Indian Financial System

Paper AH 6
For B.Com ( Hons ) –Part III
By
Tamal Basu
Assistant Professor
Department of Commerce ( UG & PG)
Prabaht Kumar College, Contai
Financial System: An Introduction
The Indian Financial System
 Meaning of the Financial System

 A set of sub systems of financial institutions,

markets, instruments and services
 Intermediates with the flow of funds between savers
and borrowers.
 Facilitates transfer and allocation of scarce
resources efficiently and effectively
 Types of Financial System
 Formal financial system – organized, institutional and regulated

 Informal financial system

Advantages
Low transaction costs
Minimum default risk
Transparency of procedures
Disadvantages
Wide range of interest rates
Higher rates of interest
Unregulated
Components of the Financial System

 Financial Institutions

 Financial Markets

 Financial Instruments

 Financial Services
 Types of Financial Institutions
 Banking: creators and purveyors of credit.
Types
Commercial Banks
Cooperative Banks
 Non-banking: purveyors of credit
Types
Developmental financial institutions
Mutual funds
Insurance companies
NBFCs
Functions of Financial Institutions

Provide three transformation services

 Liability, asset and size transformation

 Maturity transformation

 Risk transformation
 Financial Markets
Types
 Money Market – A market for short-term debt instruments
 Capital Market – A market for long-term equity and debt instruments

Segments
 Primary Market – A market for new issues
 Secondary Market – A market for trading outstanding issues
 Financial Instruments
Types

Primary

Secondary

Distinct Features

Marketable

Tradable

Tailor-made
 Functions of Financial System

Mobilise and allocate savings

Monitor corporate performance
Provide payment and settlement systems
Optimum allocation of risk bearing and reduction
Disseminate prize related information
Offer portfolio adjustment facility
Lower the cost of transactions
Promote the process of financial deepening and broadening
 Key Elements of a Well-functioning
Financial System
A strong legal and regulatory environment
Stable money
Sound public finances and public debt management
A central bank
Sound banking system
Information system
Well-functioning securities market
 Financial System Designs

Types
Bank-based

Market-based
 Market-based Financial System
Advantages
Provide attractive terms to both investors and borrowers
Facilitate diversification
Allow risk sharing
Allow financing of new technologies

Drawbacks
Prone to instability
Exposure to market risk
Free-rider problem
 Bank-based Financial System

Advantages
Close relationships with parties
Provide tailor-made contracts
Efficient inter-temporal risk sharing
No free-rider problem

Drawbacks
Retards innovation and growth
Impedes competition
 Functions of Financial Markets

