jaiib_ifsmodulea

7/31/2019 jaiib_ifsmodulea

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Financial Markets andServices

Indian Financial System

Module 1


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Financial System

An institutional framework existing in a country toenable financial transactions

Three main parts

Financial assets (loans, deposits, bonds, equities, etc.)

Financial institutions (banks, mutual funds, insurancecompanies, etc.)

Financial markets (money market, capital market, etc.)

Regulation is another aspect of the financial system(RBI, SEBI, IRDA, )


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Financial assets/instruments

Enable channelising funds from surplus units todeficit units

There are instruments for savers such as deposits,

equities, mutual fund units, etc. There are instruments for borrowers such as loans,

overdrafts, etc.

Like businesses, governments too raise fundsthrough issuing of bonds, Treasury bills, etc.


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Financial Institutions

Includes institutions and mechanisms which

Affect generation of savings by the community

Mobilisation of savings

Effective distribution of savings

Institutions are banks, insurance companies,mutual funds- promote/mobilise savings

Individual investors, industrial and tradingcompanies- borrowers


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Financial Markets

Money Market- for short-term funds (lessthan a year)

Capital Market- for long-term funds Primary Issues Market

Stock/secondary Market


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Money Market

Definition money market is a collectivename given to the various forms of andinstitutions that deals with various grades ofnear money

- Geoffrey Crowther


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Money Market Instruments

Commercial Bills

Treasury Bills

Call and short notice money Certificate of deposit

Commercial paper

Repurchase agreement ADRs/ GDRs


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Commercial bills

Commercial bill or bill of exchange is a writtendocument signed by the drawer, directing acertain person to pay certain sum of moneyonly to, or order of certain person, or to thebearer of the instrument at a fixed time in thefuture or on demand.


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Reasons for poor developmentof CBs

Preference to cash to bills

Lack of uniform practices with regard to bills

Lack of specialised discount houses Preference of cash credit and overdraft from

commercial banks


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Treasury bills

Treasury bill represents short term borrowingsof the governments. Treasury bill marketrefers to the market where treasury bills are

bought and sold

Types of treasury Bills

14 day treasury bill- weekly auction

91 days treasury bills

a) Ordinary treasury bills

b) Adhoc TBs


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182 treasury Bills- monthly issue

364 treasury bills- fortnight


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Call and short notice money

Call money refers to a money given for a veryshort period of time. It may be taken for a dayor overnight but not exceeding seven days in

any circumstance

Another variation of call money is noticemoney which is for a period up to 14 days


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Certificate of Deposit (CDs)

Certificate of deposits are marketable receiptsin bearer form of funds deposited in a bankfor a specified period of time at a specific

interest rate.

They are freely transferable

Can be traded in the secondary market

They are liquid and riskless in terms ofdefault of payment of interest and principal

RBI launched a scheme in june 1989

permitting banks to issue CDs


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The minimum denomination of CD is 5 lakh

Maturity period- varies from 91 days to 1 year

CDs to be issued on discounting basis CD are transferable after a lock-in period of

45 days

All scheduled banks other than RRBs areallowed to issue CD without any ceiling

CDs cannot to bought back nor any loan can

be given against CDs by the issuing

institutions


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Commercial papers

A commercial paper is an unsecuredpromissory note issued with a fixed maturityby a company approved by RBI, negotiable

by endorsement and delivery, issued inbearer form and issued at such discount onface value as may be determined by the

issuing company


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RBI guidelines

Commercial Paper (CP) is an unsecuredmoney market instrument issued in the formof a promissory note

It was introduced in India in 1990.

Corporate, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to

issue CP.


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A corporate would be eligible to issue CPprovided

a. the tangible net worth of the company, as perthe latest audited balance sheet, is not lessthan Rs. 4 crore

b. company has been sanctioned working

capital limit by bank/s or all-India financialinstitution/s;


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The company should have a minimum creditrating of p2 from CRISIL and A2 from ICRA

CP can be issued for maturities between aminimum of 7 days and a maximum of up toone year from the date of issue.

CP can be issued in denominations of Rs.5

lakh or multiples thereof.

Only a scheduled bank can act as an IPA forissuance of CP.


