13735265 Capital Markets Money Markets

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Indian Financial System


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Financial System

Existence of a well organized financial system

Promotes the well being and standard of living

of the people of a country

Money and monetary assets

Mobilize the saving Promotes investment


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Financial SystemFinancial System of any country consists offinancial markets, financial intermediation and

financial instruments or financial products

Suppliers of funds(Mainly households)Flow of financial services

Incomes , and financial

claims

Seekers of funds(Mainly business firms

and government)

Flow of funds (savings)


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Indian Financial System

Non- OrganizedOrganized

Money lenders

Local bankers

TradersLandlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services


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Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-StockBanks

Evolution of Financial System


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Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

MarketO

perationsSpecialized Financial Institutions

Merchant Banking

Universal Banking


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Financial System

Savers Lenders Households Foreign

Sectors

Investors

Borrowers

Corporate Sector

Govt.Sector

Un-organized

Sector

Economy

Interrelation--Financial system & Economy


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Organized Indian Financial System

Money Market

InstrumentCapital Market

Instrument

Forex

Market

Capital

Market

Money

Market

Credit

Market

Primary Market

FinancialInstruments

FinancialMarkets

FinancialIntermediaries

Secondary Market

Regulators


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Financial Markets Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates


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Why Capital Markets Exist

Capital markets facilitate the transfer ofcapital (i.e. financial) assets from one owner to

another. They provide liquidity.

Liquidity refers to how easily an asset canbe transferred without loss ofvalue.

A side benefit of capital markets is that thetransaction price provides a measure of thevalue of the asset.


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Role of Capital Markets Mobilization of Savings & acceleration ofCapital Formation

Promotion ofIndustrial Growth Raising of long term Capital

Ready & ContinuousMarkets

Proper Channelisation of Funds

Provision of a variety of Services


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Indian Capital Market -

Historical perspective StockMarket was for a privileged few

Archaic systems - Out cry meth

od

Lack ofTransparency - High tones costs

No use ofTechnology

Outdated banking system Volumes - less than Rs. 300 cr per day

No settlement guarantee mechanism - High

risks


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Indian Capital markets -

Chronology

1994-Equity Trading commences on NSE

1995-A

llT

rading go

esE

lectro

nic 1996- Depository comes in to existence

1999- FIIs Participation- Globalisation

2000- over 80% trades in Demat form

2001-Major Stocks move toRolling Sett

2003- T+2 settlements in all stocks

2003 - Demutualisation ofExchanges


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Capital Markets - Reforms Each scam has brought in reforms - 1992 / 2001

Screen based Trading through NSE

Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent

paper eliminated

Entry of Foreign Investors

Investor awareness programs

Rolling settlements

Inter-action between banking and exchanges


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Reforms / Initiatives post 2000 Corporatisation of exchange memberships

B

anningof

B

adla /A

LBM

Introduction of Derivative products - Index /

Stock Futures & Options

Reforms/Changes in the margining system

STP - electronic contracts Margin Lending

Securities Lending


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MARKET STRUCTURE

(JULY 31, 2005) 22 Stock Exchanges,22 Stock Exchanges,

Over 10000 Electronic Terminals at over 400 locations allOver 10000 Electronic Terminals at over 400 locations all

over India.over India. 9108 Stock Brokers and 14582 Sub brokers9108 Stock Brokers and 14582 Sub brokers

