MFS Module 1
Content
Management of Financial Services
Let us know what is Financial System
Financial system can be compared to nervous system
– Blood circulation in nervous System It deals with Money & monitory assets .
Complex set up –, Institutions , Markets, services,
instruments –claims and liabilities –money, credit ,Finance
Economic Development needs good Financial system
Ensure supply of Fin for production of goods and services
Well-being – standard of living
Responsibility of FS – mobilize savings and invest in
productive ventures
Promote free flow of funds in economy - liquidity
Study complex structure under following heads:
Financial system facilitates flow of funds from
the areas of surplus to the areas of deficit
Financial system consists of four segments :
Financial institutions
Financial markets
Financial instruments
Financial services
Financial Institutions
These institutions facilitate financial transactions of
individuals and corporates
They mobilise savings and allocate funds in an efficient
manner
Intermediaries: Banking : a. commercial Banks b. cooperative Banks
between savers and investors
Intermediaries operate in funds
Regulatory : RBI ( Regulates money market) SEBI
( regulates capital market ),IRDA regulates insurance activity,
etc
They give confidence for the investors
Non- intermediaries: eg. UTI IDBI GIC – NABARD, own funds /
Govt
Financial Markets
Place where buyer & seller meet
Price determination
Financial markets are the centers which facilitate buying
and selling of financial assets
Organised Market has :it has standardised rules and
regulations for financial dealings
Done under supervision of regulatory body like RBI
Capital Market: deals with financial assets which has a
long and indefinite maturity –more than one year
a. corporate securities market ,
b. Govt Securities market,
c. Long term loans market
Corp securities market has
a. primary market : new issues market fresh capital is raised –
allows formation of capital and accelarate
indl and economic development
b. Secondary market: deals with
securities which are already issued
Long term loan market has : Term loans ,
mortgages, guarantees
Money market
It is for short term money and financial assets
which are near money substitutes
Short term instruments are delt – maturity within one
year
Eg., call money market, commercial bills, Treasury Bills
Market, Short term loan market
Un organized Market: Money lenders, indigenous
Bankers
They lend mondy to the public
They are not totally controlled by RBI
Financial Instruments
Financial instrument is a Financial claims on assetsEg. Loan, bank deposits, govt bond, deb, equity
It helps channelizing funds from lenders to borrowers
Repayable after a stipulated period: eg., Bill of
Exchange, Promissory note, Treasury Bills, Govt Bond,
Deposit Receipt, Share, Debenture., etc.,
Primary securities: issued by investors to ultimate
savers directly eg., Public issue of shares
Secondary : Issued by Financial intermediaries to
ultimate savers e.g., Mutual fund units.,
Classification on the basis of duration: Short term ( one
year) Medium ( 1-5 Years) Long term ( beyond 5 years )
Characteristics of Financial
Instruments
Easily transferable
Ready market
Posses liquidity
Call back /Buy back options
Volatility of price
Give security
Tax status
Risk return profile
Financial Services
Banks
Consultants
Merchant Bankers
Services which facilitate the flow of money and
monitory assets in the economy Examples:
Portfolio Management
Factoring Services
Forfeiting
NBFC
Leasing & Hire purchase
Credit Rating
Venture capital services
Functions of Financial
System
Regulates dealings between various
Economic units – individuals, Institutions – in
money and money assets
Provides Markets – organised and unorganised
– Primary and secondary – platform for buying
and selling goods and services
Provide Financial Institutions, Intermediaries,
brokers, agents, dealers for flow of Money and
financial assets and goods and services
Provide Financial Instruments – suit
requirements of different entities
Functions of FS
Aims to promote savings and investments by
offering financial assets of various qualities
Aims to allocate savings to various channels of
investment
It arranges for creation and distribution of
money, credit and finance throughout the
economy
Promotes economic development by capital
formation by offering suitable Financial assets.
Larger the proportion of financial assets (money and
monitory assets) to Real assets (Physical goods and
services ) greater is the scope for economic growth.
Increase Standard of living of population.
Role of Financial Markets
Provide Platform for buyers and sellers
to meet & transact Fin instruments & real
assets
Provides for Price discovery
Lays down systems and procedures –
Laws - settlement of transactions
Provides Financial assets with different
varied features to suit requirement of
different entitities and investors.
Market Perfection efficiency
There are large number of savers and
investors Operating in the market
Savers and investors are rational
Operators are well informed & info freely
available.
