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Financial market and institutions bba

Financial markets and services (University of Calicut)

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FINANCIAL SYSTEM 3. Size transformation/Capital formation claims and services are the constituents of financial
In its simple meaning the term ‘finance’ refers 4. Maturity transformation market. Basically they are classified into two
to monetary resources & the term ‘financing’ refers 5. Risk transformation Categories:
to the activity of providing required monetary 6. Lowering of cost of transaction 1. Unorganized Market
resources to the needy persons and institutions. 7. Payment mechanism 2. Organized Market
The term ‘financial system’ refers to a system that is Features/Characteristics of Financial System Unorganized Market
concerned with the mobilization of the savings of 1. Financial system acts as a bridge between savers The sector that is not governed by any statutory or
the public and providing of necessary funds to the
and borrowers legal authority is known as unorganized sector. This
needy persons and institutions for enabling the
2. It consists of a set of inter-related activities and sector consists of the individuals and institutions for
production of goods and/or for provision of
services. services whom there are no standardized rules and
Components/Constituents/Elements/Parts of 3. It consists of both formal and informal financial regulations governing their financial dealings.
Financial System sectors. The existence of both formal and informal Organized Market
1. Financial Assets System is also called as financial dualism. The sector that is governed by some statutory or
2. Financial Intermediaries/Financial Institutions 4. It formulates capital, investment and profit legal authority is known as organized sector. This
3. Financial Markets generation sector consists of the institutions for whom there
4. Financial Rates of Return 5. It is universally applicable at firm level, regional are standardized rules and regulations governing
5. Financial Instruments and level, national level and international level their financial dealings.
6. Financial Services FINANCIAL MARKETS FINANCIAL ASSETS
Functions/Importance/Objectives/Advantages of The group of individuals and corporate institutions Financial assets refer to the cash or cash
Financial System dealing in financial transactions are termed as equivalents that are used for production or
1. Provision of liquidity financial markets. The centers or arrangements that consumption or for further creation of assets. Cash,
2. Mobilization of savings facilitate buying and selling of financial assets, Bank Deposits, Shares, Debentures, Investment in

Gold, Land & Buildings, Contractual right to receive Financial institutions are financial intermediaries. 2. Provide room for overcoming short term deficits
cash or another financial asset, etc., are called as They intermediate between savers and investors. 3. Facilitate development of trade and industry
Financial assets. They lend money. They also mobilise savings. 4. Facilitate development of capital market
Financial assets are classified in two ways 5. Facilitate smooth functioning of commercial
1. On the basis of marketability MODULE. II banks
2. On the basis of nature Money Market 6. Enable central bank to influence and regulate
Money Market refers to the market for short term liquidity in the economy
FINANCIAL INTERMEDIARIES/FINANCIAL
finance. Financial assets which have a short period Requirements quickly, adequately and at
INSTITUTIONS
of maturity are dealt in this market. Near money reasonable costs.
It is classified into categories:- like Trade Bills, Promissory Notes, Short term Features of money market
a. Banking Institution:- Government Papers, etc., are traded in this market. 1. Money market is a market for lending and
It includes commercial banks, private bank and Functions of Money Market borrowing of short term funds
foreign banks are operating in India.There are 12 1. It meets the short-term financial needs of various 2. It deals with financial assets having a maturity
Commercial Banks of Public Sector further, we have borrowers like individuals, institutions and period of a maximum of one year 3. It deals with
Development Banks (ICICI, IDBI), Agriculture Bank governments only those assets which can be converted into cash
(RRB, Cooperative Banks, NABARD). 2. It provides liquidity to investors and savers of immediately without any loss and with minimum
b.Non-Banking Institution: - money transaction cost 4. It provides liquidity to lenders
These are established to mobilise saving in different 3. It provides a platform for dealing in short-term The money market comprises of the following:
modes. These institutions donot offer banking securities which have a maturity period of less than
1. Call money market 2. Commercial bills market
one year
services such as accepting deposit and Lending 3. Treasury bills market 4. Short-term loan market
Significance / Objectives / Importance of money
Loans. For example LIC, UTI, GIC. Call money market
market
1. Provide a parking place for short term surplus The market where finance is provided just against a
funds mainly of commercial banks call made by the borrower is called call money

