Financial System Mba
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Transcript of Financial System Mba
FINANCIAL SYSTEMFINANCIAL SYSTEM
The term financial system includes a complex of institutions and mechanisms which affect the generation of savings and their transfer to those who will invest.
FEATURES OF THE FEATURES OF THE FINANCIAL SYSTEMFINANCIAL SYSTEM
Ideal linkage between depositors and Ideal linkage between depositors and investorsinvestors
Facilitates expansion of financial Facilitates expansion of financial marketsmarkets
Promotes efficient allocation of financial Promotes efficient allocation of financial resources for socially desirable and resources for socially desirable and economically productive purposeseconomically productive purposes
Influences both the quality and the pace Influences both the quality and the pace of economic developmentof economic development
Financial Institutions
Commercial banksInsurance CosMutual Funds
Provident FundsNon Banking Financial Cos
Demanders of funds
Financial Markets
Suppliers of Funds
IndividualsBusinesses
Governments
Money MarketCapital Market
IndividualsBusinesses
Governments
Securities
FundsFunds
Securities
Funds Funds
Deposits/ shares
Loans
The institutions includeThe institutions include
1.1. Financial institutions / Financial institutions / intermediariesintermediaries like banks, like banks, insurance org., mutual funds and insurance org., mutual funds and so on which collect capital from so on which collect capital from savers and distribute them to savers and distribute them to entrepreneurs/ productive entrepreneurs/ productive enterprises.enterprises.
2. 2. Financial marketsFinancial markets comprising of comprising of capital /securities market , the capital /securities market , the money market and the foreign money market and the foreign exchange market exchange market
3. 3. Financial assets/instrumentsFinancial assets/instruments like like shares, debentures, units etcshares, debentures, units etc
The main function of financial systems is the collection of savings and their distribution for industrial investment, thereby stimulating capital formation and to that extent accelerating the process of economic growth
ORGANISATION OF THE FINANCIAL SYSTEM
FINANCIAL INTERMEDIARIES
FINANCIAL ASSETS/
INSTRUMENTSFINANCIAL MARKETS
FINANCIAL INTERMEDIARIES
BANKS MUTUAL FUNDS INSURANCE COSNBFC’s
1. Leasing Companies2. Hire purchase/Consumer Finance Cos3. Housing Finance Cos4. Venture Capital Funds5. Merchant Banking Organisations6. Credit Rating Agencies7. Factoring and Forfeiting organisations8. Stock Broking Firms9. Depositories
BANKS NBFC’s MUTUAL FUNDSBANKS NBFC’s INSURANCE COSMUTUAL FUNDSBANKS NBFC’s
1. Leasing Companies2. Hire purchase/Consumer Finance Cos3. Housing Finance Cos4. Venture Capital Funds5. Merchant Banking Organisations6. Credit Rating Agencies7. Factoring and Forfeiting organisations8. Stock Broking Firms9. Depositories
INSURANCE COSMUTUAL FUNDSBANKS NBFC’s
FINANCIAL INTERMEDIARIES
Their relevance to the flow of savings Their relevance to the flow of savings is derived from what is called the is derived from what is called the TRANSMUTATION EFFECT.TRANSMUTATION EFFECT.
TransmutationTransmutation refers to the ability of refers to the ability of the financial intermediaries to the financial intermediaries to convert contracts with a given set of convert contracts with a given set of characteristics into contracts with characteristics into contracts with different features.different features.
FINANCIAL INTERMEDIARIES
The services that tailor financial assets to the The services that tailor financial assets to the desires of savers- investors are:desires of savers- investors are:
1.1. ConvenienceConvenience DivisibilityDivisibility MaturityMaturity
2.2. Lower RiskLower Risk Diversification eg. Mutual FundsDiversification eg. Mutual Funds
3.3. Expert managementExpert management Benefits of trained, experienced and Benefits of trained, experienced and
specialised mgt along with continuous specialised mgt along with continuous supervisionsupervision
4.4. Economies of scaleEconomies of scale Lower costLower cost
Main financial Main financial intermediaries intermediaries
Commercial BanksCommercial Banks NBFCNBFC Mutual FundsMutual Funds Insurance OrganisationsInsurance Organisations
Commercial BanksCommercial Banks
Traditional practiceTraditional practice Short term funds for working capital needsShort term funds for working capital needsEmerging needs of economic and financial systemEmerging needs of economic and financial system Term lending particularly in infrastructure Term lending particularly in infrastructure
sectorsector Capital marketCapital market Retail finance such as housing finance, Retail finance such as housing finance,
consumer finance etcconsumer finance etc Enlarged their geographical and functional Enlarged their geographical and functional
coverage in terms of rural/ agriculture and coverage in terms of rural/ agriculture and other priority sector financing like exports, other priority sector financing like exports, small enterprises etc.small enterprises etc.
