financial system mba

FINANCIAL SYSTEMFINANCIAL SYSTEM

The term financial system includes a complex of institutions and mechanisms which affect the generation of savings and their transfer to those who will invest.

FEATURES OF THE FEATURES OF THE FINANCIAL SYSTEMFINANCIAL SYSTEM

Ideal linkage between depositors and Ideal linkage between depositors and investorsinvestors

Facilitates expansion of financial Facilitates expansion of financial marketsmarkets

Promotes efficient allocation of financial Promotes efficient allocation of financial resources for socially desirable and resources for socially desirable and economically productive purposeseconomically productive purposes

Influences both the quality and the pace Influences both the quality and the pace of economic developmentof economic development

Financial Institutions

Commercial banksInsurance CosMutual Funds

Provident FundsNon Banking Financial Cos

Demanders of funds

Financial Markets

Suppliers of Funds

IndividualsBusinesses

Governments

Money MarketCapital Market

IndividualsBusinesses

Governments

Securities

FundsFunds

Securities

Funds Funds

Deposits/ shares

Loans

The institutions includeThe institutions include

1.1. Financial institutions / Financial institutions / intermediariesintermediaries like banks, like banks, insurance org., mutual funds and insurance org., mutual funds and so on which collect capital from so on which collect capital from savers and distribute them to savers and distribute them to entrepreneurs/ productive entrepreneurs/ productive enterprises.enterprises.

2. 2. Financial marketsFinancial markets comprising of comprising of capital /securities market , the capital /securities market , the money market and the foreign money market and the foreign exchange market exchange market

3. 3. Financial assets/instrumentsFinancial assets/instruments like like shares, debentures, units etcshares, debentures, units etc

The main function of financial systems is the collection of savings and their distribution for industrial investment, thereby stimulating capital formation and to that extent accelerating the process of economic growth

ORGANISATION OF THE FINANCIAL SYSTEM

FINANCIAL INTERMEDIARIES

FINANCIAL ASSETS/

INSTRUMENTSFINANCIAL MARKETS

FINANCIAL INTERMEDIARIES

BANKS MUTUAL FUNDS INSURANCE COSNBFC’s

1. Leasing Companies2. Hire purchase/Consumer Finance Cos3. Housing Finance Cos4. Venture Capital Funds5. Merchant Banking Organisations6. Credit Rating Agencies7. Factoring and Forfeiting organisations8. Stock Broking Firms9. Depositories

BANKS NBFC’s MUTUAL FUNDSBANKS NBFC’s INSURANCE COSMUTUAL FUNDSBANKS NBFC’s

1. Leasing Companies2. Hire purchase/Consumer Finance Cos3. Housing Finance Cos4. Venture Capital Funds5. Merchant Banking Organisations6. Credit Rating Agencies7. Factoring and Forfeiting organisations8. Stock Broking Firms9. Depositories

INSURANCE COSMUTUAL FUNDSBANKS NBFC’s

FINANCIAL INTERMEDIARIES

Their relevance to the flow of savings Their relevance to the flow of savings is derived from what is called the is derived from what is called the TRANSMUTATION EFFECT.TRANSMUTATION EFFECT.

TransmutationTransmutation refers to the ability of refers to the ability of the financial intermediaries to the financial intermediaries to convert contracts with a given set of convert contracts with a given set of characteristics into contracts with characteristics into contracts with different features.different features.

FINANCIAL INTERMEDIARIES

The services that tailor financial assets to the The services that tailor financial assets to the desires of savers- investors are:desires of savers- investors are:

1.1. ConvenienceConvenience DivisibilityDivisibility MaturityMaturity

2.2. Lower RiskLower Risk Diversification eg. Mutual FundsDiversification eg. Mutual Funds

3.3. Expert managementExpert management Benefits of trained, experienced and Benefits of trained, experienced and

specialised mgt along with continuous specialised mgt along with continuous supervisionsupervision

4.4. Economies of scaleEconomies of scale Lower costLower cost

Main financial Main financial intermediaries intermediaries

Commercial BanksCommercial Banks NBFCNBFC Mutual FundsMutual Funds Insurance OrganisationsInsurance Organisations

Commercial BanksCommercial Banks

Traditional practiceTraditional practice Short term funds for working capital needsShort term funds for working capital needsEmerging needs of economic and financial systemEmerging needs of economic and financial system Term lending particularly in infrastructure Term lending particularly in infrastructure

sectorsector Capital marketCapital market Retail finance such as housing finance, Retail finance such as housing finance,

consumer finance etcconsumer finance etc Enlarged their geographical and functional Enlarged their geographical and functional

coverage in terms of rural/ agriculture and coverage in terms of rural/ agriculture and other priority sector financing like exports, other priority sector financing like exports, small enterprises etc.small enterprises etc.