Enabling economic units to exercise their time preference

Separation, distribution, diversification and reduction of risk
Efficient payment mechanism
Providing information
Enhancing liquidity
Providing portfolio management services
 Role and Importance of Financial
System in Economic Development
• 1. It links the savers and investors. It helps in mobilizing and allocating the
savings efficiently and effectively. It plays a crucial role in economic
development through saving-investment process. This savings –
investment process is called capital formation.
• 2. It helps to monitor corporate performance.
• 3. It provides a mechanism for managing uncertainty and controlling risk.
• 4. It provides a mechanism for the transfer of resources across
geographical boundaries.
• 5. It offers portfolio adjustment facilities (provided by financial markets
and financial intermediaries).
• 6. It helps in lowering the transaction costs and increase returns. This will
motivate people to save more.
• 7. It promotes the process of capital formation.
• 8. It helps in promoting the process of financial deepening and
broadening. Financial deepening means increasing financial assets as a
percentage of GDP and financial broadening means building an increasing
number and variety of participants and instruments. In short, a financial
system contributes to the acceleration of economic development. It
contributes to growth through technical progress.
 Financial Markets
• Financial market deals in financial securities (or financial
instruments) and financial services. Financial markets are the
centres or arrangements that provide facilities for buying and
selling of financial claims and services. These are the markets in
which money as well as monetary claims is traded in. Financial
markets exist wherever financial transactions take place. Financial
transactions include issue of equity stock by a company, purchase of
bonds in the secondary market, deposit of money in a bank
account, transfer of funds from a current account to a savings
account etc. The participants in the financial markets are
corporations, financial institutions, individuals and the government.
These participants trade in financial products in these markets.
They trade either directly or through brokers and dealers. In short,
financial markets are markets that deal in financial assets and credit
instruments.
 Functions of Financial Markets:
• The main functions of financial markets are outlined as
below:
• 1. To facilitate creation and allocation of credit and
liquidity.
• 2. To serve as intermediaries for mobilisation of
savings.
• 3. To help in the process of balanced economic growth.
• 4. To provide financial convenience.
• 5. To provide information and facilitate transactions at
low cost. 6. To cater to the various credits needs of the
business organisations.
Classification of Financial Markets:
• There are different ways of classifying financial
markets. There are mainly five ways of
classifying financial markets.
 Financial Instruments (Securities)
• Financial instruments are the financial assets, securities and claims.
They may be viewed as financial assets and financial liabilities.
Financial assets represent claims for the payment of a sum of
money sometime in the future (repayment of principal) and/or a
periodic payment in the form of interest or dividend. Financial
liabilities are the counterparts of financial assets. They represent
promise to pay some portion of prospective income and wealth to
others. Financial assets and liabilities arise from the basic process
of financing. Some of the financial instruments are tradable/
transferable. Others are non tradable/non-transferable. Financial
assets like deposits with banks, companies and post offices,
insurance policies, NSCs, provident funds and pension funds are not
tradable. Securities (included in financial assets) like equity shares
and debentures, or government securities and bonds are tradable.
Hence they are transferable. In short, financial instruments are
instruments through which a company raises finance.
 Financial Services
• The development of a sophisticated and matured
financial system in the country, especially after the
early nineties, led to the emergence of a new sector.
This new sector is known as financial services sector.
Its objective is to intermediate and facilitate financial
transactions of individuals and institutional investors.
The financial institutions and financial markets help the
financial system through financial instruments. The
financial services include all activities connected with
the transformation of savings into investment.
Important financial services include lease financing,
hire purchase, instalment payment systems, merchant
banking, factoring, forfaiting etc.
 Role of Specialised Financial
Institutions
• SFIs are institutions set up mainly by the
government for providing medium and long-term
financial assistance to industry. As these
institutions provide developmental finance, that
is, finance for investment in fixed assets, they are
also known as ‘development banks’ or
‘development financial institutions’. These
institutions receive funds for their financing
operations primarily from the government or
other public institutions. These institutions also
raise funds from the capital market
 Types of Specialised Financial
Institutions
(a) All India Development Banks
• 1. Industrial Development Bank of India (IDBI)
• 2. Small Industries Development Bank of India (SIDBI)
• 3. Industrial Finance Corporation of India (IFCI)
• 4. Industrial credit and Investment corporation of India
(ICICI)
• 5. National Bank for Agriculture and Rural
Development (NABARD)
• 6. Industrial Investment Bank of India Ltd. (previously,
Industrial Reconstruction Bank of India) Industrial
Development Bank of India (IDBI)
 Types of Specialised Financial
Institutions
(b) State-level Institutions
1. State Financial Corporations (SFCs)
2. State Industrial Development Corporations
(SIDC)
3. State Industrial Investment Corporations (SIIC)
 Types of Specialised Financial
Institutions
(c) Investment institutions
1. Unit Trust of India (UTI)
2. Life Insurance Corporation of India (LIC)
3. General Insurance Corporation (GIC)
Objectives and Functions of Industrial
Finance Corporations of India (I.F.C.I.)
• The primary role of IFCI is to provide ‘direct
financial assistance’ on medium and long term
basis to industrial projects in the corporate
and co-operative sectors. Over the years, the
scope of activities of the corporation has
widened. The objectives of the corporation
are stated below.
 State Financial Corporations (SFCs)

