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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 System of any country consists of financial 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
Un-Organized Organize
d Money lenders
Local bankers
Traders
Landlords
Pawn brokers
Regulators
Financial Institutions
Financial Markets
Financial services
Financial Instrumentswww.StudsPlanet.com
Organized Indian Financial System
Money Market Instrument
Capital Market Instrument
Forex Market
Capital Market
Money Market
Credit Market
Primary Market
Financial Instruments
FinancialMarkets
FinancialIntermediarie
s
Secondary Market
Regulators
1.MoF
2.SEBI
3.RBI
4.IRDA
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Indian Capital Market
Market Instruments Intermediaries
Primary Secondary
Equity DebtHybrid
Regulator
•Brokers •Investment Bankers •Stock Exchanges•Underwriters
SEBI
Players
Corporate IntermediariesCRABanks/FI FDI /FIIIndividual
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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 of capital (i.e. financial) assets from one owner to another.
They provide liquidity. Liquidity refers to how easily an asset can
be transferred without loss of value.A side benefit of capital markets is that the
transaction price provides a measure of the value of the asset.
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Role of Capital Markets
Mobilization of Savings & acceleration of Capital Formation
Promotion of Industrial GrowthRaising of long term CapitalReady & Continuous MarketsProper Channelisation of Funds Provision of a variety of Services
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Capital Market Instruments
DerivativeMarket1.Exchange Traded2.Future & Optiona.Indexb.Stock
Equity Debt
Primary Market1.Public Issue2. Private Placement a. Domestic Market b. International Market
SecondaryMarket
1.NSE2.BSE
3.OTCEI4.ISE5.RSE
Private Corporate Dept.
PSU Bond Market
Govt. SecuritiesMarket
Primary Segment Secondary Segment
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Factors contributing to growth of Indian Capital
Market
Establishment of Development banks & Industrial financial institution.
Legislative measuresGrowing public confidence Increasing awareness of investment
opportunities
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Factors contributing to growth of Indian Capital Market
Growth of underwriting businessSetting up of SEBIMutual Funds Credit Rating Agencies
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Indian Capital Market 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 year and near substitutes to money is used to denote any 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 to manage 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 of Money Market
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 facilitieswww.StudsPlanet.com
Money Market Instruments
Treasury Bills Commercial Paper Certificate of Deposit Commercial Bills Term Money 1. Primary Segment 2.Secondary Segment
Call Money Market
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FINANCIAL INSTRUMENTS
Money Market Instruments The money market can be defined as a market for short-
term money and financial assets that are near substitutes for money. The term short-term means generally a period up to one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.
Some of the important money market instruments are briefly discussed below;
1. Call/Notice Money 2. Treasury Bills3. Term Money4. Certificate of Deposit5. Commercial Papers
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1.Call Money Market
Loan disbursed by commercial banks1 day – 7 daysBank can recall the loan at itsmaturityUsually advanced to bill brokers &stock exchange brokers.
2. Term Money Term Money market for deposits of maturity beyond
14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days. www.StudsPlanet.com
3. Treasury Bills. Government Paper SecuritiesDuration of 91 daysPromissory note of the government to pay a
specified sum after a specified period
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4. Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market instrument and issued in dematerialized form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period.
Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time.
CDs can be issued by (i) scheduled commercial banks excluding Regional Rural
Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been
permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements.
An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and interoperate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet. www.StudsPlanet.com
5. Commercial Paper CP is a note in evidence of the debt obligation of the issuer.
On issuing commercial paper the debt obligation is transformed into an instrument.
CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces.
CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days.
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Capital Market Instruments
Capital Market Instruments
The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.
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Equity Market
1 .Primary MarketsHelps companies in raising funds through issue of
securities like shares and debentures.Governed by SEBI (Securities and Exchange Board
of India).Methods of issuing securities in Primary Market:– Public Issue– Rights Issue– Bonus Issue– Private Placement– Bought-out Deals
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International CapitalMarkets
Development attributed to following factors:investors’ need to avoid taxes in their own
country and to ensure protection against depreciating home currencies.
emergence of new technologies in the area of financial services, development and deregulation of financial markets
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Equity Instruments
GDR: instruments which possess a number of underlying shares held by
the custodian domestic bank of the company. The GDRs are traded on a foreign stock exchange, issued to the non-
resident investors. The GDR’s are denominated in the foreign currency and the
underlying shares are denominated in the local currency of the issuer.
The GDR’s are considered as common equity of the company and are entitled to dividends and voting rights.
