Indian Financial System

INDIAN FINANCIAL SYSTEM

-DEEPAK BANSAL

UNIT-1OVERVIEW OF INDIAN FINANCIAL SYSTEMAGENDA Role of Financial Markets in capital formation

and economic development. Commercial Banks and industrial finance-

evolving role. Reserve Bank of India as a regulator of

Banking systems and its other functions. Securities & Exchange Board of India as a

regulator of Indian capital market

FINANCIAL SYSTEM AND ECONOMIC DEVELOPMENT The growth of output in any economy depends on the

increase in the proportion of savings/investment to a nation’s output of goods and services.

The financial system and financial institutions help in the diversion of rising current income into savings/investments.

The financial system is possibly the most important institutional and functional vehicle for economic transformation. Finance is a bridge between the present and the future and whether it be the mobilisation of savings or their efficient, effective and equitable allocation for investment, it is the success with which the financial system performs its functions that sets the pace for the achievement of broader national objectives.

SIGNIFICANCE & DEFINITION The term financial system is a set of inter-

related activities/services working together to achieve some predetermined purpose or goal. It includes different markets, the institutions, instruments, services and mechanisms which influence the generation of savings, investment capital formation and growth.

Van Horne defined the financial system as the purpose of financial markets to allocate savings efficiently in an economy to ultimate users either for investment in real assets or for consumption.

According to Robinson, the primary function of the system is "to provide a link between savings and investment for the creation of new wealth and to permit portfolio adjustment in the composition of the existing wealth.“

From the above definitions, it may be said that the primary function of the financial system is the mobilisation of savings, their distribution for industrial investment and stimulating capital formation to accelerate the process of economic growth.

TYPES OF MARKET Well-developed financial markets are

required for creating a balanced financial system in which both financial markets and financial institutions play important roles.

The primary function of the financial markets is to facilitate the transfer of funds from surplus sectors (lenders) to deficit sectors (borrowers).

Normally households have excess of funds or savings which they lend to borrowers in the corporate and public sectors, whose requirement of funds exceed their savings.

A financial Market consists of investors or buyers, sellers, dealers and brokers and does not refer to a physical location.

The participants in the market are linked by formal trading rules and communication networks for originating and trading financial securities.

The primary market in which the public issue of securities is made through a prospectus is a retail market and there is no physical location.

The investors are reached by direct mailing or invitation to bid within a price band.

On the other hand, the secondary market or stock exchange where existing securities are traded, is an auction market and may have a physical location such as the rotunda of the Bombay Stock Exchange or the trading floor of Delhi, Ahmadabad and other exchanges where the exchange members meet to trade securities face-to-face.

MONEY MARKET The money or credit market is the centre for

dealings in monetary assets of short-term nature generally below one year.

The instruments are call money/notice money, term money, treasury bills, commercial paper, certificates of deposits, participation certificates and forward rate agreements/interest rate swaps.

The money market has organised and unorganised components.

The organised credit market is dominated by commercial banks.

The other major players are the Reserve bank of India, Life Insurance corporation, General Insurance corporation, Unit Trust of India, Securities Trading corporation of India Ltd. And Discount and finance house of India.

Unorganised Market consists of indigenous bankers and money lenders.

There is no clear demarcation between short-term and long-term finance in as much as there is nothing on a hundi to indicate accommodation.

Hundi is the indigenous bill of exchange. Hundis are usually accommodation bills.

CAPITAL MARKET The capital market consists of primary and

secondary markets. The primary market deals with the issue of

new instruments by corporate sector such as equity shares, preference shares and debentures.

The secondary market consists of 24 stock exchanges, (out of which 5 has been de-recognized) including the national stock exchange, the over the counter exchange of India and interconnected stock exchange of India Ltd. Where existing instruments including negotiable debts are traded.

Capital formation occurs in the primary market while the secondary market provides a continuous market for the securities already issued to be bought and sold in volume with little variation in the current market price.

