FM- Indian Financial System

8/7/2019 FM- Indian Financial System

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The Indian Financial System

Presented By

Sashi Prakash (108)

Seema Nagwani (110)

Shrividya Ganesh (119)

Srinivasan Masti (126)

Theagarajan Thanikachalam(131)

Vrinda Mohan (141)


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Financial System

Financial markets of any country consists of

financial markets, financial intermediaries and

financial instruments.

Flow of funds

Flow of financial services

Seekers of funds Suppliers of funds


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Functions of Financial System:

1. Payment system

2. Pooling of funds

3. Transfer of resources

4. Managing uncertainty and controlling risk.

5. Price information for decentralized decision

making.

6. Dealing with incentive problem


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Financial Intermediaries

Commercial Banks (led by SBI)

Financial Institutions

Insurance Companies Mutual Funds

NBFC

Non Banking Financial Services companies


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Capital Market

A capital market is a market for securities (debt orequity), where business enterprises (companies)

and governments can raise long-term funds.

It is defined as a market in which money isprovided for periods longer than a year, as the

raising of short-term funds takes place on other

markets (e.g., the money market).

The capital market include s the stock market(equity securities) and the bond market (debt).

Capital markets may be classified as primary

markets and secondary markets.


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Capital Market


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Functions of Capital Market

Mobilization of Savings : Capital market is an importantsource for mobilizing idle savings from the economy. It

mobilizes funds from people for further investments in

the productive channels of an economy. In that sense it

activate the ideal monetary resources and puts them inproper investments.

Capital Formation : Capital market helps in capital

formation. Capital formation is net addition to theexisting stock of capital in the economy. Through

mobilization of ideal resources it generates savings; the

mobilized savings are made available to various segments

such as agriculture, industry, etc.


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Provision of Investment Avenue : Capital market raises

resources for longer periods of time. Thus it provides an

investment avenue for people who wish to invest resourcesfor a long period of time. It provides suitable interest rate

returns also to investors.

Speed up Economic Growth and Development : Capital

market enhances production and productivity in the national

economy. As it makes funds available for long period of time,

the financial requirements of business houses are met by the

capital market.

Proper Regulation of Funds : Capital markets not only helps in

fund mobilization, but it also helps in proper allocation ofthese resources. It can have regulation over the resources so

that it can direct funds in a qualitative manner.


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Continuous Availability of Funds : Capital market is

place where the investment avenue is continuously

available for long term investment.

The lack of an advanced and vibrant capital market

can lead to underutilization of financial resources


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Money Market


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Financial Markets

Money Market- for short-term funds (less thana year)

Organized (Banks)

Unorganized (money lenders, chit funds, etc.)

Capital Market- for long-term funds

Primary Issues Market Stock Market

Bond Market


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Money/ Corporate Sec. marketCall Money

Short noticeTerm Money

Commercial Paper

Certificates of Deposits

Money Market Mutual Funds

Commercial Bills

Treasury Bills

Inter Corporate Funds

Capital Markets

1.Primary

2.Secondary

Primary Market consists of:

Public Corporate, Existing Stock holders other entitie

.Handles Instruments like:

Stock / Shares/Debentures/Units/Bonds/Warrants

Collective Instruments like:

Venture Capital Funds, Global depository receipts,

Foreign currency convertible Bonds


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Organised Money Market

Call money market

Bill Market

Treasury bills Commercial bills

Bank loans (short-term)

Organised money market comprises RBI,banks (commercial and co-operative)


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Purpose of the money market

Banks borrow in the money market to: Fill the gaps or temporary mismatch of funds

To meet the CRR and SLR mandatory requirements

as stipulated by the central bank To meet sudden demand for funds arising out of

large outflows (like advance tax payments)

Call money market serves the role ofequilibrating the short-term liquidity positionof the banks


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Money Market Instruments

Certificates of Deposit

Commercial Paper

Inter-bank participation certificates Inter-bank term money

Treasury Bills

Bill rediscounting

Call/notice/term money

CBLO


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Commercial Papers Short-term borrowings by corporates, financial institutions,

primary dealers from the money market CPs are issued by corporate borrowers to meet their working

capital requirement

Can be issued in the physical form (Usance Promissory Note)or demat form

Introduced in 1990

When issued in physical form are negotiable by endorsementand delivery and hence, highly flexible

Issued subject to minimum of Rs. 5 lacs and in the multiple of

Rs. 5 lacs after that Maturity is 7 days to 1 year

Unsecured and backed by credit rating of the issuing company

Issued at discount to the face value


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Source Economic Times 11-04-2007


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08/04/2011 21E.T.12-11-07


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Bill Market

Treasury Bill market- Also called the T-Bill market These bills are short-term liabilities (91-day, 182-day,

364-day) of the Government of India

It is an IOU of the government, a promise to pay the

stated amount after expiry of the stated period fromthe date of issue

They are issued at discount to the face value and atthe end of maturity the face value is paid

The rate of discount and the corresponding issue priceare determined at each auction

RBI auctions 91-day T-Bills on a weekly basis, 182-dayT-Bills and 364-day T-Bills on a fortnightly basis onbehalf of the central government


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Bonds

A bond is nothing more than a loan for which

you are the lender.