NBFCNBFC Provide a variety of fund/asset based Provide a variety of fund/asset based
and non fund based /advisory servicesand non fund based /advisory servicesTypes of servicesTypes of services Leasing Companies Hire purchase/Consumer Finance Cos Housing Finance Cos Venture Capital Funds Merchant Banking Organisations Credit Rating Agencies Factoring and Forfeiting organisations Stock Broking Firms Depositories
Mutual FundsMutual Funds
Pools the savings of relatively small Pools the savings of relatively small investors and invest in a well investors and invest in a well diversified portfolio of sound invt.diversified portfolio of sound invt.
A mutual fund is set up in the form A mutual fund is set up in the form of a trust which hasof a trust which has
1.1. A SponsorA Sponsor
2.2. TrusteesTrustees
3.3. Asset Management Company (AMC)Asset Management Company (AMC)
4.4. CustodianCustodian
Insurance OrganisationsInsurance Organisations
Protection against riskProtection against risk Contractual Nature contributes to Contractual Nature contributes to
mobilisation of funds as it tends to mobilisation of funds as it tends to commit the policyholdercommit the policyholder
Desire to save due toDesire to save due to1.1. Emergency fund to guard his familyEmergency fund to guard his family
2.2. Build a potential family estateBuild a potential family estate
3.3. Accumulation of fund for retirementAccumulation of fund for retirement Peculiar combination of savings and Peculiar combination of savings and
family protectionfamily protection
FINANCIAL MARKETS
Money Market Capital/ Securities Market
Primary /New IssueMarket
Secondary /StockMarket/Exchange
FINANCIAL MARKETS
A link between the savers and A link between the savers and investors both individual as well as investors both individual as well as institutionsinstitutions
FINANCIAL MARKETS
Based on the nature of the funds Based on the nature of the funds which are stock in trade, the which are stock in trade, the financial markets are classified intofinancial markets are classified into
Money MarketMoney Market Capital MarketCapital Market
Money MarketMoney Market
Dealing in monetary assets of short Dealing in monetary assets of short term nature ie namely working term nature ie namely working capital financecapital finance
Major participants areMajor participants are1.1. RBIRBI
2.2. Commercial BanksCommercial Banks
Money MarketMoney MarketThe broad objectives areThe broad objectives are1.1. Equilibrium for balancing out short term Equilibrium for balancing out short term
surpluses and deficienciessurpluses and deficiencies2.2. Focal point for intervention by RBI for Focal point for intervention by RBI for
influencing liquidityinfluencing liquidity3.3. A reasonable access to the users of short term A reasonable access to the users of short term
funds at reasonable costfunds at reasonable costEgs- Commercial paper market, Treasury bills Egs- Commercial paper market, Treasury bills
market, Certificate of deposit market etcmarket, Certificate of deposit market etc Negotiated dealing system (NDS) is an electronic Negotiated dealing system (NDS) is an electronic
platform for facilitating dealing in Govt. platform for facilitating dealing in Govt. Securities and Money Market InstrumentsSecurities and Money Market Instruments
Capital Capital MarketMarket
Primary Market/ New Issue Market
Secondary Stock Market /Exchange
Capital MarketCapital Market
1.1. Primary market / New Issue Primary market / New Issue Market (NIM)Market (NIM)
Capital formation takes placeCapital formation takes place Triple functionTriple function
1.1. OriginationOrigination
2.2. UnderwritingUnderwriting
3.3. DistributionDistribution
2. Secondary Stock Market /Exchange 2. Secondary Stock Market /Exchange (SE)(SE)
Market for old/existing securitiesMarket for old/existing securities Three Vital functionsThree Vital functions
1.1. Nexus between savings and Nexus between savings and investmentsinvestments
2.2. Liquidity to investorsLiquidity to investors
3.3. Continuous price formationContinuous price formation
DerivativesIndirectPrimary /Direct
FINANCIAL ASSETS/
INSTRUMENTS
Innovative Debt instruments
