capital markets & money markets

Indian Financial System

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

Financial System

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

Suppliers of funds(Mainly households)Flow of financial services

Incomes , and financial claims

Seekers of funds (Mainly business firms

and government)

Flow of funds (savings)

Indian Financial System

Non- Organized Organize

d Money lenders

Local bankers

Traders

Landlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services

Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks

Evolution of Financial System

Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

Market Operations

Specialized Financial Institutions

Merchant Banking

Universal Banking

Financial System

Savers Lenders Households Foreign Sectors

Investors Borrowers

Corporate Sector Govt.Sector

Un-organized Sector

Economy

Interrelation--Financial system & Economy

Organized Indian Financial System

Money Market Instrument

Capital Market Instrument

Forex Market

Capital Market

Money Market

Credit Market

Primary Market

Financial Instruments

FinancialMarkets

FinancialIntermediarie

s

Secondary Market

Regulators

Financial Markets• Mechanism which allows people to trade

• Affected by forces of supply and demand

• Process used

• In Finance, Financial markets facilitates

Why Capital Markets Exist

• Capital markets facilitate the transfer of capital (i.e. financial) assets from one owner to another.

• They provide liquidity.– Liquidity refers to how easily an asset

can be transferred without loss of value.• A side benefit of capital markets is that

the transaction price provides a measure of the value of the asset.

Role of Capital Markets

• Mobilization of Savings & acceleration of Capital Formation

• Promotion of Industrial Growth• Raising of long term Capital• Ready & Continuous Markets• Proper Channelisation of Funds• Provision of a variety of Services

Indian Capital Market - Historical perspective

• Stock Market was for a privileged few• Archaic systems - Out cry method• Lack of Transparency - High tones costs• No use of Technology• Outdated banking system• Volumes - less than Rs. 300 cr per day• No settlement guarantee mechanism -

High risks

Indian Capital markets - Chronology

• 1994-Equity Trading commences on NSE• 1995-All Trading goes Electronic• 1996- Depository comes in to existence• 1999- FIIs Participation- Globalisation• 2000- over 80% trades in Demat form• 2001- Major Stocks move to Rolling Sett• 2003- T+2 settlements in all stocks• 2003 - Demutualisation of Exchanges

Capital Markets - Reforms

• Each scam has brought in reforms - 1992 / 2001

• Screen based Trading through NSE• Capital adequacy norms stipulated• Dematerialization of Shares - risks of

fraudulent paper eliminated• Entry of Foreign Investors• Investor awareness programs• Rolling settlements• Inter-action between banking and exchanges

Reforms / Initiatives post 2000

• Corporatisation of exchange memberships• Banning of Badla / ALBM • Introduction of Derivative products -

Index / Stock Futures & Options• Reforms/Changes in the margining system• STP - electronic contracts• Margin Lending• Securities Lending

MARKET STRUCTURE (JULY 31, 2005)

• 22 Stock Exchanges, 22 Stock Exchanges,

• Over 10000 Electronic Terminals at over 400 Over 10000 Electronic Terminals at over 400

locations all over India.locations all over India.

• 9108 Stock Brokers and 14582 Sub brokers 9108 Stock Brokers and 14582 Sub brokers

• 9644 Listed Companies9644 Listed Companies

• 2 Depositories and 483 Depository Participants2 Depositories and 483 Depository Participants

• 128 Merchant Bankers, 59 Underwriters128 Merchant Bankers, 59 Underwriters

• 34 Debenture Trustees, 96 Portfolio Managers34 Debenture Trustees, 96 Portfolio Managers

• 83 Registrars & Transfer Agents, 59 Bankers to 83 Registrars & Transfer Agents, 59 Bankers to

IssueIssue

• 4 Credit Rating Agencies4 Credit Rating Agencies

Indian Capital Market

Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

•Brokers •Investment Bankers •Stock Exchanges•Underwriters

SEBI

Players

Corporate IntermediariesCRABanks/FI FDI /FIIIndividual

Stock Exchanges in INDIA

• Mangalore Stock Exchange • Hyderabad Stock Exchange • Uttar Pradesh Stock

Exchange• Coimbatore Stock

Exchange• Cochin Stock Exchange • Bangalore Stock Exchange • Saurashtra Kutch Stock