• IFCI was established to cater to the financial needs of

industrial concerns in large scale corporate and co-
operative sectors. Small and medium sized enterprises
were outside the purview of IFCI. To meet the financial
needs of small and medium enterprises, the
government of India passed the State Financial
Corporation Act in 1951, empowering the State
governments to establish development banks for their
respective regions. Under the Act, SFCs have been
established by State governments to meet the financial
requirements of medium and small sized enterprises.
There are 18 SFCs at present.
 The objectives of state financial
corporations are as under:
• Provide financial assistance to small and medium
industrial concerns. These may be from corporate
or co-operative sectors as in case of IFCI or may
be partnership, individual or joint hindu family
business. Under SFCs Act, “industrial concern”
means any concern engaged not only in the
manufacture, preservation or processing of
goods, but also mining, hotel industry, transport
undertakings, generation or distribution of
electricity, repairs and maintenance of machinery,
setting up or development of an industrial area or
industrial estate, etc.
 Industrial Development Bank of India
(IDBI)
• The Industrial Development Bank of India was set
up in July 1964 as a wholly owned subsidiary of
the Reserve Bank of India. The purpose was to
enable the new institution to benefit from the
financial support and experience of RBI. After a
decade of its working, it was delinked from RBI in
1976, when its ownership was transferred to the
Government of India. The purpose was to allow
RBI to concentrate on its central banking function
and allow IDBI to grow into a developmental
agency.
 IDBI CONTD.
• IDBI is now the principal financial institution for co-
ordinating the working of institutions engaged in financing,
promoting or developing industry, assisting the
development of such institutions and providing credit and
other facilities for the development of industry. Thus the
role of IDBI may be stated as under:
• (1) As an apex financial institution, it coordinates the
working of other financial institutions.
• (2) It assists in the development of other financial
institutions.
• (3) It provides credit to large industrial concerns directly.
• (4) It undertakes other activities for the development of
industry.
 Objectives
The main objectives of IDBI is to serve as the apex
institution for term finance for industry in India.
(1) Co-ordination, regulation and supervision of the working
of other financial institutions such as IFCI , ICICI, UTI, LIC,
Commercial Banks and SFCs.
(2) Supplementing the resources of other financial institutions
and thereby widening the scope of their assistance.
(3) Planning, promotion and development of key industries
and diversifications of industrial growth.
(4) Devising and enforcing a system of industrial growth that
conforms to national priorities.
Its objectives include
 Industrial Credit and Investment
Corporation of India (ICICI)
• Industrial Credit and Investment Corporation of
India was established as a joint stock company in
the private sector in 1955. Its share capital was
contributed by banks, insurance companies and
foreign institutions including the World Bank. Its
major shareholders now are Unit Trust of India,
Life Insurance Corporation of India and General
Insurance Corporation and its subsidiaries. They
together hold approximately 50% of the paid up
share capital of ICICI.
 ICICI- OBJECTIVES
The ICICI has been established to achieve the following
objectives:
• (I) To assist in the formation, expansion and
modernisation of industrial units in the private sector;
• (ii) To stimulate and promote the participation of
private capital (both Indian and foreign) in such
industrial units;
• (iii) To furnish technical and managerial aid so as to
increase production and expand employment
opportunities;
• (iv) To assist in the development of the capital market
through its underwriting activities.
 Export-Import Bank of India:
Objectives
• 1. To ensure and integrated and co-ordinated approach
in solving the allied problems en
• 2. To pay specific attention to the exports of capital
goods;
• 3. Export projection;
• 4. To facilitate and encourage joint ventures and export
of technical services and international and merchant
banking; countered by exporters in India.
• 5. To extend buyers’ credit and lines of credit;
• 6. To tap domestic and foreign markets for resources
for undertaking development and financial activities in
the export sector.
 Export-Import Bank of India:
Functions
• (a) Planning, promoting and developing exp
• (b) Providing technical, administrative and
managerial assistance for promotion,
management and expansion of export
sector.orts and imports;
• (c) Undertaking market and investment
surveys and techno-economic studies related
to development of exports of goods and
services.
 EXIM BANK –OTHERS ASPECTS
• The Exim Bank has a 17-member Board of Directors, with
Chairman and Managing Director as the chief executive and
full-time director. The Board of Directors consists of the
representative of the Government of India, RBI, IDBI, ECGC,
commercial banks and the exporting community.
• The authorised capital of Exim Bank is Rs. 200 crores, of
which Rs. 75 crores is paid up. The banks have secured a
long-term loan of Rs. 20 crores from the Government of
India. It can also borrow from the RBI. It is empowered to
raise resources in domestic and international markets.
• The Bank began its lending operations from March, 1982.
Till June, 1982, it has extended assistance up to Rs. 133
crores to the export sector in various ways.
Capital Market
A capital market is market for securities (Debt or Equity),
where business enterprises (Companies) and government
can raise long term funds.

The primal role of this market is to make investment

from investors who have surplus funds to the ones
who are running a deficit
The different types of financial instruments
that are traded in the capital markets are

> Equity instruments

> Credit market instruments,
> Insurance instruments,
> Hybrid instruments and
> Derivative instruments.
Types of capital Market

There are two types of capital market:

• Primary market

• Secondary market
Primary Market

It is that market in which shares, debentures and other securities are sold for the
first time for collecting long-term capital

This market is concerned with new issues. Therefore, the primary market is also
called NEW ISSUE MARKET

In this market, the flow of funds is from savers to borrowers (industries), hence, it
helps directly in the capital formation of the country

The money collected from this market is generally used by the companies to
modernize the plant, machinery and buildings, for extending business, and for
setting up new business unit.
Features of primary market
It is related with New Issues

It has no Particular Place

It has Various Methods Of Float Capital: Following are the methods of raising
capital in the primary market:

i) Initial Public Issue (IPO)

ii) Offer For Sale
iii) Private Placement
iv) Right Issue

It comes before Secondary Market

Secondary Market

The secondary market is that market in which the buying and

selling of the previously issued securities is done.

The transactions of the secondary market are generally done

through the medium of stock exchange.

The chief purpose of the secondary market is to create

liquidity in securities.
Features of secondary market

• It Creates Liquidity

• It Comes after Primary Market

• It has a Particular Place (Stock exchanges)

• It encourage New Investments

Indian capital Market

The Indian Capital Market is one of the oldest capital

markets in Asia which evolved around 200 years
ago
Indian capital markets-Time line

1830s:Trading of corporate shares and stocks in Bank and cotton Presses in

Bombay.

1850s: Sharp increase in the capital market brokers owing to the rapid development
of commercial enterprise.

1860-61: Outbreak of the American Civil War and ' Share Mania ' in India.

1894: Formation of the Hamada Shares and Stock Brokers Association.

1908: Formation of the Calcutta Stock Exchange Association

BSE founded in1875. It can be said that in1899 the stock exchange at Bombay was
consolidated. Electronic Stock Exchange started in 1992.

NSE founded in1992 (as a competitor of BSE) NSDL founded in 1996. NSDL- National
Security Depositor Limited
Major events in Indian capital Market

In 1993- private sector entry allowed in mutual fund.

In March 1995-NSE started a limit order book market, instead

of open outcry.

In 1992- FII (Foreign Institutional Investor) were allowed in

Indian security market. Indian companies were allowed to
raise GDR & FCCBS. GDR- global depository receipt FCCBS-
foreign currency convertible bonds
INDIAN CAPITAL MARKET DIVIDED INTO TWO
STAGES

1947-91:-very much controlled and restricted by Indian Govt.