NBFCNBFC Provide a variety of fund/asset based Provide a variety of fund/asset based

and non fund based /advisory servicesand non fund based /advisory servicesTypes of servicesTypes of services Leasing Companies Hire purchase/Consumer Finance Cos Housing Finance Cos Venture Capital Funds Merchant Banking Organisations Credit Rating Agencies Factoring and Forfeiting organisations Stock Broking Firms Depositories

Mutual FundsMutual Funds

Pools the savings of relatively small Pools the savings of relatively small investors and invest in a well investors and invest in a well diversified portfolio of sound invt.diversified portfolio of sound invt.

A mutual fund is set up in the form A mutual fund is set up in the form of a trust which hasof a trust which has

1.1. A SponsorA Sponsor

2.2. TrusteesTrustees

3.3. Asset Management Company (AMC)Asset Management Company (AMC)

4.4. CustodianCustodian

Insurance OrganisationsInsurance Organisations

Protection against riskProtection against risk Contractual Nature contributes to Contractual Nature contributes to

mobilisation of funds as it tends to mobilisation of funds as it tends to commit the policyholdercommit the policyholder

Desire to save due toDesire to save due to1.1. Emergency fund to guard his familyEmergency fund to guard his family

2.2. Build a potential family estateBuild a potential family estate

3.3. Accumulation of fund for retirementAccumulation of fund for retirement Peculiar combination of savings and Peculiar combination of savings and

family protectionfamily protection

FINANCIAL MARKETS

Money Market Capital/ Securities Market

Primary /New IssueMarket

Secondary /StockMarket/Exchange

FINANCIAL MARKETS

A link between the savers and A link between the savers and investors both individual as well as investors both individual as well as institutionsinstitutions

FINANCIAL MARKETS

Based on the nature of the funds Based on the nature of the funds which are stock in trade, the which are stock in trade, the financial markets are classified intofinancial markets are classified into

Money MarketMoney Market Capital MarketCapital Market

Money MarketMoney Market

Dealing in monetary assets of short Dealing in monetary assets of short term nature ie namely working term nature ie namely working capital financecapital finance

Major participants areMajor participants are1.1. RBIRBI

2.2. Commercial BanksCommercial Banks

Money MarketMoney MarketThe broad objectives areThe broad objectives are1.1. Equilibrium for balancing out short term Equilibrium for balancing out short term

surpluses and deficienciessurpluses and deficiencies2.2. Focal point for intervention by RBI for Focal point for intervention by RBI for

influencing liquidityinfluencing liquidity3.3. A reasonable access to the users of short term A reasonable access to the users of short term

funds at reasonable costfunds at reasonable costEgs- Commercial paper market, Treasury bills Egs- Commercial paper market, Treasury bills

market, Certificate of deposit market etcmarket, Certificate of deposit market etc Negotiated dealing system (NDS) is an electronic Negotiated dealing system (NDS) is an electronic

platform for facilitating dealing in Govt. platform for facilitating dealing in Govt. Securities and Money Market InstrumentsSecurities and Money Market Instruments

Capital Capital MarketMarket

Primary Market/ New Issue Market

Secondary Stock Market /Exchange

Capital MarketCapital Market

1.1. Primary market / New Issue Primary market / New Issue Market (NIM)Market (NIM)

Capital formation takes placeCapital formation takes place Triple functionTriple function

1.1. OriginationOrigination

2.2. UnderwritingUnderwriting

3.3. DistributionDistribution

2. Secondary Stock Market /Exchange 2. Secondary Stock Market /Exchange (SE)(SE)

Market for old/existing securitiesMarket for old/existing securities Three Vital functionsThree Vital functions