The organization that sells a bond is known asthe issuer. You can think of a bond as an IOU

given by a borrower (the issuer) to a lender

(the investor).


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Bonds

The interest rate is often referred to as the

coupon.

The date on which the issuer has to repay theamount borrowed (known as face value) is

called the maturity date


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Coupon (The Interest Rate)The coupon is the amount the bondholder

will receive as interest payments.

It's called a "coupon" because sometimesthere are physical coupons on the bond

that you tear off and redeem for interest.

However, this was more common in thepast. Nowadays, records are more likely

to be kept electronically.


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Govt Bonds

In general, fixed-income securities areclassified according to the length of timebefore maturity. These are the three maincategories:

Bills - debt securities maturing in less than oneyear.

Notes - debt securities maturing in one to 10years.

Bonds - debt securities maturing in more than10 years.


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Call money market

Is an integral part of the Indian money marketwhere day-to-day surplus funds (mostly ofbanks) are traded.

The loans are of short-term duration (1 to 14days). Money lent for one day is called callmoney; if it exceeds 1 day but is less than 15days it is called notice money. Money lent for

more than 15 days is term money The borrowing is exclusively limited to banks,

who are temporarily short of funds.


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Call money market

Call loans are generally made on a clean basis- i.e. nocollateral is required

The main function of the call money market is to

redistribute the pool of day-to-day surplus funds of

banks among other banks in temporary deficit of

funds

The call market helps banks economise their cash

and yet improve their liquidity It is a highly competitive and sensitive market

It acts as a good indicator of the liquidity position


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Call Money Market Participants

Those who can both borrow and lend in themarket RBI (through LAF), banks andprimary dealers

Once upon a time, select financial institutionsviz., IDBI, UTI, Mutual funds were allowed inthe call money market only on the lendersside

These were phased out and call money marketis now a pure inter-bank market (since August2005)


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Trading in call Money market

There are no brokers in the call money market

and trading is done over the counter

Settlement is done between the participantsthrough the current account maintained with

the RBI

Currently, there are 98 commercial banks,3,000 co-operative banks and 17 PDs who

are borrowing and lending in the market,


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Money Market Instruments

Money market instruments are those which

have maturity period of less than one year.

The most active part of the money market isthe market for overnight call and term money

between banks and institutions and repo

transactions

Call money/repo are very short-term money

market products


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Market Repos

Repo is the rate at which RBI infuses liquidity through

purchase of government securities

Repo (repurchase agreement) instruments enablecollateralized short-term borrowing through the selling ofdebt instruments

A security is sold with an agreement to repurchase it at apre-determined date and rate

Reverse repo is the process of absorption of liquidityfrom the system through sale of government papers .

Reverse repo is a mirror image of repo and reflects theacquisition of a security with a simultaneouscommitment to resell

A repo is essentially a short-term interest-bearing loanagainst collateral


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Collateralised Borrowing and Lending

Obligation (CBLO) Operationalised as money market instruments by

the in 2003 Follows an anonymous, order-driven and online

trading system On the lenders side main participants are mutual

funds, insurance companies. Major borrowers are nationalised banks, PDs and

non-financial companies

The average daily turnover in the CBLO segmentincreased from Rs. 515 crore (2003-04) to Rs. 32,390 crore (2006-07)

CBLO Segment clocked the highest volume ofRs. 80,60. 9.75 Crores on June 12, 2009


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Collateralized Borrowing and

Lending Obligation (CBLO) CCIL introduced a new product Collateralised

Borrowing and Lending Obligation (CBLO) inJanuary, 2003.

The product was introduced with a definite

objective, which was to provide an alternativeavenue for managing short term liquidity for

the market players who have been restrictedand/or being phased out of call moneymarket.


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CBLO

It is an obligation by borrower to return

money as a future date

Securities are held in custody with CCIL( TheClearing Corp of India Ltd )

Members- Banks, FIs,Insurance Cos, Mutual

Funds,Primary Dealers,NBFCs,Non Govt

PF,Corporates.

Members to open SGL a/c with CCIL


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CBLO

It is a money Market Instrument. No

restriction on min denomination or lock in

period for its secondary market

Maturity- 1 day to 1 year

Rate - As decided by market participants

Borrowing Limit- As decided by CCIL at the

beginning of the day taking in to a/c securities

deposited by the borrowers


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CBLO

Market players used to borrow funds from theCBLO market, which was available at 3.5-4 percent and put the money in reverse repo,

where it earned around 6 per cent. However,now with CBLO rates going up, there is nosuch incentive( position as of April 08 ).