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ADR
Is a dollar denominated negotiable certificate traded in the US-markets whose underlying securities are of non-US companies.
ADR Level-I :first step for an issuer to enter the US market, minimum disclosure required, need not comply with the American GAAP. Can trade only on the OTC market and not on any national stock exchange.
ADR Level-II: significant disclosures to be made to the SEC, company allowed to list on AMEX, NYSE.
ADR Level-III :fresh capital can be raised company to be registered with the SEC and shall even follow US GAAP.
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Euro Bonds
These are the bonds that are issued outside the country of the currency in which it is denominated
Features:No with holding of tax on interest paymentsThese are in bearer form with coupon
interest attachedListed on stock exchanges though traded on
the OTC market
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Foreign Bonds
Bonds floated in the domestic markets denominated in the domestic currency by the non-resident.
Yankee BondsSamurai BondsBulldog BondsShibosai Bonds
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Yankee bonds
These are US dollar denominated issues by the foreign borrowers in the US markets.
FeaturesRegulated by the SEC. Requires more
disclosure than that given by the prospectus.Foreign borrower to adopt US accounting
policiesBonds sponsored by the underwriting syndicateRequires SEC registration before the sale.To be rated by the US credit rating agencies
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Samurai Bonds
Yen denominated bonds issued in the Japanese markets by the non- Japanese companies.
FeaturesMaturity: 3-20 yearsBorrowers in order of priority sovereigns,
supranational and their entities, high quality private corporations having some kind of Japanese trade links.
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Bull Dog Bonds
Sterling denominated foreign bonds floated in the UK market.
Features:Maturity 5 for short maturities 25 for long
maturities.Subscribed by the long-term institutional
investors-pension funds, life insurance Co’sBonds offered by placing or offer for sale
process will have to be listed on the London SE
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Shibosai Bonds
Privately placed bonds issued in the Japanese market
FeaturesOffered to institutional investors, including
banks the issue’s eligibility, coupon rate, etc governed by the Japan’s MOF guidelines
Pricing done based on base rate and spread which depends on the rating of Co or country.
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Forex Markets
Foreign Exchange Market: Deals with transactions in
currencies other than one’s own currency. Exchange rate: The rate at which one currency can be
converted into another currency Participants: – Exporters – Importers – Commercial Banks – Central Banks – Authorized Dealers and Money Changers – Brokers
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Equity Market
2. Secondary MarketSecurities already issued in the primary market are
traded in the secondary market. Provides liquidity to the securities held by the investors.
Provides liquidity to the securities held by theinvestors.Operates through stock exchanges that regulate the
trading activities in this market.
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Equity Market
3. Derivatives MarketFinancial derivative is a product derived from the market
of an underlying asset.Participants:– Hedgers– Speculators– ArbitratorsTypes of Derivatives:– Futures– Options - Caps - floors and Collars
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Debt. Market
Government of India, public sector units and corporations together comprise as dominant issuer of debt markets in India. Local governments, mutual funds and international financial institution issue debt instruments as well but very infrequently. The Central Government mobilizes funds mainly through issue of dated securities and T-bills. Bonds are also issued by government sponsored institutions like the development financial institutions (DFIs) like IFCI and IDBI, banks and public sector units. Some, but not all, of the PSU bonds are tax-exempt. The corporate bond market comprise of commercial papers and bonds. In recent years, there has been an increase in issuance of
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Financial Institution
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Financial Institution
Financial InstitutionsIndustrial Development Bank of India (IDBI)Industrial Finance Corporation of India (IFCI )Industrial Investment Bank of India (IIBI)Export and Import Bank of IndiaState Financial CorporationsState Industrial Development Corporations
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Non-banking financial institution
Non-Banking Financial CompaniesInvestment Trusts or Investment Companies: Close
end organizations, having fixed amount of authorized capital provides services through conserving and managing property for those who cannot manage their own funds.
Mutual Benefit Funds or Nidis: Sources of their funds are share capital, deposits.
Merchant Banks : Offers financial advice & services for fees; Services offered are management, marketing, underwriting of new issue, project promotion & finance, corporate advice, BOD, venture capital etc.
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Hire Purchase Finance CompaniesLease Finance CompaniesHousing Finance CompaniesNational Housing Bank : Wholly owned by
subsidiary of RBI, Aim is to promote housing finance Institution at local & regional levels, It refinance housing loans to scheduled commercial & co operative banks, housing finance companies etc.