The major player in the primary market are the merchant banker, mutual funds, financial institutions, foreign institutional investors and the anchor of the market, the individual investor.

In the secondary market, the stockbrokers who are members of the stock exchanges, the mutual funds, financial institutions, foreign institutional investors and individual investors.

FOREIGN EXCHANGE MARKET The foreign exchange market encompasses all

transactions involving the exchange of different monetary units for each other.

Every sovereign nation has its own currency. The monetary unit of a country can be exchanged with any other currency of any other country in the foreign exchange market.

The foreign exchange market is not a physical place. It is a network of banks’ dealers and brokers who are dispersed throughout the leading financial sectors of the world.

It acts as an intermediary for individual buyers and sellers. The foreign exchange market links financial activities in different currencies.

FEM in India comprises of authorized dealers consisting mainly of commercial banks, customers and Reserve Bank of India.

There are seven major centres in Mumbai, Delhi, Calcutta, Chennai, Bangalore, Kochi and Ahmadabad with Mumbai accounting for the major portion of the transactions.

The Foreign Exchange Dealers Association of India(FEDAI) plays an important role by laying down the rules for commission and other charges.

FOREIGN EXCHANGE RATES The foreign exchange rates govern the rate

at which one currency can be exchanged for another.

An exchange rate may be defined as the amount of currency that one requires to buy one unit of another currency or is the amount of a currency one receives when selling one unit of another currency.

RESERVE BANK OF INDIA The Reserve Bank of India as the central

bank of the country, is at the head of this group.

Commercial banks themselves may be divided into two groups, the scheduled and the non scheduled.

The commercial banking system may be distinguished into:

A. Public Sector BanksB. Private Sector Banks

A. Public Sector Banks i) State Bank of India ii) Associate Bank iii) 14 Nationalized Banks (1969) iv) 6 Nationalized Banks (1980) v) Regional Rural BanksB. Private Sector Banks Other Private Banks; ii) New sophisticated Private Banks; iii) Cooperative Banks included in the second

schedule; iv) Foreign banks in India, representative offices,

and v) One non-scheduled banks

RBI The Reserve Bank of India (RBI) is the apex

financial institution of the country‘s financial system entrusted with the task of control, supervision, promotion, development and planning.

RBI is the queen bee of the Indian financial system which influences the commercial banks' management in more than one way.

RBI performs the four basic functions of management, viz., planning, organising, directing and controlling in laying a strong foundation for the functioning of commercial bank

FUNCTIONS Issuing currency notes, to act as a currency

authority. Banker, Agent and Financial Advisor to the

State Banker to the Banks Custodian of Foreign Exchange Reserves Lender of the Last Resort Banks of Central Clearance, Settlement and

Transfer Controller of Credit Supervisory Functions

COMMERCIAL BANKS In India there are 88 commercial banks which

account for about 82 %of the total assets of the financial sector, over 2000 cooperative banks accounting for about 5% and 133 regional Rural Banks, which account for about 3% of the total assets of the financial sector.

Commercial banks are business enterprises which deal in finances, financial instruments and provide various financial services for a price known as interest, discount, commission, fee etc.

According to the Banking Regulation Act, 1949, Banking means, “accepting, deposit of money from the public, for the purpose of lending or investment.”

These deposits may be repayable on demand or otherwise and may be withdrawn by cheque, draft, order or otherwise.

Accepting deposits and lending these resources to business houses and individuals are the main function of commercial banks.

Commercial banks also involve into various financial services.

FUNCTIONS OF COMMERCIAL BANKS Accepting deposits Loans and advances Agency functions Dealings in foreign exchange Credit creation Popularising cheque system Transfer of funds Other functions Function under innovative banking Insurance business

SECURITY & EXCHANGE BOARD OF INDIA The SEBI Act was passed on 4th April, 1992

which empowered SEBI to regulate entire gamut of activities in primary and secondary market.