CBLO is the money market for non-bankingentities to lend and borrow funds for dailyrequirement.


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Category wise Turnover

In CBLO


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Developments in Money Market

Prior to mid-1980s participants depended heavily onthe call money market

The volatile nature of the call money market led tothe activation of the Treasury Bills market to reduce

dependence on call money Emergence of market repo and collateralized

borrowing and lending obligation (CBLO) instruments

Turnover in the call money market declined from Rs.

35,144 crore in 2001-02 to Rs. 14,170 crore in 2004-05 before rising to Rs. 21,725 crore in 2006-07


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Why do companies need to issue

shares to the public? Most companies are usually started privately by their

promoter(s). However, the promoters' capital and theborrowings from banks and financial institutions maynot be sufficient for setting up or running the business

over a long term. So companies invite the public tocontribute towards the equity and issue shares toindividual investors. The way to invite share capitalfrom the public is through a 'Public Issue'. Simplystated, a public issue is an offer to the public tosubscribe to the share capital of a company. Once thisis done, the company allots shares to the applicants asper the prescribed rules and regulations laid down bySEBI


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Primary Market


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Primary Markets

The primary market is that part of the capital

markets that deals with the issuance of new

securities. Companies, governments or public

sector institutions can obtain funding through thesale of a new stock or bond issue.

This is the market for new long term equity

capital. The primary market is the market where

the securities are sold for the first time. Thereforeit is also called the new issue market (NIM).


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Features of Primary Market

In a primary issue, the securities are issued by thecompany directly to investors.

The company receives the money and issues newsecurity certificates to the investors.

Primary issues are used by companies for thepurpose of setting up new business or forexpanding or modernizing the existing business.

The new issue market does not include certainother sources of new long term external finance,such as loans from financial institutions.Borrowers in the new issue market may be raisingcapital for converting private capital into publiccapital; this is known as "going public."


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Difference between public issue

and private placement When an issue is not made to only a select set

of people but is open to the general publicand any other investor at large, it is a public

issue. But if the issue is made to a select set ofpeople, it is called private placement. As perCompanies Act, 1956, an issue becomes publicif it results in allotment to 50 persons or more.

This means an issue can be privately placedwhere an allotment is made to less than 50persons


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Various Issues In Primary Market


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Rights Issue

A rights issue is a way in which a company can sellnew shares in order to raise capital. Shares areoffered to existing shareholders in proportion to

their current shareholding, respecting their pre-emption right

The price at which the shares are offered isusually at a discount to the current share price,

which gives investors an incentive to buy the newshares if they do not, the value of their holdingis diluted.


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Preferential issue

A Preferential issue is an issue of shares or ofconvertible securities by listed companies to aselect group of persons under Section 81 of theCompanies Act, 1956 which is neither a rights

issue nor a public issue. This is a faster way for acompany to raise equity capital. The issuercompany has to comply with the Companies Actand the requirements contained in the Chapter

pertaining to preferential allotment in SEBIguidelines which inter-alia include pricing,disclosures in notice etc.


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Initial Public Offer

A company's new offering is placed on the

primary market through an initial public offer.

An Initial Public Stock Offering(IPO) is simply

an "offering" or "flotation," when a company

(called the issuer) issue Common stocks or

shares to the public for the first time. It can be

issued by small, young companies as well asby large privately-owned companies


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Initial Public Offer contd..

The sale of an IPO takes place in several forms.Some Common Methods are:

Best Efforts Contract: In the best effortscontract the underwriter agrees to sell as manyshares as possible at the agreed-upon price.

Firm Commitment Contract: In the firmcommitment contract the underwriter guaranteesthe sale of the issued stock at the agreed-upon

price. For the issuer, it is the safest but the mostexpensive type of the contracts, since theunderwriter takes the risk of sale.


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All or None Contract: Under the all-or-none contractthe underwriter agrees either to sell the entire offeringor to cancel the deal.

Bought Deal: A bought deal occurs when anunderwriter, such as an investment bank or a syndicate,

purchases securities from an issuer before apreliminary prospectus is filed. The investment bank (orunderwriter) acts as principal rather than agent andthus actually "goes long" in the security. The banknegotiates a price with the issuer.

Self Distribution of Stock: The company itself involvesinto Stock Distribution however this cant be donewhen the volumes are large


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A large IPO is usually underwritten by asyndicate of investment banks led byone or more major investment banks .Upon selling the shares, theunderwriters keep a commission based

on a percentage of the value of theshares sold (called the gross spread).Usually, the lead underwriters, i.e. theunderwriters selling the largestproportions of the IPO, take the highest

commissionsup to 8% in some cases .However, should the Underwriters notbe able to find enough investors, theywill have to hold some securitiesthemselves.