1991 onwards:-liberalized, progressive and regulated by .SEBI

WHY IN 1991INDIAN CAPITAL MARKET LIBERALIZED?

Because of increasing oil price

Double digit inflation

Foreign loan chances of default creates shortage of

adequate capital and brought economic crisis for
India.
CHANGES IN CAPITAL MARKET POLICY AND GROWTH RATE OF INDIA

Since independence India followed democratic socialism

1951-56 - 3.6%

War period - 1961 -66 - 2.5%

Always remains below - 5%

1991 onwards liberalized economic policy

8th plan 1992-97 - 6.7% growth rate and

Then afterwards always remains more than 5%.

In 2008 India was world’s second fastest growing major economy even in world
slowdown-2009 - growth rate 6.1%

Now expecting 8% growth rate

Reforms in Capital Market of India

The major reforms undertaken in capital market of India includes

1. Establishment of SEBI
2. Establishment of Creditors Rating Agencies
3. Increasing of Merchant Banking Activities
4. FII and performance of Indian Economy
5. Rising Electronic Transactions
6. Growing Mutual Fund Industry
7. Growing Stock Exchanges
8. Investor's Protection
9. Growth of Derivative Transactions
10.Insurance Sector Reforms
11.Commodity Trading
 CAPITAL MARKET
•

• A good capital market is essential pre requisite for industrial and commercial
development of a country.credit is required and supplied on both short term and
long term basis.The money market caters to the short term needs only.The long
term needs are met by the capital market.

• The term, refers to the institutional arrangements for facilitating the borrowing
and lending of long term funds..It may be defined as an organised mechanism for
effective and efficient transfer of money capital or financial resources from the
investing parties to the entrepreneurs engaged in industry or commerce.