SEBI exercises control over new issues registration and regulation of market intermediaries, regulation of mutual funds, regulating listing of securities, imposing a code of conduct on merchant bankers, underwriter, brokers.

SEBI protects the interests of investors in securities and promote the development and regulation of the securities market.

The Board consists of a chairman, two members from the Government of India, ministries of Law and Finance, one member from the RBI and two other members.

The SEBI prohibits unfair trade practices and insider trading, regulation of take-overs etc.

FUNCTIONS OF SEBI Regulating the business in stock exchanges

and any other securities market. Registering and regulating the working of

stock brokers, sub-brokers, share transfer agents, bankers to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner.

Registering and regulating the working of collective investment schemes including mutual fund.

Promoting and regulating self-regulatory organisation.

Prohibiting fraudulent and unfair trade practices relating to securities market.

Promoting investors’ education and training of intermediaries of securities market.

Prohibiting insider trading in securities. Levying fees or other charges for carrying out

the above purposes and Conducting research for the above purposes.

UNIT- IIFINANCIAL MARKETAgenda Money Market: Organisation, Constituents

and Instruments Capital Market: New Issue Market & Stock

Exchanges- Differences & Similarities, Functions, Methods of New Issues, Regulatory framework.

MONEY MARKET Money Market is a very important segment of

the Indian financial system. Money Market is basically over-the-phone

market. The transactions are conducted through oral communications.

It is the market for dealing in monetary assets of short-term nature. Short-term funds up to one year.

Money market instruments have the characteristics of liquidity, minimum transaction cost and no loss in value.

Money market provides access to providers and users of short term funds to fulfill their borrowings and investment requirements.

The Money Market is the major mechanism through which the Reserve Bank influences liquidity and the general level of interest rates.

There are a large number of participants in the money market: Commercial Banks, Mutual funds, investment institutions, financial institutions and finally the Reserve Bank of India.

The money market can obtain funds from the central bank either by borrowing or through sale of securities.

ORGANISATION OF MONEY MARKET Organised

Reserve Bank of India Public Sector Banks Private Sector Banks-

Non-Scheduled BanksScheduled Banks-

Foreign Banks Indian Banks

Development Banks and other Financial Institutions like LIC, UTI, IFC, IDBI etc.

DFHI Ltd.

Unorganised Indigenous bankers Money Lenders Traders Commission Agents Chit Funds Nidhis

MONEY MARKET INSTRUMENTS Money at call and short notice (Call Loans) Treasury Bills Bills Rediscounting Scheme (BRS) Certificates of Deposits (CDs) Commercial Papers (CPs) Repurchase Options Inter-Bank Participation Certificates on a risk

sharing basis or without risk sharing basis Options Swaps

CAPITAL MARKETNew Issue Market

New Issues Market comprises all people, institutions, methods, services and practices involved in raising fresh capital for both new and existing companies. This Market is also called Primary Market. PM deals in only new securities which acquire form for the first time, i.e. which were not available previously.On the other hand, secondary market or stock market or stock exchange deal in existing securities, i.e. securities which have already been issued by companies and are listed with the stock exchanges.

FUNCTIONS OF NIM Facilitates transfer of resources from savers

to entrepreneurs establishing new companies.

Helps raising resources for expansion and/or diversification of activities of existing companies

Helps selling existing enterprises to the public as going concerns through conversion of existing proprietorship/partnership/private limited concerns into public limited companies.

PLAYERS IN THE NEW ISSUE MARKET Merchant Bankers Registrars Collecting and co-ordinating Bankers Underwriters Brokers, Agents Printers Advertising Agencies Mailing Agencies SEBI

DIFFERENCES BETWEEN NIM AND STOCK EXCHANGESNIM Stock Exchanges1. Market for new securities 1. Market for existing

securities2. No fixed geographical location

2. Located at a fixed place

3. Results in raising fresh resources for the corporate sector

3. Facilitates transfer of securities from one corporate investor to another.

4. All companies enter NIM 4. Securities of only listed companies can be traded at stock exchanges

5. No tangible form or administrative set-up

5. Has a definite administrative set-up and a tangible form.

6. Subjected to outside control by SEBI, Stock Exchanges and the companies Act.

6. Subjected to control both from within and outside.

SIMILARITIES BETWEEN NIM & STOCK EXCHANGES Securities traded at stock exchanges are

those which have first been issued by the companies.

