Indian Financial System Report

8/8/2019 Indian Financial System Report

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Indian Financial Sector

INDIANINDIAN

FINANCIALFINANCIAL

SECTORSECTOR

PRESENTED TO:PRESENTED TO:

COMPILED BY:COMPILED BY:


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CONTENTSCONTENTS

Introduction

Features of Financial System

Role of Financial System

Back Drop of Financial System

Indian Financial System from 1950 1980

Indian Financial System Post 1990s


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INTRODUCTIONINTRODUCTION

The financial system or the financial sector of any country consists of:-

(a) specialized & non specialized financial institution

(b)organized &unorganized financial markets and

(c) Financial instruments & services which facilitate transfer of funds.

Procedure & practices adopted in the markets, and financial inter

relationships are also the parts of the system. These parts are not always

mutually exclusive. For example, the financial institution operate in

financial market and are, therefore a part of such market. The word system

in the term financial system implies a set of complex and closely connected

or inters mixed institution, agents practices, markets, transactions, claims, &

liabilities in the economy. The financial system is concerned about money,

credit, & finance the terms intimately related yet some what different fromeach other. Money refers to the current medium of exchange or means of

payment. Credit or Loan is a sum of money to be returned normally with

Interest it refers to a debt of economic unit. Finance is a monetary resources

comprising debt & ownership fund of the state, company or person.


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FEATURES OF FINANCIAL SYSTEM -:FEATURES OF FINANCIAL SYSTEM -:

1. It provides an Ideal linkage between depositors savers and

Investors Therefore it encourages savings and investment.

2. Financial system facilitates expansion of financial markets

over a period of time.

3. Financial system should promote deficient allocation of

financial resources of socially desirable and economically

productive purpose.

4. Financial system influence both quality and the pace ofeconomic development.

ROLE OF FINANCIAL SYSTEM:ROLE OF FINANCIAL SYSTEM:

The role of the financial system is to promote savings & investments in

the economy. It has a vital role to play in the productive process and in

the mobilization of savings and their distribution among the various

productive activities. Savings are the excess of current expenditure over

income. The domestic savings has been categorized into three sectors,

household, government & private sectors.

The savings from household sector dominates the domestic savings

component. The savings will be in the form of currency, bank deposits,

non bank deposits, life insurance funds, provident funds, pension funds,

shares, debentures, bonds, units & trade debts. All of these currency &

deposits are voluntary transactions & precautionary measures. The


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savings in the household sector are mobilized directly in the form of

units, premium, provident fund, and pension fund. These are the

contractual forms of savings. Financial actively deals with the

production, distribution & consumption of goods and services. The

financial system will provide inputs to productive activity. Financial

sector provides inputs in the form of cash credit & assets in financial

for production activities.

The function of a financial system is to establish a bridge between the

savers and investors. It helps in mobilization of savings to materializeinvestment ideas into realities. It helps to increase the output towards

the existing production frontier. The growth of the banking habit helps

to activate saving and undertake fresh saving. The financial system

encourages investment activity by reducing the cost of finance risk. It

helps to make investment decisions regarding projects by sponsoring,

encouraging, export project appraisal, feasibility studies, monitoring &

execution of the projects.


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An overview of Financial System and Financial Markets in India

BACK DROP OF INDIAN FINANCIAL SYSTEM

MINISTRY OF FINANCE

Financial Institutions RBI SEBI IRDA

Insurance company

Mutual Fund Venture CapitalFund

Capital Market

LIC &Other

GIC &Other

CommercialBanks

NBFC Money Market

PrimaryMarket

SecondaryMarket

StockExchange

GovernmentSecurityMarket

DevelopmentBanks

InvestmentBanks

SectoralBanks

State LevelFinancialInstitution


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At the time of independence, India had a reasonably diversified financial

system in terms of intermediaries but a somewhat narrow focus on terms of

intermediation, i.e., a lack of a long term capital market and the relative

neglect of agriculture in particular and rural areas in general.

As India embarked on a process of industrialization and growth, RBI set up

Development Financial Institutions (DFIs) and State Finance Corporations

(SFCs) as providers of long term capital. Agricultures need for credit was

met by cooperative banks. UTI was set up to canalize resources from retail

investors to the capital market.

In essence, the understanding that requirement of financial needs for

accelerated growth and development was best met by specialized financial

intermediaries who performed specialized functions influenced financial

market architecture.

19471960s

Industrys share in credit doubled,agriculture, rural areas, SSI, exports stillneglected

Nationalisation of Banks toensure credit allocation as perplan priorities

1980s1970s

NABARD, EXIM, SIDBI,NHB setup

RRBs setup

1990s

Credit to Industry / GovtdoubledHighly segmented financialmarket, highly restricted

Neglected: long term, agricultural, and rural area creditNeed for specialized FIs felt.DFIs, SFCs, UTI, Co-op Banks setup.


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To ensure that these specializations were adhered to, financial intermediaries

developed and promoted by the Reserve Bank of India had significant

restrictions on both the asset and liabilities side of their balance sheets.

In the 1950s and 1960s, despite an expansion of the commercial banking

system in terms of both reach and mobilization of resources, agriculture still

remained under funded and rural areas under banked. Whereas industrys

share in credit disbursed almost doubled between 1951 and 1968, from 34 to

67.5%, agriculture got barely 2% of available. Credit to exports and small

scale industries were relatively neglected as well.

In view of the above, it was decided to nationalize the banking sector so that

credit allocation could take place in accordance in plan priorities.

Nationalization took place in two phases, with a first round in 1969 followed

by another in 1980.

By the mid-seventies it was felt that commercialized banks did not have

sufficient expertise in rural banking and hence in 1975 Regional Rural

Banks (RRBs) were set up to help bring rural India into the ambit of the

financial network. This effort was capped in 1980 with the formation of

National Bank for Agriculture and Rural Development (NABARD), which

was to function as an apex bank for all cooperative banks in the country,

helping control and guide their activities. NABARD was also given the

remit of regulating rural credit cooperatives.

Following with the logic of specialization, the 1980s saw other DFIs with

specific remits being set up e.g. The EXIM Bank for export financing, the


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Small Industries Development Bank of India (SIDBI) for small scale

industries and the National Housing Bank (NHB) for housing finance.

Long term finance for the private sector came from DFIs and institutional

investors or through the capital market. However both price and quantity of

capital issues was regulated by the Controller of Capital Issues.

Therefore the deepening of financial intermediation had occurred with an

increase in the draft by both the commercial sector and the government on

financial resources mobilized.

At the end of the 1980s then the Indian financial system was characterized by segmented financial markets with significant restrictions on both the

asset and liability side of the balance sheet of financial intermediaries as

well as the price at which financial products could be offered.

In the Indian context segmentation meant that competition was muted. In a

scenario where price was determined from outside the system and targets

were set in terms of quantities, there was no pressure for non-price

competition as well. As a result the financial system had relatively high

transaction costs and political economy factors meant that asset quality was

not a prime concern. Therefore even though the Indian financial system at

the end of 1980s had achieved substantial expansion in terms of access, this

had come at the cost of asset quality. In addition, was the fact that the draft

of the government on resources of the financial system had increased

significantly. This in itself need necessarily was not a problem but over this

period, i.e., the 1980s, the composition of government expenditure was

changing as well, with shift towards current rather than capital expenditure.

In addition, in the absence of a reasonably liquid market for government


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securities, an increase in net bank lending to the government meant that the

asset side of banks balance sheets tended to become increasingly illiquid.

The impetus for change came from one expected and one unexpected

quarter - first, the importance of prudential capital adequacy ratios was

underlined by the announcement of BaselI norms (see Error: Reference

source not found Error: Reference source not found) That banks were

expected to adhere to; second the macroeconomic crisis of 1990-91.

