Indian Financial System-Introduction

8/6/2019 Indian Financial System-Introduction

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Prof. Parveen Sultana

INDIAN FINANCIAL SYSTEM


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FINANCE


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FINANCE MEANS

y The Science OfThe Management Of Money And

Other Assets.

y The Management Of Money, Banking Investment

And Credit.

y Finances Monetary Resources, Funds Especially

Those Of A Govt Or Corporate Body

y The Supplying Of Funds Or Capital.


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SYSTEM MEANS

y A BodyThat AllowsThe Free Flow OfTransaction In

Systematic Manner.

y THE WORDS SYSTEM INTHETERMS OF FINANCIAL

SYST

EM , IMPLIES A SET

OF COMPLEX AND CLOSELYCONNETED OR INTERLINED INSTITUTIONS, AGENTS

PRACTIES, MARKETSTRANSACTIONS CLAIMS AND

LIABLITIES INTHE ECONOMY .THE FINANCIAL

SYSTEM IS CONCERNED ABOUT MONEY, CREDIT

AND FINANCIALTHE 3TERMS ARE INTIMATELY

RELATED YETARE SOMEWHAT DIFFERENT FROM

EACH OTHER


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FINANCIAL SYSTEMS


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FINANCIAL SYSTEM

yA System that allows the transfer of money

between service or borrowers, it channels

h

ouseh

old saving to th

e corporate sector.yAllows assets-liabilities transformation . It

helps in risk transformation by

diversification


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Evolution of financial systemy Barter

y Money lender

y Chit funds

y Indigenous Banking

y Cooperative movements

y Societies, Banks, Joint stock banks

y Consolidation

y Commercial Banks

y Nationalization

y Investment Banks

y Development Financial institutions

y Investment / Insurance companies

y Stock exchange

y Market operations

y Specialized Financial institutions

y Merchant Banking

y Universal banking


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Financial system

y Inter-relation of financial systems

Financial systems

Saving

Finance


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Inter-relationship between varied

segments of the economy

p Economicgrowth

Financial system

Goal

system

Financial Financial

financial

System


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Financial system

y Flow of funds

Seeking of funds

Namely, business, firms or

govt etc

Suppliers of funds

Namely, household saving, tax etc

Flows of

financialservices

Incomes &Financial

claims


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Inter-relation financial system & economy

Financial system

Saver, lendersHouseholds foreign

sector

Cooperator

Sector

Govt sectorInvestors

borrowers

Unorganized sector

Economy


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y Christy has opined that the objective of financial system is to

supply funds to various sectors and activities of the economy inways that promoters the fullest possible utilization of resources

without the destabilizing consequence of price level changes or

unnecessary interference with individual desires.

y Robinson ,the primary function of the system is to provide a

link between savings & investment for the creation of new wealth

& to permit portfolio, adjustment in the composition of the

existing wealth.


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Indian financial systemsy INDIAN FINANCIAL MARKETS

IFS

CAPITAL

MARKETS

MONEY

MARKETS

BANKING

MARKETS


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Indian financial system

y Supply of borrowing & lending funds

y Demand & supply of funds of all individuals institution ,

companies and govt.

Consist of two parts:1. Indian money market.

2. Indian capital market.


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Functions of Indian financial systems

y Provision of liquidity

y Mobilizations of saving


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Landmark in Growth IFS

yNationalization of financial institution of

insurance sector.

yEstablishment of financial institutions.


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Development.

y RBI was nationalized in 1948.

y 1948 industrial finance corporation was established.

y July 1st state bank of India established.

y 1969, 14 commercial bank were nationalized.

y LIC was established.

y1972 govt of nationalized general insurance business.

y National industrial development corporation refinance corporation forindustry ltd IDBI, SIDC, NABARD.

y 1991 LPG transferred closed economy to open economy.

y Private sector was allowed in insurance sector.

y Introduction of derivative instrument like /index/ stock/ interest/futures/ swaps/ etc


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Concepts/components used in Indianfinancial systems

y Financial assets.

y Financial intermediaries

y Financial markets

y Financial rate of return

yFinancial instruments


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Financial assets

y Financial assets are those which are used for production or

consumption or for further creation of assets. Financial assets are

different from physical assets as physical assets are not useful for

further production of goods or for earning income.

y Classification of financial assets

Marketable Non- Marketable

y Shares Bank deposits

y

Govt securities Provident fundsy Bonds LIC Schemes

y Mutual funds PO certificates


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Financial intermediaries

y These are the organizations which intermediate and facilitates

financial transaction for both individuals & companies.