While issuing prospectus, the companies stipulate in the prospectus that application has been made or will be made in due course for listing of shares with the stock exchange.

Stock exchange exercise control over the organisation of new issues as a precondition for listing of shares.

Stock exchanges provide liquidity to the securities which have passed through NIM.

METHODS OF NEW ISSUES Public issue through prospectus Through offer for sale Through placement of securities- private

placement and stock exchange placing Rights issue Issue of Bonus shares Book-building Stock option or Employees Stock Option

Scheme

UNIT-IIIBANKING INSTITUTIONSAgenda

Commercial Banks Co-operative Banks

COMMERCIAL BANKS Commercial Banks are business enterprises

which deal in finances, financial instruments and provide various financial services for a price known as interest, discount, commission, fee etc.

According to the Banking Regulation Act, 1949, banking means, “Accepting deposits of money from the public, for the purpose of lending or investment”.

These deposit may be repayable on demand or otherwise and may be withdrawn by cheques, draft, order or otherwise.

Accepting deposits and lending these resources to business houses and individuals are the main function of commercial banks.

FUNCTIONS OF COMMERCIAL BANKS Accepting Deposits

Demand deposits or current accountsSavings depositsTime deposits or fixed deposits

Loans and AdvancesCash CreditsOverdraftsDiscounting of billsShort-term, Medium-term or Long-term loans

Agency function Dealings in foreign exchange Credit Creation Popularising Cheque System Transfer of funds Other functions Insurance Business

SOURCES & APPLICATION OF FUNDSSources Paid-up Capital Reserves and Surpluses Deposits

Application Buildings, furniture, office equipment etc. for

conducting business Money at call and short notice Bills discounted and purchased Treasury bills etc.

ASSET STRUCTURE OF COMMERCIAL BANKS Cash Balances Money at call and short notice Short-term Bills Loans and advances Investments

NON-PERFORMING ASSETS A non-performing Asset in India represents

an advance that has not been serviced as a result of past dues accumulating for 90 days and over.

NPAs consist of assets under three categories:-

Sub-standardDoubtful and Loss

A non-performing asset is an advance where: Interest and/or installment of principal

remain overdue for a period of more than 90 days in respect of term loan.

The account remains our of order for a period of more than 90 days in respect of an overdraft/cash credit.

The bill remains overdue for a period of more than 90 days in case of the bills purchased and discounted.

Interest and/or installment of principal remain overdue for two harvest seasons but for a period of not exceeding 180 days in the case of an advance granted for agricultural purposes.

And amount to be received for a period of more than 90 days in respect of other accounts.

BANK RATE, LENDING RATES AND CREDIT-OFF TAKE Bank rate is the rate of interest at which

Reserve Bank of India lends money to banks. Its is the rate at which the central bank

rediscounts certain defined bills and other eligible papers.

Prime Lending rate is the rate of interest at which banks lend to the borrowers with highest credit-worthiness.

Credit-off take occurs when the demand for money at lower rate (bank rate and various interest rate) is promoted.

REPO AND REVERSE REPO RATE Repo rate is the rate at which banks borrow

short-term funds from RBI. Reverse repo rate is the rate at which banks

park their short-term surplus funds in the RBI.