market. In this market finance is provided for an 3. High volatility in the interest rates Treasury bills market
extremely short period of time. Commercial Bills Market or Discount Market The market where finance is provided against the
Major Participants of Call money market The market where finance is provided by treasury bills is called as treasury bills market. The
1. Commercial banks which deal in this market to discounting of commercial bills is called as term ‘treasury bill’ refers to the promissory notes or
meet requirement of large payments, Statutory commercial bills market. finance bills issued by the government for its short
Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) ‘Commercial bills’ refer to the bills of exchange term finance requirements. RBI is the only agency
2. Stock brokers and speculators who deal in stock arising out of genuine trade transactions. which issues these bills on behalf of the
exchanges and bullion markets 3. Commercial bills Advantages of Commercial Bills Government.
market who are required to meet the matured bills 1. Provision of liquidity Major Participants of Treasury Bills Market
4. The Discount and Finance House of India (DFHI) 2. Certainty of payment 1. RBI which issues treasury bills on behalf the
and the Securities Trading Corporation of India 3. Ideal investment government
(STCI) which activates the call market 4. Simple legal remedy 2. Commercial banks which deal in this market to
Advantages of call money market 5. High and quick yield meet requirement of Statutory Liquidity Ratio (SLR)
1. High liquidity 2. High profitability 3. 6. Easy central bank control and Cash Reserve Ratio (CRR) and account for
Maintenance of SLR and CRR 4. High safety 5. Drawbacks of Commercial Bills nearly 90% of the transactions in this market.
Most cheap as brokerage is not required to be 1. Absence of bill culture 3. The Discount and Finance House of India (DFHI)
paid 2. Absence of rediscounting facility and the Securities Trading Corporation of India
Drawbacks of call money market in India 3. Stamp duty and inadequate availability of stamp (STCI) which activates the treasury bills market
1. Confinement of market only to big industrial and papers Advantages of Treasury Bills
commercial centers 4. Absence of secondary market 1. Highest Safety
2. Lack of integration among markets spread across 5. Difficulty in ascertaining genuine trade bills 2. Most Liquid
the country 3. Ideal for short-term investment

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4. Ideal for fund management as they are traded in invested in money market instruments. The Types of Bills
the secondary market investors get a higher return. They are more liquid Many types of bills are in circulation in a bill market.
5. Ideal for meeting Statutory Liquidity Requirement as compared to other investment alternatives. They may be broadly classified as follows:-
of commercial banks American depository receipt and Global depository 1. Demand Bills and Time Bills: - Demand bill is
6. Ideal for meeting Cash Reserve Requirement of receipt payable on demand. It is payableimmediately on
commercial banks ADRs are instruments in the nature of depository presentation or at sight to the drawing.
Defects of Treasury Bills receipt and certificate. These instruments are 2. Clean Bills and Documentary Bills: - When bills
1. Interest rate is very less compared to other negotiable and represent publicly traded, local have to be accompanied by documents of title to
securities currency equity shares issued by non -American goods such as railway receipts, bill of lading etc.
2. Competitive bidding is less among the company. 3. Inland and Foreign Bills: Inland bills are bills
participants Structure of Money Market drawn upon a person resident in India and are
3. Less trading activity since the holders generally Money market consists of a number of sub markets. payable in India. Foreign bills are bills drawn outside
keep the treasury bills till maturity All submarkets collectively constitute the money India and they may be payable either in India or
Repurchase Agreements (REPO) market. Each sub market deals in a particular outside India.
REPO is basically a contract entered into by two financial instrument. The main components or 4. Accommodation Bills and Supply Bills: In case of
parties (parties include RBI, a bank or NBFC. In this constituents or sub markets of a money markets are accommodation bills, two parties draw bills on each
contract, a holder of Govt. securities sells the as follows : other purely for the purpose of mutual financial
securities to a lender and agrees to repurchase 1. Call money market accommodation.
them at an agreed future date at an agreed price. 2. Commercial bill market
Money Market Mutual Funds (MMMFs) 3. Treasury bill markets
Money Market Mutual Funds mobilise money from 4. Certificates of deposits market
the general public. The money collected will be 5. Commercial paper market