Venture Capital Funding Companies
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DEVELOPMENT FINANCE INSTITUTION
All India Financial InstitutionsIFCI: Industrial Finance Corporation of IndiaThe IFCI, India’s first DFL, was established on 1 July
1948 IFCI principal activities can be categorised into - Financing - Promotional activities
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FINANCING ACTIVITIES
Project ActivitiesFinancial ServicesCorporate advisory ServicesCorporate advisory Services to Foreign
Investors
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PROMOTIONAL ACTIVITIES
Played a key role in the development of cooperatives in the sugar and textile sector
It has promoted technical consultancy organisation primarily in less developed state, to provide necessary services to the promoters of small and medium- sized industries in collaboration with other banks
and institutions. It has developed many institutions like
Management Development institute Investment and credit rating agency Tourism finance corporation of India
Rashtriya Gramin Vikas Nidhi
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DISADVANTAGES
The reasons to this dismal state of affairs of the company are as follows
Operational Inefficiency Political Interference Traditional sector financing Higher provisioning for Non –performing assets
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The steps taken for the revival of IFCI are as follows: IFCI constituted an expert committee in 2001 To formulate a medium-to long term strategic plan for IFCI in
the emerging new business environment The committee has laid down the road map plan for the next
five years It has made recommendations covering a wide range of
structural and operational areas It has strengthened its risk management techniques and is
putting in efforts to bring down the NPAs to a manageable level, through corporate debt structuring
It has initiated action against defaulters and has filed suits against defaulter companies
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INDUSTRIAL DEVELOPMENT BANK OF INDIA
Established in 1964 by Parliament as a wholly owned subsidiary of the RBI
In 1976, the banks ownership was transferred to the Government of India
IDBI has engineered the development of capital market through helping in setting up of the
- Securities Exchange Board of India (SEBI)- National Stock Exchange of India Limited (NSE)- Credit Analysis and Research Limited (CARE)- Stock Holding corporation of India Limited (SHCIL)- Investors Services of India Limited (ISIL)- National Securities Depository Limited (NSDL)- Clearing Corporation of India Limited (CCIL)
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IDBI has undertaken several initiatives to reposition itself as a universal
Bank:- In April 2001, IDBI appointed Boston consulting Group India
Private Limited (BCG) as consultant to draw up a road map for conversion into a universal bank
Formation of high level risk management committee to develop overall risk management policy
The bank has constituted a credit risk management group to evaluate credit risk both at the transaction level and also at the portfolio level
It has pioneered the setting up of Asset Reconstruction Company (India) Limited (ARCIL) in 2002 in association with select banks and financial institutions
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IDBI-SERVICES
IDBI provides Merchant banking and wide array of corporate advisory services as part of its fee based activities
This includes professional advice and services for - issue management - private placement of equity/debt instruments - project evaluation - credit syndication - share valuation - corporate restructuring including mergers and acqusitions
and divestment of equity the bank also offers a number of Forex related services on a
commission basis including opening of letters of credit and remittance
of foreign currency on behalf of its assisted companies for import of its goods and services
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IIBI
Established in 1985 under the IRBI Act 1984 It is a principal credit & reconstruction agency for re-
habilitation of sick & closed industrial units. The range of its services include provision of infrastructure
facilities , consultancies , managerial & merchant banking facilities & making available machinery & other equipment on a lease or hire purchase bases
It was renamed as industrial investment bank of India & brought under companies act 1956 since March 17 1997.
It finances new projects , modernization work , balancing equipment needs , correcting imbalance in current Assets , relieving strains on cash resources , repayment of pressing liabilities and other activities.
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IDFC
Conceived as an institution to facilitate the flow of private finance to commercially viable infrastructure projects & help mitigate commercial & structural risk contain therein , by designing innovative products & processes.
It operates in areas such as energy , telecommunication & IT , integrated transportation , Urban infrastructure & food & agri-business infrastructure.
It offers the variety of services to projects in the infrastructure & advisory services.
It helps promoters raise resources from international markets It intends offering advisory services to these funds to
facilitate & strengthen their connectivity with infrastructure projects.
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NABARD
Established in July 1982 under an act of parliament , is an apex dvpt. Bank for promotion & dvpt. Of agriculture , small-scale industries , cottage & village industries & other allied economic activities in rural areas.
Objective is to promote integrated rural development for overall prosperity of rural areas.
Provides long term investment credit to the Farm sector for various approved agricultural & allied activities such as minor irrigation , plantation etc.
It also extends refinance to banks for financing government sponsered programmes like prime minister Rojgar Yojna , Swarna Jayanti Gram Swarozgar Yojna etc.
Other important development includes setting up of micro finance development fund by NABARD.