1.1. Nexus between savings and Nexus between savings and investmentsinvestments

2.2. Liquidity to investorsLiquidity to investors

3.3. Continuous price formationContinuous price formation

DerivativesIndirectPrimary /Direct

FINANCIAL ASSETS/

INSTRUMENTS

Innovative Debt instruments

DebenturesPreference SharesEquity/Ordinary

Shares

1. Convertible debenture2. Non convertible deb3. Secured Premium Notes4. Warrants

1. Mutual Fund Units2. Security Receipts3. Pass Through Certificates

Forward OptionsFutures

FINANCIAL ASSETS/INSTRUMENTS

Direct / PrimaryDirect / Primary IndirectIndirect DerivativesDerivatives

Direct / PrimaryDirect / Primary

1.1. Ordinary / equity sharesOrdinary / equity shares

2.2. Preference SharesPreference Shares

3.3. Debentures/ bonds including Debentures/ bonds including innovative debt instrumentsinnovative debt instruments

Innovative debt Innovative debt instrumentsinstruments

Participating DebenturesParticipating Debentures Convertible Debentures with optionsConvertible Debentures with options Third party convertible debenturesThird party convertible debentures Convertible debentures redeemable at Convertible debentures redeemable at

premiumpremium Debt Equity swapsDebt Equity swaps Zero coupon convertible notesZero coupon convertible notes Zero interest fully convertible debenturesZero interest fully convertible debentures Warrants either with equity or debenturesWarrants either with equity or debentures Fully convertible debentures with interest Fully convertible debentures with interest

(Optional)(Optional)

Indirect SecuritiesIndirect Securities

Financial assets issued by financial Financial assets issued by financial intermediariesintermediaries

1.1. Units of Mutual FundsUnits of Mutual Funds

2.2. Policies of insurance cosPolicies of insurance cos

3.3. Deposits of banks etcDeposits of banks etc Better suited to small investorsBetter suited to small investors

Derivatives/Derivative Derivatives/Derivative instrumentinstrument

Used to partially/ fully transfer price Used to partially/ fully transfer price risks by locking in asset prices.risks by locking in asset prices.

Derivative is a product whose value Derivative is a product whose value is derived from the value of is derived from the value of one/more basic variables called one/more basic variables called base( underlying base( underlying asset/index/reference rate) in a asset/index/reference rate) in a contractual mannercontractual manner

Derivatives/Derivative Derivatives/Derivative instrumentinstrumentThe most commonly used derivative contracts are:The most commonly used derivative contracts are:

Forward ContractForward Contract An agreement to exchange an asset, for cash, at a An agreement to exchange an asset, for cash, at a

predetermined future date specified todaypredetermined future date specified today Not typically tradeable and has to be settled by delivery of Not typically tradeable and has to be settled by delivery of

assetasset Futures/ Future contractFutures/ Future contract

They are transferable specific delivery forward contracts.They are transferable specific delivery forward contracts. They are agreement between two counterparties to fix the They are agreement between two counterparties to fix the

terms of an exchange/lock in price today of an exchange terms of an exchange/lock in price today of an exchange that will take place between them at some fixed future that will take place between them at some fixed future date.date.

OptionsOptionsOptions are contracts that give the holder the Options are contracts that give the holder the

right (but not the obligation) to buy (call option) or right (but not the obligation) to buy (call option) or sell (put option) securities at a pre determined price sell (put option) securities at a pre determined price (strike /exercise price) within /at the end of a (strike /exercise price) within /at the end of a specified period (expiration period)specified period (expiration period)

INDIAN FINANCIAL INDIAN FINANCIAL SYSTEMSYSTEM

INDIAN FINANCIAL INDIAN FINANCIAL SYSTEMSYSTEM

The evolution of the Indian Financial system The evolution of the Indian Financial system falls into three distinct phasesfalls into three distinct phases

1.1. Up to 1951,corresponding to the post Up to 1951,corresponding to the post independence scenario, on the eve of the independence scenario, on the eve of the initiation of planned economic development.initiation of planned economic development.