MODULE.III Components of Capital Market secondary market. This is usually in the form of
Capital Market There are four main components of capital market. bonds, but it may include notes, bills, and so for
Meaning They are: public and private expenditures.
Capital market simply refers to a market for long 1. Primary market Development financial institution (DFI)
term funds. It is a market for buying and selling of 2. Secondary Market (Details are given in last A development financial institution (DFI), also
equity, debt and other securities. Generally, it deals module) known as a development bank or development
with long term securities that have a maturity 3. Government Securities Market (Gilt Edged finance company (DFC), is a financial institution that
period of above one year. Security Market) provides risk capital for economic development
Functions of a Capital Market 4. Financial Institutions projects on a non-commercial basis.
The functions of an efficient capital market are as Credit guarantee market IFCI Ltd
follows: Credit guarantee means an arrangement by which IFCI, previously Industrial Finance Corporation of
1. Mobilise long term savings for financing long any person guarantees to discharge the monetary India, is a development finance institution under
term investments. liability of another person, irrespective of its form, the jurisdiction of Ministry of Finance, Government
2. Provide risk capital in the form of equity or quasi- but does not, unless otherwise prescribed, include of India .
equity to entrepreneurs. an undertaking or promise to 15 satisfy the SFC – State Finance Corporation
3. Provide liquidity with a mechanism enabling the obligation of another consumer in respect of a The State Finance Corporations (SFCs) are an
investor to sell financial assets. credit arrangement integral part of institutional finance structure of a
4. Improve the efficiency of capital allocation Bond market country. Where SEC promotes small and medium
through a competitive pricing mechanism. The bond market (also debt market or credit industries of the states. Besides, SFC help in
5. Disseminate information efficiently for enabling market) is a financial market where participants can ensuring balanced regional development, higher
participants to develop an informed opinion about issue new debt, known as the primary market, or investment, more employment generation and
investment, disinvestment, reinvestment etc. buy and sell debt securities, known as the broad ownership of various industrie.

Industrial Credit and Investment Corporation of jurisdiction of Ministry of Finance , Government of Banks, all India financial institutions or private
India (ICICI) India headquartered at Lucknow and having its firms..
Industrial Credit and Investment Corporation of offices all over the country. Underwriting: It is an agreement whereby the
India (ICICI) is a financial institution in India and was Non-banking financial institution (NBFI) or non- underwriter promises to subscribe to a specified
established in 1955 as a public limited company. bank financial company (NBFC) number of shares or debentures or a specified
The Indian Company Act governs it. ICICI is A non-banking financial institution (NBFI) or non- amount of stock in the event of public not
incorporated for developing medium and small bank financial company (NBFC) is a financial subscribing to the issue.
industries of the private sector. institution that does not have a full banking license Distribution: It is the function ofsale ofsecuritiesto
Infrastructure Development Finance Company or is not supervised by a national or international ultimate investors. Thisis performedby specialized
Limited (IDFC) banking regulatory agency. agencieslike brokers and agents who maintain a
Infrastructure Development Finance Company regular and direct contact
Limited, more commonly known MODULE.IV withtheultimateinvestors.
As IDFC, is a finance company based in India under Primary Market Role of New Issue/ Primary Market:
Department of FinancialServices, Government of New Issue Market or primary market is the market Capital Formation: It provides attractive issue to
India.[1] It provides finance and advisory services for new long-term capital.Here the securities are the potential investors and with this company can
for infrastructure projects as well as asset issued by company for the first time directly to the raise capital at lower costs.
management and investment banking. investors. On receiving the money from new issues, Liquidity: As the securitiesissued in primary market
Small Industries Development Bank of India (SIDBI) the company will issue the security certificates to can be immediately sold in secondary market.
Small Industries Development Bank of India (SIDBI) the investors. Reduction in Cost: Prospectus containing all details
is the apex regulatory body for overall licensing and Function of New Issue Market about securities are given to theinvestors.
regulation of micro, small and medium enterprise Origination: It refers to the work of investigation, Primary Market Intermediaries
finance companies in India. It is under the analysis and processing of new project proposals.

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The major intermediaries of the primary securities Stock exchange 7. Listingofsecurities.

market include: Stock exchange is the place where the stocks, 8. Platformforpublic dept.
1. Merchant Bankers/ LeadManagers shares and the securities are bought and sold. A 9. Clearinghouseofbusinessinformation.
2. Underwriters stock exchange is a corporation of mutual Trading mechanism
3. Bankers to an Issue: organizations which provide the facilities for stock Once you have your Demat account and trading
4. Registrars to an Issue & Share Transfer Agent brokers to trade company stocks and other account is ready, you are all set to trade in the stock
5. Debenture Trustees securities. market. Companies list their shares in the Primary
Book Building Features of stock exchange are: Market through an Initial Public Offering Or IPO.
Book Building is basically a process used in Initial It is aplace where securities are purchasedandsold. After the IPO the stocks of the company are listed
Public Offer (IPO) for efficient price discovery. It is a O A stock exchange is an association of persons on an exchange and are available for trading in the
mechanism where, during the period for which the whether incorporated or secondary market.
IPO is open, bids are collected from investors at Not.
various prices, which are above or equal to the floor O Thetradinginastockexchangeisstrictlyregulated. 1.Bombay Stock Exchange (BSE)
price. The offer price is determined after the bid OBothgenuineinvestorsandspeculatorsbuyandsellsh Bombay stock exchange was established in 1875 as
closing date. ares a voluntary non-profit makingassociation at
Secondary Market Functions of Stock Exchange: Mumbai. It is Asia’s oldest stock exchange and is a
The secondary market, also called the aftermarket 1. Ensureliquidityof capital. major stock exchanges inIndia.
and follow on public offering, is the financial market 2. Regularmarketforsecurities. National Stock Exchange(NSE)
in which previously issued financial instruments 3. Evaluation ofsecurities. National Stock Exchange wasincorporated in
such as stock, bonds, options, and futures are 4. Mobilisingsurplussavings. November 1992 with an equity capital of 25 crores.
bought and sold. 5. Helpfulinraisingnewcapital. NSE is professionally managed national market
6. Safetyindealing. forshares, PSU bonds, debentures and government