• OBJECTIVES AND IMPORTANCE

Capital market,Ensures best possible coordination and balance between the flow
of savings on the one hand and the flow of investment leading to capital formation
on the other.Directs the flow of savings into most profitable channels and thereby
ensures optimum utilisation of financial resources
 FUNCTIONS
• Mobilisation of financial resources on a
nation wid
• Import of foreign capital to supplement the
deficit in the required financial resources for
economic growth.Effective allocation of
mobilised financial resources.
 COMPONENTS OF CAPITAL MARKET
• New issue or primary market.
• Secondary market
• Financial institutions
 PARTICIPANTS OF CAPITAL MARKET
• Clearing house for long term capital
• 1) New Issue Market
• 2)stock Exchange
• 3) Financial Institutions
• Borrowers:
• Individuals,Corporations
• Institutions
• Government
• Entrepreneurs
Supply of money capital:
Individuals,
Corporations
Institutions
Banks
Government
 NEW ISSUE MARKET OR PRIMARY
MARKET
• New securities, i.e., shares or bonds that have
never been issued previously, are offered.Both
new and existing companies can raise capital
on the new issue market.The main function is
to facilitate the transfer of funds from the
willing investors to the entrepreneurs.
 CAPITAL MARKET INSTRUMENTS
• Ownership securities
• Equity shares.
• Preference shares
• Creditor ship securities
• Debentures
• Bonds
 CAPITAL MARKET INTERMEDIARIES
• Firm or person (such as
a broker or consultant) who acts as
a mediator on a link between parties to
a business deal, investment
decision, negotiation, etc.Intermediaries
usually specialize in specific areas, and serve
as a conduit for market and
other types of information.
 INTRMEDIARIES
• Intermediaries are service providers in the market, including stock brokers, sub-
brokers, financiers, merchant bankers, underwriters, depository participants,
registrar and transfer agents, FIIs/ sub accounts, mutual Funds, venture capital
funds, portfolio managers, custodians, etc
• MERCHANT BANKERS
• STOCK BROKERS
• PUBLIC
• CAPITAL MARKETS
• UNDERWRITERS
• DEPOSITORY PARTICIPTANT
• INTERMEDIARIES
• PORTFOLIO MANAGERS
• INTERMEDIARIES
• FINANCIERS
• MUTUAL FUNDS
• VENTURE CAPTAL
 DEPOSITORY PARTICIPTANT
• Depository system introduced in India in the
year 1996.In India, a Depository
Participant (DP) is described as an agent of the
depository. They are the intermediaries
between the depository and the
investors.Service provided- Dematerialization,
Rematerialization, Transfers of securities,
settlement of trades.In India- NSDL & CDSL are
the two entity.
 STOCK BROKER
• A stockbroker is a regulated professional
individual, usually associated with a brokerage
form firm or broker-dealer, who buys and
sells stocks and other securities for both retail
and institutional clients, through a stock
exchange or over the counter, in return for
a fee or commission.Stockbrokers are known by
numerous professional designations, depending
on the license they hold, the type of securities
they sell, or the services they provide.
 SUB BROKERS
• An intermediary broker, from whom
another broker acquires
the reinsurance that needs to be placed.Person
who is not a Trading Member of a Stock Exchange
but who acts on behalf of a Trading Member as
an agent or otherwise for assisting investors in
dealing in securities through such Trading
Members.All Sub-Brokers are required to obtain a
Certificate of Registration from SEBI without
which they are not permitted to deal in
securities. a Sub-Broker unless they are registered
with SEBI can wok as a Sub-Broker.
 UNDERWRITERS
• A company or other entity that administers the
public issuance and distribution of securities from
a corporation or other issuing body.They have
taken on the risk of distributing the
securities.Underwriters make their income from
the price difference (the "underwriting spread")
between the price they pay the issuer and what
they collect from investors or from broker-dealers
who buy portions of the offering.
 Advantages of Underwriting
• 1. The company is sure of getting the value of
shares issued
• 2. It enhances goodwill of the company
• 3. It facilitates wide distribution of securities
• 4. The company gets expert advice from
underwriters in the matter of marketing
securities
• 5. It fulfills requirement of minimum
subscription
 STOCK EXCHANGE
• the secondary market where existing
securities (shares and debentures) are traded.
• STOCK EXCHANGEStock Exchanges are
organised and regulated markets for various
securities issued by corporate sector and
other institutions.
• 24 approved stock exchanges in our country
 DEFINITIONS OF STOCK EXCHANGE
• “ Security exchanges are market places where
securities that have been listed thereon may
be bought and sold for either investment or
speculation” Pyle Stock Exchange means any
body of individuals whether incorporated or
not, constituted for the purpose of assisting,
regulating or controlling the business of
buying, selling in securities” Securities
Contract (Regulation) Act, 1956
FUNCTIONS OF STOCK EXCHANGE
• 1. Ensure liquidity of capitalProvide ready market
where buyers and sellers are always availableProvide
hard cash after selling their holdings
• 2. Continuous market of securitiesSecurities once listed
continue to be traded at the exchange irrespective of
the fact that owners go on changing
• 3. Evaluation of SecuritiesInvestors can evaluate the
worth of their holdings from the prices quoted at
different exchanges for these securities.
 LISTING OF SECURITIES
• Listing of securities means permission to
quote shares and debentures officially on the
trading floor of the stock exchangeEvery
security listed by companies cannot be traded
at a stock exchange. The stock exchange fix
certain standards which the company must
fulfill before getting the securities listed.
OBJECTIVE OF LISTING OF SECURITIES
• Proper supervision and control of dealing in
securitiesProtect the interest of shareholders
and the investors
• Avoid concentration of economic power
• Ensure liquidity of securitiesRegulate dealings
in securities
• Requiring promoters to have reasonable stake
in the company
 DEMATERIALISATION OF SHARES
• Securities held in physical form are converted
into electronic form and credited to demat
account.It offers a number of benefits to the
investor.It is a safe and convenient way to hold
securities compared to holding securities in
physical form.No stamp duty is levied on
transfer of securities held in demat
form.Instantaneous transfer of securities
enhances liquidity.
 REMATERIALISATION OF SHARES
• Securities can be changed from demat form to
physical form.For this one has to submit a
Rematerialisation Request Form (RRF) through
the concerned DP in the same manner as
Dematerialisation.The Depository Participant
will forward the request to the Depository
after verifying that the client has the
necessary securities in balance.
 There are two depositories in India,
namely, NSDL and CDSL.
• For smooth functioning of the depository system,
depository participants act as intermediary
between the clients and the depository. They
help in transfer of securities in a smooth manner.
They also help in performing the task of changing
physical securities into demat form and vice-
versa.ISIN(International Securities Identification
Number) is a unique identification number
