The Indian Financial System
An Overview
Financial Markets: Functions
help in allocation of resources in the economy (link savers &
investors)
provide liquidity; existence of a platform for exchange. A motivation for an investor to hold the financial asset; awareness that the
financial asset can be sold at any time (assets possess
transferability & negotiability) & the company is assured of continuous supply of money
Cost of transaction is reduced: search (locate buyer, seller) &
information (analyse the financial asset)
markets facilitate price discovery: continuous interaction between buyers and sellers establishes the price of financial assets (share price of a share listed on a stock exchange such as BSE/NSE)
Financial Markets: classification
Deal with Financial assets (paper or electronic claims on some issuer such as the government or a company)
Maturity of claim: Short term (money market: usually up to 1 year
& debt) or Long term (capital market: usually equity instruments)
Organisational structure: Exchange traded market with standard procedures or Over-the-counter (decentralized with customised
procedures)
Timing of delivery: Cash/Spot or Forward market where delivery is made at a predetermined time in the future
Nature of claim: Fixed (debt instrument) Timing of delivery:
Cash/Spot or Forward market where delivery is made at a predetermined time in the future
or Residual (equity)
Capital & Money Markets
a source of long term funds for users of capital.
The sale and purchase of equity and debt instruments takes place
Includes primary markets, where new shares and bonds are sold to investors, and secondary
markets, which trade in existing securities.
Markets for short term borrowing &
lending; working capital needs
Financial assets which are a close substitute for money. There is no loss of value.
Wholesale market & participants are institutional investors,
commercial banks, mutual funds, companies
Inter-related sub markets are call market, commercial bill market, treasury bill market, commercial paper market, certificate of deposit market, etc.
NIM & Secondary market
The NIM provides direct finance to new or existing companies whereas the securities market helps in continuous price
discovery of securities (liquidity & marketability).
Secondary market enables investors to buy and sell securities freely thus enhancing the attractiveness of the investment to the investor.
The NIM does not exist physically and neither does it have an administrative set up like the stock exchange.
However, both are inter related. When prices of stock exchange securities increase, the number of new issues also go up,
reflecting the upbeat sentiment of investors.
Financial markets: Components
Individuals (net savers)
Firms/corporates (net borrowers, offering different securities)
Government: borrower (deficit financing) or controlling liquidity, disinvesting shares
Financial intermediaries: Banks & NBFCs, Insurance companies,
NABARD, IFCI, SIDBI, merchant banking, underwriting, credit rating, mutual funds,
Instruments: shares, debentures, Treasury bills, commercial papers, Certificates of deposits, shares, bonds, debentures, derivatives
(futures & options)
Financial services Regulators: SEBI, IRDAI, RBI, Company Law Board, Dept of Eco Affairs, Ministry of Co affairs
Financial markets: participants
Stock exchange: NSE &BSE
Depositories-dematerializes certificates & effects electronic transfer of ownership; NSDL &CSDL brokers
Depository participant & broker
Foreign institutional investors- registered with SEBI
Merchant bankers- regd with SEBI, issue advise to a company about raising funds through shares & manage the issue of securities
Primary Dealers- appointed by RBI, underwriters in the primary
market and market makers in the secondary market for T bills, etc.
Financial markets: participants
Custodians- looks after the investment back office of MFs; receives &
delivers securities, collects income, distributes dividends, separates assets between schemes; takes help of Registrar
Registrars & Transfer agents- provide admin support to the company or MF to handle investor related services (allotment, refund of over subscription)
Underwriter- guarantor for public subscription
Bankers to the issue
Venture capital funds- pool of capital invested in equity of unlisted companies
Credit rating agencies-(CRISIL) rating debt instruments
