INSTITUTE –University School of Business

DEPARTMENT -Management
M.B.A
Financial Markets and Services-BAA 735
Faculty Name : Dr Rasna Sharma
(Assistant Professor)

Financial System DISCOVER . LEARN . EMPOWER

In India

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Financial System
In India
Course Outcome
CO Title Level
Number Will be covered in this
CO1 Remember lecture
Students will have a thorough knowledge  
about the financial system and its functioning

CO2 Understand
Students will be able to understand the  
emerging role and regulations relating to the
financial services in India

CO3 Students will be able to know the services Understand

provided by the Indian market
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 Topic – 1
Financial System In India

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 Financial System
• Existence of a well organized financial system
• Promotes the well being and standard of living of the people of a country
• Money and monetary assets
• Mobilize the saving
• Promotes investment

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 Financial System
 An institutional framework existing in a country to enable
financial transactions
 Three main parts
• Financial assets / Instruments (loans, deposits, bonds, equities,
etc.)
• Financial institutions (banks, mutual funds, insurance
companies, etc.)
• Financial markets (money market, capital market, forex market,
etc.)
 Regulation is another aspect of the financial system (RBI, SEBI,
IRDA)

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Financial System of any country consists of financial markets,
financial intermediation and financial instruments or
financial products

Flow of funds (savings)

Seekers of funds
Suppliers of funds
(Mainly business firms
(Mainly households)
and government)
Flow of financial services

Incomes , and financial

claims

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 Financial assets/instruments
 Enable channelising funds from surplus units to deficit units

 There are instruments for savers such as deposits, equities, mutual fund units,
etc.

 There are instruments for borrowers such as loans, overdrafts, etc.

 Like businesses, governments too raise funds through issuing of bonds, Treasury
bills, etc.

 Instruments like PPF, etc. are available to savers who wish to lend money to the
government
 Financial Institutions
• Includes institutions and mechanisms which
• Affect generation of savings by the community
• Mobilisation of savings
• Effective distribution of savings

• Institutions are banks, insurance companies, mutual funds- promote/mobilise

savings

• Individual investors, industrial and trading companies- borrowers

 Financial Markets
• Money Market- for short-term funds (less than a year)
• Organised (Banks)
• Unorganised (money lenders, chit funds, etc.)

• Capital Market- for long-term funds

• Primary Issues Market
• Stock Market
• Bond Market
 Indian Financial System

Organized Un-Organized

Regulators Money lenders

Financial Institutions Local bankers
Financial Markets Traders
Financial services Landlords
Financial Instruments Pawn brokers
Indian Financial System
Deficiencies of Indian Financial system
• Lack of Coordination between different FIs
• Monopolistic market structure
• Dominance of development banks in industrial
financing
• Inactive and Erratic Capital Market
• Imprudent Financial Practice
Topic 2

Money Market

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MONEY MARKET

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 What is Money Market?
As per RBI definition “A market for short terms financial assets
that are close substitute for money, facilitates the exchange of
money in primary and secondary market”.

 The money market is a mechanism that deals with the lending

and borrowing of short term funds (less than one year).

 A segment of the financial market in which financial

instruments with high liquidity and very short maturities are
traded.
 It doesn’t actually deal in cash or money but deals with
substitute of cash like trade bills, promissory notes & govt
papers which can be converted into cash without any loss at
low transaction cost.
 Features of Money Market

 It is a market purely for short-terms funds or financial assets

called near money.

 It deals with financial assets having a maturity period less

than one year only.

 In Money Market transaction can not take place formal like

stock exchange, only through oral communication, relevant
document and written communication transaction can be
done.
Continued……..
 Transaction have to be conducted without the help of
brokers.

 It is not a single homogeneous market, it comprises of

several submarket like call money market, acceptance & bill
market.

 The component of Money Market are the commercial banks,

acceptance houses & NBFC (Non-banking financial
companies).
Objective of Money Market

 To provide a parking place to employ short term surplus

funds.

 To provide room for overcoming short term deficits.

 To enable the central bank to influence and regulate liquidity

in the economy through its intervention in this market.

 To provide a reasonable access to users of short-term funds to

meet their requirement quickly, adequately at reasonable
cost.
Importance of Money Market

o Development of trade & industry.

o Development of capital market.
o Smooth functioning of commercial banks.
o Effective central bank control.
o Formulation of suitable monetary policy.
o Non inflationary source of finance to government.
Structure of Indian Money Market
I :- ORGANISED STRUCTURE
1. Reserve bank of India.
2. DFHI (Discount And Finance House of India).
3. Commercial banks
i. Public sector banks
SBI with 7 subsidiaries
Cooperative banks
20 nationalised banks
ii. Private banks
Indian Banks
Foreign banks
4. Development bank
IDBI, IFCI, ICICI, NABARD, LIC, UTI etc.
II. UNORGANISED SECTOR
1. Indigenous banks
2 Money lenders
3. Chits
4. Nidhis

III. CO-OPERATIVE SECTOR

1. State cooperative
i. central cooperative banks
Primary Agri credit societies
Primary urban banks
2. State Land development banks
central land development banks
Primary land development banks
 Composition of Money Market

Money Market consists of a number of sub-markets which collectively constitute

the money market. They are,
 Call Money Market
 Commercial bills market or discount market
 Acceptance market
 Treasury bill market
Instrument of Money Market
A variety of instrument are available in a developed money
market. In India till 1986, only a few instrument were available.

