Professional Documents
Culture Documents
Financial
Financial
Financial
Financial
Institution
Markets
Instruments
Services
Financial institutions
Financial institutions are the business organization that acts as a
mobilizes and depositories of savings, and as purveyors of credit or
finance. They also provide various financial services to the community.
They differ from the non-financial business organization in respect of
their wares. The distinction between the financial sector and the real
sector should not be taken to mean that there is something ephemeral or
unproductive about finance. At the same time, it means that the role of the
V.E.S college of arts, science and commerce
-2-
Financial services
A financial service is any kind of service of a financial nature offered by a
financial provider. All banking and insurance related services are included
in this concept. These services are intangible and invisible. There should
be proximity between the service provider and the consumer in order to
complete a service transaction. These services cover a wide range of
economic activities. Financial services have developed to meet the needs
of companies. Banking and insurance are traditional financial services.
The modern financial services include over the counter services. Share
transfer, pledging of shares, mutual funds, factoring, discounting, venture
capital and credit cards. Financial services have started long back in
western countries.
FINANCIAL MARKETS
Financial markets are the centers or arrangements that provide facilities
for buying and selling of financial claims and services. The corporations,
financial institution, individuals, and governments trade in financial
products on these markets either directly or through brokers and dealers
on organized exchanges or off-exchanges. The participants on the demand
and supply sides of these markets are financial institution, agents,
brokers, dealers, borrowers, lenders, savers, and others who are
interlinked by the laws, contracts, and communication networks.
Financial markets are in the forefront in the developing
economies. Efficient financial markets are an essential for speedy
economic development. The vibrant financial market enhances the
efficiency of capital formation. Dr. Khan has opined that; a variegated
financial market can appeal to the security, motivation and other such
aspects of savers and attracts more savings by the creation of an array of
attractive attractive financial asset. It also tends to promote the
development financial structure. The role of financial market in the
financial system is quite unique. The relevance of financial market in the
financial system is not merely quantitative but also supportive. Thus,
financial market bridges one set of financial intermediaries with another
set of players. A well developed financial market enlarges the range of
financial services.
TYPES OF MARKETS
1) Broad markets: - These markets are those which attract large
volume of funds from diversified types and widely scattered
investors.
2) Deep markets: - These markets are those that provide an
opportunity for large orders of purchase or sale of financial
instruments at a rate close to the initial market rate.
3) Shallow
markets:-
These
are
the
markets
that
remain
CAPITAL MARKET:The capital market is a market for financial assets which have a long or
indefinite maturity. Generally, it deals with long term securities which
have maturity period of more than a year
Importance of capital market:
Absence of capital market acts as a deterrent factor to capital formation
and economic growth. Resources would remain idle if finances are not
funneled through the capital market. The importance of capital market
can be briefly summarized as follows:
The capital market serves as an important source for the productive
use of the economys saving. It mobilizes the saving of the people
for further investment and thus avoids their wastage in
unproductive uses.
It provides incentives to saving and facilitates capital formation by
offering suitable rate of interest as the price of the capital.
It provides an avenue for investors, particularly the household
sector to invest in financial asset which are more productive than
physical assets.
It facilitates increase in production and productivity in the
economy and thus, enhances the economic welfare of the society.
Thus, it facilitates the movement stream of command over capital
to the point of highest yield towards those who can apply them
productively and profitably to enhance the national income in the
aggregate.
V.E.S college of arts, science and commerce
-7-
MORTGAGES MARKET:-
guarantees
are
provided
mainly
by
commercial
banks,
PRIMARY MARKET
Primary market is a market for raising fresh capital in the form of shares
and debentures. Public limited companies that are desirous of raising
capital funds through the issue of securities, approach this market. The
public limited companies and the government companies are the issuers
and individuals, institutions and mutual funds are the investors in this
market. The primary market allows for the formation of capital in the
country and the accelerated industrial and economic development.
Everywhere in the world capital markets have originated as the new issue
markets. Once industrial companies are set up in a big number and with
them a considerable volume of business comes into existence a market
for outstanding issues develops. In order to sell securities, the company
has to fulfill various requirements and decide upon the appropriate timing
and method of issue. It is quite normal to obtain the assistance of
underwriters, merchant banks or special agencies to look after these
aspects. This primary market is also called as the new issue market.