There are no transaction costs
Fin assets are infinitely divisible
There are no Taxes
Under these ideal conditions Market attains
equilibrium – supply and demand are
equal
Limitations of financial
system
Industrial finance dominated by development Banks –
but they do not mobilize savings
Capital market is not very strong and dependable – lot
of scams and frauds – public do not have enough faith
Govt owns many institutions – it also controls – hence
there is no much co-ordination between them
Monopolistic structure : very large - not much of
compition – like LIC
Financial system and
economic development
Financial sector is an important condition for growth of
an economy
National income, employment, standard of living and
social welfare are influenced by supply of finance
Economic growth or development means growth in
national income of the country – not true if rate of
population growth is more than National income
Economic growth means increase in the percapita
income of the country - higher standard of living
Stages of economic
development
There are three stages in economic development - according
to Prof Rostow:
1. preparatory stage :
Long period or a century - when the precondition fro take off
are established
In the matter of society’s attitude, political sovereignty, good
tax system, financial institutions, creation of infrastructure etc.,
2. The take off period:
It is abrief period - say two to three decades
After this economic development takes place automatically
3. Period of self sustained growth :
There is a good savings and investment – self generating
Effect of financial system
on savings and
Human capital and physical capital can be
investments
bought and developed with money as input
Money , credit and finance are the life blood of
the economic system
The required technology also can be
developed for acclerating growth
It also enlarges the markets – deepen and
widen - leads to efficiency in medium of
exchange
Financial Sector reforms :
Before 1991 – financial institutions were in bad
shape Asset quality was poor
say lack of competition in banks,
low capital base,
low productivity,
high intermediation costs,
lower usage of technology ,
quality of service,
no risk management system and prudential norms
, no compitition in insurance and mutual funds
Financial markets were:
Operated under controlled conditions
There were barriers for entry
Transaction costs were high
Banks were running under loss or low profits
Banks were unable to provide for defaults, and
build their capital
High SLR and CRR
Cross subsidization – low rates to priority sector
and high rates to larger borrowers
New Economic policy (NEP) was given a
big thrust in India in 1991
Govt appointed a high power committee
to examine structure, organization,
function procedure of financial system
After its report lot of changes were
introduced - as the financial institutions
and markets were in bad shape
Objectives of financial
reforms -1991
To develop market oriented competitive, world integrated
transparent financial system
Allocate the savings properly,
Promote growth in real sector
Create accountability, profitability, efficiency, professionalism
and depoliticalisation in financial sector
Promote competition – free entry and exit for players -in level
playing ground to them
Rationalize interest rates - market determined – dismantle
administered system of interest rates
Improve financial infrastructure, supervision credit , etc.,
Modernize instruments to make it suitable for conducting
monetary policy and control
Major reforms after 1991
in financial system
Reforms in the areas of
operational matters,
Banking,
primary and secondary stock
markets ,
govt. securities market
Systemic and policy
reforms
Interest rates deregulated - market rates on G sec. – dismantle
administered interest rates
SLR reduced from 38.5% of DTL to 23% now
Capital adequacy norms introduced
Board of financial supervision - dept in RBI was formed
Recovery of debts by banks by special recovery tribunals
Ad hoc treasury bills replaced by ways and means advances from
1997
Private sector was allowed to set up banks, Mutual funds,
insurance companies
Office of CCI was abolished
SEBI was formed to regulate capital market
NBFC with above 25 laths Net owned fund should register with RBI
OTC and NSE were formed to have nationwide trading and display
Some impt banking
reforms are:
Interest rates on deposits and advances deregulated
SBI and nationalized banks allowed to access capital market for
debt and equity
Introduce prudential norms for income recognition,
classification of assets and provisioning for bad debts
Valuation of investments by banks - make it mark to market for
securities held by them
Bank balance sheet to become fully transparant and adopt
international accounting standards
Banks given freedom to open, shifit, or open extension counters
Provided budgetory support for weak PSU Banks
Banking ombudsman scheme 1995 was introduced
Free to fix the FX open positon – subject to RBI approal
Primary and secondary
market reforms
Primary market allotment only through depository
100% book building for issues above 25 crores
Payment of direct or indirect discount on shares prohibited
Housing companies can raise money if they get refinance
from NHB
Mutual funds allowed to underwrite the public issues
Depositories act 1996 was passed - dmat of shares
Stock lending scheme introduced – facilitate short sellers
Stock exchanges modernised – introduce on line trading by
BSE
Short and long sales are disclosed to stock exchange impose strict margins
Government securities
market reforms
364 days TB replaced the 182 day TB - sold through auction
Maturity period fro CG securities reduced from 20 years to
10 yr
new instruments introduced : ie., zero coupon bonds, Tap
stock partly paid govt stock, floating rate bonds, capital
indexed bond
State govts and Provident funds allowed to participate in 91
day TB auctions
Primary dealers in g Sec were instituted
System of DVP was introduced in subsidiary gen. ledger
SGL transactions introduced at Mumbai
Reverse repo was extended to DFHI and STCI
External financial market
reforms
FIIs allowed to access Indian capital markets on
Regn with SEBI
Indian companies permitted to access international
capial markets through various euro-equity issues
FERA replacved by FEMA – 1997-98
NRIs and OCB’s are permitted to invest upto 24%in
equities of Indian companies
RBI made single window agency for overseas
investment by indian companies
Reserve Bank of India
Money is medium of exchange
Monitory system – role of RBI crucial
Apex institution in Banking & fin System
Partial shouldering of mgt of economy
England –highly developed banking & central banking system
Bankers bank, lender of last resort – maintain CRR – active
securities market
Technical advisory service in fx, foster growth
RBI set up in 1935 – as a body corporate -paid up Rs. 5 crores
nationalized in 1949 – to control inflation and plan economic
programme and to fall in line with international trend
Operates according to the provisions of RBI Act
Objectives of Central Bank
1. Maintain internal value of the currency
2. To preserve the external value of the currency
To secure reasonable price stability
Promote economic development – raise