Commercial Banks

Scheduled Banks non-scheduled banks

(i) Public Sector (28) (i) Local Area Banks(ii) Private Sector (60) SBI Group (8)(iii) Regional Rural (231) Nationalised

Bank(19)

Indian (29)Foreign (31)

ORGANISATIONAL STRUCTURE OF CO-OPERATIVE CREDIT INSTITUTIONS Urban Co-operative Banks Rural Co-operative Credit Institutions

Short Term CreditState Co-operative BanksDistrict/Central BanksPrimary Agricultural Credit Societies

Long Term CreditState Co-operative Agricultural & Rural Development Banks

Primary Co-operative Agricultural & Rural Development Banks

CO-OPERATIVE BANKS Co-operative Banks undertake the business

of banking both in urban and rural areas on the principle of co-operation.

They have served a useful role in spreading the banking habit throughout the country.

The co-operative banks have been set up under the various Co-operative Societies Acts enacted by the State Governments.

The State Governments regulate/monitor these banks.

Certain provisions of the Banking Regulation Act 1949 were made applicable to co-operative banks as well.

The State Co-operative Banks and Urban Co-operative Banks are eligible to be granted the status of scheduled banks by the Reserve Bank of India.

All Co-operative banks are eligible for being registered as insured banks.

URBAN CO-OPERATIVE BANKS These banks are required to obtain a license

from the Reserve Bank of India under section 22 of the Banking Regulation Act, 1949.

Recently the Reserve Bank of India has revised the licensing policy of new banks.

According the this, a new bank should have share capital of Rs. 4 Crore and membership of at least 3000 if the population is over 10 lakhs.

A share capital of Rs. 2 Crore and membership of at least 2000 are required for population of 5 to 10 lakhs.

Share capital of Rs. 1 Crore and membership of at least 1500 are required for population of 1 to 5 lakhs.

Share capital of Rs. 25 lakhs and membership of at least 500 for population of less than 1 lakh.

The new bank should have at least 2 directors with suitable banking experience or relevant professional qualifications.

An urban co-operative bank is allowed to become a schedule bank if its net demand and time liabilities are at least Rs. 100 Crore and its overall functioning in terms of select parameters is satisfactory.

All categories of scheduled banks including co-operative banks are now subject to the same cash reserve requirement as applicable to Scheduled Commercial Banks.

STATE CO-OPERATIVE BANKS These are the important banks in the field of

short-term co-operative credit in rural areas. The scheduled co-operative banks are

eligible for loans and advances from RBI and have to make cash reserve ratio with the RBI.

The non-scheduled state co-operative banks have to comply with the requirement of making deposit with RBI.

State co-operative banks are also required to seek licence from RBI for carrying on of Banking business under section 22 of the Banking Regulation Act, 1949.

State Co-operative banks are eligible for obtaining credit from NABARD on the basis of short-term and medium-term credit granted by them.

State co-operative banks grant loans and advances to the central/district co-operative banks.

UNIT-IVNON-BANKING FINANCIAL INTERMEDIARIESAgenda Investment Policy and performance appraisal

of Unit Trust of India and other mutual funds Non-Banking Financial Companies Insurance Companies

NON-BANKING FINANCIAL COMPANIES Non-banking Financial Institutions carry out

financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions.

The principal business of NBFCs is to accept deposits under various schemes or arrangements like regulated deposits and exempted deposits and to lend in various ways.

NBFCs except HFCs are regulated by the RBI. HFCs are regulated by NHB. NBFCs were allowed to enter into credit card

business on their own or in association with another NBFC or a scheduled commercial bank.

Loan Companies Investment Companies Hire-purchase Finance Housing finance Lease Finance Mutual Benefit Financial Companies Residuary Non-Banking Companies Merchant Banks Venture Capital Funds Factors

Apart from these NBFIs, another part of Indian financial system consists of a large number of privately owned, decentralised, and relatively small-sized financial intermediaries. Most work in different, miniscule niches and make the market more broad-based and competitive. While some of them restrict themselves to fund-based business, many others provide financial services of various types. The entities of the former type are termed as "non-bank financial companies (NBFCs)". The latter type are called "non-bank financial services companies (NBFCs)".