2.2. Between 1951 and the mid eighties Between 1951 and the mid eighties reflecting the imperatives of planned reflecting the imperatives of planned economic growtheconomic growth

3.3. After the early nineties responding to the After the early nineties responding to the requirements of requirements of liberalised/deregulated/globalised economic liberalised/deregulated/globalised economic environment.environment.

PHASE I PHASE I PRE -1951 ORGANISATIONPRE -1951 ORGANISATION

FeaturesFeatures Closed circle character of industrial Closed circle character of industrial

entrepreneurshipentrepreneurship A semi organised and narrow industrial A semi organised and narrow industrial

securities marketsecurities market Devoid of issuing institutionsDevoid of issuing institutions Virtual absence of participation of Virtual absence of participation of

intermediary financial institutions in the intermediary financial institutions in the long term financing of the industrylong term financing of the industry

PHASE IIPHASE II1951 TO MID-EIGHTIES1951 TO MID-EIGHTIES

FeaturesFeatures

1.1. Public/ Government ownership of Public/ Government ownership of financial institutionsfinancial institutions

2.2. Fortification of the institutional Fortification of the institutional structurestructure

3.3. Protection to investorsProtection to investors

4.4. Participation of financial institutions Participation of financial institutions in corporate managementin corporate management

Public/ Government Public/ Government ownership of financial ownership of financial

institutionsinstitutions Nationalisation of the RBI in 1948Nationalisation of the RBI in 1948 Setting up of SBI in 1956 by taking over Imperial Setting up of SBI in 1956 by taking over Imperial

Bank of IndiaBank of India 245 Life insurance cos were nationalised and 245 Life insurance cos were nationalised and

merged with LICmerged with LIC 14 Major Banks were nationalised in 196914 Major Banks were nationalised in 1969 GIC in 1972GIC in 1972 6 more banks were nationalised in 19806 more banks were nationalised in 1980 DFIs / term lending institutions were set upDFIs / term lending institutions were set up UTI was createdUTI was created The entire instutional structure was owned and The entire instutional structure was owned and

controlled by Government.controlled by Government.

Fortification of the Fortification of the institutional structureinstitutional structure

Establishment of Establishment of DFIs and financial lending institutionsDFIs and financial lending institutions Industrial Finance Corporation of India (IFCI) in 1948Industrial Finance Corporation of India (IFCI) in 1948 State Financial CorporationState Financial Corporation Industrial Credit and Investment Corporation of India Industrial Credit and Investment Corporation of India

(ICICI) in 1955(ICICI) in 1955 Pioneer in many aspects like underwriting of shares, Pioneer in many aspects like underwriting of shares,

channelisation of foreign currency loans from World Bank to channelisation of foreign currency loans from World Bank to private industry etcprivate industry etc

Industrial Development Bank of India (IDBI) in 1964 as a Industrial Development Bank of India (IDBI) in 1964 as a subsidiary of RBI and was delinked in 1976subsidiary of RBI and was delinked in 1976

Small Industrial Development Bank of India as a subsidiary Small Industrial Development Bank of India as a subsidiary of IDBIof IDBI

LIC in 1956LIC in 1956 UTI in 1964UTI in 1964

Diversification in forms of financing Diversification in forms of financing of commercial banks such as Term of commercial banks such as Term Lending, underwriting of new issues.Lending, underwriting of new issues.

Enlargement of functional coverageEnlargement of functional coverage

Protection to investorsProtection to investors

Enactment of Enactment of

1.1. Companies Act of 1956Companies Act of 1956

2.2. Capital Issues (control) Act, 1947Capital Issues (control) Act, 1947

3.3. Securities Contracts (Regulation) Act, Securities Contracts (Regulation) Act, 19561956

4.4. Monopolies and Restrictive Trade Monopolies and Restrictive Trade Practices Act, 1970Practices Act, 1970

5.5. Foreign Exchange Regulation Act Foreign Exchange Regulation Act (FERA), 1973(FERA), 1973

Phase II- Organisation of Indian Financial System

Public/Govt.Ownership of

Financial Institutions

Fortification ofInstitutional

Structure

Investor Protection

Nationalisationof:RBISBILICBanksGIC

New InstitutionsDFIsUTI

DFIs:IFCISFCsICICIIDBISIDCsSIICsIIBI

Banks:1.DiversificationOf forms of Financing2. Enlargement of functionalCoverage3. Innovative banking