Therefore financial intermediaries are financial institutions

and investing institutions to facilities financial transactions in

financial markets which may be organized or unorganized.

y Classification of financial intermediaries:-

Capital markets intermediaries------- financial corporations/

LIC etc.

Money market intermediaries----- commercial banks/ co

operative banks etc.


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Financial markets

y The places where financial transactions take place .

Therefore, financial markets may be centre orarrangement which facilitates buying and selling offinancial assets.

y Classification of financial markets

1)U

norganized market2) Organized market

Organized market:- in this market, standardized rules &regulation exist to govern the financial dealings ofparticipants .These markets are under direct control ofRBI and other regulatory bodies.

Classification of organized markets:-

1. Capital markets 2. Money markets


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Organized Indian Financial System

Organized IFS

RegulatorsFinancial

InstrumentsFinancial markets

Financial

Intermediaries

Money

Market

Instrument

Capital

market

Instrument

Forex

market

Capital

market

Money

market

Credit

market

Primary market

&Secondary

market


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capital markets

y This is the markets for financial assets whichhave along &

indefinite maturity. Hence this market deals with long term

securities . Capital market is again divided into 3 types,

y

1. Industrial securities markets.y 2. Govt securities market.

y 3. Long term loan market.


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Long term loan market

y Term loan market.

y Market for mortgage.

y Market for financial guarantees.


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Industrial securities markets

y Primary markets

y Secondary markets


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Primary markets

y It is new issue market which deals with those securities ,

which are issued to the public for the first time and borrower

issues new securities for long term funds .This markets

facilities capital formations.

company raises capital in primary markets in 3 ways:-

y Public issue.

y Right issue.

yPrivate placements.


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Instrument in primary markets

y Secured premium notes.

y Equity shares.

y Preference shares.

y Debentures.y Zero interest bonds.

y Deep discount bonds.

y Option bond.

y Bonds with warrants.


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Players in the primary markets

y Merchant bankers.

y Registrars.

y Collecting & coordinating bankers.

y Underwriters & brokers.

y

Advertising agencies.


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Function of new issue market

y Origination

y Underwriting

y Distribution


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Regulation of new issue markets

1. Company must have been registered under the company act

1956.

2. Company must have obtained the permission from the

controller of capital issue.

3. Company must have appointed bankers and underwriter for

the issue.

4. Company must have been listed in the recognized stock

exchange in India.

5. Company must have raised the minimum within the prescribed

period.

6. Company will have to attach the prospects with every

application for share subscription.


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y Company shall have to return the share money deposited by thepublic in the collection centre if share are not allotted within the

prescribed period.y Allotment shall have to be made as per the direction of SEBI.

y Issue of share will be only at par if the company is completelynew one.

y Issue of share by new company established by existing company(with 5 yrs track record) can freely issue share at premium.

y Private and closely had company shall be permitted to pricetheir issue freely.

y Existing listed company will be allowed to raise fresh capital by

freely pricing issue provided promoters contribution is 50% on1st 100 crores , 30% on next 100 crores and 15% on the balanceissue.


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Secondary market

y The market where existing securities are traded is referred tosecondary market or stock market. In this market , purchases andsales of securities of govt, semi-govt, public sectors, privatesectors, shares & debentures of joint stock companies areeffected.

y The securities of govt are traded in the stock markets as aseparate component called Guilt edged market. Anothercomponent of stock market deals with stock and share of joint

stock companies called market for stock & share or stockmarket.


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Definition of stock exchange

y The market in which existing securities are traded among

investors through an intermediaries.OR

y It is a financial market where previously issued securities &

financial instrument such as stock , bonds, are bought and sold.


