Investigating intermediaries and

other participants for malpractice

Ministry of Corporate Affairs (MCA)

The MCA concerns itself with administering the Companies Act and its various
iterations. It sets up the rules and regulations for the lawful functioning of the corporate
sector.
Apart from the Companies Act, MCA also administered the Limited Liability Partnership
Act 2008. It oversees all Acts and rules that regulate the functioning of the corporate sector
in India.
Its objective is to help the growth of companies. The MCA’s Registrar of Companies
authorizes company registrations as well as their functioning as per law.

SEBI

SEBI commonly known as the Securities and Exchange Board of India is a regulatory
body of the financial markets of India. It was originally established as a non-statutory
body on 12 April 1988, but it was declared an autonomous body with statutory powers in
1992 under section 3 of the Securities and Exchange of India Act, 1992, which came into
force on 30 January 1992.

Organization structure
Structure of SEBI

SEBI board comprises nine members. The Board consists of the following members.

One Chairman of the board who is appointed by the Central Government of India One

Board member who is appointed by the Central Bank, that is, the RBI, Two Board

members who are hailing from the Union Ministry of Finance Five Board members who

are elected by the Central Government of India is

Structure of SEBI

SEBI board comprises nine members. The Board consists of the following members. One

Chairman of the board who is appointed by the Central Government of India One Board

member who is appointed by the Central Bank, that is, the RBI

Two Board members who are hailing from the Union Ministry of Finance Five Board

members who are elected by the Central Government of India

Objective of SEBI
The important objective of SEBI is to protect the interest of the investors and to
promote the development of the stock exchange and regulate the activities of the stock
market. Let us see the furthermore objectives of SEBI:
(a) To regulate and to make the rules for all the activities made in the stock market.
The other objective is to protect the right of the investors and make sure that the
investments are made by them should be safe and secure in perspective to their
investment.
(b) To make the regulation and develop the code of conduct for the intermediaries
that includes brokers, underwriters, etc
(c)To remove and to prevent all the wrong malpractices and the fraudulent by
making the balance between the self-regulation of the business and to maintain
statutory regulations.
Powers of SEBI

SEBI holds the following three main powers w.r.t. to the Indian capital market:

Quasi-Judicial. To deliver judgments on practices relating to fraud as well as unethical

practices.
 Quasi-Executive. To implement the regulations and judgments. Additionally, take legal
action against the violators. To inspect the Books of accounts and other documents in case
of any violation of the regulations.

Quasi-Legislative. To frame rules and regulations to protect the interests of the investors.
Few instances are insider trading regulations, listing obligations, as well as disclosure
requirements.

Functions of SEBI:

The SEBI performs functions to meet its objectives. To meet three objectives
SEBI has three important functions. These are:
i. Protective functions
ii. Developmental functions
iii. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and
provide safety of investment.

As protective functions SEBI performs following functions:

- It Checks Price Rigging: Price rigging refers to manipulating the prices of securities with
the main objective of inflating or depressing the market price of securities. SEBI prohibits
such practice because this can defraud and cheat the investors.
- It Prohibits Insider trading: Insider is any person connected with the company such as
directors, promoters etc. These insiders have sensitive information which affects the prices
of the securities. This information is not available to people at large but the insiders get this
privileged information by working inside the company and if they use this information to
make profit, then it is known as insider Trading, e.g., the directors of a company may know
that company will issue Bonus shares to its shareholders at the end of year and they
purchase shares from market to make profit with bonus issue. This is known as insider
trading. SEBI keeps a strict check when insiders are buying securities of the company and
takes strict action on insider trading.
- SEBI prohibits fraudulent and Unfair Trade Practices: SEBI does not allow the companies
to make misleading statements which are likely to induce the sale or purchase of securities
by any other person.
- SEBI undertakes steps to educate investors so that they are able to evaluate the securities of
various companies and select the most profitable securities.
- SEBI promotes fair practices and code of conduct in security market by taking following
steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders
wherein companies cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has
provisions for stiff fine and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares
unrelated to market prices.
2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock
exchange and increase the business in stock exchange. Under developmental categories
following functions are performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and
adoptable approach in following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.

3. Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock

exchange. To regulate the activities of stock exchange following functions are
performed:
(i) SEBI has framed rules and regulations and a code of conduct to regulate the
intermediaries such as merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory
purview and private placement has been made more restrictive.

(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share

transfer agents, trustees, merchant bankers and all those who are associated with stock
exchange in any manner.