LIC UTI

Companies Act

ForeignExchangeReglulationAct

Securities Contracts (Regulations) Act

Capital Issues(Control) Act

MonopoliesAnd RestrictiveTrade PracticesAct

Participation byFinancial InstitutionsIn CorporateManagement

NOTABLE DEVELOPMENTS NOTABLE DEVELOPMENTS POST 1991POST 1991

Privatisation of financial institutionsPrivatisation of financial institutions Reorganisation of institutional Reorganisation of institutional

structurestructure Investor protectionInvestor protection

Post 1991 Phase Organisation of the Indian Financial System

Privatisation of Financial Institutions1. Banks2. Mutual Funds3. Insurance

companiesompanies

Re organisation of Structure

DFIsPFI’s

Banks NBFCsMutual funds

CapitalMarket

Money market

PrimaryStock

Exchange

Investor Protection

SEBI

Privatisation of financial Privatisation of financial institutionsinstitutions

Conversion of Industrial Finance Corporation Conversion of Industrial Finance Corporation of India in to a public company. (IFCI Ltd.)of India in to a public company. (IFCI Ltd.)

IDBI and IFCI offered equity to public IDBI and IFCI offered equity to public investorsinvestors

Pvt. mutual funds set upPvt. mutual funds set up Pvt. Banks have come upPvt. Banks have come up With the enactment of IRDA, 1999 pvt. With the enactment of IRDA, 1999 pvt.

Insurance Cos set up by both domestic and Insurance Cos set up by both domestic and foreign promotersforeign promoters

Establishment of Pension Fund Regulation Establishment of Pension Fund Regulation and Development Authority, pvt. Entities are and Development Authority, pvt. Entities are posed to enter this field. posed to enter this field.

Reorganisation of Reorganisation of institutional structureinstitutional structure

Development/Public Financial InstitutionsDevelopment/Public Financial Institutions1. Greater reliance of industry on capital market.1. Greater reliance of industry on capital market.2. Giving core working capital to industry in addition 2. Giving core working capital to industry in addition to traditional loanto traditional loan3.Growing focus on non fund based financial 3.Growing focus on non fund based financial activities like merchant banking etcactivities like merchant banking etc4. Pattern of financing changed4. Pattern of financing changed5. Change in the nature of institutions sponsored 5. Change in the nature of institutions sponsored from TCO, MDI to CRISIL, CARE,ICRAfrom TCO, MDI to CRISIL, CARE,ICRA6. Extension of internationally accepted accounting 6. Extension of internationally accepted accounting std has improved the bottomlinestd has improved the bottomline7. With conversion of ICICI Ltd and IDBI into banks, 7. With conversion of ICICI Ltd and IDBI into banks, DFI’s and PFI’s have disappeared. DFI’s and PFI’s have disappeared.

Commercial BanksCommercial Banks

Geographically wide and functionally Geographically wide and functionally diverse banking systemdiverse banking system

But gross profits progressively But gross profits progressively declineddeclined

Factors affecting Profitability

Macro aspects of Envt.

Internal Factors

Interest on SLR very low

Credit to priority sector resulted in deterioration in quality and growth of over duesPolitical and adm. interference

Escalation in interest cost

Couldn’t cope with load of servicing more branchesDiluted the quality of manpowerAccounting practices not in conformity with international stds.Lack of autonomy

NBFCsNBFCs

Fund based activitiesFund based activities Hire purchaseHire purchase Bills discountingBills discounting Venture capitaVenture capita Stock brokingStock broking Loans/investmentsLoans/investments Equipment leasingEquipment leasing

Fee based/advisory servicesFee based/advisory services Issue managementIssue management Portfolio managementPortfolio management Loan /lease syndicationLoan /lease syndication Merging and acquisitionMerging and acquisition

Main elements of Main elements of regulationregulation

1.1. Chapter III B of the RBI Act amended in 1998Chapter III B of the RBI Act amended in 1998

2.2. RBI Acceptance of Deposits Regulations, 1998RBI Acceptance of Deposits Regulations, 1998

3.3. NBFCs Prudential Norms (RBI) Directions, NBFCs Prudential Norms (RBI) Directions, 19981998

4.4. NBFCs Auditor Reports (RBI) Directions , 1998NBFCs Auditor Reports (RBI) Directions , 1998

5.5. RBI has set up Department of Non Banking RBI has set up Department of Non Banking Supervision which undertakes both on site and Supervision which undertakes both on site and off site surveillance over the institutionsoff site surveillance over the institutions