securitieswith all the necessary infrastructure and goal, at an affordable cost.in dematerialized form in Objectives of the SEBI
trading facilities. the Indian capital market. The main objectives of the SEBI are
Objectives of NSE STCIL and STCI .To save the rights and interests of investors
The following are the objectives of NSE: The State Trading Corporation of India Ltd. (STC) is a particularly individual investors and to guide and
I. Providinga nationalwide tradingfacilityfor premier International educate them.
equities,debt instruments etc. Trading company of the Government of India, and, .To prevent trading malpracticeslikeriggingthe
II. Ensure equal accessto investors all over the was engaged primarily in exports, and imports price,insidertrading, misleading
country through an appropriate operations. Statementsin prospectus, etc.
Communication network. . Toregulate stock exchanges and the
2. NSDL Securities and Exchange Board of India (SEBI) securitiesmarket to promote their orderly
NSDL, one of the largest Depositories in the World, The SEBI of India was established in April 1988. It Functioning.
established in August 1996 has established a state- has been functioning the full .To registering and regulating the working of stock
of-the-art infrastructure that handles most of the Administrative control of the Government of India. brokers, sub-brokers etc.
securities held and settled It works under the guidance of Ministry of Finance. Functions of SEBI
CDSL It is the agent of the CentralGovernmentin 1. Protective Functions:
Central Depository Services Limited (“CDSL”) was capitalmarket.It is established for the regulation • It stops and bans unfair trade practices in the
found in 1999 to fulfil one and orderly functioning of the stock exchanges. It securities market, e.g., price
Goal: Convenient, Dependable and secured also works for protecting the investor’s rights, Rigging,marketmisleading statementsin prospectus
depository services. Over two decades later, prevents malpractices in security trading and manipulationsetc.
everything we have done – the values we have built promotes healthy growth of the capital • It controlsinsidertrading and imposes
on, dematerialisation of various asset classes, e- Markets. penaltiesforsuch practices.
services – have all been in support of that singular • It undertakesstepsforinvestors protection.

2. Regulatory Functions: 1.Regulatingthebusinessactivitiesinthecapitalmarket Participants in the derivative markets

• It involvesregulationofthe businessin 2.Powertograntregistrationtofinancialintermediarie Hedgers,Speculators,Arbitrageurs,Margin traders
securitymarkets and other stock s. What are Swaps?
Exchanges; 3. Register and regulate how the depositories Swaps are derivatives instruments. The swaps
•Registration and regulation of participants work.Working of custodians,FIIs,Creditrating contract involve an exchange of cash flows over
working, depositories, agenciesis also seen time. Swaps are typically done between two parties.
Custodians of securities, FNIS, credit rating 4.Registeringandregulatingtheworkingofventurecapi One party makes a payment to the other. This
•promoting and regulatingself- talfunds and mutualfunds. depends on whether a price is above or below a
regulatoryorganizations 5. Powerto grant approval to bye-laws of recognized reference price.
Development Functions: exchanges. What is “Badla” trading?
• Promotionofthe education ofinvestors and 6. Powerto prohibitinsidertrading. The “Badla” trading is a mechanism of trade
theirtraining of intermediariesof 7. Powerto compellistingofsecuritiesby public settlement in India. “Badla” is a Hindi term for
Securitiesmarkets; companies carryover transactions. This kind of trading
• Banning any company to issue prospectus, any facilitates trade shares on the margin on the
offer document,or MODULE IV Bombay Stock Exchange.
Advertisementsolicitingmoneyfromthe public for DERIVATIVES MARKET
the issueofsecurities Derivative securities are financial instrumentsthat
Powers of SEBI are based on other assets. In this one sense, they
The powers have been given to the SEBIwith the are similar securitized assets. However, derivative
enactment of SEBIAct, 1992.They securities, unlike securitized assets, are not
Are: obligations backed by the original issuer of the
underlying security.

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