employment, output, etc.,
To facilitate external trade and payment
To provide adequate quantity of currency notes
and coins in good quality
Functions of RBI – RBI Act
1. Banker to CG: accept & make payment of govt
money – exchange remittances, manage public
debt –maintain govt money & securities – give
“ways & means” advance – repay in 3 months – if
exceeds 75% issue GOI
Banker to SG: undertake payment/accept deposit –
free of int –public debt & issue of new loans
Issue currency notes: sole right – issue & distribute
on behalf of govt, denomination Rs. 2, 5,, 10, 50,
100, 500, 1000 notes – legal tender – guaranteed
Bankers Bank: maintain CRR – lender of last resort
Custodian of FX reeserves
Functions – contd
Controller of credit : through OMO – selective
credit controls - regulation of banks – Bank send
weekly report to RBI – inspect books of Bank
Sponsor top Banks: idbi, nabard, NHB
Sit in boards of all banks
Advise on CG& SG – monitory matters
Keep CRR – 3% to 15%- send statemt
Grant loans - security approved securities –
rediscount Bills
Watch dog of entire financial system
Indian RBI – one of the best
Organisation and
mangement
Central board : gen superintendence – a governor, not more
than 4 dy governors and 15 directors – nominated by CG
Local Board : in 4 regional areas – mumbai, Kolkata, New Delhi,
and chennai.- perform the duties delegated by Central board
Departments of RBI :
Issue department
Banking department
Banking development - expansion , training banks etc
Agricultural credit
Exchange control
Industrial finance
Non Banking companies
Depts - contd
Legal department
Research and statistics Department of
planning and reorganization
Economic department
Inspection department
Department of accounts and expn.,
RBI services board : HRD of RBI
Department of supervision – of banks
Role of Reserve bank of
India
1. promotion of commercial banks : regulation, control and
supervision
2. Promotion of rural credit : to improve agricultural sector
Promotion of co-operative credit:
4. promotion of Industrial finance : promoted many financial
corporations like IDBI
5. promotion of export credit : export credit schemes – establish
exim bank
6 regulation of credit : regulate cost, quantity and purpose of
credit , selective credit controls – for eco development
7 credit to weaker sections
8 development of Bill Market - DFHI
9Exchange controls – to maintain the stability of exchange value
Achievements of RBI
Developed banking practices
Managing public debt effectively
Institutionalize savings – establish specialized agencies
Promote co-operative credit
Regulate credit to meet the requirement of trade and industry
Provision of credit facilities to exporters and concessional rate –
refinance,
Providing deposit insurance and credit guarantee DICGC
Successfully develop bill culture in the country
Providing information on different sectors – give publications
Providing clearing house facilities
Good management of FX by RBI
Set up training colleges to difft banks
Modernized through information technology
Monetary policy of RBI –
Monetary policy refers to use of instruments within the control
of RBI to influence demand for goods and services and certain
sectors of economy
FEATURES OF Monetary policy of RBI :
Since 1951 RBI is actively using all the measures of credit
control
Control money supply – for economic growth and control inflation
Set up policies for busy and slack seasons – agricultural seasons
Make policies flexible : like changing CRR, Repo rates, interest
rates to control inflation
Investment and savings promotion – making credit available to
trade and higher interest rates to attract deposits
Objectives of monetary
policy
Supply money – set right demand and supply
inequailbrium
Price stabilization ; freedom from cyclical fluctuation
Exchange rate stability :for international confidence
and promotion of international trade
Create full employment : it is precondition of social
welfare Economic growth : this implies increase in the
percapita output and income. - can be achieved by
equitable distribution of income between social
classes
Limitations of monetary
policy of india
Limited role in controlling prices: price rise takes place for
many reasons – money supply is only one factor
Poor banking habits : reduces credit creation capacity of
bank
Under developed money market :
Existence of black money
Objectives of RBI are conflicting - economic development
v/s inflation
Monetary policy and fiscal policy are not co-ordinated
Lack of banking facilities in remote areas
Imbalance in credit allocation - ignores agriculture and
small scale industries
Securities & exchange Board of
India (SEBI)
Regulatory
Authority
–
over
constitutuents of Capital Market
• - constituted in 1988 – operational and
autonomous in 1992
•Vested with various powers like
•Regulate Stock Exchanges
•Intermediaries and mutual funds
•Investor Education
•Training of intermediaries
•Establish SRO s
•Prohibit
Unfair trade practices and
insider trading
•
Objectives of SEBI
Investor protection
Encourage steady flow of savings
Transparency in work
Promote efficient services
Ensure fair practices by issuers
To create surveillance mechanisms
BOARD consist of :
Chairman
Two officials from Finance to law ministry
One RBI Representatives
2 or 3 Members - CG can appoint
Operational departments
Primary Markets Dept
Issue Management and intermediaries dept
Secondary Markets Dept
Institutional Dept
Legal and investigation Dept - Headed by officials of ED
rank
Two Advisory committees
- Primary market
Secondary markets
Note : Advisory committee members are selected from the
players or eminent persons from the the capital market
Functions of SEBI
1.
2.
3.
4.
5.
6.
7.
Create good atmosphere for raising money - comprise of rules,
regulation – trade practices, customs, to restore confidence and
trust of investors
Educates investors – create awareness of rights – provide
information for liquidity, safety and profitability
Create investment climate – raise securities easily, efficiently at min
cost
Develop proper infrastructure – expansion and growth – to brokers,
bankers, merchant bankers, ensure service to investors and
corporate at low cost
To create open and orderly framework for takeovers and mergers
Regulate Business in stock exchanges and sec market
Registering and regulating sub brokers , brokers registrars, bankers,
merchant Bankers, underwriters, investment advisors, portfolio
managers etc.,
Functions contd
Regulate working of mutual funds
Promote and regulate SRO s
Prohibit unfair practices in
securities market
Call information, inspection,
investigation of SE s ,
intermediaries. SRO s
Powers of SEBI
QIASI JUDICIAL POWERS:
Can call periodical returns and explanations from
stock exchanges
Grant bye-laws & amend bye-laws of SE s
Grant regn to intermediaries
Levy fee and other charges
Penalize members of SE for violations
Seize books and accounts
Can impose penalty upto Rs. 25 crores in case of
insider trading and cheating investors
Can suspend even chiefs of SE s
Limitations of SEBI
SEBI is permitted to frame its rules and regulations for monitoring
capital markets
These rules and regulations should be approved by CG – this
causes unnecessary delays and interferences from Finance
Ministry.