DebenturesPreference SharesEquity/Ordinary
Shares
1. Convertible debenture2. Non convertible deb3. Secured Premium Notes4. Warrants
1. Mutual Fund Units2. Security Receipts3. Pass Through Certificates
Forward OptionsFutures
FINANCIAL ASSETS/INSTRUMENTS
Direct / PrimaryDirect / Primary IndirectIndirect DerivativesDerivatives
Direct / PrimaryDirect / Primary
1.1. Ordinary / equity sharesOrdinary / equity shares
2.2. Preference SharesPreference Shares
3.3. Debentures/ bonds including Debentures/ bonds including innovative debt instrumentsinnovative debt instruments
Innovative debt Innovative debt instrumentsinstruments
Participating DebenturesParticipating Debentures Convertible Debentures with optionsConvertible Debentures with options Third party convertible debenturesThird party convertible debentures Convertible debentures redeemable at Convertible debentures redeemable at
premiumpremium Debt Equity swapsDebt Equity swaps Zero coupon convertible notesZero coupon convertible notes Zero interest fully convertible debenturesZero interest fully convertible debentures Warrants either with equity or debenturesWarrants either with equity or debentures Fully convertible debentures with interest Fully convertible debentures with interest
(Optional)(Optional)
Indirect SecuritiesIndirect Securities
Financial assets issued by financial Financial assets issued by financial intermediariesintermediaries
1.1. Units of Mutual FundsUnits of Mutual Funds
2.2. Policies of insurance cosPolicies of insurance cos
3.3. Deposits of banks etcDeposits of banks etc Better suited to small investorsBetter suited to small investors
Derivatives/Derivative Derivatives/Derivative instrumentinstrument
Used to partially/ fully transfer price Used to partially/ fully transfer price risks by locking in asset prices.risks by locking in asset prices.
Derivative is a product whose value Derivative is a product whose value is derived from the value of is derived from the value of one/more basic variables called one/more basic variables called base( underlying base( underlying asset/index/reference rate) in a asset/index/reference rate) in a contractual mannercontractual manner
Derivatives/Derivative Derivatives/Derivative instrumentinstrumentThe most commonly used derivative contracts are:The most commonly used derivative contracts are:
Forward ContractForward Contract An agreement to exchange an asset, for cash, at a An agreement to exchange an asset, for cash, at a
predetermined future date specified todaypredetermined future date specified today Not typically tradeable and has to be settled by delivery of Not typically tradeable and has to be settled by delivery of
assetasset Futures/ Future contractFutures/ Future contract
They are transferable specific delivery forward contracts.They are transferable specific delivery forward contracts. They are agreement between two counterparties to fix the They are agreement between two counterparties to fix the
terms of an exchange/lock in price today of an exchange terms of an exchange/lock in price today of an exchange that will take place between them at some fixed future that will take place between them at some fixed future date.date.
OptionsOptionsOptions are contracts that give the holder the Options are contracts that give the holder the
right (but not the obligation) to buy (call option) or right (but not the obligation) to buy (call option) or sell (put option) securities at a pre determined price sell (put option) securities at a pre determined price (strike /exercise price) within /at the end of a (strike /exercise price) within /at the end of a specified period (expiration period)specified period (expiration period)
INDIAN FINANCIAL INDIAN FINANCIAL SYSTEMSYSTEM
INDIAN FINANCIAL INDIAN FINANCIAL SYSTEMSYSTEM
The evolution of the Indian Financial system The evolution of the Indian Financial system falls into three distinct phasesfalls into three distinct phases
1.1. Up to 1951,corresponding to the post Up to 1951,corresponding to the post independence scenario, on the eve of the independence scenario, on the eve of the initiation of planned economic development.initiation of planned economic development.