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Individuals, banking companies, othercorporate bodies (registered or incorporatedin India) and unincorporated bodies, Non-

Resident Indians (NRIs) and ForeignInstitutional Investors (FIIs) etc. can invest inCPs


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It can be held as dematerialized form

Underwriting not allowed


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REPO(Repurchase Agreement)

Repo is a money market instrument whichenables collateralized short-term borrowingand lending through sale and purchase of this

instrument

Under repo, a holder of securities sells themto investor with an agreement to purchase it

at a later date and a rate. The forward price set in advance at a level

different from the spot rate by considering the

RBI repo rate


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Regulated by SCR act 1956 and RBI

Repo- seller point of view

Reverse repo- supplier of funds/ buyer pointof view


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Significance of money market

Economic development

Profitable investment

Borrowings by the government Importance of central bank

Mobilization of funds

Self-sufficiency of commercial banks Savings and investment


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The institutions of moneymarket

Commercial banks

Central bank

Acceptance houses/ bill brokers Non banking financial intermediaries


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Characteristics of a developedmoney market

Developed commercial banking system

Presence of central bank

Near money assets Availability of ample resources

Integrated interest- rate structure


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Capital market

Meaning- capital market refers to theinstitutional arrangements for lending andborrowing of long term funds

It consists of series of channels through whichthe savings of the community are madeavailable for industrial and commercial

enterprises and public authorities


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Functions of capital market

Mobilsation of financial resources on a nationwide scale

Securing the foreign capital to fill up thedeficit in the required resources for economicgrowth at a faster rate

Effective allocation of the mobilized financial

resources


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Components of Capital market

New issue market/ primary market

Stock market/ secondary market

Financial institutions


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Capital market instruments

Ownership securities-

Creditorship securities


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Financial Services

Fund based

Non fund based


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Fund based

Fund based activities / services are thosewhere funds of financial institutions areinvolved such as:

Underwriting of investments in shares,debentures

Equipment leasing

Hire purchase

Bill discounting

Venture capital


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Housing finance

Insurance services

Factoring etc..,


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Non fund based

Non-Fund based activities/services are thosewhere funds are not involved and financialinstitution gets income in the form of fee such

as

Issue management

Portfolio management

Loan syndication


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Credit rating

Stock broking


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Secondary Market

Definition-

security exchanges are market places where

securities that have been listed thereon maybe bought and sold for either investment orspeculation

-pyle


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Characteristics

It is a place where securities purchased andsold

A stock exchange is an association ofpersons

The trading in stock exchange is strictlyregulated and rules and regulations are

prescribed for various transactions Both genuine and speculators buy and sell

shares


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The securities of corporations, trusts,governments, municipal corporation etc.., areallowed to be dealt in stock exchange


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Functions of a stock exchange

Ensure liquidity of capital

Continuous market of securities

Evaluations of securities Mobilizing surplus funds

Safety in dealings

Listing of securities Platform for public debt

Clearing house of business information


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Listing of securities

Meaning- listing of securities means permissionto quote shares and debentures officially onthe trading floor of the stock exchange.the

stock exchange fix certain standards whichthe company must fulfill before getting listed


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Requirements for listing

MOA & AOA

Copies of all prospectus and statement inlieuof prospectus

Copies of B.S, audited accounts, agreementswith promoters, underwriters,brokers

Letter on consent from controller of capital

issues, now replaced by SEBI

Details of shares and debentures forfeited


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Details of bonuses and dividends declared

History of company in brief

An undertaking regarding the compliancewith the provisions of companies act 1956and securities contracts regulation act of1956


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Objectives of listing

To ensure proper supervision and control inthe dealings in securities

The protect the interest of the investors

To avoid concentration of economic power

To assure marketing facilities for securities

To ensure liquidity of securities


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Advantages of listing

Publicity of securities

Protection of investors interest

Ensures liquidity Better goodwill


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Criteria for listing

At least 60% of each class of securities listedmust be offered to public for subscription andthe minim um issued capital should be 3

crores

It must be offered through advertisement innewspaper at least for a period of 2 days

The company should be of a fair size havingbroad based capital structure and publicinterest in its securities


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There must be at least 10 public

shareholders for every Rs 1 lakh shares offresh issue of capital and it is 20 in case ofsubsequent issue of shares

A company having its paid up share capital ofmore than 5 crores must list its securities inmore than one recognized stock exchange

The co must pay interest on the excessapplication money received at the ratesranging between 4% and 15% depending onthe delay beyond 10 weeks from the date of

closure of subscription


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the existing companies must adhere to theceiling in expenditure of public issues

A certificate to the effect that shares frompromoters quota are not sold or transferredfor a period of 3 years must be submitted


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Players in stock market

Jobbers

Taraniwalas

Commission brokers Sub-Brokers/remisiers

Authorized clerks

M th d f T di g i St k


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Method of Trading in a StockExchange

Choice of broker

Placement of order

a)

At best orderb) Limit order

c) Immediate or cancel order

d) Discretionary ordere) Limited discretionary order

f) Open order

g) Stop loss order


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Execution of orders

Preparation of contract notes

Settlement of transactionsa) Spot delivery

b) Hand delivery system- DoA or 14 days WEE

c) Clearing settlementd) Special settlement


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Depository system

Depository - A depository is a provider forholding and transacting securities inelectronic form.