9644 Listed Companies9644 Listed Companies

2 Depositories and 483 Depository Participants2 Depositories and 483 Depository Participants

128 Merchant Bankers, 59 Underwriters128 Merchant Bankers, 59 Underwriters

34 Debenture Trustees, 96Portfolio Managers34 Debenture Trustees, 96Portfolio Managers

83 Registrars & Transfer Agents, 59Bankers toIssue83 Registrars & Transfer Agents, 59Bankers toIssue

4C

reditR

atingA

gencies4

C

reditR

atingA

gencies


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Indian Capital Market

Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

Brokers

Investment BankersStockExchanges

Underwriters

SEBI

Players

Corporate IntermediariesCRA Banks/FI FDI /FIIIndividual


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Stock Exchanges in INDIA

Mangalore Stock Exchange

Hyderabad Stock Exchange

Uttar Pradesh StockExchange

Coimbatore Stock Exchange Cochin Stock Exchange

Bangalore Stock Exchange

Saurashtra Kutch StockExchange

Pune Stock Exchange

National Stock Exchange OTC Exchange of India Calcutta Stock Exchange

Inter-connected StockExchange (NEW)

Madras Stock Exchange

Bombay Stock Exchange

Madhya Pradesh Stock

Exchange

Vadodara Stock Exchange The Ahmedabad Stock

Exchange

Magadh Stock Exchange

Gauhati Stock Exchange

Bhubaneswar StockExchange

Jaipur Stock Exchange

Delhi Stock Exchange Assoc

Ludhiana Stock Exchange


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The role of the stock exchange Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth


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The role of the stock exchange Corporate governance

Creates investment opportunities for smallinvestors

Government raises capital for development

projects

Barometer of the economy


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Growth Pattern of the Indian Stock MarketSl.No.

As on 31stDecember

1946 1961 1971 1975 1980 1985 1991 1995

1No. ofStock Exchanges

7 7 8 8 9 14 20 22

2No. ofListed Cos.

1125 1203 1599 1552 2265 4344 6229 8593

3No. of StockIssues ofListed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4 Capital of ListedCos. (Cr. Rs.) 270 753 1812 2614 3973 9723 32041 59583

5Market value ofCapital of ListedCos. (Cr. Rs.)

971 1292 2675 3273 6750 25302 110279

478121

6

Capital perListed Cos. (4/2)(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)

86 107 167 211 298 582 1770 5564

8

Appreciated valueof Capital per

358 170 148 126 170 260 344 803


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Capital Market Instruments

ADR / GDR

Equity Debt

Equity

SharesPreference

SharesDebentures Zero coupon

bonds

Deep

Discount

Bonds

Hybrid


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Factors contributing to growth of


Establishment of Development banks &Industrial

financial instituti

on.

Legislative measures

Growing public confidence

Increasing awareness of investment

opportunities


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Factors contributing to growth of


Growth of underwriting business

Setting up of SEBI

Mutual Funds

Credit Rating Agencies


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deficiencies

Lack of transparency

Physical settlement

Variety of manipulative practices

Institutional deficiencies

Insider trading


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Money Market Market for short-term money and financial assets

that are near substitutes for money.

Short-Term means generally period upto one yearand near substitutes to money is used to denoteany financial asset which can be quickly converted

into money with minimum transaction cost


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Money Market

It is a place for Large Institutions and government tomanage their short-term cash needs

It is a subsection of the Fixed Income Market

It specializes in very short-term debt securities

They are also called as Cash Investments


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Defects

ofMo

neyM

arket Lack of Integration

Lack of Rational Interest Rates structure

Absence of an organized bill market

Shortage of funds in the Money Market

Seasonal Stringency of funds and fluctuations in

Interest rates

Inadequate banking facilities


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Money

Market

Instruments

Treasury Bills

Commercial Paper

Certificate of Deposit

Money Market Mutual Funds

Repo Market


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Segment Issuer Instruments

Government

CentralGovernment

ZeroCoupon Bonds, Coupon Bearing Bonds,Capital Index Bonds, Treasury Bills.