Mutual FundsMutual Funds A remarkable development post 1991A remarkable development post 1991 Vehicle for institutionalisation of security Vehicle for institutionalisation of security

invts for the relatively small investorsinvts for the relatively small investors Domestic mutual funds sponsored by UTI, Domestic mutual funds sponsored by UTI,

bank subsidiaries, insurance bank subsidiaries, insurance organisations, private sector with foreign organisations, private sector with foreign collaboration and foreign institutional collaboration and foreign institutional investors/ merchant banksinvestors/ merchant banks

Several off shore/overseas/country funds Several off shore/overseas/country funds sponsored by Indian Financial sponsored by Indian Financial institutions as well as Foreign institutions as well as Foreign institutional investorsinstitutional investors

A variety of schemes focusing on income A variety of schemes focusing on income growth, tax savings , insurance linkage growth, tax savings , insurance linkage etc etc

Capital/Securities Capital/Securities MarketMarket

Dormant till mid 1980sDormant till mid 1980s After that it has emerged as the most After that it has emerged as the most

important mechanism for allocating important mechanism for allocating resourcesresources Shown by rapid expansion in quantum of funds Shown by rapid expansion in quantum of funds

raised raised the number of investors in primary marketthe number of investors in primary market Increase in number of stock exchanges and Increase in number of stock exchanges and

listed securitieslisted securities Speedy rise in market capitalisation and volume Speedy rise in market capitalisation and volume

of tradeof trade Entry of FIIs and mutual fundsEntry of FIIs and mutual funds

Capital Market

Primary Market

Secondary Market

Primary MarketPrimary Market New Issue MarketNew Issue Market One component of the organisation, namely, One component of the organisation, namely,

the market intermediaries comprise ofthe market intermediaries comprise of Specialist merchant banks/ lead managerSpecialist merchant banks/ lead manager UnderwritersUnderwriters Bankers to an issueBankers to an issue Registrars to an issueRegistrars to an issue Share transfer agentsShare transfer agents Porfolio managersPorfolio managers Brokers, FIIs etcBrokers, FIIs etc

Rigorous compliance to SEBIRigorous compliance to SEBI

Secondary MarketSecondary Market

A few stock exchanges , dominated by A few stock exchanges , dominated by Bombay Stock Exchange provided the trading Bombay Stock Exchange provided the trading platforms for secondary market transactionsplatforms for secondary market transactions

NSE introduced Screen based trading in NSE introduced Screen based trading in 19921992

The Depositories Act, 1996- Central The Depositories Act, 1996- Central Depository services Ltd(CDSL) and National Depository services Ltd(CDSL) and National Securities Depository Ltd.(NSDL) were set upSecurities Depository Ltd.(NSDL) were set up

Successful dematerialisation of shares upto Successful dematerialisation of shares upto 99 percent of total market capitalisation99 percent of total market capitalisation

Shortening of settlement cycle from Shortening of settlement cycle from 14 days to T + 214 days to T + 2

Introduction of securities related Introduction of securities related derivativesderivatives

FIIs have been allowed to invest in FIIs have been allowed to invest in IndiaIndia

Money MarketMoney Market

Sophisticated and articulate money Sophisticated and articulate money market has emergedmarket has emerged

Emergence of specialised institutions – Emergence of specialised institutions – Primary Dealers and money market Primary Dealers and money market mutual fundsmutual funds

Consists of inter related sub marketsConsists of inter related sub markets Call/notice mkt, Commercial bills mkt, T-Call/notice mkt, Commercial bills mkt, T-

bills mkt, Commercial paper mkt, bills mkt, Commercial paper mkt, Certificates of deposits market and Repo Certificates of deposits market and Repo marketmarket

Protection of investors: Protection of investors: Securities and Exchange Securities and Exchange