Exchange • Pune Stock Exchange • National Stock Exchange • OTC Exchange of India • Calcutta Stock Exchange • Inter-connected Stock

Exchange (NEW)• Madras Stock Exchange

• Bombay Stock Exchange • Madhya Pradesh Stock

Exchange • Vadodara Stock Exchange • The Ahmedabad Stock

Exchange • Magadh Stock Exchange • Gauhati Stock Exchange• Bhubaneswar Stock

Exchange• Jaipur Stock Exchange • Delhi Stock Exchange

Assoc • Ludhiana Stock Exchange

The role of the stock exchange

• Raising capital for businesses

• Mobilizing savings for investment

• Facilitate company growth

• Redistribution of wealth

The role of the stock exchange

• Corporate governance

• Creates investment opportunities for small investors

• Government raises capital for development projects

• Barometer of the economy

Growth Pattern of the Indian Stock MarketSl.No.

As on 31stDecember

1946

1961

1971

1975

1980

1985 1991 1995

1 No. ofStock Exchanges

7 7 8 8 9 14 20 22

2No. of Listed Cos.

1125

1203

1599

1552

2265

4344 6229 8593

3 No. of StockIssues of Listed Cos.

1506

2111

2838

3230

3697

6174 8967 11784

4 Capital of ListedCos. (Cr. Rs.)

270 753 1812

2614

3973

9723 32041 59583

5 Market value ofCapital of ListedCos. (Cr. Rs.)

971 1292

2675

3273

6750

25302

110279

478121

6 Capital perListed Cos. (4/2)(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)

86 107 167 211 298 582 1770 5564

8

Appreciated value of Capital perListed Cos. (Lak Rs.)

358 170 148 126 170 260 344 803

Capital Market Instruments

ADR / GDR

Equity Debt

EquityShares

PreferenceShares

Debentures Zero coupon bonds

Deep DiscountBonds

Hybrid

Factors contributing to growth of Indian Capital

Market • Establishment of Development banks &

Industrial financial institution.• Legislative measures• Growing public confidence • Increasing awareness of investment

opportunities

Factors contributing to growth of Indian Capital

Market

• Growth of underwriting business• Setting up of SEBI• Mutual Funds • Credit Rating Agencies

Indian Capital Market deficiencies

• Lack of transparency • Physical settlement • Variety of manipulative practices • Institutional deficiencies • Insider trading

Money Market• Market for short-term money and

financial assets that are near substitutes for money.

• Short-Term means generally period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost

Money Market

• It is a place for Large Institutions and government to manage their short-term cash needs

• It is a subsection of the Fixed Income Market

• It specializes in very short-term debt securities

• They are also called as Cash Investments

Defects of Money Market

• Lack of Integration

• Lack of Rational Interest Rates structure

• Absence of an organized bill market

• Shortage of funds in the Money Market

• Seasonal Stringency of funds and fluctuations in Interest rates

• Inadequate banking facilities

Money Market Instruments

• Treasury Bills

• Commercial Paper

• Certificate of Deposit

• Money Market Mutual Funds

• Repo Market

Segment

Issuer Instruments

Government

Central Government

Zero Coupon Bonds, Coupon Bearing Bonds, Capital Index Bonds, Treasury Bills.

Public Sector

Government Agencies / Statutory Bodies

Govt. Guaranteed Bonds, Debentures

Public Sector Units

PSU Bonds, Debenture, Commercial Paper

Private Corporate Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

Financial Institutions

Certificate of Deposits, Bonds

Financial Regulators

Financial Regulators

• Securities and Exchange Board of India (SEBI)

• Reserve Bank of India

• Ministry of Finance

Security Exchange Board of India(SEBI)

• Securities and Exchange Board of India (SEBI) was first established in the year 1988

• Its a non-statutory body for regulating the securities market

• It became an autonomous body in 1992

Functions Of SEBI

• Regulates Capital Market.