There is a need to allow sebi to form rules as per demands of the
situation and achieve professional efficiency
In case of filing of criminal complaints for violations of
regulations , this will cause delay at govt level
SEBi board is dominated by govt and RBI nominees – leads to
bureaucracy
Chairman of SEBI has no fixed tenure . He can be sacked with 3
months notice
Securities & exchange Board of
India
Regulatory Authority – over
constitutuents of Capital Market
•constituted in 1988 – operational and
autonomous in 1992
•Vested with various powers like
•Regulate Stock Exchanges
•Intermediaries and mutual funds
•Investor Education
•Training of intermediaries
•Establish SRO s
•Prohibit Unfair trade practices and insider
trading
•
Sebi – a regulatory
authority
•Regulatory Authority – over
constitutuents of Capital Market
• - constituted in 1988 – operational and
autonomous in 1992
•Vested with various powers like
•Regulate Stock Exchanges
•Intermediaries and mutual funds
•Investor Education
•Training of intermediaries
•Establish SRO s
•Prohibit Unfair trade practices and
insider trading
Objectives of SEBI
Investor protection
Regulate the securities market - Encourage steady flow of savings
Transparency in work
Promote efficient services
Ensure fair practices by issuers
To create surveillance mechanisms
BOARD consist of :
Chairman
Two officials from Finance to law ministry
One RBI Representatives
2 or 3 Members - CG can appoint
CG can terminate the chairman or members by giving not less than
3 months notice
Operational departments
Primary Markets Dept
Issue Management and intermediaries dept
Secondary Markets Dept
Institutional Dept
Legal and investigation Dept - Headed by officials of ED
rank
Two Advisory committees
- Primary market
Secondary markets
Note : Advisory committee members are selected from the
players or eminent persons from the the capital market
Functions of SEBI
1.
2.
3.
4.
5.
6.
7.
Create good atmosphere for raising money - comprise of
rules, regulation – trade practices, customs, to restore
confidence and trust of investors
Educates investors – create awareness of rights – provide
information for liquidity, safety and profitability
Create investment climate – raise securities easily,
efficiently at min cost
Develop proper infrastructure – expansion and growth – to
brokers, bankers, merchant bankers, ensure service to
investors and corporates at low cost
To create open and orderly framework for takeovers and
mergers
Regulate Business in stock exchanges and sec market
Registring and regulating sub brokers , brokers registrars,
bankers, merchant Bankers, underwriters, investment
advisors, portfolio managers etc.,
Functions contd
Regulate working of mutual funds
Promote and regulate SRO s
Prohibit unfair practices in
securities market
Call information, inspection,
investigation of SE s ,
intermediaries. SRO s
Powers of SEBI
QIASI JUDICIAL POWERS:
Can call periodical returns and explanations from
stock exchanges
Grant bye-laws & amend bye-laws of SE s
Grant regn to intermediaries
Levy fee and other charges
Penalize members of SE for violations
Seize books and accounts
Can impose penalty upto Rs. 25 crores in case of
insider trading and cheating investors
Can suspend even chiefs of SE s
SEBI guidelines for IPOs
Time frame for issue and post issue formalities:
Minimum period for which the issue be kept open is 3
working days and Max of 10 working days
In case of rights issue it is min is 15 working days and
maximum is 60 working days
In case of over subscription excess money can be retained
- Green shoe option – if indicated in prospectus –
A right issue has to procure 90% subscription within 60
days of opening of the issue
Allotment has to be made within 30 days of closure of the
public issue - and 42 days in case of rights issue
Listing formalities should be completed within 70 days
from the date of closure
SEBI guidelines contd.,
5. regarding allotment of shares:
Net offer to the public should be not less than 25% of the total
issue size
Get the shares listed in a SE – where the regd office of the co is
situated
If issue is above 25 crores – issuer can use book building route
Minimum 50% of the net offer to the public should be reserved for
application for 1000 shares
There should be at lest 5 investors for every one lakh of equity
offered
Quoting of PAN is compulsory for applicants of Rs. 50,000 and
above
Financial institutions and MF can be allotted upto 75% of the issue
amount
Allotment to FII, NRI/OCBs is upto 24% - can be extended upto
30% on application to RBI and passing a resolution in general
meeting
Sebi guidelins – IPO contd
Dispatch of Refund orders :
Refund orders should be dispatched within 30 days of closure
of public issue
OTHR REGULATIONS :
The public issue has to be fully underwritten
If the issue is undersubscribed the amount collected should
be returned back
If the issue size is more than 500 crores – voluntarily disclose
deployment of funds
Code of advertisement specified by SEBI should be adhered
to
Draft prospectus submitted to SEBI should also be
simultaneously submitted to stock exchanges where it is
listed
SEBIguidelines for IPOs –
contd
Restrictions on othr allotments :
Firm allotment to MF , FII, employees are
not subjected to lock-in period
Within 12 months of Public/rights issue ,
no bonus issue should be made
Max percentage of shares allotted should
not exceed 5% - and for each employee
only a maximum of 200 shares can be
allotted
SEBI guidelines for rights
issue - offer of shares to
Ensure that the rights issue is within the authorized
existing
capital of the co sh holdrs
Ensure that draft prospectus is vetted by SEBI before
issued
Appoint a merchant banker if the issue size exceeds Rs.
50 lakhs
Ensure that issue is not kept open for more than 60 days
Open separate bank account for keeping subscription
received under rights issue
Convene a board meeting to decide the proportion in
which it should be issued
Secretary to draft a explanatory statement and notices
of the meeting – explaining how the additional capital is
proposed to be utilized .
SEBI guidelines on issue of Bonus shares by
public companies - (note : there are not
guidelines private and unlisted companies )
No company shall issue bonus shares pending conversion of
FCD/PCD unless a similar benefit is extended to FCD and PCD
Out of free reserves : it can be issued only out of free reserves
or share premium collected in cash
Revaluation reserve should not be used for issue of bonus
shares
Declaration of bonus issue in place of dividend is not permitted
The existing partly paid shares should be made fully paid before
issue of bonus shares
There should not be default in payment of interest to depositors
or debentures
Company should not have defaulted in payment of statutory
dues of employees - like PF, gratuity, etc.,
The decision of the board for issue of bonus shares can be
implemented within a period of 15 days - no need to share
holders approval
Let us know what is Financial System
Financial system can be compared to nervous system
– Blood circulation in nervous System It deals with Money & monitory assets .