(iv) SEBI registers and regulates the working of mutual funds etc.

(v) SEBI regulates takeover of the companies.

(vi) SEBI conducts inquiries and audit of stock exchanges.

Role/ Functions of SEBI

Securities and Exchange Board of India (frequently abbreviated SEBI) is the nodal
agency which safeguards the interests of an investor in the Indian Financial market. SEBI
performs three key functions: quasi-legislative, quasi-judicial and quasi-executive. It
drafts regulations, conducts investigation & enforcement action and it passes rulings and
orders.

i. Safeguarding the interests of investors by means of adequate education and

guidance. SEBI makes rules and regulation that must be followed by the financial
intermediaries like portfolio exchanges, underwriters and merchant bankers, etc. It
takes care of the complaints received from investors . Additionally, it issues notices
and booklets for the information, assistance and protection of small investors.

ii. Regulating and controlling the business on stock markets. Registration of brokers and
sub-brokers is made mandatory and they have to abide by certain regulations and rules.

iii. Conduct inspection and inquiries of stock exchanges, intermediaries and self-
regulating organizations and to take appropriate measures wherever required. This
function is carried out for organized working of stock exchanges and intermediaries.

iv. Barring insider trading in securities.

v. Prohibiting deceptive and unfair methods used by financial intermediaries

operating in securities markets.

vi. Registering and controlling the functioning of stock brokers, sub-brokers, share
transfer agents, bankers, trustees, registrars, merchant bankers, underwriters, portfolio
managers, investment advisers and various other intermediaries who might be linked to
securities markets in any manner.

vii. SEBI issues Guidelines and Instructions to businesses concerning capital issues.
Separate guidelines are provided for initial public issue made by listed companies, etc.
It conducts research and publishes information beneficial to all market players (i.e. all
buyers and sellers)

viii. SEBI regulates mergers and acquisitions as a way to protect the interest of investors.
For this, SEBI has released appropriate guidelines with the intention that such mergers
and takeovers won‘t be at the expense of small investors.

ix. Registering and controlling the functioning of collective investment schemes such as
mutual funds. SEBI has created regulations and guidelines that should be followed by
mutual funds. The aim is to maintain effective supervision and avoid any unfair and
anti-investor actions.
x. Promoting self-regulatory organization of intermediaries. It has extensive legal powers.
Having said that, self-regulation is preferable to external regulation. The function of
SEBI is to motivate financial intermediaries to create their professional associations and
manage harmful actions of their members. It can also make use of its powers when needed
for protection of investors.

xi. Carrying out steps in order to develop the capital markets by having an accommodating
approach.

xii. Provide appropriate training to financial intermediaries. This function is

great for healthy environment in the stock markets and also for the protection
of investors.

xiii. Levying fee or any other type of charges to carry out the purpose of the Act.

xiv. Performing functions that may be assigned to it by the Central Government of India.

SEBI regulation on primary market

1. Regulation and Oversight: SEBI (Securities and Exchange Board of India)

regulates and oversees activities in the primary market to ensure transparency,
fairness, and investor protection.
2. Approval of IPOs: SEBI plays a crucial role in approving Initial Public Offerings
(IPOs) by scrutinizing the company's prospectus, financials, and compliance with
disclosure norms.
3. Disclosure Requirements: It sets guidelines for companies regarding the disclosure of
information in their prospectus, ensuring that investors have access to comprehensive
and accurate details before making investment decisions.

4. Protection of Investor Interests: SEBI works to safeguard the interests of investors by

promoting fair practices, preventing fraudulent activities, and ensuring that companies
adhere to ethical standards.
5. Monitoring of Issuer Compliance: SEBI monitors the compliance of issuers with the
regulations related to the issue of securities, ensuring that they follow the prescribed
norms and guidelines.
6. Regulation of Underwriters: SEBI regulates the activities of underwriters, ensuring
they adhere to the code of conduct and fulfill their responsibilities in the process of
bringing securities to the primary market.
7. Setting Price Bands: SEBI has the authority to set price bands within which
securities can be traded during the initial listing period, preventing excessive volatility
and price manipulation.
8. Promotion of Market Integrity: SEBI works towards maintaining the integrity of
the market by preventing fraudulent and unfair trade practices in the primary
market.