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Function of stock market

y The price of stock is totally guided by the force of demand &

supply.The share price of liquid stock with wide participation

keep changing through out the trading hours.They can betracked continuously on trading screens.

y Protection of investor interest

y Protection the investor from the frauds & protecting the saving

of the investor.


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Reforms in the primary market.y Merit based regime to disclosure based regime

y Disclosure & investor protection guidelines issued

y Pricing of public issues determined by the market.

y A system of proportional allotment of shares introduced.

y Banks , FIs & PSUs allowed to raise funds from the primarymarket.

y Accounting Standard are close to close to the inner nationalstandard.

y Corporate governance guidelines issued.

y discretionary allotment system to QIBs withdrawn.


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y FIIs allowed to invest in primary issues within the sectoral limit (

including g-sec).

y

Mutual funds are encouraged , both

in public & private sector and th

eyhave been.

y Guidelines for private placements of debt issued.

y SEBI promoted self-regulatory organization (SROS).

y

Allocation to retail investors increased from 25% to 35%.y Separate allocation of 5% to domestic mutual funds with in the QIB

category.

y Freedom to fix face value of shares below Rs 10 per share only in

cases where the issue price is Rs 50 or more.

y Shares allotted on a preferential basis as well as the pre-allotment

holding are subject to a lock in period of 6 month to prevent sales of

shares.


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MAJORREFORMS IN THE SECONDARY MARKETS

y Mandatory registration of market intermediaries.

y Capital adequacy norms specified for the brokers. Sub-brokers of stock exchange.

y

Guidelines issued on listed agreement between stockexchange & corporate.

y Shortening of settlement cycle toT+2.

y Regular inspection of stock exchanges and other

intermediaries including mutual funds put in place.y Regulation of substantial acquisition of share and takeovers.

y FIIs allowed to invest in Indian capital since 1992.


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y Order driven , fully automatic anonymous screens basedtrading introduced.

y

Depositories act enactedy Guidelines on corporate governance issued.

y SEBI has prohibited fraudulent and unfair trade practices,including insider trading.

y Straight through processing introduced and made mandatoryfor institutional trades.

y Margin trading short selling and securities lending andborrowing schemes introduced.

y Separate trading platform, namely indo-next for SME sectorlaunched.

y Corporatization and demutualization of stock marketnotified.


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y Settlement & trade guarantee fund/investor protection fund

set up.

y Comprehensive surveillance system.

y Securities appellate tribunal (SAT) set up,

y Introduction of exchange traded derivatives.

y

Mutual funds &FII to enter th

e unique client code . (U

CC)pertaining to the parent entity at the order entry level, and

enter the UCCs for the individual schemes/ sub- accounts on

the post closing session.

y

Comprehensive risk management system (capital adequacy ,trading & exposure limit margin requirement , index-based

market-wide circuit breaker , online position monitoring,

automatic disablement of terminals ) put in place.


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Reforms in Banking sector

y Prudential measures.

y Competition enhancing measures.

y Portfolio & business activities.

yInstitutional & legal measures.

y Supervisory measures.

y Technology reloading measures.


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Prudential measures

y Introduction & phased implementation of international best

practices and norms on risk weighted capital adequacy

requirements accounting income recognition, provisioning

and exposure.

y Measure of strengthen risk management through recognition

of different components of risk assignment of risk weights to

various asset classes , norms on connected lending risk

concentration , application of marked to market, principles

for investment portfolio and limits on development of fundsin sensitive activities.


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Competition enhancing measuresy

Granting of operation autonomy to public sector banks reductionof public ownership in public sector banks by allowing them to

raise capital from equity market up to 49% of paid up capital.

y Transparent norms for entry of Indian private sector , foreign

and joint vendor banks and insurance companies permission forforeign investment in the financial sector in the form of FDI as

well as portfolio investment permission to banks to diversity

product.