2.2. Between 1951 and the mid eighties Between 1951 and the mid eighties reflecting the imperatives of planned reflecting the imperatives of planned economic growtheconomic growth
3.3. After the early nineties responding to the After the early nineties responding to the requirements of requirements of liberalised/deregulated/globalised economic liberalised/deregulated/globalised economic environment.environment.
PHASE I PHASE I PRE -1951 ORGANISATIONPRE -1951 ORGANISATION
FeaturesFeatures Closed circle character of industrial Closed circle character of industrial
entrepreneurshipentrepreneurship A semi organised and narrow industrial A semi organised and narrow industrial
securities marketsecurities market Devoid of issuing institutionsDevoid of issuing institutions Virtual absence of participation of Virtual absence of participation of
intermediary financial institutions in the intermediary financial institutions in the long term financing of the industrylong term financing of the industry
PHASE IIPHASE II1951 TO MID-EIGHTIES1951 TO MID-EIGHTIES
FeaturesFeatures
1.1. Public/ Government ownership of Public/ Government ownership of financial institutionsfinancial institutions
2.2. Fortification of the institutional Fortification of the institutional structurestructure
3.3. Protection to investorsProtection to investors
4.4. Participation of financial institutions Participation of financial institutions in corporate managementin corporate management
Public/ Government Public/ Government ownership of financial ownership of financial
institutionsinstitutions Nationalisation of the RBI in 1948Nationalisation of the RBI in 1948 Setting up of SBI in 1956 by taking over Imperial Setting up of SBI in 1956 by taking over Imperial
Bank of IndiaBank of India 245 Life insurance cos were nationalised and 245 Life insurance cos were nationalised and
merged with LICmerged with LIC 14 Major Banks were nationalised in 196914 Major Banks were nationalised in 1969 GIC in 1972GIC in 1972 6 more banks were nationalised in 19806 more banks were nationalised in 1980 DFIs / term lending institutions were set upDFIs / term lending institutions were set up UTI was createdUTI was created The entire instutional structure was owned and The entire instutional structure was owned and
controlled by Government.controlled by Government.
Fortification of the Fortification of the institutional structureinstitutional structure
Establishment of Establishment of DFIs and financial lending institutionsDFIs and financial lending institutions Industrial Finance Corporation of India (IFCI) in 1948Industrial Finance Corporation of India (IFCI) in 1948 State Financial CorporationState Financial Corporation Industrial Credit and Investment Corporation of India Industrial Credit and Investment Corporation of India
(ICICI) in 1955(ICICI) in 1955 Pioneer in many aspects like underwriting of shares, Pioneer in many aspects like underwriting of shares,
channelisation of foreign currency loans from World Bank to channelisation of foreign currency loans from World Bank to private industry etcprivate industry etc
Industrial Development Bank of India (IDBI) in 1964 as a Industrial Development Bank of India (IDBI) in 1964 as a subsidiary of RBI and was delinked in 1976subsidiary of RBI and was delinked in 1976
Small Industrial Development Bank of India as a subsidiary Small Industrial Development Bank of India as a subsidiary of IDBIof IDBI
LIC in 1956LIC in 1956 UTI in 1964UTI in 1964
Diversification in forms of financing Diversification in forms of financing of commercial banks such as Term of commercial banks such as Term Lending, underwriting of new issues.Lending, underwriting of new issues.