9. Educational Initiatives: SEBI conducts investor education programs to enhance

awareness and understanding of the primary market among investors, promoting
informed decision-making.
10. Continuous Monitoring and Amendments: SEBI constantly monitors market dynamics
and makes necessary amendments to regulations to align them with the changing
financial environment, fostering a robust and dynamic primary market ecosystem.
Role of SEBI in regulating secondary market
1. Market Surveillance: SEBI actively monitors the secondary market through
advanced surveillance systems to detect and prevent market manipulation, fraud, and
other irregularities.
2. Listing Requirements: SEBI sets and enforces listing requirements for companies,
ensuring that those listed on stock exchanges adhere to disclosure norms, corporate
governance standards, and timely reporting.
3. Regulation of Stock Exchanges: SEBI regulates and supervises stock exchanges,
ensuring they maintain fair and transparent trading practices and have robust systems in
place for efficient market operations.
4. Insider Trading Regulation: SEBI prohibits insider trading and implements
regulations to prevent the misuse of confidential information by company insiders for
personal gains.
5. Investor Protection: SEBI works to protect the interests of investors in the
secondary market by enforcing rules that promote fair and equitable treatment of all
market participants.
6. Continuous Disclosure Requirements: It mandates continuous disclosure of material
information by listed companies to ensure that investors have access to up-to-date and
relevant information for making informed investment decisions.

7. Regulation of Brokers and Intermediaries: SEBI regulates stockbrokers and other

intermediaries in the secondary market, setting standards for their conduct, ensuring fair
practices, and promoting investor trust.
8. Margin Trading Regulations: SEBI establishes rules and regulations governing
margin trading to prevent excessive speculation and maintain market stability.
9. Delisting Procedures: SEBI prescribes guidelines for the voluntary and
compulsory delisting of securities, ensuring a fair and transparent process that
considers the interests of all stakeholders.
10. Market Development Initiatives: SEBI undertakes initiatives to develop and enhance
the secondary market, introducing reforms and innovations to improve liquidity,
transparency, and overall efficiency of the market.
SEBI regulation and mutual fund
1. Registration and Regulation: SEBI mandates that mutual funds must be registered
with the board. It formulates policies and regulations to govern the establishment,
operations, and management of mutual funds in India.
2. Fund Structure: SEBI regulates the structure of mutual funds, defining the types of
funds that can be offered, such as equity funds, debt funds, hybrid funds, etc.
3. Disclosure Requirements: Mutual funds are required to adhere to strict disclosure
norms set by SEBI. This includes providing detailed information in the offer document,
periodic reports to investors, and updates on changes in the fund's strategy or portfolio.

4. Investment Guidelines: SEBI stipulates the investment norms for mutual funds,
including restrictions on the types of securities they can invest in, sectoral exposure
limits, and asset allocation guidelines to ensure prudent investment practices.
5. Net Asset Value (NAV) Calculation: SEBI sets guidelines for the calculation of NAV,
ensuring consistency and transparency in valuing mutual fund units. NAV is calculated
daily for open-ended funds and is crucial for determining the unit prices.
6. Code of Conduct: SEBI establishes a code of conduct for asset management
companies (AMCs) managing mutual funds. This includes guidelines on the behavior
of fund managers, conflict of interest resolution, and ethical standards.

7. Sponsorship and Trusteeship: SEBI defines the roles and responsibilities of sponsors,
trustees, and asset management companies in the mutual fund structure, ensuring a clear
separation of powers and safeguarding the interests of investors.
8. Advertising and Marketing Guidelines: SEBI regulates the advertising and
marketing practices of mutual funds to prevent misleading information and to ensure
that promotional materials provide accurate and relevant details to investors.

Market intermediaries and SEBI

SEBI (Securities and Exchange Board of India) regulates intermediaries in the
securities market to maintain transparency, protect investors, and ensure fair practices.
Here are key regulations for intermediaries:
1. Registration Requirements: Intermediaries, such as stockbrokers, sub-brokers,
depository participants, and merchant bankers, must register with SEBI. The
registration process involves meeting specific eligibility criteria and complying with the
prescribed regulations.
2. Code of Conduct: SEBI establishes a code of conduct for intermediaries, outlining
ethical standards and professional behavior. Intermediaries are required to adhere to
these guidelines to maintain integrity in their dealings.
3. Know Your Customer (KYC) Norms: SEBI mandates strict adherence to KYC norms
by intermediaries to verify and authenticate the identity of their clients. This helps in
preventing fraudulent activities and ensures a secure and transparent trading
environment.
4. Risk Management: Intermediaries are required to implement robust risk
management systems to identify, assess, and manage various risks associated with
their operations. This includes market risk, credit risk, and operational risk.