The reform process that followed accelerated the process of liberalizationalready begun in the 1980s and began a series of measured and deliberate

steps to integrate India into the global economy, including the global

financial network.

Briefly however, given the problems facing the financial system and

keeping in mind the institutional changes necessary to help India financially

integrate into the global economy, financial reform focused on the

following: improving the asset quality on bank balance sheets in particular

and operational efficiency in general; increasing competition by removing

regulatory barriers to entry; increasing product competition by removing

restrictions on asset and liability sides of financial intermediaries; allowing

financial intermediaries freedom to set their prices; putting in place a market

for government securities; and improving the functioning of the call money

market.

The government security market was particularly important not only

because it was decided the RBI would no longer monetize the fiscal deficit,


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which would now be financed by directly borrowing from the market, but

also monetary policy would be conducted through open market operations

and a large liquid bond market would help the RBI sterilise, if necessary,

foreign exchange movements.

INDIAN FINANCIAL SYSTEM FROM 1950 TO

1980

Indian Financial System During this period evolved in response to the

objective of planned economic development. With the adoption of mixed

economy as a pattern of industrial development, a complimentary role was

conceived for public and private sector. There was a need to align financial

system with government economic policies. At that time there was

government control over distribution of credit and finance. The main

elements of financial organization in planned economic development are as

follows:-


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1. Public ownership of financial institutions 1. Public ownership of financial institutions

The nationalization of RBI was in 1948, SBI was set up in 1956, LIC came

in to existence in 1956 by merging 245 life insurance companies in 1969, 14

major private banks were brought under the direct control of Government of

India. In 1972, GIC was set up and in 1980; six more commercial banks

were brought under public ownership. Some institutions were also set up

during this period like development banks, term lending institutions, UTI

was set up in public sector in 1964, provident fund, pension fund was set up.

In this way public sector occupied commanding position in Indian Financial

System.

2. Fortification Of Institutional structure 2. Fortification Of Institutional structure

Financial institutions should stimulate / encourage capital formation in the

economy. The important feature of well developed financial system is

strengthening of institutional structures. Development banks was set up with

this objective like industrial finance corporation of India (IFCI) was set up

in 1948, state financial corporation (SFCs) were set up in 1951, Industrial

credit and Investment corporation of India Ltd (ICICI)was set up in 1955. It

was pioneer in many respects like underwriting of issue of capital,

channelisation of foreign currency loans from World Bank to private

industry. In 1964, Industrial Development of India (IDBI).

3. Protection of Investors 3. Protection of Investors

Lot many acts were passed during this period for protection of investors in

financial markets. The various acts Companies Act, 1956 ; Capital Issues

Control Act, 1947 ; Securities Contract Regulation Act, 1956 ; Monopolies


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and Restrictive Trade Practices Act, 1970 ; Foreign Exchange Regulation

Act, 1973 ; Securities & Exchange Board of India, 1988.

4. Participation in Corporate Management 4. Participation in Corporate Management

As participation were made by large companies and financial instruments it

leads to accumulation of voting power in hands of institutional investors in

several big companies financial instruments particularly LIC and UTI were

able to put considerable pressure on management by virtual of their voting

power. The Indian Financial System between 1951 and mid80s was broad

based number of institutions came up. The system was characterized bydiversifying organizations which used to perform number of functions. The

Financial structure with considerable strength and capability of supplying

industrial capital to various enterprises was gradually built up the whole

financial system came under the ownership and control of public authorities

in this manner public sector occupy a commanding position in the industrial

enterprises. Such control was viewed as integral part of the strategy of

planned economy development.

INDIAN FINANCIAL SYSTEM POST 1990S

The organizations of Indian Financial system witnessed transformation after

launching of new economic policy 1991. The development process shifted

from controlled economy to free market for these changes were made in the

economic policy. The role of government in business was reduced the

measure trust of the government should be on development of infrastructure,


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public welfare and equity. The capital market an important role in allocation

of resources. The major development during this phase are:-

1. Privatisation of Financial Institutions1. Privatisation of Financial Institutions

At this time many institutions were converted in to public company and

number of private players were allowed to enter in to various sectors:

a) Industrial Finance Corporation on India (IFCI): The pioneer

development finance institution was converted in to a public

company.

b) Industrial Development Bank of India & Industrial Finance

Corporation of India (IDBI & IFCI): IDBI & IFCI ltd offers their

equity capital to private investors.

c) Private Mutual Funds have been set up under the guidelines

prescribed by SEBI.

d) Number of private banks and foreign banks came up under the RBI

guidelines. Private institution companies emerged and work under the

guidelines of IRDA, 1999.

e) In this manner government monopoly over financial institutions has

been dismantled in phased manner. IT was done by converting public

financial institutions in joint stock companies and permitting to sell

equity capital to the government.

2. Reorganization of Institutional Structure 2. Reorganization of Institutional Structure

The importance of development financial institutions decline with shift to

capital market for raising finance commercial banks were give more funds


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to investment in capital market for this. SLR and CRR were produced; SLR

earlier @ 38.5% was reduced to 25% and CRR which used to be 25% is at

present 5%. Permission was also given to banks to directly undertake

leasing, hire-purchase and factoring business. There was trust on

development of primary market, secondary market and money market.

3. Investors Protection 3. Investors Protection

SEBI is given power to regulate financial markets and the various

intermediaries in the financial markets.

FINANCIAL MARKET


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Money Market

Call Money Market Commercial Paper

Certificate of Deposit

Treasury Bill Market

Money Market Mutual Fund

Capital Market

International Capital Market


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MONEY MARKET AND GOVT. SECURITIES MARKET

Money market deal with short term monetary assets and claims, which are

generally from one day to one year duration.

Govt. securities on the other hand are also called dated securities to denote

that they are generally long term in nature and are issued by state and central

govt. under their borrowing programmes and duration of more than one

year, generally of 5 years and above.

These securities being long term in nature are also traded in govt. securities

market between institution and banks also on the stock exchanges- debt

segments.

MONEY MARKET

One of the important function of a well developed money market is to

channelize saving into short term productive investments like working

capital. Call money market, treasury bills market and markets for

commercial paper and certificate of deposit are some of the example of

money market.

CALL MONEY MARKETThe call money markets form a part of the national money market, where

day today surplus funds, mostly of banks are traded . The call money

loans are very short term in nature and the maturity period of this vary from

1 to 15 days. The money which is lent for one day in this market is known as


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call money, and if it exceeds one day (but less than 15 days), is referred as

notice money in this market any amount could be lent or borrowed at a

convenient interest rate . Which is acceptable to both borrower and lender

.these loans are consider as highly liquid as they are repayable on demand

at the option of ether the lender or borrower.

PURPOSE

Call money is borrowed from the market to meet various requirements of

commercial bill market and commercial banks. Commercial bill market

borrower call money for short period to discount commercial bills.

Banks borrower in call market to:

1:- Fill the temporary gaps, or mismatches that banks normally face.

2:- Meet the cash Reserve Ratio requirement.

3: - Meet sudden demand for fund, which may arise due to large payment

and remittance.

Banks usually borrow form the market to avoid the penal interest rate for not

meeting CRR requirement and high cost of refinance from RBI. Call money

helps the banks to maintain short term liquidity position at comfortable

level.

LOCATION

In India call money markets are mainly located in commercial centers and

big industrial centers and industrial center such as Mumbai, Calcutta,

Chennai, Delhi and Ahmedabad. As BSE and NSE and head office of RBI


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and many other banks are situated in Mumbai; the volume of funds involved

in call money market in Mumbai is far bigger than other cities.