Enlargement of functional coverageEnlargement of functional coverage
Protection to investorsProtection to investors
Enactment of Enactment of
1.1. Companies Act of 1956Companies Act of 1956
2.2. Capital Issues (control) Act, 1947Capital Issues (control) Act, 1947
3.3. Securities Contracts (Regulation) Act, Securities Contracts (Regulation) Act, 19561956
4.4. Monopolies and Restrictive Trade Monopolies and Restrictive Trade Practices Act, 1970Practices Act, 1970
5.5. Foreign Exchange Regulation Act Foreign Exchange Regulation Act (FERA), 1973(FERA), 1973
Phase II- Organisation of Indian Financial System
Public/Govt.Ownership of
Financial Institutions
Fortification ofInstitutional
Structure
Investor Protection
Nationalisationof:RBISBILICBanksGIC
New InstitutionsDFIsUTI
DFIs:IFCISFCsICICIIDBISIDCsSIICsIIBI
Banks:1.DiversificationOf forms of Financing2. Enlargement of functionalCoverage3. Innovative banking
LIC UTI
Companies Act
ForeignExchangeReglulationAct
Securities Contracts (Regulations) Act
Capital Issues(Control) Act
MonopoliesAnd RestrictiveTrade PracticesAct
Participation byFinancial InstitutionsIn CorporateManagement
NOTABLE DEVELOPMENTS NOTABLE DEVELOPMENTS POST 1991POST 1991
Privatisation of financial institutionsPrivatisation of financial institutions Reorganisation of institutional Reorganisation of institutional
structurestructure Investor protectionInvestor protection
Post 1991 Phase Organisation of the Indian Financial System
Privatisation of Financial Institutions1. Banks2. Mutual Funds3. Insurance
companiesompanies
Re organisation of Structure
DFIsPFI’s
Banks NBFCsMutual funds
CapitalMarket
Money market
PrimaryStock
Exchange
Investor Protection
SEBI
Privatisation of financial Privatisation of financial institutionsinstitutions
Conversion of Industrial Finance Corporation Conversion of Industrial Finance Corporation of India in to a public company. (IFCI Ltd.)of India in to a public company. (IFCI Ltd.)
IDBI and IFCI offered equity to public IDBI and IFCI offered equity to public investorsinvestors
Pvt. mutual funds set upPvt. mutual funds set up Pvt. Banks have come upPvt. Banks have come up With the enactment of IRDA, 1999 pvt. With the enactment of IRDA, 1999 pvt.
Insurance Cos set up by both domestic and Insurance Cos set up by both domestic and foreign promotersforeign promoters
Establishment of Pension Fund Regulation Establishment of Pension Fund Regulation and Development Authority, pvt. Entities are and Development Authority, pvt. Entities are posed to enter this field. posed to enter this field.
Reorganisation of Reorganisation of institutional structureinstitutional structure
Development/Public Financial InstitutionsDevelopment/Public Financial Institutions1. Greater reliance of industry on capital market.1. Greater reliance of industry on capital market.2. Giving core working capital to industry in addition 2. Giving core working capital to industry in addition to traditional loanto traditional loan3.Growing focus on non fund based financial 3.Growing focus on non fund based financial activities like merchant banking etcactivities like merchant banking etc4. Pattern of financing changed4. Pattern of financing changed5. Change in the nature of institutions sponsored 5. Change in the nature of institutions sponsored from TCO, MDI to CRISIL, CARE,ICRAfrom TCO, MDI to CRISIL, CARE,ICRA6. Extension of internationally accepted accounting 6. Extension of internationally accepted accounting std has improved the bottomlinestd has improved the bottomline7. With conversion of ICICI Ltd and IDBI into banks, 7. With conversion of ICICI Ltd and IDBI into banks, DFI’s and PFI’s have disappeared. DFI’s and PFI’s have disappeared.
Commercial BanksCommercial Banks
Geographically wide and functionally Geographically wide and functionally diverse banking systemdiverse banking system
But gross profits progressively But gross profits progressively declineddeclined
Factors affecting Profitability
Macro aspects of Envt.