assigned to all the securities as per ISO
(International Standards Organisation).
 SECURITIES AND EXCHANGE BOARD
OF INDIA (SEBI)
• The Government issue and ordinance on January
30,1992 for giving statutory power to SEBI. This
Act was passed by the parliament as Act No. 15 of
1992 which received assent of the parliament on
4th April Further, on May 29, 1992 the
Government issued an ordinance abolishing the
Capital Control Act, The ordinance also
supersedes the various guidelines issued by the
CCI from time to time . Accordingly, SEBI was set
up under the SEBI Act, 1992.
 OBJECTIVE OF SEBI ACT 1992
• The overall objective of SEBI are to protect the
interest of investors and promote the
development of stock exchange and to regulate
the activities of stock market. The objective of
SEBI are :-To regulate the activities of the stock
exchange.To protect the rights of investors and
ensuring safety to their investment.To pr event
fraudulent and malpractices by having balance
between self regulation of business and its
statutory regulation.To regulate and develop a
code of conduct for intermediaries such as
brokers, underwriters etc.
 POWER AND FUNCTION OF SEBI
• Regulating the business in stock exchange and any other
securities.Registering and regulating the working of stock
broker, sub-broker , share transfer agents, bankers to issue,
merchant bankers, underwriters, portfolio manager,
investment advisor and such other intermediaries who may
be associated with securities markets in any
manner.Registering and regulating the working of the
working of venture capital funds and collective investment
schemes, including mutual funds.Promoting and regulating
self – regulatory organization.Prohibiting fraudulent and
unfair trade practices relating to securities
markets.Promoting investor’s education and training of
intermediaries of securities markets
 Money Markets
• Money market constitutes an important segment of the financial
market by providing an avenue for equilibrating the surplus
funds of lenders and the requirements of borrowers for short
periods ranging from overnight up to an year.It also provides a
focal point for central bank’s intervention in influencing the
liquidity in the financial system and thereby transmitting the
monetary policy impulses.
• "Money Market" refers to the market for short-term
requirement and deployment of funds.Money market
instruments are those instruments, which have a maturity
period of less than one year.The most active part of the money
market is the market for overnight call and term money between
banks and institutions and repo transactions.Call Money / Repo
are very short-term Money Market products.
Instruments termed as money market
instruments
• Certificate of Deposit (CD)
• Commercial Paper (CP)
• Inter Bank Participation
• Certificates
• Inter Bank term Money
• Treasury Bills
• Bill Rediscounting
• Call/ Notice/ Term Money
 Call/Notice Money Call Money –
Overnight one day borrowing
• Notice Money – period upto 14 daysBalances
very short term liquidity requirementsNo
collateral requirementMainly used to meet
CRR requirements
 Commercial Paper
• Commercial Papers are short term borrowings by
Corporates, FIs, PDs, from Money
Market.FeaturesCommercial Papers when issued
in Physical Form are negotiable by endorsement
and delivery and hence highly flexible
instrumentsIssued subject to minimum of Rs 5
lakhs and in the multiples of Rs. 5 Lac
thereafter,Maturity is 15 days to 1 yearUnsecured
and backed by credit of the issuing companyCan
be issued with or without Backstop facility of
Bank / FI
 Eligibility Criteria CP
• Any private/public sector co. wishing to raise money
through the CP market has to meet the following
requirements:Tangible net-worth not less than Rs 4 crore -
as per last audited statementShould have Working Capital
limit sanctioned by a bank / FICredit Rating not lower than
P2 or its equivalent - by Credit Rating Agency approved by
Reserve Bank of India.Board resolution authorizing
company to issue CPsCommercial Papers can be issued in
both physical and demat form.Commercial Papers are
issued in the form of discount to the face value.Commercial
Papers are short-term unsecured borrowings by reputed
companies that are financially strong and carry a high credit
rating.
 CD
• CDs are short-term borrowings in the form of Promissory Notes
having a maturity of not less than 15 days up to a maximum of one
year.CD is subject to payment of Stamp Duty under Indian Stamp
Act, 1899They are like bank term deposits accounts. Unlike
traditional time deposits these are freely negotiable instruments
and are often referred to as Negotiable Certificate of
DepositsFeatures of CDAll scheduled banks (except RRBs and Co-
operative banks) are eligible to issue CDsIssued to individuals,
corporations, trusts, funds and associationsThey are issued at a
discount rate freely determined by the issuer and the
market/investors.Freely transferable by endorsement and delivery.
At present CDs are issued in physical form (UPN)These are issued in
denominations of Rs.5 Lacs and Rs. 1 Lac thereafter.Bank CDs have
maturity up to one year. Minimum period for a bank CD is fifteen
days.Financial Institutions are allowed to issue CDs for a period
between 1 year and up to 3 years.
 Repo and a Reverse Repo
• A Repo deal is one where eligible parties enter into a
contract with another to borrow money against at a
pre-determined rate against the collateral of eligible
security for a specified period of time.The legal title of
the security does change. The motive of the deal is to
fund a position.Though the mechanics essentially
remain the same and the contract virtually remains the
same, in case of a reverse Repo deal the underlying
motive of the deal is to meet the security / instrument
specific needs or to lend the money.Indian Repo
Market is governed by Reserve Bank of India.
 Meaning of Repo
• It is a transaction in which two parties agree
to sell and repurchase the same security.
Under such an agreement the seller sells
specified securities with an agreement to
repurchase the same at a mutually decided
future date and a priceThe Repo/Reverse
Repo transaction can only be done at Mumbai
between parties approved by RBI and in
securities as approved by RBI (Treasury Bills,
Central/State Govt securities).
 Uses of Repo It helps banks to invest
surplus cash
• It helps investor achieve money market
returns with sovereign risk.It helps borrower
to raise funds at better ratesAn SLR surplus
and CRR deficit bank can use the Repo deals
as a convenient way of adjusting SLR/CRR
positions simultaneously.RBI uses Repo and
Reverse repo as instruments for liquidity
adjustment in the system
 Treasury bills (T-Bills)
• A class of Central Government SecuritiesT-Bills
are issued by Government of India against
their short term borrowing requirements with
maturities ranging between 14 to 364
days.Banks, Primary Dealers, State
Governments, Provident Funds, Financial
Institutions, Insurance Companies, NBFCs, FIIs
(as per prescribed norms), NRIs & OCBs can
invest in T-Bills.
 T-bills Type
• T-Bills are for different maturities day, 28 days
(announced in Credit policy but yet to be
introduced), 91 days, 182 days and 364 days. 14
days T-Bills had been discontinued recently. 182
days T-Bills were not re-introduced.The T-Bill of
91-day and 364-day are currently issuedT-Bills are