PARTICIPANTS

Initially, only few large banks were operating in the bank market. however

the market had expanded and now scheduled , non scheduled commercial

banks foreign banks ,state , district, and urban cooperative banks , financial

institution such as LIC,UTI,GIC, and its subsidiaries , IDBI, NABARD,

IRBI, ECGC, EXIM Bank, IFCI, NHB , TFCI, and SIDBI, Mutual fund

such as SBI Mutual fund . LIC Mutual funds. And RBI Intermediaries like

DFHI and STCI are participants in local call money markets. However RBI

has recently introduced restriction on some of the participants to phase them

out of call money market in a time bound manner.

Participant in call money market are split into two categories

1:- BORROWER AND LENDER:-

This comprises entities those who can both borrower and lend in this

market, such as RBI, intermediaries like DFHI, and STCI and commercial

banks.

2:- ONLY LENDER: -

This category comprises of entities those who can act only as lender, like

financial institution and mutual funds.


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CALL RATES

The interest paid on call loan is known as the call rates. Unlike in the case ofother short and long rates. The call rate is expected to freely reflect the day

to day availability and long rates. These rates vary highly from day to day.

Often from hour to hour. While high rates indicate a tightness of liquidity

position in market. The rate is largely subject to be influenced by sources of

supply and demand for funds.

The call money rate had fluctuated from time to time reflecting the seasonal

variation in fund requirements. Call rates climbs high during busy seasons in

relation to those in slack season. These seasonal variations were high due to

a limited number of lender and many borrowers. The entry of financial

institution and money market mutual funds into the call market has reduced

the demand supply gap and these fluctuations gradually came down in

recent years.

Though the seasonal fluctuations were reduced to considerable extent, there

are still variations in the call rates due to the following reason:

1:- large borrower by banks to meet the CRR requirements on certain dates

cause a gate demand for call money. These rates usually go up during the

first week to meet CRR requirements and decline afterwards.

2:- the sanction of loans by banks, in excess of their own resources compel

the bank to rely on the call market. Banks use the call market as a source of

funds for meeting dis-equilibrium of inflow and out flow of fund s.


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3:- the withdrawal of funds to pay advance tax by the corporate sector leads

to steep increase in call money rates in the market.

COMMERCIAL PAPER

Commercial paper are short term, unsecured promissory notes issued at a

discount to face value by well- known companies that are financial strong

and carry a high credit rating . They are sold directly by the issuers to

investor, or else placed by borrowers through agents like merchant banks

and security houses the flexible maturity at which they can be issued are one

of the main attraction for borrower and investor since issues can be adapted

to the needs of both. The CP market has the advantage of giving highly rated

corporate borrowers cheaper fund than they could obtain from the banks

while still providing institutional investors with higher interest earning than

they could obtain form the banking system the issue of CP imparts a degree

of financial stability to the systems as the issuing company has an incentive

to remain financially strong.

THE FEATURES OF CP

1. They are negotiable by endorsement and delivery.

2. They are issued in multiple of Rs 5 lakhs.

3. The maturity varies between 15 days to a year.

4. No prior approval of RBI is needed for CP issued.

5. The tangible net worth issuing company should not be less than 4

lakhs

6. The company fund based working capital limit should not less than Rs

10 crore.


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7. The issuing company shall have P2 and A2 rating from CRISIL and

ICRA.

CERTIFICATE OF DEPOSIT

Certificate of Deposits,. Instruments such as the Certificates of Deposit

(CDs introduced in 1989), Commercial Paper (CP introduced in 1989),

inter-bank participation certificates (with and without risk) were

introduced to increase the range of instruments. Certificates of Deposit

are basically negotiable money market instruments issued by banks and

financial institutions during tight liquidity conditions. Smaller bankswith relatively smaller branch networks generally mobilise CDs. As CDs

are large size deposits, transaction costs on CDs are lower than retail

deposits

FEATURES OF CD

1. All scheduled bank other than RRB and scheduled cooperative

bank are eligible to issue CDs.

2. CDs can be issued to individuals, corporation, companies, trust,

funds and associations. NRI can subscribe to CDs but only on a

non- repatriation basis.

3. They are issued at a discount rate freely determined by the

issuing bank and market.

4. They issued in the multiple of Rs 5 lakh subject to minimum

size of each issue of Rs is 10 lakh.


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5. The bank can issue CDs ranging from 3 month t 1 year ,

whereas financial institution can issue CDs ranging from 1 year

to 3 years.

TREASURY BILLS MARKETTREASURY BILLS MARKET:-:-

Treasury bills are the main financial instruments of money market. These

bills are issued by the government. The borrowings of the government are

monitored & controlled by the central bank. The bills are issued by the RBI

on behalf of the central government. The RBI is the agent of Union

Government. They are issued by tender or tap. The bills were sold to the

public by tender method up to 1965. These bills were put at weekly

auctions. A treasury bill is a particular kind of finance bill. It is a promissory

note issued by the government. Until 1950 these bills were also issued by

the state government. After 1950 onwards the central government has the

authority to issue such bills. These bills are greater liquidity than any other

kind of bills. They are of two kinds: a) ad hoc, b) regular.

Ad hoc treasury bills are issued to the state governments, semi government

departments & foreign ventral banks. They are not marketable. The ad hocbills are not sold to the banks & public. The regular treasury bills are sold to

the general public & banks. They are freely marketable. These bills are sold

by the RBI on behalf of the central government.

The treasury bills can be categorized as follows:-


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1) 14 days treasury bills:-

The 14 day treasury bills has been introduced from 1996-97. These

bills are non-transferable. They are issued only in book entry system

they would be redeemed at par. Generally the participants in this

market are state government, specific bodies & foreign central banks.

The discount rate on this bill will be decided at the beginning of the

year quarter.


These bills were introduced in 1998. The treasury bills in India issuedon auction basis. The date of issue of these bills will be announced in

advance to the market. The information regarding the notified amount

is announced before each auction. The notified amount in respect of

treasury bills auction is announced in advance for the whole year

separately. A uniform calendar of treasury bills issuance is also

announced.


The 91 days treasury bills were issued from July 1965. These were

issued tap basis at a discount rate. The discount rates vary between

2.5 to 4.6% P.a. from July 1974 the discount rate of 4.6% remained

uncharged the return on these bills were very low. However the RBI

provides rediscounting facility freely for this bill.


The 182 days treasury bills was introduced in November 1986. The

chakravarthy committee made recommendations regarding 182 day


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treasury bills instruments. There was a significant development in this

market. These bills were sold through monthly auctions. These bills

were issued without any specified amount. These bills are tailored to

meet the requirements of the holders of short term liquid funds. These

bills were issued at a discount. These instruments were eligible as

securities for SLR purposes. These bills have rediscounting facilities.


The 364 treasury bills were introduced by the government in April

1992. These instruments are issued to stabilise the money market.These bills were sold on the basis of auction. The auctions for these

instruments will be conducted for every fortnight. There will be no

indication when they are putting auction. Therefore the RBI does not

provide rediscounting facility to these bills. These instruments have

been instrumental in reducing, the net RBI credit to the government.

These bills have become very popular in India.

Money Market Mutual Funds (MMMFs)

The benefits of developments in the various in the money market like

cell money loans. Treasury bills, commercial papers and certificate of

deposits were available only to the few institutional participants in the

market. The main reason for this was that huge amounts were

required to be invested in these instruments, the minimum being Rs.

10 lack, which was beyond the means of individual money markets to

small investors.


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MMMFs are mutual funds that invest primarily in money market

instruments of very high quality and of very short maturities.

MMMFs can be set up by very high quality and of very short

maturities. MMMFs can be set up by commercial bank, RBI and

public financial institution either directly or through their existing

mutual fund subsidiaries. The guidelines with respect to mobilization

of funds by MMMFs provide that only individuals are allowed to

invest in such funds.