Non-bank financial intermediaries (NBFIs) comprise a mixed bag of institutions, ranging from leasing, factoring, and venture capital companies to various types of contractual savings and institutional investors (pension funds, insurance companies, and mutual funds). The common characteristic of these institutions is that they mobilize savings and facilitate the financing of different activities, but they do not accept deposits from the public. NBFIs play an important dual role in the financial system.

MUTUAL FUNDS Mutual Funds are financial intermediaries

which collect the savings of investors and invest them in a large and well diversified portfolio of securities such as money market instruments, corporate and Government bonds and equity shares of joint stock companies.

A Mutual Fund is a pool of mix funds invested by different investors, who have no contact with each other.

Mutual funds helps the investors who generally don’t have adequate time, knowledge, experience and resources for directly accessing the capital market.

The first mutual fund was the Unit Trust of India in 1964 under an act of Parliament.

During the years 1987-1992, seven new mutual funds were established in the public sector.

In 1993, the Government changed its policy to allow the entry of private corporate and foreign institutional investor into the mutual fund segment.

There are two types of Mutual Funds : Open-ended funds Closed-ended funds

ORGANIZATION The Sponsor The Board of Trustee or Trust Company The Asset Management Company The Custodian The Unit-holders

INVESTMENT POLICY & PERFORMANCE APPRAISAL OF UTI The MFs invest their resources in different

type of financial assets subject to the guidelines form the government and the SEBI.

The government directs that investment by the UTI in anyone company should not exceed five percent of its total investible fund, or 10 percent of the value of the outstanding securities of that company, whichever is lower.

It is further laid down that UTI should not invest more than 5 percent of its funds in the initial issues of any new industrial concern.

The objective of government regulations are to minimize risk and avoid concentration of investments in a few large companies.

In view of the requirement of safe provision of a stable, regular and growing income to its unit-holders, the portfolio of its assets has to be composed of fixed-income securities and ordinary shares.

The SEBI requires other mutual funds to invest not more than 5 percent of the outstanding equity capital of any company.

DETERMINANTS OF MUTUAL FUND PERFORMANCE Factors affecting expected returns include

asset allocation and systematic risk, while transaction costs include explicit and implicit ones, which can be measured by expense ratios, age of the funds, fund fees, management structure, management tenure, macro economics variables like inflation, growth rate of GDP, development of capital market, and size of funds respectively.

In order to judge the performance of MF schemes in an objective manner and offer investors an easy way to identify funds that have performed better in relation to their peer, a number of….

Entities are evaluating and ranking their performance.

The most popular of them are rankings/evaluations by CRISIL, Value Research India and Credence Analytics.

INSURANCE COMPANIES The Insurance companies are financial

intermediaries as they collect and invest large amounts of premiums.

They offer protection to the investors, provide means for accumulating savings and channelise funds to the government and other sectors.

The insurance industry has both economic and social purpose. It provides social security and promotes individual welfare.

The actual premium of insurance companies comprises the pure premium and administrative as well as marketing cost.

The pure premium is the present value of the expected cost of an insurance claim.

Since there is a lag between payment of premiums and payment of claims, there is generation of investible funds known as insurance reserves.

Insurance companies may be organised as either corporations or mutual associations.

There are various parts of insurance industry: life insurance, health insurance, general insurance, etc.

INSURANCE INDUSTRY IN INDIA Public Sector

Life – LIC, Post Office Insurance General – GIC and its four subsidiaries

Private Sector Life General

INVESTMENT PATTERN AND POLICY The pattern of investment of LIC funds has

been governed by the provisions of the Insurance Act 1938.

Till very recently, it had to invest at least 50 percent of its controlled funds in government and other approved securities, 15 percent in “other” investments which included loans to state government for housing and water supply schemes, municipal securities not included in category one, government guaranteed loans to municipal committees and co-operative sugar factories, and upto 35 percent in “approved” …..

investments which included shares and debentures of public and private limited companies, of co-operative societies, immovable property, loans to its policy-holders and fixed deposits with scheduled banks and co-operative societies.