• Checks Trading of securities.

• Checks the malpractices in securities market.

• It enhances investor's knowledge on market by providing education.

• It regulates the stockbrokers and sub-brokers.

• To promote Research and Investigation

Functions Of SEBI

Objectives of SEBI

• It tries to develop the securities market.

• Promotes Investors Interest.

• Makes rules and regulations for the securities market.

The Recent Initiatives Undertaken

• Sole Control on Brokers

• For Underwriters

• For Share Prices

• For Mutual Funds

Reserve Bank of India• Established on April 1, 1935 in accordance

with the provisions of the RBI Act, 1934.

• The Central Office of the Reserve Bank has been in Mumbai.

• It acts as the apex monetary authority of the country.

Functions Of RBI

Monetary Authority: • Formulation and Implementation of monetary

policies.• Maintaining price stability and ensuring

adequate flow of credit to the Productive sectors.

Issuer of currency: • Issues and exchanges or destroys currency and

coins.• Provide the public adequate quantity of supplies

of currency notes and coins.

Regulator and supervisor of the financial system:

• Prescribes broad parameters of banking operations• Maintain public confidence, protect depositors'

interest and provide cost-effective banking services.

Authority On Foreign Exchange:

• Manages the Foreign Exchange Management Act, 1999.

• Facilitate external trade, payment, promote orderly development and maintenance of foreign exchange market.

Functions Of RBI

Developmental role:

• Performs a wide range of promotional functions to support national objectives.

Related Functions:

• Banker to the Government: performs merchant banking function for the central and the state governments.• Maintains banking accounts of all scheduled banks.

Functions Of RBI

Monetary Measures

(a) Bank Rate: The Bank Rate was kept unchanged at 6.0

per cent. (b) Reverse Repo Rate:

The Repo rate is around 7 per cent and Reverse repo rate is around 6.10 per cent.(c) Cash Reserve Ratio:

The cash reserve ratio (CRR) of scheduled banks is currently at 5.0 per cent.

Reforms in the Financial System

• Pre-reforms period

• Steps taken

• Objectives

• Conclusion

Pre-Reforms Period • The period from the mid 1960s to the early

1990s.

• Characterized by:

– Administered interest rates– Industrial licensing and controls– Dominant public sector– Limited competition– High capital-output ratio

• Banks and financial institutions acted as a deposit agencies.

• Price discovery process was prevented.

• Government failed to generate resources for investment and public services.

• Till 90s it was closed, highly regulated, and segmented system.

Pre-Reforms Period

Steps Taken• Economic reforms initiated in June 1991.

• The committee appointed under the chairmanship of M Narasimham.

• He submitted report with all the recommendations

• Government liberalized the various sectors in the economy.

• Reform of the public sector and tax system.

Objectives• Reorientation of the economy

• Macro economic stability

• To Increase competitive efficiency in the operations

• To remove structural rigidities and inefficiencies

• To attain a balance between the goals of financial stability & integrated & efficient markets

Recommendations

• Reduce the level of state ownership in banking

• Lift restrictions on foreign ownership of banks

• Spur the development of the corporate-bond market

• Strengthen legal protections

• Deregulate the insurance industry

• Drop proposed limits on pension reforms

• Increase consumer ownership of mutual-fund products

• Introduce a gold deposit scheme

Recommendations

• Speed up the development of electronic payments.

• Separate the RBI's regulatory and central-bank functions

• Lift the remaining capital account controls

• Phase out statutory priority lending and restrictions on asset allocation

Recommendations

Conclusion• The financial system is fairly integrated,

stable, efficient.

• Weaknesses need to be addressed.

• The reforms have been more capital centric in nature.

• Foreign capital flows and foreign exchange reserves have increased but absorption of foreign capital is low.

Thank you