Earlier these funds were regulated by the RBI. But RBI withdrew itsguidelines, with effect form March 7, 2001 and now they are

governed by SEBI.

The schemes offered by MMMfs can either by open ended or close-

ended. In case of open- ended schemer, the units are available for

purchase on a continuous basis and the MMMFs would be willing to

repurchase the units. A close ended scheme is available for

subscription for a limited period and is redeemed at maturity.

The guidelines on the on MMMfs specify a minimum lock in period

of 15 days during which the investor cannot redeem his investment.

The guidelines also stipulate the minimum size of the MMMF to be

Rs. 50 crore and this should not exceed 2% of the aggregate deposits

of the latest accounting year in the case of banks and 2% of the long-

term domestic borrowings in the case of public financial institutions.


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Structure of capital market

PrivatePlacement

CAPITAL MARKET

Secondary Market

Listing Trading Practices of Settlements

& Clearing

Primary Market

Costs ofIssue

Method ofIssue

PublicIssue

Quantumof Issue

BonusIssue

Operation

Right Issue

Players


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CAPITAL MARKETCAPITAL MARKET

Capital market is market for long term securities. It contains financialinstruments of maturity period exceeding one year. It involves in long

term nature of transactions. It is a growing element of the financial

system in the India economy. It differs from the money market in terms

of maturity period & liquidity. It is the financial pillar of industrialized

economy. The development of a nation depends upon the functions &

capabilities of the capital market.

Capital market is the market for long term sources of finance. It refers to

meet the long term requirements of the industry. Generally the business

concerns need two kinds of finance:-

1. Short term funds for working capital requirements.

2. Long term funds for purchasing fixed assets.

Therefore the requirements of working capital of the industry are met by the

money market. The long term requirements of the funds to the corporate

sector are supplied by the capital market. It refers to the institutional

arrangements which facilitate the lending & borrowing of long term funds.

IMPORTANCE OF CAPITAL MARKETIMPORTANCE OF CAPITAL MARKET

Companies (Issuer)

Intermediaries (MerchantBanks FIIs & Broker)

Investor (Public)

Instruments

Interest Rates

Procedures


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Capital market deals with long term funds. These funds are subject to

uncertainty & risk. Its supplies long term funds & medium term funds to the

corporate sector. It provides the mechanism for facilitating capital fund

transactions. It deals I ordinary shares, bond debentures & stocks &

securities of the governments. In this market the funds flow will come from

savers. It converts financial assets in to productive physical assets. It

provides incentives to savers in the form of interest or dividend to the

investors. It leads to the capital formation. The following factors play an

important role in the growth of the capital market:-

A strong & powerful central government. Financial dynamics

Speedy industrialization

Attracting foreign investment

Investments from NRIs

Speedy implementation of policies

Regulatory changes

Globalization

The level of savings & investments pattern of the household sectors

Development of financial theories

Sophisticated technological advances.

PLAYERS IN THE CAPITAL MARKETPLAYERS IN THE CAPITAL MARKETCapital market is a market for long term funds. It requires a well structured

market to enhance the financial capability of the country. The market consist

a number of players. They are categorized as:-

1. Companies


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2. Financial intermediaries

3. Investors.

I. COMPANIES:

Generally every company which is a public limited company can access

the capital market. The companies which are in need of finance for

their project can approach the market. The capital market provides

funds from the savers of the community. The companies can mobilize

the resources for their long term needs such as project cost, expansion

& diversification of projects & other expenditure of India to raise thecapital from the market. The SEBI is the most powerful organization to

monitor, control & guidance the capital market. It classifies the

companies for the issue of share capital as new companies, existing

unlisted companies& existing listed companies. According to its

guidelines a company is a new company if it satisfies all the following:-

a) The company shall not complete 12 months of commercial

operations.

b) Its audited operative results are not available.

c) The company may set up by entrepreneurs with or without

track record.

A company which can be treated as existing listed company, if its

shares are listed in any recognized stock exchange in India. A company

is said to be an existing unlisted company if it is a closely held or

private company.

II. FINANCIAL INTERMEDIARIES:


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Financial intermediaries are those who assist in the process of

converting savings into capital formation in the country. A strong

capital formation process is the oxygen to the corporate sector.

Therefore the intermediaries occupy a dominant role in the capital

formation which ultimately leads to the growth of prosperous to the

community. Their role in this situation cannot be. The government

should encourage these intermediaries to build a strong financial

empire for the country. They are also being called as financial

architectures of the India digital economy. Their financial capability

cannot be measured. They take active role in the capital market. Themajor intermediaries in the capital market are:-

a) Brokers.

b) Stock brokers & sub brokers

c) Merchant bankers

d) Underwriters

e) Registrars

f) Mutual funds

g) Collecting agents

h) Depositories

i) Agents

j) Advertising agencies

III. INVESTORS:

The capital market consists many numbers of investors. All types

of investors basic objective is to get good returns on their

investment. Investment means, just parking ones idle fund in a


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right parking place for a stipulated period of time. Every parked

vehicle shall be taken away by its owners from parking place after

a specific period. The same process may be applicable to the

investment. Every fund owner may desire to take away the fund

after a specific period. Therefore safety is the most important

factor while considering the investment proposal. The investors

comprise the financial investment companies & the general public

companies. Usually the individual savers are also treated as

investors. Return is the reward to the investors. Risk is the

punishment to the investors for being wrong selection of theirinvestment decision. Return is always chased by the risk. An

intelligent investor must always try to escape the risk & attract the

return. All rational investors prefer return, but most investors are

risk average. They attempt to get maximum capital gain. The

return can be available to the investors in two types they are in the

form of revenue or capital appreciation. Some investors will prefer

for revenue receipt & others prefer capital appreciation. It depends

upon their economic status & the effect of tax implications.

STRUCTURE OF THE CAPITAL MARKET IN INDIA

The structure of the capital market has undergone vast changes in recent

years. The Indian capital market has transformed into a new appearance over

the last four & a half decades. Now it comprises an impressive network of

financial institutions & financial instruments. The market for already issued

securities has become more sophisticated in response to the different needs

of the investors. The specialized financial institutions were involved in


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providing long term credit to the corporate sector. Therefore the premier

financial institutions such as ICICI, IDBI, UTI, and LIC & GIC constitute

the largest segment. A number of new financial instruments & financial

intermediaries have emerged in the capital market. Usually the capital

markets are classified in two ways:-

A. On the basis of issuer

B. On the basis of instruments

On the basis of issuer the capital market can be classified again two types:-

a) Corporate securities marketb) Governments securities market

On the basis of financial instruments the capital markets are classifieds into

two kinds:-

a) Equity market

b) Debt market

Recently there has been a substantial development of the India capital

market. It comprises various submarkets.

Equity market is more popular in India. It refers to the market for equity

shares of existing & new companies. Every company shall approach the

market for raising of funds. The equity market can be divided into two

categories (a) primary market (b) secondary market. Debt market represents

the market for long term financial instruments such as debentures, bonds,

etc.

PRIMARY MARKET


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To meet the financial requirement of their project company raise their

capital through issue of securities in the company market.

Capital issue of the companies were controlled by the capital issue control

act 1947. Pricing of issue was determined by the controller of capital issue

the main purpose of control on capital issue was to prevent the diversion of

investible resources to non- essential projects. Through the necessity of

retaining some sort of control on issue of capital to meet the above purpose

still exist . The CCI was abolished in 1992 as the practice of government

control over the capital issue as well as the overlapping of issuing has lost

its relevance in the changed circumstances.