Complex set up –, Institutions , Markets, services,
instruments –claims and liabilities –money, credit ,Finance
Economic Development needs good Financial system
Ensure supply of Fin for production of goods and services
Well-being – standard of living
Responsibility of FS – mobilize savings and invest in
productive ventures
Promote free flow of funds in economy - liquidity
Study complex structure under following heads:
Financial system facilitates flow of funds from
the areas of surplus to the areas of deficit
Financial system consists of four segments :
Financial institutions
Financial markets
Financial instruments
Financial services
Financial Institutions
These institutions facilitate financial transactions of
individuals and corporates
They mobilise savings and allocate funds in an efficient
manner
Intermediaries: Banking : a. commercial Banks b. cooperative Banks
between savers and investors
Intermediaries operate in funds
Regulatory : RBI ( Regulates money market) SEBI
( regulates capital market ),IRDA regulates insurance activity,
etc
They give confidence for the investors
Non- intermediaries: eg. UTI IDBI GIC – NABARD, own funds /
Govt
Financial Markets
Place where buyer & seller meet
Price determination
Financial markets are the centers which facilitate buying
and selling of financial assets
Organised Market has :it has standardised rules and
regulations for financial dealings
Done under supervision of regulatory body like RBI
Capital Market: deals with financial assets which has a
long and indefinite maturity –more than one year
a. corporate securities market ,
b. Govt Securities market,
c. Long term loans market
Corp securities market has
a. primary market : new issues market fresh capital is raised –
allows formation of capital and accelarate
indl and economic development
b. Secondary market: deals with
securities which are already issued
Long term loan market has : Term loans ,
mortgages, guarantees
Money market
It is for short term money and financial assets
which are near money substitutes
Short term instruments are delt – maturity within one
year
Eg., call money market, commercial bills, Treasury Bills
Market, Short term loan market
Un organized Market: Money lenders, indigenous
Bankers
They lend mondy to the public
They are not totally controlled by RBI
Financial Instruments
Financial instrument is a Financial claims on assetsEg. Loan, bank deposits, govt bond, deb, equity
It helps channelizing funds from lenders to borrowers
Repayable after a stipulated period: eg., Bill of
Exchange, Promissory note, Treasury Bills, Govt Bond,
Deposit Receipt, Share, Debenture., etc.,
Primary securities: issued by investors to ultimate
savers directly eg., Public issue of shares
Secondary : Issued by Financial intermediaries to
ultimate savers e.g., Mutual fund units.,
Classification on the basis of duration: Short term ( one
year) Medium ( 1-5 Years) Long term ( beyond 5 years )
Characteristics of Financial
Instruments
Easily transferable
Ready market
Posses liquidity
Call back /Buy back options
Volatility of price
Give security
Tax status
Risk return profile
Financial Services
Banks
Consultants
Merchant Bankers
Services which facilitate the flow of money and
monitory assets in the economy Examples:
Portfolio Management
Factoring Services
Forfeiting
NBFC
Leasing & Hire purchase
Credit Rating
Venture capital services
Functions of Financial
System
Regulates dealings between various
Economic units – individuals, Institutions – in
money and money assets
Provides Markets – organised and unorganised
– Primary and secondary – platform for buying
and selling goods and services
Provide Financial Institutions, Intermediaries,
brokers, agents, dealers for flow of Money and
financial assets and goods and services
Provide Financial Instruments – suit
requirements of different entities
Functions of FS
Aims to promote savings and investments by
offering financial assets of various qualities
Aims to allocate savings to various channels of
investment
It arranges for creation and distribution of
money, credit and finance throughout the
economy
Promotes economic development by capital
formation by offering suitable Financial assets.
Larger the proportion of financial assets (money and
monitory assets) to Real assets (Physical goods and
services ) greater is the scope for economic growth.
Increase Standard of living of population.
Role of Financial Markets
Provide Platform for buyers and sellers
to meet & transact Fin instruments & real
assets
Provides for Price discovery
Lays down systems and procedures –
Laws - settlement of transactions
Provides Financial assets with different
varied features to suit requirement of
different entitities and investors.
Market Perfection efficiency
There are large number of savers and
investors Operating in the market
Savers and investors are rational
Operators are well informed & info freely
available.