Internal Factors
Interest on SLR very low
Credit to priority sector resulted in deterioration in quality and growth of over duesPolitical and adm. interference
Escalation in interest cost
Couldn’t cope with load of servicing more branchesDiluted the quality of manpowerAccounting practices not in conformity with international stds.Lack of autonomy
NBFCsNBFCs
Fund based activitiesFund based activities Hire purchaseHire purchase Bills discountingBills discounting Venture capitaVenture capita Stock brokingStock broking Loans/investmentsLoans/investments Equipment leasingEquipment leasing
Fee based/advisory servicesFee based/advisory services Issue managementIssue management Portfolio managementPortfolio management Loan /lease syndicationLoan /lease syndication Merging and acquisitionMerging and acquisition
Main elements of Main elements of regulationregulation
1.1. Chapter III B of the RBI Act amended in 1998Chapter III B of the RBI Act amended in 1998
2.2. RBI Acceptance of Deposits Regulations, 1998RBI Acceptance of Deposits Regulations, 1998
3.3. NBFCs Prudential Norms (RBI) Directions, NBFCs Prudential Norms (RBI) Directions, 19981998
4.4. NBFCs Auditor Reports (RBI) Directions , 1998NBFCs Auditor Reports (RBI) Directions , 1998
5.5. RBI has set up Department of Non Banking RBI has set up Department of Non Banking Supervision which undertakes both on site and Supervision which undertakes both on site and off site surveillance over the institutionsoff site surveillance over the institutions
Mutual FundsMutual Funds A remarkable development post 1991A remarkable development post 1991 Vehicle for institutionalisation of security Vehicle for institutionalisation of security
invts for the relatively small investorsinvts for the relatively small investors Domestic mutual funds sponsored by UTI, Domestic mutual funds sponsored by UTI,
bank subsidiaries, insurance bank subsidiaries, insurance organisations, private sector with foreign organisations, private sector with foreign collaboration and foreign institutional collaboration and foreign institutional investors/ merchant banksinvestors/ merchant banks
Several off shore/overseas/country funds Several off shore/overseas/country funds sponsored by Indian Financial sponsored by Indian Financial institutions as well as Foreign institutions as well as Foreign institutional investorsinstitutional investors
A variety of schemes focusing on income A variety of schemes focusing on income growth, tax savings , insurance linkage growth, tax savings , insurance linkage etc etc
Capital/Securities Capital/Securities MarketMarket
Dormant till mid 1980sDormant till mid 1980s After that it has emerged as the most After that it has emerged as the most
important mechanism for allocating important mechanism for allocating resourcesresources Shown by rapid expansion in quantum of funds Shown by rapid expansion in quantum of funds
raised raised the number of investors in primary marketthe number of investors in primary market Increase in number of stock exchanges and Increase in number of stock exchanges and
listed securitieslisted securities Speedy rise in market capitalisation and volume Speedy rise in market capitalisation and volume
of tradeof trade Entry of FIIs and mutual fundsEntry of FIIs and mutual funds
Capital Market
Primary Market
Secondary Market
Primary MarketPrimary Market New Issue MarketNew Issue Market One component of the organisation, namely, One component of the organisation, namely,
the market intermediaries comprise ofthe market intermediaries comprise of Specialist merchant banks/ lead managerSpecialist merchant banks/ lead manager UnderwritersUnderwriters Bankers to an issueBankers to an issue Registrars to an issueRegistrars to an issue Share transfer agentsShare transfer agents Porfolio managersPorfolio managers Brokers, FIIs etcBrokers, FIIs etc
Rigorous compliance to SEBIRigorous compliance to SEBI
Secondary MarketSecondary Market
A few stock exchanges , dominated by A few stock exchanges , dominated by Bombay Stock Exchange provided the trading Bombay Stock Exchange provided the trading platforms for secondary market transactionsplatforms for secondary market transactions
NSE introduced Screen based trading in NSE introduced Screen based trading in 19921992
The Depositories Act, 1996- Central The Depositories Act, 1996- Central Depository services Ltd(CDSL) and National Depository services Ltd(CDSL) and National Securities Depository Ltd.(NSDL) were set upSecurities Depository Ltd.(NSDL) were set up
Successful dematerialisation of shares upto Successful dematerialisation of shares upto 99 percent of total market capitalisation99 percent of total market capitalisation
Shortening of settlement cycle from Shortening of settlement cycle from 14 days to T + 214 days to T + 2
Introduction of securities related Introduction of securities related derivativesderivatives
FIIs have been allowed to invest in FIIs have been allowed to invest in IndiaIndia
Money MarketMoney Market
Sophisticated and articulate money Sophisticated and articulate money market has emergedmarket has emerged
Emergence of specialised institutions – Emergence of specialised institutions – Primary Dealers and money market Primary Dealers and money market mutual fundsmutual funds
Consists of inter related sub marketsConsists of inter related sub markets Call/notice mkt, Commercial bills mkt, T-Call/notice mkt, Commercial bills mkt, T-