UNIT-VDEVELOPMENT, MERCHANT & INVESTMENT BANKINGAgenda

Development Banking Merchant Banking Investment Banking

DEVELOPMENT BANKING Development Banking is the financing of

projects assessed on the basis of their viability to generate cash flows to meet the interest and repayment obligation.

They have an in-built promotional aspect because projects have to fall within the overall national industrial priorities, located preferably in backward areas and promoted by entrepreneurs.

Development banking is different: Loans are made not to those who have accumulated wealth in the past but to those who show promise to become wealthy in the future. Normal banking looks for safety in assets accumulated from the past; in development banking, possible accumulation of assets in the future is the true collateral. Thus, while in normal banking, the collateral is real and tangible, in development banking, the collateral is a dream; it is intangible. In normal banking, an interest default of more than 90 days becomes a non-performing asset. In the case of development, growth is rarely smooth; development happens in fits and starts; cash flows are subject to wild fluctuations and become negative at times.

development banks need to have a longer perspective than three months; they should show patience for years. Normal banks can afford to be myopic; development banks should take the long view. For development banks, it is the trend line and not the current surplus that is important. As one development banker blithely explained: "When I see any risk, I take my money and run away." But that is not development banking; development banks take risks that ordinary banks will not.

MERCHANT BANKING Merchant banking activity was formally initiated

into the Indian Capital markets when Grindlays bank in 1967 received the license from Reserve Bank of India in 1967.

Apart from meeting specially, the needs of small scale units, it provided management consultancy services to large and medium sized companies.

Following Grindlays Bank, Citibank set up its merchant banking division in 1970. The division took up the task of assisting new entrepreneurs and existing units in the evaluation of new projects and raising funds through borrowing and equity issues.

Merchant Bankers are permitted to carry on activities of primary dealers in government securities.

On the recommendations of Banking Commission in 1972, Indian banks should offer merchant banking services as part of the multiple services they could provide their clients.

State Bank of India started the merchant Banking division in 1972. In the initial years the SBIs objective was to render corporate advice and assistance to small and medium entrepreneurs.

The commercial banks that followed SBI were Central Bank of India, Bank of India and syndicate Bank in 1977; Bank of Baroda, Standard Chartered Bank and Mercantile Bank in 1978 and United Bank of India, United Commercial Bank, PNB, Canara Bank and IOB in late 1970s and early 1980s.

Among the development banks ICICI started merchant banking activities in 1973, followed by IFCI(1986) and IDBI (1991).

The notification of the Ministry of Finance defines a merchant banker as, “any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management.”

Merchant bankers have to be organized as body corporates. They are governed by the merchant bankers rules issued by the Ministry of Finance and merchant bankers regulations issued by SEBI.

SERVICES RENDERED BY MERCHANT BANKS Organizing and extending finance for

investment in projects, Assistance in financial management, Acceptance of house business, Raising Eurodollar loans and issue of foreign

currency bonds, Financing local authorities Financing export of capital goods, ships,

hydropower installation, railways. Financing of hire-purchase transactions,

equipment leasing, mergers and take-overs

Valuation of Assets, Investment management and promotion of

investment trusts. All merchant banks don’t offer all these

services. Different merchant bankers specialize in

different services. Merchant banking is a skill based activity and

involves servicing of any financial need of the client.

Merchant banking activities are regulated by (1) Guidelines of SEBI and Ministry of Finance, (2) Companies act 1956 (3) Listing guidelines of Stock Exchanges and (4) Securities Contracts (Regulation) Act 1956.

INVESTMENT BANKING

UNIT-VIFDI AND ISSUES RELATED THEREINAgenda Foreign Investment and its regulation Accessing International Capital Market

FOREIGN DIRECT INVESTMENT