There are no transaction costs
Fin assets are infinitely divisible
There are no Taxes
Under these ideal conditions Market attains
equilibrium – supply and demand are
equal
Limitations of financial
system
Industrial finance dominated by development Banks –
but they do not mobilize savings
Capital market is not very strong and dependable – lot
of scams and frauds – public do not have enough faith
Govt owns many institutions – it also controls – hence
there is no much co-ordination between them
Monopolistic structure : very large - not much of
compition – like LIC
Financial system and
economic development
Financial sector is an important condition for growth of
an economy
National income, employment, standard of living and
social welfare are influenced by supply of finance
Economic growth or development means growth in
national income of the country – not true if rate of
population growth is more than National income
Economic growth means increase in the percapita
income of the country - higher standard of living
Stages of economic
development
There are three stages in economic development - according
to Prof Rostow:
1. preparatory stage :
Long period or a century - when the precondition fro take off
are established
In the matter of society’s attitude, political sovereignty, good
tax system, financial institutions, creation of infrastructure etc.,
2. The take off period:
It is abrief period - say two to three decades
After this economic development takes place automatically
3. Period of self sustained growth :
There is a good savings and investment – self generating
Effect of financial system
on savings and
Human capital and physical capital can be
investments
bought and developed with money as input
Money , credit and finance are the life blood of
the economic system
The required technology also can be
developed for acclerating growth
It also enlarges the markets – deepen and
widen - leads to efficiency in medium of
exchange
Financial Sector reforms :
Before 1991 – financial institutions were in bad
shape Asset quality was poor
say lack of competition in banks,
low capital base,
low productivity,
high intermediation costs,
lower usage of technology ,
quality of service,
no risk management system and prudential norms
, no compitition in insurance and mutual funds
Financial markets were:
Operated under controlled conditions
There were barriers for entry
Transaction costs were high
Banks were running under loss or low profits
Banks were unable to provide for defaults, and
build their capital
High SLR and CRR
Cross subsidization – low rates to priority sector
and high rates to larger borrowers
New Economic policy (NEP) was given a
big thrust in India in 1991
Govt appointed a high power committee
to examine structure, organization,
function procedure of financial system
After its report lot of changes were
introduced - as the financial institutions
and markets were in bad shape
Objectives of financial
reforms -1991
To develop market oriented competitive, world integrated
transparent financial system
Allocate the savings properly,
Promote growth in real sector
Create accountability, profitability, efficiency, professionalism
and depoliticalisation in financial sector
Promote competition – free entry and exit for players -in level
playing ground to them
Rationalize interest rates - market determined – dismantle
administered system of interest rates
Improve financial infrastructure, supervision credit , etc.,
Modernize instruments to make it suitable for conducting
monetary policy and control
Major reforms after 1991
in financial system
Reforms in the areas of
operational matters,
Banking,
primary and secondary stock
markets ,
govt. securities market
Systemic and policy
reforms
Interest rates deregulated - market rates on G sec. – dismantle
administered interest rates
SLR reduced from 38.5% of DTL to 23% now
Capital adequacy norms introduced
Board of financial supervision - dept in RBI was formed
Recovery of debts by banks by special recovery tribunals
Ad hoc treasury bills replaced by ways and means advances from
1997
Private sector was allowed to set up banks, Mutual funds,
insurance companies
Office of CCI was abolished
SEBI was formed to regulate capital market
NBFC with above 25 laths Net owned fund should register with RBI
OTC and NSE were formed to have nationwide trading and display
Some impt banking
reforms are:
Interest rates on deposits and advances deregulated
SBI and nationalized banks allowed to access capital market for
debt and equity
Introduce prudential norms for income recognition,
classification of assets and provisioning for bad debts
Valuation of investments by banks - make it mark to market for
securities held by them
Bank balance sheet to become fully transparant and adopt
international accounting standards
Banks given freedom to open, shifit, or open extension counters
Provided budgetory support for weak PSU Banks
Banking ombudsman scheme 1995 was introduced
Free to fix the FX open positon – subject to RBI approal
Primary and secondary
market reforms
Primary market allotment only through depository
100% book building for issues above 25 crores
Payment of direct or indirect discount on shares prohibited
Housing companies can raise money if they get refinance
from NHB
Mutual funds allowed to underwrite the public issues
Depositories act 1996 was passed - dmat of shares
Stock lending scheme introduced – facilitate short sellers
Stock exchanges modernised – introduce on line trading by
BSE
Short and long sales are disclosed to stock exchange impose strict margins
Government securities
market reforms
364 days TB replaced the 182 day TB - sold through auction
Maturity period fro CG securities reduced from 20 years to
10 yr
new instruments introduced : ie., zero coupon bonds, Tap
stock partly paid govt stock, floating rate bonds, capital
indexed bond
State govts and Provident funds allowed to participate in 91
day TB auctions
Primary dealers in g Sec were instituted
System of DVP was introduced in subsidiary gen. ledger
SGL transactions introduced at Mumbai
Reverse repo was extended to DFHI and STCI
External financial market
reforms
FIIs allowed to access Indian capital markets on
Regn with SEBI
Indian companies permitted to access international
capial markets through various euro-equity issues
FERA replacved by FEMA – 1997-98
NRIs and OCB’s are permitted to invest upto 24%in
equities of Indian companies
RBI made single window agency for overseas
investment by indian companies
Reserve Bank of India
Money is medium of exchange
Monitory system – role of RBI crucial
Apex institution in Banking & fin System
Partial shouldering of mgt of economy
England –highly developed banking & central banking system
Bankers bank, lender of last resort – maintain CRR – active
securities market
Technical advisory service in fx, foster growth
RBI set up in 1935 – as a body corporate -paid up Rs. 5 crores
nationalized in 1949 – to control inflation and plan economic
programme and to fall in line with international trend
Operates according to the provisions of RBI Act
Objectives of Central Bank
1. Maintain internal value of the currency
2. To preserve the external value of the currency
To secure reasonable price stability
Promote economic development – raise