SECURITIES & EXCHANGE BOARD OF INDIA

INTRODUCTION:INTRODUCTION:

It was set up in 1988 through administrative order it became statutory body

in 1992. SEBI is under the control of Ministry of Finance. Head office is at

Mumbai and regional offices are at Delhi, Calcutta and Chennai. The

creation of SEBI is with the objective to replace multiple regulatory

structures. It is governed by six member board of governors appointed by

government of India and RBI.

OBJECTIVES OF SEBI:OBJECTIVES OF SEBI:

1. To protect the interest of investors in securities.

2. To regulate securities market and the various intermediaries in the

market.

3. To develop securities market over a period of time.


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POWERS AND FUNCTIONS OF SEBI:POWERS AND FUNCTIONS OF SEBI:

(1) ISSUE GUIDELINES TO COMPANIES:-

SEBI issues guidelines to the companies for disclosing information

and to protect the interest of investor. The guidelines relates to issue

of new shares, issue of convertible debentures, issue by new

companies, etc. After abolition of capital issues control act, SEBI was

given powers to control and regulate new issue market as well as

stock exchanges.

(2) REGULATION OF PORTFOLIO MANAGEMENT

SERVICES:-

Portfolio Management services were brought under SEBI regulations

in January 1993. SEBI framed regulations for portfolio management

keeping securities scams in mind. SEBI has been entrusted with a job

to regulate the working of portfolio managers in order to give

protections to investors.

(3) REGULATION OF MUTUAL FUNDS:-

The mutual funds were placed under the control of SEBI on January

1993. Mutual funds have been restricted from short selling or carrying

forward transactions in securities. Permission has been granted toinvest only in transferable securities in money market and capital

market.

(4) CONTROL ON MERCHANT BANKING:-


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Merchant bankers are to be authorized by SEBI, they have to follow

code of conduct which makes them responsible towards the investors

in respect of pricing, disclosure of/ in the prospectus and issue of

securities, merchant bankers have high degree of accountability in

relation to offer documents and issue of shares.

(5) ACTION FOR DELAY IN TRANSFER AND

REFUNDS:-

SEBI has prosecuted many companies for delay in transfer of shares

and refund of money to the applicants to whom the shares are not

allotted. These also gives protection to investors and ensures timely

payment in case of refunds.

(6) ISSUE GUIDELINES TO INTERMEDIARIES:-

SEBI controls unfair practices of intermediaries operating in capital

market, such control helps in winning investors confidence and alsogives protection to investors.

(7) GUIDELINES FOR TAKEOVERS AND MERGERS:-

SEBI makes guidelines for takeover and merger to ensure

transparency in acquisitions of shares, fair disclosure through public

announcement and also to avoid unfair practices in takeover and

mergers.

(8) REGULATION OF STOCK EXCHANGES

FUNCTIONING:-


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SEBI is working for expanding the membership of stock exchanges to

improve transparency, to shorten settlement period and to promote

professionalism among brokers. All these steps are for the healthy

growth of stock exchanges and to improve their functioning.

(9) REGULATION OF FOREIGN INSTITUTIONAL

INVESTMENT (FIIS):-

SEBI has started registration of foreign institutional investment. It is

for effective control on such investors who invest on a large scale in

securities.

TYPES OF ISSUE

A company can raise its capital through issue of share and debenture by

means of :-

PUBLIC ISSUE :-

Public issue is the most popular method of raising capital and involvesraising capital and involve raising of fund direct from the public .

RIGHT ISSUE :-

Right issue is the method of raising additional finance from existing

members by offering securities to them on pro rata basis.

A company proposing to issue securities on right basis should send a

letter of offer to the shareholders giving adequate discloser as to how

the additional amount received by the issue is used by the company.


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BONUS ISSUE:-

Some companies distribute profits to existing shareholders by way of

fully paid up bonus share in lieu of dividend. Bonus share are issued in

the ratio of existing share held. The shareholder do not have to nay

additional payment for these share .

PRIVATE PLACEMENT :-

private placement market financing is the direct sale by a public limited

company or private limited company of private as well as public sector

of its securities to a limited number of sophisticated investors like UTI ,

LIC , GIC state finance corporation and pension and insurance funds the

intermediaries are credit rating agencies and trustees and financial

advisors such as merchant bankers. And the maximum time frame

required for private placement market is only 2 to 3 months. Private

placement can be made out of promoter quota but it cannot be made

with unrelated investors.

SECONDRY MARKET

The secondary market is that segment of the capital market where the

outstanding securities are traded from the investors point of view the

secondary market imparts liquidity to the long term securities held by

them by providing an auction market for these securities.

The secondary market operates through the medium of stock exchange

which regulates the trading activity in this market and ensures a measure

of safety and fair dealing to the investors.


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India has a long tradition of trading in securities going back to nearly

200 years. The first India stock exchange established at Mumbai in

1875 is the oldest exchange in Asia. The main objective was to protect

the character status and interest of the native share and stock broker.

BOMBAY STOCK EXCHANGE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich

heritage, now spanning three centuries in its 133 years of existence. What is

now popularly known as BSE was established as "The Native Share & StockBrokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent

recognition (in 1956) from the Government of India under the Securities

Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in the

development of the Indian capital market is widely recognized. It migrated

from the open outcry system to an online screen-based order driven trading

system in 1995. Earlier an Association of Persons (AOP), BSE is now a

corporatised and demutualised entity incorporated under the provisions of

the Companies Act, 1956, pursuant to the BSE (Corporatisation and

Demutualisation) Scheme, 2005 notified by the Securities and Exchange

Board of India (SEBI). With demutualisation, BSE has two of world's best

exchanges, Deutsche Brse and Singapore Exchange, as its strategic

partners.

Over the past 133 years, BSE has facilitated the growth of the Indian


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corporate sector by providing it with an efficient access to resources. There

is perhaps no major corporate in India which has not sourced BSE's services

in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of

listed companies and the world's 5th in transaction numbers. The market

capitalization as on December 31, 2007 stood at USD 1.79 trillion . An

investor can choose from more than 4,700 listed companies, which for easy

reference, are classified into A, B, S, T and Z groups.

The BSE Index, SENSEX, is India's first stock market index that enjoys an

iconic stature , and is tracked worldwide. It is an index of 30 stocks

representing 12 major sectors. The SENSEX is constructed on a 'free-float'

methodology, and is sensitive to market sentiments and market realities.

Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral

indices. BSE has entered into an index cooperation agreement with

Deutsche Brse. This agreement has made SENSEX and other BSE indices

available to investors in Europe and America. Moreover, Barclays Global

Investors (BGI), the global leader in ETFs through its iShares brand, has

created the 'iShares BSE SENSEX India Tracker' which tracks the

SENSEX. The ETF enables investors in Hong Kong to take an exposure to

the Indian equity market.

BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-

denominated futures trading of SENSEX in the U.S. The tie-up enables


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eligible U.S. investors to directly participate in India's equity markets for the

first time, without requiring American Depository Receipt (ADR)

authorization. The first Exchange Traded Fund (ETF) on SENSEX, called

"SPIcE" is listed on BSE. It brings to the investors a trading tool that can be

easily used for the purposes of investment, trading, hedging and arbitrage.

SPIcE allows small investors to take a long-term view of the market.

BSE provides an efficient and transparent market for trading in equity, debt

instruments and derivatives. It has a nation-wide reach with a presence in

more than 450 cities and towns of India. BSE has always been at par with

the international standards. The systems and processes are designed to

safeguard market integrity and enhance transparency in operations. BSE is

the first exchange in India and the second in the world to obtain an ISO

9001:2000 certification. It is also the first exchange in the country and

second in the world to receive Information Security Management System

Standard BS 7799-2-2002 certification for its BSE On-line Trading System

(BOLT).