bills mkt, Commercial paper mkt, bills mkt, Commercial paper mkt, Certificates of deposits market and Repo Certificates of deposits market and Repo marketmarket
Protection of investors: Protection of investors: Securities and Exchange Securities and Exchange
Board of IndiaBoard of India The Capital Issues (Control) Act was The Capital Issues (Control) Act was
repealed in 1992repealed in 1992 The office of the Controller of The office of the Controller of
Capital Issues was abolishedCapital Issues was abolished SEBI was set up in 1988SEBI was set up in 1988
Mandate of SEBIMandate of SEBI
1.1. Protect the interest of the investors Protect the interest of the investors in securitiesin securities
2.2. Promote the development of the Promote the development of the securities marketsecurities market
3.3. Regulate the securities marketRegulate the securities market
SEBI exercises power SEBI exercises power underunder
The SEBI ActThe SEBI Act Securities Contract s(Regulation) Securities Contract s(Regulation)
ActAct Depositories ActDepositories Act The delegated powers under the The delegated powers under the
Companies ActCompanies Act
The SEBI regulates and supervises the securities markets through 1. regulation 2. guidelines and schemes
FINANCIAL MARKET
FINANCIAL MARKET
Capital Market Money Market
Capital Market
Primary Market/New Issue Market
Secondary Market/Stock Exchange
Two stages are involved in purchase and sale of
securitiesFirst stage- Securities are acquired from the
issuing companies
Second stage- Purchased and sold continuously among investors without involvement of the companies except for registering ownership
The section of the market dealing with first stage is referred to as the NIM, while the secondary market covers the second stage of the dealings in securities
Difference between Stock Exchange and Primary
Market
New Issue Market
Stock Exchange
1 Types of security
New Existing/ old
2 Nature of Financing
Direct Indirect
3 Organisation No geographical existence
Physical existence
4 Functions Specialist institutional triple servicesOriginationUnderwritingDistribution
Nexus between savings and investmentsMarket placeContinuous price formation
Similarities between NIM and the stock exchanges
Stock exchange Listing Stock Exchange exercise
considerable control over new issues Economic Interdependence – Has two
dimensions Behaviour of Stock Exchange has
significant bearing on the level of activity in the NIM
Prices of new issues are influenced by the price movements on the stock market
Functions of Stock/Secondary Markets/
Exchanges1. Nexus between Savings and
Investments2. Market Place3. Continuous price formation
Nexus between Savings and Investments
Savings of the community are mobilised and channelled by stock exchanges for investment into those sectors and units which are favoured by the community
Stock Exchanges render this service thru new issues and sale of existing securities
Ensures that the various listing rules are complied with
Members of stock exchange help by acting as As brokers – try to procure invts from all over the country As underwriters
Market Place
Provide market place for purchase and sale of shares thereby ensuring transferability
Continuous price formation
Large number of buyers and sellers has the effect of bringing about changes in the levels of security prices in small graduations
Ever changing demand and supply conditions result in continuous revision of assets
Stock exchanges act as a barometer of the state of health of the nations economy , by constantly measuring its progress or otherwise
Functions of New Issues/ Primary Market
Transfer of resources from sav ers to entrepreneurs
Is a complex set of institutions thru which funds can be obtained directly or indirectly by those who require the, from investors have savings
The Securities issued by the company for the first time either after the incorporation or conversion from Private to Public companies are designated as initial issues, while those issued by cos which already have stock exchange quotation either public issue or by rights to existing shareholders, are referred to as old
Two types of issues are excluded from the category
of new issues Bonus issues Exchange issues by which shares are
exchanged for securities in another co.
General function of NIM can be split into three
services Origination Underwroters Distribution
Origination Refers to the work of investigation as
analysis and processing of new proposals Are performed by specialist agencies
which act as the sponsors of issues A careful study of technical, economic ,
financial and legal aspects of the issuing companies
In this process, the sponsoring institutions render some services of an advisory nature which go to improve quality of capital issues
Services include
Determination of the class of security to be issued and prices of the issues in the light of market conditions
The timing and magnitude of issue Methods of floatation Technique of selling etc
Underwriting
A form of guarantee that issues would be sold by eliminating the risk arising from uncertainty of public response
Distribution
The sale of securities to the ultimate investors is known as distribution
Issue Mechanism
Public issue through prospectus Tender / Book building Offer for sale Placement Rights issue
Public issue through prospectus
Issuing companies offer directly to the public
Issues are underwritten Minimum contents of a issue are
prescribed by the Companies Act, 1956.