employment, output, etc.,
To facilitate external trade and payment
To provide adequate quantity of currency notes
and coins in good quality
Functions of RBI – RBI Act
1. Banker to CG: accept & make payment of govt
money – exchange remittances, manage public
debt –maintain govt money & securities – give
“ways & means” advance – repay in 3 months – if
exceeds 75% issue GOI
Banker to SG: undertake payment/accept deposit –
free of int –public debt & issue of new loans
Issue currency notes: sole right – issue & distribute
on behalf of govt, denomination Rs. 2, 5,, 10, 50,
100, 500, 1000 notes – legal tender – guaranteed
Bankers Bank: maintain CRR – lender of last resort
Custodian of FX reeserves
Functions – contd
Controller of credit : through OMO – selective
credit controls - regulation of banks – Bank send
weekly report to RBI – inspect books of Bank
Sponsor top Banks: idbi, nabard, NHB
Sit in boards of all banks
Advise on CG& SG – monitory matters
Keep CRR – 3% to 15%- send statemt
Grant loans - security approved securities –
rediscount Bills
Watch dog of entire financial system
Indian RBI – one of the best
Organisation and
mangement
Central board : gen superintendence – a governor, not more
than 4 dy governors and 15 directors – nominated by CG
Local Board : in 4 regional areas – mumbai, Kolkata, New Delhi,
and chennai.- perform the duties delegated by Central board
Departments of RBI :
Issue department
Banking department
Banking development - expansion , training banks etc
Agricultural credit
Exchange control
Industrial finance
Non Banking companies
Depts - contd
Legal department
Research and statistics Department of
planning and reorganization
Economic department
Inspection department
Department of accounts and expn.,
RBI services board : HRD of RBI
Department of supervision – of banks
Role of Reserve bank of
India
1. promotion of commercial banks : regulation, control and
supervision
2. Promotion of rural credit : to improve agricultural sector
Promotion of co-operative credit:
4. promotion of Industrial finance : promoted many financial
corporations like IDBI
5. promotion of export credit : export credit schemes – establish
exim bank
6 regulation of credit : regulate cost, quantity and purpose of
credit , selective credit controls – for eco development
7 credit to weaker sections
8 development of Bill Market - DFHI
9Exchange controls – to maintain the stability of exchange value
Achievements of RBI
Developed banking practices
Managing public debt effectively
Institutionalize savings – establish specialized agencies
Promote co-operative credit
Regulate credit to meet the requirement of trade and industry
Provision of credit facilities to exporters and concessional rate –
refinance,
Providing deposit insurance and credit guarantee DICGC
Successfully develop bill culture in the country
Providing information on different sectors – give publications
Providing clearing house facilities
Good management of FX by RBI
Set up training colleges to difft banks
Modernized through information technology
Monetary policy of RBI –
Monetary policy refers to use of instruments within the control
of RBI to influence demand for goods and services and certain
sectors of economy
FEATURES OF Monetary policy of RBI :
Since 1951 RBI is actively using all the measures of credit
control
Control money supply – for economic growth and control inflation
Set up policies for busy and slack seasons – agricultural seasons
Make policies flexible : like changing CRR, Repo rates, interest
rates to control inflation
Investment and savings promotion – making credit available to
trade and higher interest rates to attract deposits
Objectives of monetary
policy
Supply money – set right demand and supply
inequailbrium
Price stabilization ; freedom from cyclical fluctuation
Exchange rate stability :for international confidence
and promotion of international trade
Create full employment : it is precondition of social
welfare Economic growth : this implies increase in the
percapita output and income. - can be achieved by
equitable distribution of income between social
classes
Limitations of monetary
policy of india
Limited role in controlling prices: price rise takes place for
many reasons – money supply is only one factor
Poor banking habits : reduces credit creation capacity of
bank
Under developed money market :
Existence of black money
Objectives of RBI are conflicting - economic development
v/s inflation
Monetary policy and fiscal policy are not co-ordinated
Lack of banking facilities in remote areas
Imbalance in credit allocation - ignores agriculture and
small scale industries
Securities & exchange Board of
India (SEBI)
Regulatory
Authority
–
over
constitutuents of Capital Market
• - constituted in 1988 – operational and
autonomous in 1992
•Vested with various powers like
•Regulate Stock Exchanges
•Intermediaries and mutual funds
•Investor Education
•Training of intermediaries
•Establish SRO s
•Prohibit
Unfair trade practices and
insider trading
•
Objectives of SEBI
Investor protection
Encourage steady flow of savings
Transparency in work
Promote efficient services
Ensure fair practices by issuers
To create surveillance mechanisms
BOARD consist of :
Chairman
Two officials from Finance to law ministry
One RBI Representatives
2 or 3 Members - CG can appoint
Operational departments
Primary Markets Dept
Issue Management and intermediaries dept
Secondary Markets Dept
Institutional Dept
Legal and investigation Dept - Headed by officials of ED
rank
Two Advisory committees
- Primary market
Secondary markets
Note : Advisory committee members are selected from the
players or eminent persons from the the capital market
Functions of SEBI
1.
2.
3.
4.
5.
6.
7.
Create good atmosphere for raising money - comprise of rules,
regulation – trade practices, customs, to restore confidence and
trust of investors
Educates investors – create awareness of rights – provide
information for liquidity, safety and profitability
Create investment climate – raise securities easily, efficiently at min
cost
Develop proper infrastructure – expansion and growth – to brokers,
bankers, merchant bankers, ensure service to investors and
corporate at low cost
To create open and orderly framework for takeovers and mergers
Regulate Business in stock exchanges and sec market
Registering and regulating sub brokers , brokers registrars, bankers,
merchant Bankers, underwriters, investment advisors, portfolio
managers etc.,
Functions contd
Regulate working of mutual funds
Promote and regulate SRO s
Prohibit unfair practices in
securities market
Call information, inspection,
investigation of SE s ,
intermediaries. SRO s
Powers of SEBI
QIASI JUDICIAL POWERS:
Can call periodical returns and explanations from
stock exchanges
Grant bye-laws & amend bye-laws of SE s
Grant regn to intermediaries
Levy fee and other charges
Penalize members of SE for violations
Seize books and accounts
Can impose penalty upto Rs. 25 crores in case of
insider trading and cheating investors
Can suspend even chiefs of SE s
Limitations of SEBI
SEBI is permitted to frame its rules and regulations for monitoring
capital markets
These rules and regulations should be approved by CG – this
causes unnecessary delays and interferences from Finance
Ministry.