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Portfolio & Business activities

y Measures exchange in pre emption through reserve

requirement , market determined pricing for govt securities

disbanding of administered interest rates with a few

exception and enhanced transparency and disclosure norms

to facilities market discipline.

y Measures enhancing role of market forces.

y Introduction of pure inter bank call money market , auction

based repos reserve repos for short term liquidity

management facilitation of improved payment & settlement

mechanism.


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Institutional & legal measures

y Setting up of Lok-adulates, debt recovery tribunals , assetreconstruction companies settlement advisory committees corporatedebt restructuring mechanism etc for quicker recovery (restructuringpromulgation of securitization & reconstruction of financial assets &enforcement of securities & interest (SARFAESI) act and itssubsequent amendment to ensure creditor rights.

y Setting up of credit information Bureau for information sharing ondefaulters as also other borrowers.

y Setting up credit information bureau for information sharing ondefaulters as also on there borrowers.

y

Setting up clearing corporation of India limited (CCIL) to act ascentral counter party for facilitating payment and settlement systemrelating to fixed income securities and money market instruments.


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Supervisory measures

y Establishment of the board for financial supervision as the apexsupervisory authority for commercial banks , financial

institutions & non- banking financing companies.

y Introduction of camels supervisory rating system move towards

rise based supervision , consolidation supervision of financialconglomerates , strengthening off site surveillance through

control return.

y Recasting of the role of statutory auditors increased internal

control through strengthening of internal audit.y Strengthening corporate governance enhanced due diligence on

important shareholders fit & proper test for directors


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Technology measures

y Setting up of INFINET as the commication backbone for the

financial sector , introduction of negotiated dealing system

(NDS) for screen based trading in govt securities & real time

gross settlement (RTGS) system.


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SEBI regulations & guidelines in forceRegulations:-1. SEBI- Stock brokers & sub-brokers regulations.

2. SEBI- Prohibition of insider trading regulations.

3. SEBI- Merchant bankers Regulation .

4. SEBI Portfolio managers regulation.

5. SEBI- Registrars to an issue & share transfer agents regulations.6. SEBI- underwriters regulations.

7. SEBI- debentures trustees regulations.

8. SEBI- bankers to an issue regulations.

9. SEBI- Foreign institutional investors regulations.

10. SEBI- custodian of securities regulation.

11. SEBI- central listing authority regulation.

12. SEBI-ombudsman regulation.

13. SEBI-central database of market participants regulation.

14. SEBI-securitized debt instrument regulation 2008.


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1. SEBI- depositories & participants regulation.

2. SEBI-venture capital funds regulations.

3. SEBI-mutual funds regulations.

4. SEBI- substantial acquisition of share & takeovers regulation.5. SEBI- buy back of securities regulations.

6. SEBI- credit rating agencies regulation.

7. SEBI-collective investment schemes regulations.

8. SEBI- foreign venture capital investors regulation.

9. SEBI-procedure for board meeting regulations.

10. SEBI- issue of Sweat equity regulation.

11. SEBI- procedure for holding enquiry by enquiry officer & imposingpenalty regulation.

12. SEBI- prohibition for fraudulent & unfair trade practice relating to

securities markets regulations.13. SEBI-self regulatory organization regulation.

14. SEBI-intermediaries regulation 2008 act.

15. SEBI-issue & listing of debt instruments regulations 2008.


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SEBI - Schemes & GuidelinesSchemes:-

y Securities lending

y SEBI-scheme-informal guidelines.

Guidelines:-

y

SEBI- employee stock option schemes & employee stock purc

hasescheme guidelines.

y Guidelines for opening of trading terminals abroad.

y SEBI-disclosure & investor protection guidelines.

y SEBI-delisting of securities guidelines.

y SEBI- STP centralized Hub &STP service providers guidelines.y Comprehensive guidelines for investor protection funds/

customer protection funds at stock market.


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Financial innovation in India

Causes for financial innovation :-

y National differences in the approach to financial innovation.

y

The main causes of financial innovation is future outlook-India Vs developed countries .

y Cost benefit aspects of innovation.


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Assignment

Modern activates of financial

innovation after LPG & PresentIndian scenario


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THE END

Indian Financial System-Introduction

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