BSE continues to innovate. In recent times, it has become the first national

level stock exchange to launch its website in Gujarati and Hindi to reach out

to a larger number of investors. It has successfully launched a reporting

platform for corporate bonds in India christened the ICDM or Indian

Corporate Debt Market and a unique ticker-cum-screen aptly named 'BSE

Broadcast' which enables information dissemination to the common man on

the street.


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In 2006, BSE launched the Directors Database and ICERS (Indian

Corporate Electronic Reporting System) to facilitate information flow and

increase transparency in the Indian capital market. While the Directors

Database provides a single-point access to information on the boards of

directors of listed companies, the ICERS facilitates the corporates in sharing

with BSE their corporate announcements.

BSE also has a wide range of services to empower investors and facilitate

smooth transactions:

Investor Services: The Department of Investor Services redresses grievances

of investors. BSE was the first exchange in the country to provide an amount

of Rs.1 million towards the investor protection fund; it is an amount higher

than that of any exchange in the country. BSE launched a nationwide

investor awareness programme- 'Safe Investing in the Stock Market' under

which 264 programmes were held in more than 200 cities.

The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates

on-line screen based trading in securities. BOLT is currently operating in

25,000 Trader Workstations located across over 450 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first

centralized exchange-based Internet trading system, BSEWEBX.com. This


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initiative enables investors anywhere in the world to trade on the BSE

platform.

Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a

real-time basis the price movements, volume positions and members'

positions and real-time measurement of default risk, market reconstruction

and generation of cross market alerts.

BSE Training Institute: BTI imparts capital market training and certification,

in collaboration with reputed management institutes and universities. Itoffers over 40 courses on various aspects of the capital market and financial

sector. More than 20,000 people have attended the BTI programmes

Awards

The World Council of Corporate Governance has awarded the Golden

Peacock Global CSR Award for BSE's initiatives in Corporate SocialResponsibility (CSR).

The Annual Reports and Accounts of BSE for the year ended March

31, 2006 and March 31 2007 have been awarded the ICAI awards for

excellence in financial reporting.

The Human Resource Management at BSE has won the Asia - Pacific

HRM awards for its efforts in employer branding through talent

management at work, health management at work and excellence in

HR through technology

Drawing from its rich past and its equally robust performance in the recent

times, BSE will continue to remain an icon in the Indian capital market.


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NATIONAL STOCK EXCHANGE

The National Stock Exchange of India Limited has genesis in the report of

the High Powered Study Group on Establishment of New Stock Exchanges,which recommended promotion of a National Stock Exchange by financial

institutions (FIs) to provide access to investors from all across the country

on an equal footing. Based on the recommendations, NSE was promoted by

leading Financial Institutions at the behest of the Government of India and

was incorporated in November 1992 as a tax-paying company unlike other

stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts

(Regulation) Act, 1956 in April 1993, NSE commenced operations in the

Wholesale Debt Market (WDM) segment in June 1994. The Capital Market

(Equities) segment commenced operations in November 1994 and

operations in Derivatives segment commenced in June 2000.

NSE's mission is setting the agenda for change in the securities markets in

India. The NSE was set-up with the main objectives of:

establishing a nation-wide trading facility for equities, debt

instruments and hybrids,


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ensuring equal access to investors all over the country through an

appropriate communication network,

providing a fair, efficient and transparent securities market to

investors using electronic trading systems,

enabling shorter settlement cycles and book entry settlements

systems, and

Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technology have

become industry benchmarks and are being emulated by other market

participants. NSE is more than a mere market facilitator. It's that force

which is guiding the industry towards new horizons and greater

opportunities.

The logo of the NSE symbolises a single nationwide securities trading

facility ensuring equal and fair access to investors, trading members and

issuers all over the country. The initials of the Exchange viz., N, S and E

have been etched on the logo and are distinctly visible. The logo symbolises

use of state of the art information technology and satellite connectivity to

bring about the change within the securities industry. The logo symbolises


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vibrancy and unleashing of creative energy to constantly bring about change

through innovation.

CORPORATE STRUCTURE

NSE is one of the first de-mutualised stock exchanges in the country, where

the ownership and management of the Exchange is completely divorced

from the right to trade on it. Though the impetus for its establishment came

from policy makers in the country, it has been set up as a public limited

company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the

ownership, management and trading is in the hands of three different sets of

people. NSE is owned by a set of leading financial institutions, banks,

insurance companies and other financial intermediaries and is managed by

professionals, who do not directly or indirectly trade on the Exchange. This

has completely eliminated any conflict of interest and helped NSE in

aggressively pursuing policies and practices within a public interest

framework.

The NSE model however, does not preclude, but in fact accommodates

involvement, support and contribution of trading members in a variety of

ways. Its Board comprises of senior executives from promoter institutions,

eminent professionals in the fields of law, economics, accountancy, finance,

taxation, and etc, public representatives, nominees of SEBI and one full time

executive of the Exchange.
http://www.nseindia.com/content/us/us_promoters.htmhttp://www.nseindia.com/content/us/us_promoters.htmhttp://www.nseindia.com/content/us/us_board.htmhttp://www.nseindia.com/content/us/us_promoters.htmhttp://www.nseindia.com/content/us/us_promoters.htmhttp://www.nseindia.com/content/us/us_board.htm


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While the Board deals with broad policy issues, decisions relating to market

operations are delegated by the Board to various committees constituted by

it. Such committees includes representatives from trading members,

professionals, the public and the management. The day-to-day management

of the Exchange is delegated to the Managing Director who is supported by

a team of professional staff.

STRUCTURE OF INTERNATIONAL CAPITAL MARKET
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FINANCIAL INSTITUTION

ALL INDIA DEVELOPMENT BANK

Industrial Development Bank

Industrial Finance Corporation of India

INTERNATIONAL

CAPITAL MARKETS

INTERNATIONAL

BOND MARKET

INTERNATIONAL

EQUITY MARKET

FOREIGN

BONDS

YANKEEBONDS

SAMURAI

BONDS

BULLDOG

BONDS

FOREIGN

EQUITY

EURO

BOND

EURO/DOLLAR

EURO/

YEN

EURO/

POUNDS

EURO

EQUITY

GLOBAL

DEPOSITORYRECIEPTS

AMERICAN

DEPOSITORYRECIEPTS

IDR/

EDR


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Industrial Investment Bank of India Export Import Bank of India State Financial Corporation State Industrial Development Corporation

INVESTMENT INSTITUTIONS

Life insurance Corporation

General Insurance Corporation

Unit trust of India Mutual Funds

BANKS

Reserve Bank of India Commercial Banks Scheduled Banks Regional Rural Banks

NON BANKING FINANCIAL CORPORATION

Investment Trust

NIDHIS

Merchant Banks Hire Purchases Finance Company Lease Finance Company Housing Finance Companies National Housing Bank Venture Capital Funding Companies

ALL INDIA DEVELOPMEN T BANKS

INDUSTRIAL DEVELOPMENT BANK OF INDIA

IDBI was established in 1964 as a subsidiary of the RBI by an act of the

parliament and was made a wholly owned govt. of India undertaking in

1975. It was established with the main objective of serving as an apex

financial institution to coordinate the functioning of all other financial


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institution. Planning ,promoting and developing functioning of all other

financial institution .industries to fill the gaps in the industrial structure of

the country providing technical administrative assistance for promoting or

expansion of industry . undertaking market and investment research survey

n connection with the development of industry and to provide finance

keeping in view national priorities irrespective of the financial attractiveness

of project are its other objective IDBI finance industries directly & also

support state financial corporation and state industrial development

corporations by providing refinance and through the bill rediscounting scale

IDBI was transformed from finance institution to commercial bank in theyear 2004.