5. Client Registration and Documentation: SEBI regulates the process of client

registration and documentation, ensuring that intermediaries maintain accurate and
updated records of their clients. This is crucial for effective communication and
compliance monitoring.
6. Conflict of Interest Management: Intermediaries must manage and disclose any
potential conflicts of interest that may arise in their dealings with clients. This helps in
maintaining fairness and transparency in the financial markets.
7. Compliance Monitoring: SEBI requires intermediaries to establish an effective
compliance mechanism to monitor and ensure adherence to regulatory norms. This
involves periodic audits and reporting to SEBI.
8. Financial Soundness: SEBI imposes financial soundness criteria on intermediaries to
ensure their financial stability. Adequate capital, net worth, and financial resources are
essential for intermediaries to fulfill their responsibilities.
9. Record Keeping and Reporting: Intermediaries are required to maintain
comprehensive records of their transactions and activities. They must also submit
regular reports to SEBI, facilitating regulatory oversight and surveillance.
10. Education and Training: SEBI emphasizes the importance of education and training
for intermediaries. Continuous learning and skill development are encouraged to
enhance the competency and professionalism of market participants.

Insider trading
Meaning:
Insider trading refers to the buying or selling of a security in breach of a
fiduciary duty or other relationship of trust and confidence, while in possession of
material, non-public information about the security.
In simpler terms, it involves trading stocks or securities based on information
that has not yet been made available to the general public, giving the trader an unfair
advantage.
This practice is illegal in most securities markets because it undermines the
principle of fair and equal access to information for all investors. Regulatory bodies, such
as the Securities and Exchange Commission (SEC) in the United States and the
Securities and Exchange Board of India (SEBI), actively monitor and enforce regulations
against insider trading to maintain market integrity and protect investors.
Causes of Insider Trading:
1. Access to Non-Public Information: Insiders, such as company executives,
employees, or individuals close to the company, may have access to confidential
information not yet disclosed to the public.
2. Financial Gain: Insiders may engage in trading based on material non-public
information to benefit financially from anticipated stock price movements.
3. Market Speculation: Insiders might trade on information not yet disclosed to
the public, speculating on how the market will react once the information
becomes public.
4. Inadequate Regulations: Weak or inadequate regulatory frameworks may contribute to
the prevalence of insider trading by providing insufficient deterrence or punishment.
5. Lack of Enforcement: Inconsistent or lax enforcement of insider trading regulations
can embolden individuals to engage in such activities without fear of consequences.
6. Information Leakage: Unintentional leakage of insider information through various
channels, such as employees sharing information with friends or family, can contribute
to insider trading.
7. Inadequate Internal Controls: Companies with weak internal controls may find it
challenging to prevent unauthorized access to sensitive information, increasing the
risk of insider trading.
8. Market Manipulation: Insiders may trade to manipulate the market or the company's
stock price for personal or corporate gain.
9. Mergers and Acquisitions: Insider trading can occur around merger and acquisition
activities, where insiders may have knowledge of impending deals.
10. Lack of Awareness: In some cases, individuals may not fully understand or
appreciate the legal implications of trading on non-public information.

Remedies for Insider Trading:

1. Strict Regulatory Framework: Implement and enforce stringent regulatory
frameworks that clearly define insider trading, its penalties, and mechanisms for
detection.
2. Surveillance and Monitoring: Employ advanced surveillance and monitoring systems
to track trading activities, identify unusual patterns, and detect potential instances of
insider trading.
3. Periodic Training: Conduct regular training programs to educate employees,
executives, and market participants about the consequences of insider trading and the
importance of compliance.

4. Whistleblower Mechanism: Establish effective whistleblower mechanisms to

encourage individuals to report suspected instances of insider trading without fear of
retaliation.
5. Stringent Penalties: Impose severe penalties, including fines and imprisonment, for
individuals found guilty of insider trading. This acts as a deterrent to potential
wrongdoers.
6. Timely Disclosures: Encourage companies to make timely and transparent
disclosures of material information to minimize the window of opportunity for
insider trading.
7. Restricted Trading Windows: Introduce restricted trading windows, limiting the
times when insiders can trade to reduce the chances of trading on material non-public
information.
8. Internal Controls and Policies: Strengthen internal controls within companies,
including access restrictions to sensitive information and robust policies against
insider trading.
9. Continuous Regulatory Updates: Regularly update and adapt insider trading
regulations to address emerging market practices and loopholes.

10. International Cooperation: Foster international cooperation and information

sharing among regulatory authorities to address cross-border instances of insider
trading effectively.