Board of IndiaBoard of India The Capital Issues (Control) Act was The Capital Issues (Control) Act was

repealed in 1992repealed in 1992 The office of the Controller of The office of the Controller of

Capital Issues was abolishedCapital Issues was abolished SEBI was set up in 1988SEBI was set up in 1988

Mandate of SEBIMandate of SEBI

1.1. Protect the interest of the investors Protect the interest of the investors in securitiesin securities

2.2. Promote the development of the Promote the development of the securities marketsecurities market

3.3. Regulate the securities marketRegulate the securities market

SEBI exercises power SEBI exercises power underunder

The SEBI ActThe SEBI Act Securities Contract s(Regulation) Securities Contract s(Regulation)

ActAct Depositories ActDepositories Act The delegated powers under the The delegated powers under the

Companies ActCompanies Act

The SEBI regulates and supervises the securities markets through 1. regulation 2. guidelines and schemes

FINANCIAL MARKET

FINANCIAL MARKET

Capital Market Money Market

Capital Market

Primary Market/New Issue Market

Secondary Market/Stock Exchange

Two stages are involved in purchase and sale of

securitiesFirst stage- Securities are acquired from the

issuing companies

Second stage- Purchased and sold continuously among investors without involvement of the companies except for registering ownership

The section of the market dealing with first stage is referred to as the NIM, while the secondary market covers the second stage of the dealings in securities

Difference between Stock Exchange and Primary

Market

New Issue Market

Stock Exchange

1 Types of security

New Existing/ old

2 Nature of Financing

Direct Indirect

3 Organisation No geographical existence

Physical existence

4 Functions Specialist institutional triple servicesOriginationUnderwritingDistribution

Nexus between savings and investmentsMarket placeContinuous price formation

Similarities between NIM and the stock exchanges

Stock exchange Listing Stock Exchange exercise

considerable control over new issues Economic Interdependence – Has two

dimensions Behaviour of Stock Exchange has

significant bearing on the level of activity in the NIM

Prices of new issues are influenced by the price movements on the stock market

Functions of Stock/Secondary Markets/

Exchanges1. Nexus between Savings and

Investments2. Market Place3. Continuous price formation

Nexus between Savings and Investments

Savings of the community are mobilised and channelled by stock exchanges for investment into those sectors and units which are favoured by the community

Stock Exchanges render this service thru new issues and sale of existing securities

Ensures that the various listing rules are complied with

Members of stock exchange help by acting as As brokers – try to procure invts from all over the country As underwriters

Market Place

Provide market place for purchase and sale of shares thereby ensuring transferability

Continuous price formation

Large number of buyers and sellers has the effect of bringing about changes in the levels of security prices in small graduations

Ever changing demand and supply conditions result in continuous revision of assets

Stock exchanges act as a barometer of the state of health of the nations economy , by constantly measuring its progress or otherwise

Functions of New Issues/ Primary Market

Transfer of resources from sav ers to entrepreneurs

Is a complex set of institutions thru which funds can be obtained directly or indirectly by those who require the, from investors have savings

The Securities issued by the company for the first time either after the incorporation or conversion from Private to Public companies are designated as initial issues, while those issued by cos which already have stock exchange quotation either public issue or by rights to existing shareholders, are referred to as old

Two types of issues are excluded from the category

of new issues Bonus issues Exchange issues by which shares are

exchanged for securities in another co.

General function of NIM can be split into three

services Origination Underwroters Distribution

Origination Refers to the work of investigation as

analysis and processing of new proposals Are performed by specialist agencies

which act as the sponsors of issues A careful study of technical, economic ,

financial and legal aspects of the issuing companies

In this process, the sponsoring institutions render some services of an advisory nature which go to improve quality of capital issues

Services include

Determination of the class of security to be issued and prices of the issues in the light of market conditions

The timing and magnitude of issue Methods of floatation Technique of selling etc

Underwriting

A form of guarantee that issues would be sold by eliminating the risk arising from uncertainty of public response

Distribution

The sale of securities to the ultimate investors is known as distribution

Issue Mechanism

Public issue through prospectus Tender / Book building Offer for sale Placement Rights issue

Public issue through prospectus

Issuing companies offer directly to the public

Issues are underwritten Minimum contents of a issue are

prescribed by the Companies Act, 1956.