INDUSTRIAL FINANCE CORPORATION OF INDIA

IFCI is the first financial institution to be established in India in 1948 by an

act of parliament with objective of providing medium and long term finance

to industrial concerns eligible for financing under the act. The sector for

which the IFCI provides finance extend through the industrial spectrum of

the country.

INDUSTRIAL INVESTMENT BANK OF INDIA

The IIBI first came into existence as a central government corporation with

the name Industrial Reconstruction Corporation of India in 1971. Its basic

objective was to finance the reconstruction and rehabilitation of sick and

closed industrial unit. Its name was changed to Industrial reconstruction


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bank of India and it was made the principal credit and reconstruction agency

in the country in 1985 through the RBI act 1984. The bank started co-

ordinary similar work of the institutions and banks preparing schemes for

reconstructions by reconstructing the liabilities appraising schemes of

merger & amalgamation of sick company and providing financial assistance

for modernization expansion, diversification and technological up gradation

of sick units.

In March 1987, in line with the ongoing policies of financial and economic

reforms, IRBI was converted into a full-fledged development financial

institution. It was renamed as Industrial Investment Bank of India ltd. And

was incorporated as company under the companies act 1956. Its entire

equity is finance for the establishment of new industrial project as well as

for expansion diversification and modernization of existing industrial

enterprises. It provides financial assistance in the form of term loans,

subscription to debenture equity shares and deferred payment guarantees.

IIBI is now also active ion merchant banking and its services includes inter

alia, structuring suitable instrument for public rights issues preparation of

prospective offer documents and working as a lead manager it also offers its

services for debt syndication and package of services for merger and

acquisition.

THE EXPORT IMPORT BANK OF INDIA .

The EXIM Bank was set up in 1982 to coordinate the activity of the various

institutional engaged in trade finance it helps Indian exporter in extending

credit to their overseas customer by providing long term finance to them it


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also provides financial assistance to bank in extending credit for export and

export linked imports it also provides advisory services and information to

exports.

STATE FINANCIAL CORPORATION .

At the beginning of the fifties the govt. found that of achieving rapid

industrialization separate institution should be set up that cater exclusively

to the needs of the small medium sector therefore the SFC was act passed by

the parliament in 1951 to enable the state govt. establish SFC the basic

objective for which the SFC was set up was to provide financial assistance

to small and medium scale industries estates. The SFC provides finance in

the form of log term loan, by underwriting issue of share and debentures

and standing guarantee for loans raised from other institution and form the

general public.

STATE INDUSTRIAL DEVELOPMENT CORPORATIONS.

The SIDCS have been set up to facilitate rapid industrial growth in the

respective state. In addition to providing finance , the SIDC identify and

sponsor project in the participation of private entrepreneurs.

INVESTEMENT INSTITUITONS

LIFE INSURANCE CORPORATION OF INDIA .

The LIC was established in 1956 by amalgamation and nationalization of

245 private insurance companies by an enactment of parliament . the main


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business of LIC is to provide life insurance and it has almost a monopoly in

this business. The LIC act permits it invest up to 10 percent of the

investable funds in the private sector . it provides finance by participating in

a consortium with other institution and does not undertake independent

appraisal of projects.

GENERAL INSURANCE CORPORATION OF INDIA

The GIC was establish in 1974 with the nationalization of general insurance

business in country it can invest up to 30 % of the fresh accrual of funds in

the private sector . like the LIC the GIC also provides finance by

participating in consortium based on the appraisal made by other financial

institutions but does not independently provide the finance.

UNIT TRUST OF INDIA

The UTI was founded in 1964 under the UTI act 1963. Initially 50% of the

capital of the trust was contributed by the RBI while the rest was brought in

by the SBI and its associates, LIC ,GIC, and other financial institutions. In

1974 the holding of RBI was transferred to the IDBI making the UTI an

associate of IDBI . the primary objective of UTI is to mobilize the savings in

the countries and channelize them in to productive corporate investments.

UTI provides assistance by underwriting debenture and share , subscription

to public and right issue of share and debenture subscription to provide

private placement and bridge finance. In January . 2003 UTI split in to two

part UTI 1 and UTI-2 . UTI-1 has given all the assured return scheme and

unit scheme 64 and it is being administrated by central govt. UTI-2


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entrusted with the task of managing NAV-based schemes. UTI -2 is being

managed by SBI, PNB,BOB and LIC.

MUTUAL FUNDS

Mutual funds serves the purpose of mobilizing of funds from various

categories of investors and channelizing them into productive investment.

Apart form UTI. Mutual fund sponsored by various bank subsidiaries,

insurance organizations private sector financial institutions DFI and FII have

come up . these mutual fund work within the framework of SEBI regulation

which prescribe the mechanism for setting up of a mutual fund , procedure

of registration its constitution and the duties, functions and responsibility of

the various parties involved.


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BANK

THE RESERVE BANK OF INDIA

The Reserve Bank of India is the central bank of the country entrusted with

monetary stability, the management of currency and the supervision of the

financial as well as the payments system.

Established in 1935, its functions and focus have evolved in response to the

changing economic environment. Its history is not only intrinsicallyinterwoven with the economic and financial history of the country, but also

gives insights into the thought processes that have helped shape the

country's economic policies.

The Reserve Bank of India is the central bank of the country. Central banks

are a relatively recent innovation and most central banks, as we know them

today, were established around the early twentieth century.

The Reserve Bank of India was set up on the basis of the recommendations

of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II

of 1934) provides the statutory basis of the functioning of the Bank, which

commenced operations on April 1, 1935.

The RBI has 22 regional offices, most of them in state capitals like Bhopal,

Hyderabad, Jaipur, Nagpur, Kolkata etc.


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HISTORY OF THE RBI

The Bank began its operations by taking over from the Government the

functions so far being performed by the Controller of Currency and from the

Imperial Bank of India, the management of Government accounts and public

debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon,

Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue

Department. Offices of the Banking Department were established in

Calcutta, Bombay, Madras, Delhi and Rangoon.

Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve

Bank continued to act as the Central Bank for Burma till Japanese

Occupation of Burma and later up to April, 1947. After the partition of

India, the Reserve Bank served as the central bank of Pakistan up to June

1948 when the State Bank of Pakistan commenced operations. The Bank,

which was originally set up as a shareholder's bank, was nationalized in

1949.

The RBI was established by legislation in 1934, through the RBI Act of

1934. The RBI started functioning from April 1st 1935. This represented the

culmination of a long series of efforts to set up an institution of this kind in

the country. The RBI was originally constituted as a Shareholders Bank

with a share capital of Rs.5 Crore. In view of the need of close integration

between its policies and those of the government, it was nationalized in

1949.


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With liberalization, the Bank's focus has shifted back to core central banking

functions like Monetary Policy, Bank Supervision and Regulation, and

Overseeing the Payments System and onto developing the financial markets.

The sequences of events leading to the formation of the RBI are summarized

in the figure:

ESTABLISHMENT OF THE RESERVE BANK OF INDIA

In India, the urgent need for a central banking institution was recognizedwhen the 3 presidency banks Bank of Madras, Bank of Bombay & Bank

of Bengal were amalgamated in 1921 to form the Imperial Bank.

Presidency Bank

Imperial Bank of India

Central Banking Enquiry Committee, 1931

Reserve Bank of India Act, 1934

Constitution of RBI, April 1st 1935

Nationalization of the RBI. 1949


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In 1926, the Hilton-Young Commission recommended the establishment of

a central bank. A bill was passed in the Central Legislature in January 1927

but was dropped. A fresh bill was introduced on September 8th, 1923 and

was received.

Thus the Reserve Bank of India was established by legislation in 1934

through the Reserve Bank of India Act 1934. The Act provides the statutory

basis of functioning of the bank which commenced operations on April 1st,

1935.