There is a need to allow sebi to form rules as per demands of the
situation and achieve professional efficiency
In case of filing of criminal complaints for violations of
regulations , this will cause delay at govt level
SEBi board is dominated by govt and RBI nominees – leads to
bureaucracy
Chairman of SEBI has no fixed tenure . He can be sacked with 3
months notice
Securities & exchange Board of
India
Regulatory Authority – over
constitutuents of Capital Market
•constituted in 1988 – operational and
autonomous in 1992
•Vested with various powers like
•Regulate Stock Exchanges
•Intermediaries and mutual funds
•Investor Education
•Training of intermediaries
•Establish SRO s
•Prohibit Unfair trade practices and insider
trading
•
Sebi – a regulatory
authority
•Regulatory Authority – over
constitutuents of Capital Market
• - constituted in 1988 – operational and
autonomous in 1992
•Vested with various powers like
•Regulate Stock Exchanges
•Intermediaries and mutual funds
•Investor Education
•Training of intermediaries
•Establish SRO s
•Prohibit Unfair trade practices and
insider trading
Objectives of SEBI
Investor protection
Regulate the securities market - Encourage steady flow of savings
Transparency in work
Promote efficient services
Ensure fair practices by issuers
To create surveillance mechanisms
BOARD consist of :
Chairman
Two officials from Finance to law ministry
One RBI Representatives
2 or 3 Members - CG can appoint
CG can terminate the chairman or members by giving not less than
3 months notice
Operational departments
Primary Markets Dept
Issue Management and intermediaries dept
Secondary Markets Dept
Institutional Dept
Legal and investigation Dept - Headed by officials of ED
rank
Two Advisory committees
- Primary market
Secondary markets
Note : Advisory committee members are selected from the
players or eminent persons from the the capital market
Functions of SEBI
1.
2.
3.
4.
5.
6.
7.
Create good atmosphere for raising money - comprise of
rules, regulation – trade practices, customs, to restore
confidence and trust of investors
Educates investors – create awareness of rights – provide
information for liquidity, safety and profitability
Create investment climate – raise securities easily,
efficiently at min cost
Develop proper infrastructure – expansion and growth – to
brokers, bankers, merchant bankers, ensure service to
investors and corporates at low cost
To create open and orderly framework for takeovers and
mergers
Regulate Business in stock exchanges and sec market
Registring and regulating sub brokers , brokers registrars,
bankers, merchant Bankers, underwriters, investment
advisors, portfolio managers etc.,
Functions contd
Regulate working of mutual funds
Promote and regulate SRO s
Prohibit unfair practices in
securities market
Call information, inspection,
investigation of SE s ,
intermediaries. SRO s
Powers of SEBI
QIASI JUDICIAL POWERS:
Can call periodical returns and explanations from
stock exchanges
Grant bye-laws & amend bye-laws of SE s
Grant regn to intermediaries
Levy fee and other charges
Penalize members of SE for violations
Seize books and accounts
Can impose penalty upto Rs. 25 crores in case of
insider trading and cheating investors
Can suspend even chiefs of SE s
SEBI guidelines for IPOs
Time frame for issue and post issue formalities:
Minimum period for which the issue be kept open is 3
working days and Max of 10 working days
In case of rights issue it is min is 15 working days and
maximum is 60 working days
In case of over subscription excess money can be retained
- Green shoe option – if indicated in prospectus –
A right issue has to procure 90% subscription within 60
days of opening of the issue
Allotment has to be made within 30 days of closure of the
public issue - and 42 days in case of rights issue
Listing formalities should be completed within 70 days
from the date of closure
SEBI guidelines contd.,
5. regarding allotment of shares:
Net offer to the public should be not less than 25% of the total
issue size
Get the shares listed in a SE – where the regd office of the co is
situated
If issue is above 25 crores – issuer can use book building route
Minimum 50% of the net offer to the public should be reserved for
application for 1000 shares
There should be at lest 5 investors for every one lakh of equity
offered
Quoting of PAN is compulsory for applicants of Rs. 50,000 and
above
Financial institutions and MF can be allotted upto 75% of the issue
amount
Allotment to FII, NRI/OCBs is upto 24% - can be extended upto
30% on application to RBI and passing a resolution in general
meeting
Sebi guidelins – IPO contd
Dispatch of Refund orders :
Refund orders should be dispatched within 30 days of closure
of public issue
OTHR REGULATIONS :
The public issue has to be fully underwritten
If the issue is undersubscribed the amount collected should
be returned back
If the issue size is more than 500 crores – voluntarily disclose
deployment of funds
Code of advertisement specified by SEBI should be adhered
to
Draft prospectus submitted to SEBI should also be
simultaneously submitted to stock exchanges where it is
listed
SEBIguidelines for IPOs –
contd
Restrictions on othr allotments :
Firm allotment to MF , FII, employees are
not subjected to lock-in period
Within 12 months of Public/rights issue ,
no bonus issue should be made
Max percentage of shares allotted should
not exceed 5% - and for each employee
only a maximum of 200 shares can be
allotted
SEBI guidelines for rights
issue - offer of shares to
Ensure that the rights issue is within the authorized
existing
capital of the co sh holdrs
Ensure that draft prospectus is vetted by SEBI before
issued
Appoint a merchant banker if the issue size exceeds Rs.
50 lakhs
Ensure that issue is not kept open for more than 60 days
Open separate bank account for keeping subscription
received under rights issue
Convene a board meeting to decide the proportion in
which it should be issued
Secretary to draft a explanatory statement and notices
of the meeting – explaining how the additional capital is
proposed to be utilized .
SEBI guidelines on issue of Bonus shares by
public companies - (note : there are not
guidelines private and unlisted companies )
No company shall issue bonus shares pending conversion of
FCD/PCD unless a similar benefit is extended to FCD and PCD
Out of free reserves : it can be issued only out of free reserves
or share premium collected in cash
Revaluation reserve should not be used for issue of bonus
shares
Declaration of bonus issue in place of dividend is not permitted
The existing partly paid shares should be made fully paid before
issue of bonus shares
There should not be default in payment of interest to depositors
or debentures
Company should not have defaulted in payment of statutory
dues of employees - like PF, gratuity, etc.,
The decision of the board for issue of bonus shares can be
implemented within a period of 15 days - no need to share
holders approval