They were
• Treasury bills
• Money at call and short notice in the call loan market.
• Commercial bills, promissory notes in the bill market.
New instruments

Now, in addition to the above the following new instrument

are available:

 Commercial papers.
 Certificate of deposit.
 Banker's Acceptance
 Repurchase agreement
 Money Market mutual funds
Topic 3

Capital Market

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 Primary Market
 It is a market for new issues of shares, debentures and
bonds.
 Type of Issues
 Issues are of three types. They are as follows:
(a) Public Issue
(b) Right Issue
(c) Private Placements
 IPO Process

 Appointment of merchant banker and other intermediaries

 Registration of offer document
 Book Building
 Marketing of the issue
 Post-issue activities
 Book Building

Book Building is basically a capital issuance process used in

Initial Public Offer (IPO). It is a process used for marketing a
public offer of equity shares of a company. The Book Building
process allows for price and demand discovery. The cost of the
public issue is reduced. The time taken to complete the entire
process is also reduced. It is a mechanism where, during the
period for which the book for the IPO is open, bids are
collected from investors at various prices. Bids are probable
price offered by the possible buyers of shares. Such bids are
above or equal to the floor price. The process aims at tapping
both wholesale and retail investors. The offer or issue price is
then determined after the bid closing date based on certain
evaluation criteria.
Marketing of the Issue

(a) Timing of the Issue

(b) Retail Distribution
(c) Reservation of the Issue
(d) Advertising Campaign
Post-Issue Activities

 Principles of Allotment
 Formality Associated With Listing
 Secondary
Market
It is a market for the secondary sale
of securities. In other words, the
market where existing securities are
traded is referred to as the
secondary market or stock market.
Types of Securities Traded
 Industrial Securities
 Government Securities
 Financial Intermediaries Securities
 Financial Services: Introduction

 Financial services refer to services provided by the finance

industry.
 Services that are financial in nature.
 The finance industry encompasses a broad range of
organizations that deal with the management of money.
 Among these organizations are banks, credit card companies,
insurance companies, consumer finance companies, stock
brokerages, investment funds and some government
sponsored enterprises.
 TYPES OF FINANCIAL SERVICES

Banking services

Provide personal
Issuance of
loans, commercial ATMs
checkbooks
loans
 TYPES OF FINANCIAL SERVICES

 Fund or asset based Financial services

 Fee based Financial services
 Fund Based Services
 The firm raises funds through  debt, equity, deposits and the
bank invests the funds in securities or lends to those who are
in need of capital.
 The following are some of these fund-based services such as:
• Leasing and Hire Purchase
• Housing Finance
• Credit Cards
• Venture Capital
• Factoring
• Forfeiting
• Bill Discounting
• Insurance
 Stock Market in India

 With small beginnings in the early 19th century, India’s stock market has risen
to great heights.
 By 1990, India had 19 stock exchanges. By 1999, the number of stock exchanges
has risen to 23.
 There were around 9877 listed companies.
 Role and Functions
The major roles played by a stock exchange in a country are:
 The stock exchange provides a market place for purchase and sale
of securities.
 The stock exchange provides the linkage between the savings in the
household sector and the investment in corporate economy.
 The stock exchanges provide a market quotation of the prices of
shares and bonds.
 It serves a barometer, not only of the state of health of individual
companies, but also of a nation’s economy as a whole.
 The stock exchanges in India serve the joint sector units as also! to
some extent public sector enterprises.
 Another important function that stock exchanges in India discharge
is of providing a market for gilt-edged securities. Central
Government, State Government, and Municipalities etc issue gilt-
edged securities.
 Individual Membership Qualifications

(a) Minimum age of 21.