PublicSector

Government

Agencies /StatutoryBodies

Govt. Guaranteed Bonds, Debentures

Public SectorUnits

PSU Bonds, Debenture, Commercial Paper

Private CorporateDebentures, Bonds, Commercial Paper, FloatingRate Bonds, ZeroCoupon Bonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

FinancialInstitutions Certificate of Deposits, Bonds


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Financial Regulators


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FinancialR

egulato

rs

Securities and ExchangeBoardofIndia (SEBI)

ReserveBankofIndia

Ministry ofFinance


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Security Exchange Board ofIndia

(SEBI)

Securities and Exchange Board ofIndia

(SEBI) was first established in the year1988

Its a non-statutory body for regulating

the securities market It became an autonomous body in 1992


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It enhances investor's knowledge on marketby providing education.

It regulates the stockbrokers and sub-brokers.

Topro

mo

teR

esearch andInv

estigatio

n

Functions Of SEBI


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Objectiv

esof

SEBI

It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the securities

market.


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The Recent Initiatives

Undertaken

Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds


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Reser

veB

ankof

India

Established on April 1, 1935 in accordancewith the provisions of the RBIAct, 1934.

The Central Office of the Reserve Bank hasbeen in Mumbai.

It acts as the apex monetary authority of thecountry.


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Functio

ns Of

RBI

Monetary Authority:

Formulation and Implementation of monetary

po

licies. Maintaining price stability and ensuring adequate

flowof credit to the Productive sectors.

Issuer of currency:

Issues and exchanges or destroys currency and coins. Provide the public adequate quantity of supplies of

currency notes and coins.


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Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations M

aintain public co

nfidence, pr

otect dep

osito

rs'interest and provide cost-effective banking services.

Authority On Foreign Exchange:

Manages the Foreign Exchange Management Act,

1999. Facilitate external trade, payment, promote orderly

development and maintenance offoreign exchangemarket.

Functions OfRBI


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Developmental role:

Performs a wide range of promotional functions to

suppo

rt natio

nalo

bjectiv

es.

Related Functions:

Banker to the Government: performs merchant

bankingfuncti

onfo

r the central and the stategovernments.

Maintains banking accounts of all scheduled banks.

Functions OfRBI


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Monetary

M

easures(a) Bank Rate:

The Bank Rate was kept unchanged at 6.0 per

cent.(b) Reverse Repo Rate:

The Repo rate is around 7 per cent and Reverserepo rate is around 6.10 per cent.

(c) Cash Reserve Ratio:The cash reserve ratio (CRR) of scheduled banks iscurrently at 5.0 per cent.


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Reforms in the Financial

System

Pre-reforms period

Steps taken

Objectives

Conclusion


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P

re-R

efo

rmsP

erio

d The period from the mid 1960s to the early 1990s.

Characterized by:

Administered interest rates

Industrial licensing and controls

Dominant public sector

Limited competition High capital-output ratio


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Banks and financial institutions acted as adeposit agencies.

Price discovery process was prevented.

Government failed to generate resources for

investment and public services.

Till 90s it was closed, highly regulated, andsegmented system.

P

re-R

efo

rmsP

erio

d


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StepsT

aken Economic reforms initiated in June 1991.

The committee appointed under the chairmanship

of M Narasimham.

He submitted report with all the recommendations

Government liberalized the various sectors in the

economy. Reform of the public sector and tax system.


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R

eco

mmendatio

ns Reduce the level of state ownership inbanking

Lift restrictions on foreign ownership of banks

Spur the development of the corporate-bondmarket

Strengthen legal protections


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Deregulate the insurance industry

Drop proposed limits on pension reforms

Increase consumer ownership of mutual-fund products

Introduce a gold deposit scheme

R

eco

mmendatio

ns


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Speed up the development of electronicpayments.

Separate the RBI's regulatory and central-bank functions

Lift the remaining capital account controls

Phase out statutory priority lending andrestrictions on asset allocation

R

eco

mmendatio

ns


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Co

nclusio

n The financial system is fairly integrated, stable,

efficient.

Weaknesses need to be addressed. The reforms have been more capital centric in

nature.

Fo

reign capitalf

low

s andfo

reign exchangereserves have increased but absorption offoreigncapital is low.


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Thank you

13735265 Capital Markets Money Markets

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