issued at a discount-to-face value. For example a
Treasury bill of Rs face value issued for Rs gets
redeemed at the end of it's tenure at Rs91 days T-
Bills are auctioned under uniform price auction
method where as 364 days T-Bills are auctioned
on the basis of multiple price auction method.
 Mutual Fund
• A mutual fund is a type of financial vehicle made up of a pool of
money collected from many investors to invest in securities like
stocks, bonds, money market instruments, and other assets. Mutual
funds are operated by professional money managers, who allocate
the fund's assets and attempt to produce capital gains or income
for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its
prospectus.
• Mutual funds give small or individual investors access to
professionally managed portfolios of equities, bonds, and other
securities. Each shareholder, therefore, participates proportionally
in the gains or losses of the fund. Mutual funds invest in a vast
number of securities, and performance is usually tracked as the
change in the total market cap of the fund—derived by the
aggregating performance of the underlying investments.
 Organization of a Mutual Fund
The Organization of a Mutual Fund contains
entities such as
• Mutual Fund Shareholders
• Board of directors
• Investment management company or Asset
Management Company
• Custodians
• Transfer Agents
• SEBI
 Types of Mutual Funds
By Structure:
• Open-ended Funds
• Closed-ended Funds
• Interval Funds
By Investment Objective:
• Growth Funds
• Income Funds
• Balanced Funds
• Money Market Funds
• Load Funds
• No-Load Funds
 Advantages of Mutual Funds
• Diversification
• Expert Management.
• Liquidity
• Convenience
• Reinvestment of Income
• Range of Investment Options and Objectives
• Affordability
 Disadvantages of Mutual Funds
• Although mutual funds can be beneficial in
many ways, they are not for everyone.
• No Control Over Portfolio
• Capital Gains
• Fees and Expenses
• Over-diversification
• Cash Drag
Structure of Mutual Funds in India.
• The structure of Mutual Funds in India is a three-
tier one. There are three distinct entities involved
in the process – the sponsor (who creates a
Mutual Fund), trustees and the asset
management company (which oversees the fund
management). The structure of Mutual Funds has
come into existence due to SEBI (Securities and
Exchange Board of India) Mutual Fund
Regulations, 1996. Under these regulations, a
Mutual Fund is created as a Public Trust. We will
look into the structure of Mutual Funds in a
detailed manner
 The Fund Sponsor
• The Fund Sponsor is the first layer in the three-tier
structure of Mutual Funds in India. SEBI regulations say that
a fund sponsor is any person or any entity that can set up a
Mutual Fund to earn money by fund management. This
fund management is done through an associate company
which manages the investment of the fund. A sponsor can
be seen as the promoter of the associate company. A
sponsor has to approach SEBI to seek permission for a
setting up a Mutual Fund. Once SEBI agrees to the
inception, a Public Trust is formed under the Indian Trust
Act, 1882 and is registered with SEBI. Trustees are
appointed to manage the trust and an asset management
company is created complying with the Companies Act,
1956.
 Trust and Trustees
• Trust and trustees form the second layer of the structure of
Mutual Funds in India. A trust is created by the fund
sponsor in favour of the trustees, through a document
called a trust deed. The trust is managed by the trustees
and they are answerable to investors. They can be seen as
primary guardians of fund and assets. Trustees can be
formed by two ways – a Trustee Company or a Board of
Trustees. The trustees work to monitor the activities of the
Mutual Fund and check its compliance with SEBI (Mutual
Fund) regulations. They also monitor the systems,
procedures, and overall working of the asset management
company. Without the trustees’ approval, AMC cannot float
any scheme in the market. The trustees have to report to
SEBI every six months about the activities of the AMC.
 Asset Management Companies
• Asset Management Companies are the third layer in
the structure of Mutual Funds. The asset management
company acts as the fund manager or as an investment
manager for the trust. A small fee is paid to the AMC
for managing the fund. The AMC is responsible for all
the fund-related activities. It initiates various schemes
and launches the same. The AMC is bound to manage
funds and provide services to the investor. It solicits
these services with other elements like brokers,
auditors, bankers, registrars, lawyers, etc. and works
with them. To ensure that there is no conflict between
the AMCs, there are certain restrictions imposed on
the business activities of the companies
 Custodian
• A custodian is responsible for the safekeeping
of the securities of the Mutual Fund. They
manage the investment account of the Mutual
Fund, ensure the delivery and transfer of the
securities. They also collect and track the
dividends & interests received on the Mutual
Fund investment
 Registrar and Transfer Agents (RTAS).
• These are the entities who provide services to Mutual Funds. RTAs
are more like the operational arm of Mutual Funds. Since the
operations of all Mutual Fund companies are similar, it is
economical in scale and cost effective for all the 44 AMCs to seek
the services of RTAs. CAMS, Karvy, Sundaram, Principal, Templeton,
etc are some of the well-known RTAs in India. Their services
include.
• Processing investors’ application
• Keeping a record of investors’ details
• Sending out account statements to the investors
• Sending out periodic reports
• Processing the payouts of the dividends
• Updating the investor details i.e. adding new members and
removing those who have withdrawn from the fund.
 NAV ( Net Asset Value ) –in Mutual
Funds
• Net Asset Value (NAV) is the market value of a
mutual fund unit. The overall cost of a mutual
fund depends on this market value per fund unit.
If you add up the market value of all the shares in
the fund and divide it by the number of total
mutual fund units, the resulting figure will be
NAV.
• NAV is simply the price per share of the fund. Just
like shares have a share price; mutual funds have
a net asset value.
 What is the difference between NAV
& Market Price?
• Investors tend to assume that the net asset value and
the market price of an equity share are the same,
which is not true. They might be selling or buying the
mutual fund units at NAV but it shouldn’t be confused
with the market price of a unit. The share price is
decided by investors in the stock market. Whereas the
investors do not decide the NAV of a mutual fund unit.
• Factors like demand-supply and company’s potential
also determine the share price. So, the net asset value
will always be different from the market price of a
share.
 NAV Calculation
• All mutual companies estimate their portfolio
worth once the stock market closes at 3:30 p.m.,
each day. The market opens again the next day
with the previous day’s closing share prices. The
fund house deducts all the outstanding liabilities
and expenses accordingly to calculate net asset
value (NAV) of the day using the given formula.
• Net Asset Value = [Assets – (Liabilities +
Expenses)] / Number of outstanding units
SHARE TRADING
 Types of Trading in Stock Market