(b) Citizenship of India: The Governing Board may, in suitable case, relax this
condition.
(c) Not been adjudged bankrupt or insolvent.
(d) Not compounded with his creditors.
(e) Not been convicted of an offence involving fraud or dishonesty.
(f) Not engaged as principal or employee in any business other than that of
securities.
(g) Not been, at any time, expelled or declared a defaulter by any other Stock
Exchange.
(h) Either matriculate or has the 10 plus 2 years, qualification. Generally,
however, preference is given to professionally qualified persons.
 Weaknesses of Stock Exchanges in India
1 Unprecedented booms and crashes lead to rampant speculative activities. This does
not reflect a very healthy state of affairs.
2. Insider trading is rampant on Indian stock exchanges. Insider trading means
operating on information, which is price sensitive and not available to the public.
Potential source of information is people working in companies.
3. Demand and supply forces in the stock market are not allowed to act freely. It is
highly dominated by large financial firms, big brokers and operators. Therefore, it is
oligopolistic in structure. In an Oligopoly market, only few sellers prevail.
4. There are limited forward trading activities in the stock exchanges.
5. The major problem areas include settlement periods, margin system and carry
forward (badla) system.
6. The recent development of the primary market has created serious problems of
interfacing with the secondary market. The secondary market should be re-oriented
as to discharge the new responsibilities cast on it by the recent developments.
 Weaknesses of Stock Exchanges in India
7. Indian stock market has still fragmented regulation even with the arrival of SEBI. There
is multiplicity of administration.
8. The Primary markets are not ignited enough to cope with changes taking place in the
financial system.
9. Poor disclosure in prospectus is still rampant.
10. Even with the world of dematerialization, investors face problems of delays (refund,
transfer, etc.).
11. FIIs are now permitted to invest in unlisted securities and corporate and Government
debt. Still there is some wall separating the foreign institutional investors to invest in
Indian securities.
12. Stock Exchanges are run as brokers’ clubs. Management is still dominated by brokers.
13. Poor disclosures by mutual funds are the main problem in the mutual fund industries.
Net asset value (NAV) is not revealing the real picture about the performance of the
fund.
 Reforms in Indian Securities Market
1. Capital Issues (Control) Act of 1947 was repealed and the office of controller
of Capital Issues abolished. Control over price and premiums of shares were
removed. Companies are now free to raise funds from securities markets after
filing prospectus with the Securities and Exchange Board of India (SEBI).
2. The power to regulate stock exchanges has been delegated to SEBI by the
Government.
3. SEBI introduces regulations for primary and other secondary market
intermediaries, brings them within the regulatory framework.
4. Reforms by SEBI in the primary market include improved disclosure
standards, introduction of prudential norms, and simplification of issue
procedures. Companies are required disclosing all material facts and specific
risk factors associated I with their projects while making public issues.
5. Listing agreements of stock exchanges have been amended to require listed
companies to furnish annual statement showing variations between financial
projections and projected utilization of funds in the offer document and
actual figures. This is to enable shareholders to make comparisons between
performance and promises.
 Reforms in Indian Securities Market
6. SEBI introduces a code of advertisement for public issues to ensure fair and truthful
disclosures.
7. Disclosure norms further have strengthened by introducing cash flow statements.
8. New issue procedures have been introduced. Book building for institutional investors
is introduced to bring down the costs of issue.
9. SEBI introduces regulations governing substantial acquisition of shares and takeovers
and lays down conditions under which disclosures and mandatory public offers are to
be made to the shareholders. Regulations further revised and strengthened in 1996.
10. SEBI reconstitutes the governing boards of the stock exchanges and introduces capital
adequacy norms for broker accounts. Hi. Private mutual funds are permitted and
several such funds have been already set up. All mutual funds are allowed to apply for
firm allotment in public issues. This is to reduce issue costs.
11. Regulations for mutual funds have been revised in 1996, giving more flexibility to
fund managers while increasing transparent-disclosure, and accountability.
 Reforms in Indian Securities Market
12. Over-the-Counter Exchange of India has been formed.
13. National Stock Exchange (NSE) has been established as a stock exchange
with nationwide electronic trading.
14. Bombay Stock Exchange (BSE) introduces screen-based trading. 15 stock
exchanges now have screened-based trading. BSE has been granted
permission to expand its trading network to other centers.
15. Capital adequacy requirement for brokers has been enforced.
16. System of mark-to-market margins has been introduced in the stock
exchanges.
17. Stock lending scheme has been introduced.
18. Transparency is brought about in short selling.
19. NSE has set up the National Securities Clearing Corporation, Ltd.
20. BSE is in the process of implementing a trade guarantee scheme
 Reforms in Indian Securities Market
21. SEBI strengthens surveillance mechanisms and directs all stock exchanges to
have separate surveillance departments.
22. SEBI strengthens enforcement of its regulations.
23. SEBI begins the process of prosecuting companies for misstatements and
ensures refunds of application in several issues on account of misstatements in
the prospectus.
24. Indian companies are permitted to access international capital markets
through Euro issues.
25. Foreign direct investment has been allowed in stock broking, asset
management companies, merchant banking, and other non-bank finance
companies.
26. Foreign institutional investors (FIIs) are allowed access to Indian capital
markets on registration with SEBI.
New Generation Stock Exchanges

 Over the Counter Exchange of India (OTECI)

 National Stock Exchange of India
 References

• M.Y. Khan (2006), Financial Services, Tata McGraw-Hill Publishing Co. Ltd., New Delhi.
• L. M. Bhole (2007), Financial Institutions and Markets, Tata McGraw-Hill Publishing Co. Ltd.,
New Delhi.
• V. K. Bhalla: Management of Financial Services, Anmol Publications.
• V. A. Avdhani: Marketing of Financial Services, Himalaya Publishing House.
• Bansal, L.K., Merchant Banking and Financial Services, Tata McGraw Hill.
• http://www.economicsdiscussion.net/india/money-market/money-market-in-india-features-s
tructure-constituents-participants-and-defects/31348

• International Journal Of Finance

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