CENTRAL BOARD

The Reserve Bank's affairs are governed by a central board of directors. The

Board is appointed by the Government of India in keeping with the Reserve

Bank of India Act. The Board of Directors is comprised of:

1. A governor and not more that 4 deputy governors appointed by the

Central Government.2. Four Directors nominated by the Central Government, one from each

of the 4 Local Boards.

3. Ten Directors nominated by the Central Government

4. One government official nominated by the Central Government.

The Governor & Deputy Governor hold office for such periods not

exceeding 4 years as may be fixed by the Central Government at the time of

their appointment and are eligible for reappointment. The Government

official holds office during the pleasure of the Central Government. The

Governor, in his absence, appoints a deputy Governor to be the chairman on


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the Central Board. Meetings of the Central Board are required to be held not

less than 6 times in each year & at least once in a quarter.

LOCAL BOARDS

For each of the 4 regional areas of the country, there is a Local Board with

headquarters in Kolkata, Chennai, and Mumbai & New Delhi. Local Boards

consist of 5 members each, appointer by the Central Government for a term

of 4 years. The Local Board members elect from amongst themselves the

chairman of the Board. The Regional Directors of the bank offices in

Kolkata, Chennai, and Mumbai & New Delhi are the ex-officio secretaries

of the Local Boards at the Centers. The functions of Local Boards are

reviewed by the Central Board from time to time.

Central Board of RBI

4 Local Boards at Chennai, Kolkata,Mumbai & New Delhi

18 branches in major cities of thecountry.

Internal Organization & Management:

This consists of about 25 departments

training establishments & researchinstitutions.


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Its functions include advising the Central Board on local matters and

representing territorial and economic interests of local cooperative and

indigenous banks & to perform such other functions as delegated by Central

Board from time to time.

INTERNAL ORGANIZATION & MANAGEMENT

The Governor is the Chief Executive Architect of the RBI. The Governor

has the powers of general superintendence and direction of affairs and

business of the Bank. The Executive General Managers are in between the

Deputy Governors and Chief General Managers of central office

departments.

Formulating of policies concerning monetary management, regulation and

supervision of banks, non banking institutions, financial institutions, and co-

operative banks, extension of exchange resources and rendering of advice tothe Government on economic and financial matters are also done by the

RBI.

MAIN FUNCTIONS

The Reserve Bank of India was constituted to:

Regulate the issue of banknotes

Maintain reserves with a view to securing monetary stability

Operate the credit and currency system of the country to its advantage


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Promote financial and economic development jeopardizing monetary

stability

Set up many financial institutes provide development of finance and

foster financial markets.

CORE FUNCTIONS:

Following are the core functions of the Reserve Bank of India:

Operating monetary policy for maintaining price stability and

ensuring adequate financial resources for development process. Promotion of an efficient financial system.

Meeting currency requirement of the public

Reserve Bank of India

Issue ofCurrencyNotes

Banker toGovernment

Banker toBanks

Monetary &Credit Policy

ForeignExchange

Management

ClearingHose Agent


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MONETARY AUTHORITY:

The Reserve Bank of India constantly works towards keeping inflation

under check and ensuring adequate supply of liquidity for the productivesector as also towards financial stability. It also formulates, implements and

monitors the monetary policy.

REGULATOR AND SUPERVISOR OF THE FINANCIAL

SYSTEM:

Prescribes broad parameters of banking operations within which thecountry's banking and financial system functions.

Objective: maintain public confidence in the system, protect

depositors' interest and provide cost-effective banking services to the

public.

Permitting banks to fix their own position limits as per international

terms & aggregating gap limits.

DEVELOPMENTAL ROLE

Performs a wide range of promotional functions to support national

objectives.

Provides rural credit.

Setting up of institutional framework.

Service area approach.

Financing the industries.

Provision of finance to information technology and software industry.

Infrastructure financing


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ISSUER OF CURRENCY

The Reserve Bank of India ensures good quality coins and currency notes in

adequate quantity by:

Issuing and exchanges or destroys currency and coins not fit for

circulation.

Mopping up notes and coins unfit for circulation

Advising the Government on designing of currency notes with the

latest security features.

MANAGER OF FOREIGN EXCHANGE

The Reserve Bank of India is mainly empowered with authority under the

Foreign Exchange Management Act (FEMA) 1999 to regulate foreign

exchange operation. As such, rules and regulations relating to non-resident

accounts are issued by the RBI. The RBI also formulates policies to

facilitate external trade and payments, facilitates foreign investments in

India and Indian investments abroad and promotes orderly development of

foreign exchange markets

BANKER TO THE GOVERNMENT


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The RBI acts as a Banker to the Government under section 20 of the RBI

Act of 1934. Section 21 provides that the Government should entrust its

money remittance, exchange and banking transactions in India to the RBI.

The RBI maintains accounts of central and state governments. It performs

merchant banking function for the central and the state governments. It also:

Encourages development and orderly functioning of Government

securities market

Advises central and state governments in better cash management.

PAYMENT SYSTEMS

Negotiated dealing system for security dealing.

Establishment of clearing corporation of India Ltd. (CCIL) for

settlement of security deals.

Introduction of Real Time Gross Settlement (RTGS)

Electronic payment facilities like Electronic Clearing System (ECS),

Electronic Funds Transfer (EFT), and National Electronic Funds

Transfer (NEFT) and Cheque truncation.

Providing messaging network and encryption facilities for secured

messaging through the Institute for Development and Research in

Banking Technology (IDRBT).

BANKERS' BANK

The Reserve Bank of India acts as a banker to all scheduled banks.

Commercial banks including foreign banks, co-operative banks & regional

rural banks are eligible to be included in the second schedule of the Reserve


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Bank of India Act subject to fulfilling conditions laid down under Section 42

(6) of the Reserve Bank of India Act 1934..

SUPERVISOR OF THE FINANCIAL SYSTEM

Prescribes regulations for sound functioning of banks and financial

institutions, including non-banking finance companies

Promotes best practices in risk management and corporate governance

to protect depositors' interest and to enhance public confidence in the

financial system of the country

Encourages use of technology in banks to provide cost-effective

service to consumers.

BOARD FOR FINANCIAL SUPERVISION

The Reserve Bank of India performs this function under the guidance of the

Board for Financial Supervision (BFS). The Board was constituted in

November 1994 as a committee of the Central Board of Directors of the

Reserve Bank of India.

OBJECTIVE

Primary objective of BFS is to undertake consolidated supervision of the

financial sector comprising commercial banks, financial institutions and

non-banking finance companies.

CONSTITUTION OF THE BOARD


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The Board is constituted by co-opting four Directors from the Central Board

as members for a term of two years and is chaired by the Governor. The

Deputy Governors of the Reserve Bank are ex-officio members. One Deputy

Governor, usually, the Deputy Governor in charge of banking regulation and

supervision, is nominated as the Vice-Chairman of the Board.

BFS MEETINGS

The Board is required to meet normally once every month. It considers

inspection reports and other supervisory issues placed before it by the

supervisory departments.

BFS through the Audit Sub-Committee also aims at upgrading the quality of

the statutory audit and internal audit functions in banks and financial

institutions. The audit sub-committee includes Deputy Governor as the

chairman and two Directors of the Central Board as members.

The BFS oversees the functioning of Department of Banking Supervision(DBS), Department of Non-Banking Supervision (DNBS) and Financial

Institutions Division (FID) and gives directions on the regulatory and

supervisory issues.

FUNCTIONS OF THE BFS

Some of the initiatives taken by BFS include:

i. restructuring of the system of bank inspections

ii. introduction of off-site surveillance

Indian Financial System Report

Documents