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SIDCS
Established under the companies act 1956, as wholly owned undertakings of the state governments with the specific objective of promoting and developing medium and large industries in the respective states.
It undertakes a range of promotional activities including:-repression of preparation of feasibility reports .-conducting industrial potential surveys.-entrepreneurship training and development programs.-developing industrial estates. It also offer package of developmental services that includeTechnical guidance, assistance in plant location and
coordination with other agencies.
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EXIM BANK
Established in 1982, is a wholly government owned financial institution setup for the purpose of financing, facilitating and promoting India’s foreign trade.
Its financing services include a range of fund and non-fund based programs to enhance the exports, competitiveness of Indian companies.
Its major operations presently comprise -financing of projects-products and service exports -building export competitiveness-promotional programs-Financing of research and development activities of exporting
companies.
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SFC
It is a state level development bank setup under the SFCs act, 1951, for the development of small and medium scale industries in their respective states.
It aims at bringing about balanced regional development by wider dispersal of industries and generating larger employment opportunities.
It includes composite loan scheme, scheme for women entrepreneurs, modernization scheme, equipment finance scheme etc.
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SIDBI
It offer a chain of financial product covering micro finance, business,incubation, venture capital etc.
It also provides support services such as training, market information and advise for enhancing the inherent strength of small scale units.
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Products And Services of SIDBI
Direct finance scheme.Bills finance scheme.Re-finance scheme.International finance scheme.Marketing finance and development schemes.SIDBI foundation for micro-credit.Other schemes.Promotional and development activities.Fixed deposit/bond.
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Financial Regulators
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Financial Regulators
Securities and Exchange Board of India (SEBI)
Reserve Bank of India
Ministry of FinanceIRDA
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Security Exchange Board of India(SEBI)
Securities and Exchange Board of India (SEBI) was first established in the year 1988
Its a non-statutory body for regulating the securities market
It became an autonomous body in 1992
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Functions Of SEBI
Regulates Capital Market.
Checks Trading of securities.
Checks the malpractices in securities market.
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Functions Of SEBI
It enhances investor's knowledge on market by providing education.
It regulates the stockbrokers and sub-brokers.
To promote Research and Investigation
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Objectives of 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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Reserve Bank of India
Established on April 1, 1935 in accordance with the provisions of the RBI Act, 1934.
The Central Office of the Reserve Bank has been in Mumbai.
It acts as the apex monetary authority of the country.
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Functions Of RBIMonetary Authority: Formulation and Implementation of monetary
policies.Maintaining price stability and ensuring
adequate flow of 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 operationsMaintain public confidence, protect depositors'
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 of foreign exchange market.
Functions Of RBI
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Developmental role:
Performs a wide range of promotional functions to support national objectives.
Related Functions:
Banker to the Government: performs merchant banking function for the central and the state governments. Maintains banking accounts of all scheduled banks.
Functions Of RBI
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Monetary Measures
(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 Reverse repo rate is around 6.10 per cent.(c) Cash Reserve Ratio:
The cash reserve ratio (CRR) of scheduled banks is currently at 5.0 per cent.
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Objectives Of MoF
Reorientation of the economy
Macro economic stability
To Increase competitive efficiency in the operations
To remove structural rigidities and inefficiencies
To attain a balance between the goals of financial stability & integrated & efficient markets
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Recommendations
Reduce the level of state ownership in banking
Lift restrictions on foreign ownership of banks
Spur the development of the corporate-bond market
Strengthen legal protections
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Recommendations
Deregulate the insurance industry
Drop proposed limits on pension reforms
Increase consumer ownership of mutual-fund products
Introduce a gold deposit scheme
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Recommendations
Speed up the development of electronic payments.
Separate the RBI's regulatory and central-bank functions
Lift the remaining capital account controls
Phase out statutory priority lending and restrictions on asset allocation
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IRDA
Agent RegistrationPortal
Designated Person
(Ins. Co.)
Service Provider-----------------------
1.Care-Site2.Tech Support
Ins. Co.(Development
Officer)
I I I
EXAM
IRDA
Agent TrainingInstitute Agents
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IRDA Function….
Data Correction Approval (License)• Shows list of data correction requests by DPs• IRDA can approve these requests Cancellation Approval (License/Certificate)• Shows list of license cancellation requests• IRDA can approve or reject• IRDA can cancel with or without refund Recall Cancellation Approval• Shows list of license recall cancellation requests• IRDA can approve or reject Termination Approval• Shows list of license termination requests by Corporate DP• IRDA can approve or reject termination requests Terminate License
• IRDA can terminate individual/corporate license
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Thank you
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