National Securities Depository Limited(NSDL), and

Central Depository Service Limited (CDSL)


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Depository Participant- A Depository Participant(DP) is an agent of the depository andprovides depository services to investors. To

avail the services of the depository, theinvestors has to open an account with a DP


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Beneficial Owner -is a person in whosename a demat account is opened with CDSLfor the purpose of holding securities in the

electronic form and whose name is recordedwith CDSL.

Issuer -means any entity making an issue of

securities


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Dematerialisation: The model adopted inIndia provides for dematerialisation ofsecurities. This is a significant step in the

direction of achieving a completely paper-freesecurities market. Dematerialization is aprocess by which physical certificates of an

investor are converted into electronic formand credited to the account of the depositoryparticipant


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In order to dematerialise physical securitiesone has to fill in a DRF (Demat RequestForm) which is available with the DP and

submit the same along with physicalcertificates one wishes to dematerialise.Separate DRF has to be filled for each ISIN

no.. The complete process ofdematerialization is outlined below:

Bullet Surrender certificates fordematerialization to your depository

artici ant.


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Depository participant intimates Depositoryof the request through the system.

Depository participant submits the

certificates to the registrar.

Registrar confirms the dematerializationrequest from depository.

After dematerializing certificates, Registrarupdates accounts and informs depository ofthe completion of dematerializations.


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Depository updates the accounts andinforms the depository participant.

Depository participant updates the

accounts and informs the investor.


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Rematerialisation

If one wishes to get back your securities inthe physical form one has to fill in the RRFform (Remat Request Form) and one request

your DP for rematerialisation of the balancesin your securities account. The process ofrematerilisation outlined below:

One makes a request for rematerialisation. Depository Participant intimates depository of

the request through the system.


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Depository confirms rematerialisation requestto the registrar.

Registrar updates accounts and prints

certificates.

Depository updates accounts and downloadsdetails to depository participant.

Registrar dispatches certificates to theinvestor.


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Benefits of depository system

Elimination of bad deliveries

Elimination of all risks associated withphysical certificates

No stamp duty

Immediate transfer and registration ofsecurities

Faster settlement cycle T+2

Elimination of problems related to changeof address of investor


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Elimination of problems related totransmission of demat shares


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SEBI(April 12 1988)

Objectives

To protect the interests of investors so thatthere is a steady flow of savings into the

capital market

To regulate the securities market and ensurefair practices by the issuers of the securities

so that they can raise resources at minimumcost


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To promote efficient services by brokers,merchant bankers and other intermediariesso that they become competitive and

professional


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Functions

Regulatory functions

Developmental functions


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Regulatory functions

Regulation of stock exchange

Registration and regulation of stock brokers,sub-brokers, registrar to all issue, merchant

bankers, underwriters, portfolio managersand such other intermediaries, who areassociated with securities market

Registration and regulation of working ofcollective investment schemes includingmutual funds


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Prohibition of fraudulent and unfair tradepractices relating to securities market

Prohibition of insider trading

Regulating substantial acquisition of sharesand take over a company


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Developmental functions

Promoting investors education

Training of intermediaries

Conducting research and publishedinformation useful to all market participants

Promotion of fair practices. Code of conductin the stock exchange

Promotion of self-regulatory orgainsations

Association of Merchant Bankers of India(AMBI)

Association of Mutual Funds of India AMFI


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Powers

Power to call periodical returns fromrecognised stock exchange

Power to call any information or explanation

from recognised stock exchange and theirmembers

Power to direct enquiries to be made in

relation to affairs of stock exchange or theirmembers

Power to grant approval to bye-laws of

recognised stock exchange


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Power to make or amend bye-laws ofrecognised stock exchanges

Power to compel listing of securities by public

companies

Power to control and regulate stockexchange

Power to grant registration to marketintermediaries


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Organisation

6 members

A chairman and two members are appointedby central government

One member is appointed by RBI

Two members having experience in thesecurities market appointed by the central

government

Organisational departments of


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Organisational departments ofSEBI

Primary market department

Issue management and intermediariesdepartment

Secondary market department

Institutional investment department


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