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Initial Price

A company that is planning an IPO appoints lead managersto help it decide on an appropriate price at which the shares

should be issued. There are two ways in which the price of

an IPO can be determined: either the company, with the

help of its lead managers, fixes a price or the price is arrivedat through the process of book building.

Book building refers to the process of generating, capturing

and recording investor demand for shares during an IPO (or

other securities during their issuance process) in order tosupport efficient price discovery. Usually, the issuer

appoints a major investment bank to act as a major

securities underwriter or book runner


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Risk in Primary Markets

As the saying goes, A known Devil is much better than anUnknown Devil.

It is highly risky and also much more riskier thansecondary market.

It is highly risky hope that the differential premium

existing in the secondary market does not vanish beforefresh shares find their way to the market.

One such example can be seen as that happened in 2005between India Info line, which made an IPO, and JindalPolyfilms that made a subsequent public offer.

Though both the offerings came out at the same time,JPFL suffered with its investors not able to do anythingapart from seeing their vanishing premiums whereasIndia Info line came out with flying colors


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What are secondary markets?

A market where investors purchase securities orassets from other investors, rather than fromissuing companies themselves

Ex: NYSE, NASDAQ, BSE, NSE etc

In any secondary market trade, the cash proceedsgo to an investor rather than to the underlyingcompany/entity directly.

In the secondary market only basic forces likesupply and demand determine the price of thesecurity.


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Stock Exchanges

Securities and Exchange Board of India (SEBI),

provides a trading platform, where buyers and sellerscan meet to transact in securities.

Electronic trading platform: Demat accounts

Indian stock exchange allows a member broker to

perform following activities: Act as an agent,

Buy and sell securities for his clients and chargecommission for the same,

Act as a trader or dealer as a principal, Buy and sell securities on his own account and

risk.

At present, there are twenty one recognized stockexchanges in India, main ones being BSE and NSE.


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BSE(Bombay Stock Exchange)

Historically an open outcry floor

trading exchange.

Now an electronic trading system.

Operational from 8 a.m. to 5:30 p.m.

Most popular index : SENSEX

Top Brokers include: HDFCSecurities, ICICI Securities etc.


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NSE(National Stock Exchange)

Professionally managed national market forshares, PSU bonds, debentures & governmentsecurities.

Fully automated screen based system thatprovides higher degree of transparency .

Largest in India by daily turnover and number oftrades, for both equities and derivative trading

Operational from 9 a.m. to 3:30 p.m.

Key index is the S&P CNX Nifty, known as the NSENIFTY


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Products in the Secondary Market

Shares

Mutual Funds

Index ETFs Government Securities (G-Secs)

Debentures

Bonds

Derivatives


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Derivatives

Derivative is a product whose value is derived

from the value of one or more basic variables,

called underlying

Types of Derivatives:

Forwards

Futures

Options Warrants

Interest rate derivatives

Commodity derivatives


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REGULATORY AUTHORITIES

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SEBI (Securities and Exchange

Board of India) Set up in 1988, as part of the SC(R) Act 1956.

The first regulator under the SC(R)A, 1956 was the

CCI.

Regulator of anything that is exchangetraded. SEBI can set regulatory policy, carry out

implementation as well as has the power to enforce

regulatory rules and impose punishment on wrong-

doing.

Grievances and appeals to SEBI rulings are heard by

the Securities Appellate Tribunal.

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RBI (Reserve Bank of India)

Set up under the RBI Act, 1935.

Regulator of deposit-taking agencies.

Regulator for debt, foreign exchange markets.

Securities infrastructure for debt, foreignexchange markets.

Payments system.

Investment banker for the government. Central bank.

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FMC (Forward Markets Commission)

Flows from the FC(R) Act 1952. Regulator of commodity derivative markets, commodity

derivative brokers.

FMC regulation is in the form of policy

recommendation rather than implementation (which is

done by the DCA) or enforcement/punitive action

(which is done by the police).

Plays a role in the development of commodity derivativemarkets.

Is an arm of Department of Consumer Affairs.

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MoF (Ministry of Finance)


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MoF (Ministry of Finance)

Plays a role in creating regulators. Prior to the reforms of the nineties, played the

role of supervisor of rules and regulations.

Legislative work.

Big picture policy questions that go beyond

the agenda of any one regulator.

Conflict of interest: owner of many financecompanies.

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HLCC (High Level Coordination Committee)

Co-ordination between regulators.

Members:

Governor, RBI

Chairman, SEBI

Chairman, IRDA

Finance Secretary, MoF

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Thank You

FM- Indian Financial System

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