• Intraday Trading [ Types of Trading for

Experienced Players]
• Delivery Trading [ Types of Trading for Beginners]
• Short Sell [ Types of Trading for Experienced
Players]
• Buy Today Sell Tomorrow (BTST)
• Sell Today Buy Tomorrow (STBT)
• Margin Trading
Intraday Trading [ Types of Trading for
Experienced Players]
• Intraday trading is also known as day trading. In this
type of trading, the trader buys and sells the stocks on
the same day. He can enter into a stock any number of
times within a single day. Here, the trader can hold a
stock for a few seconds or few hours or till the end of
trading session. In other words, he has to close his
trade before the closing hours of market.
• Intraday trading is for active traders. It allows them to
earn quick money. However, it is equally risky. It
requires fast decision making and quick actions.
Therefore, beginners should stay away from intraday
trading style.
Delivery Trading [ Types of Trading for
Beginners]
• Delivery trading is also known as position trading. In
this type of trading, the trader keeps a long tern
horizon. Meaning, the trader buys and holds the stocks
for longer period of time. It can be for weeks or even
months. The biggest challenge in delivery trading is to
identify stocks with large price movement. Here, the
trader seeks to buy stocks based on extensive research.
Moreover, he looks at technical trends and projections
that suggest a possibility of large price movement. In
this trading style, the trader buys a stock when he sees
an emerging trend. Likewise, he sells a stock when the
trend is at its peak.
 Short Sell [ Types of Trading for
Experienced Players]
• Short selling is another popular trading strategy. Here,
the trader sells the shares even without holding them.
In other words, he sells first and then later buys the
shares before the end of the trading session. The logic
behind this trading style is that the trader anticipates
the market to be bearish. He expects the price to fall.
So, he enters a short position (sells shares) and later
recovers the same (buys shares) when the price falls
down. The position has to be squared off before the
market closes. In other words, it means selling shares
at the high price and buying it back at a low price.
 Buy Today Sell Tomorrow (BTST)

• As the name suggests, in this type of trading, you buy today and sell
tomorrow. Which means people buy shares today in anticipation
that price will go up the next day. The next day when the market
opens, the trader sells his shares and makes a profit. In BTST, you do
not get the delivery of shares. This is because stock market in India
works on T+2 settlement cycle.
• There is a difference between delivery trading and BTST. In delivery
trading, you get the delivery of stocks to your demat account. Once
you get the delivery, only then you can sell the stocks. But what if
there is a big opportunity that exists before you get the delivery?
Then the role of BTST comes into the picture. In BTST trading style,
you can buy shares and sell them tomorrow even without having a
delivery. An advantage of BTST is that you don’t have to pay any DP
charges.
 Sell Today Buy Tomorrow (STBT)

• This trading style is exactly opposite of BTST. Here you

can sell today and buy tomorrow. But this type of
trading is not allowed in equity trading. However, it can
be done in the derivatives market. In this style, the
trader enters into a short sell first (sells). He then
carries forward his short sell position to the next day
and squares it off by buying. In other words, the trader
here expects the market to be bearish. Therefore, he
taps the opportunity and earns a profit. In simple
words, in STBT, a trader sells some asset class future
and again buys it as the market opens on the next day.
 Margin Trading

• Margin trading involves buying and selling

securities in a single session. It is good for
traders who believe in making quick money.
Margin trading is very useful for Futures and
Options trading. Here you have to buy a
minimum lot of assets in one go. A trader
needs to pay the initial margin to trade in this
style. The margin is a certain percentage of
the total traded value. It is pre-determined
by SEBI (stock market regulator).
 OPTION TRADING
• Options trading allows you to buy or sell stocks, ETFs etc. at
a specific price within a specific date. This type of trading
also gives buyers the flexibility to not buy the security at
the specified price or date.
While it is a little more complex than stock trading, options
can help you make relatively larger profits if the price of the
security goes up. That’s because you don’t have to pay the
full price for the security in an options contract. In the same
way, options trading can restrict your losses if the price of
the security goes down, which is known as hedging.
• The right to buy a security is known as ‘Call’, while the right
to sell is called ‘Put’.