Hence, the primary market is that part of the capital markets that deals
with the issuance of new securities. Companies, governments or public
sector institutions can obtain funding through the sale of a new stock or
bond issue. This is typically done through a syndicate of securities
dealers. The process of selling new issues to investors is called
underwriting. In the case of a new stock issue, this sale is called an initial
public offering (IPO). Dealers earn a commission that is built into the
price of the security offering, though it can be found in the prospectus
Equity
Debentures
shares
Preference
Total
shares
Annual
average
1951-
202
44
39
285
28.5
1960
1961-
462
188
77
728
72.8
1970
1971-
746
190
56
992
99.2
1980
1981-
7857
15459
40
23357
2335.7
1990
1991-
56997
40267
746
98010
16335.0
1997
1997-
10405
15152
206
25763
4294
2003
The fresh capital raised on the new issue market has increased decade
after decade; the greatest increase has occurred during the 1990s. The
annual average absolute amount of capital raised by non-government
public limited companies increased from Rs 28 crore during the 1950s to
Rs 16335 crore during the 1990s which declined to Rs 4294 crore during
1997-98 to 2002-03. Both equity capital and debenture capital have
contributed to this growth and decline. The stock market capital has
V.E.S college of arts, science and commerce
- 16 -
advertisement,
banks commission,
PLACEMENT:Under this method, the issue houses or brokers buy the securities outright
with the intention of placing them with their clients afterwards. Here the
brokers act as almost wholesalers selling them in retail to the public. The
broker would make profit in the process of reselling to the public. The
issue houses and the brokers maintain their own list of clients and
through customers contact sell the securities. There is no need for a
formal prospectus as well as underwriting agreement.
PLACEMENT HAS THE FOLLOWING ADVANTAGES:1) Timing of issue is important for successful floatation of shares. In a
depressed market condition when the issues are not likely to get
public response through prospectus, placement method is a useful
method of floatation of shares.
2) This method is suitable when small company issue their shares.
3) It avoids delays involved in the public issue and it also reduces the
expenses involved in public issue.
It maintains confidentiality in issue and removes the fear of takeovers.
The main disadvantage of this method is that the securities are not widely
distributed to the large section of investors. This method of a private
placement is used to a limited extent in India. The promoters sell the
shares to their friends, relatives and well wishers to get minimum
subscription which is a precondition for issue of shares to the public.
RIGHT ISSUE:V.E.S college of arts, science and commerce
- 24 -
1)
MERCHANT BANKER:-
REGISTRARS:-
SECONDARY MARKET
V.E.S college of arts, science and commerce
- 30 -
the
financial
year
1991-92,
stock
markets
witnessed
Recent Developments in Secondary Market:Many steps have been taken in recent years to reform the secondary
market so that it may function efficiently and effectively. Some of the
developments in this direction are as follows:
1) Regulation of Intermediaries:To improve the functioning of intermediaries in the capital market, strict
control is being exercised on them by SEBI. The intermediaries such as
merchant bankers, underwriters, brokers, bankers to the issue etc must be
registered with the SEBI. To improve their financial adequacy, brokers
are expected to maintain a minimum capital of Rs.5 lakhs in major
exchanges and Rs. 2 lakh in minor exchanges and a minimum net worth
of 8% of the annual turnover.
2) Change in the management structure
In the early days, the board of stock exchanges was dominated by brokers
whose decisions were not fair and transparent. The SEBI now requires
that 50 % of the directors must be non-brokers directors or government
representatives.
3) Insistence of quality securities
Credit rating agencies have been set up for awarding credit rating to the
money market instruments, debt instruments, deposits and even to equity
shares also. Now, all debt instruments must be compulsorily credit rated
by a credit rating agency so that the investing public may not be deceived
by financially unsound companies. It is a healthy trend towards a
developed capital market.
11) Reserve Bank of Indias Measures
The RBI is also taking measures to revive the capital market which is
undergoing a period of sluggishness. It has permitted commercial banks
to invest up to 5% of their incremental deposits in ordinary shares of the
corporate sector including PSUs. Again, banks are allowed to extend
loans to corporate against shares held by them so as to enable them to
meet promoters contribution to the equity in new companies. The RBI
has also increased the ceiling for banks advances to individuals against
V.E.S college of arts, science and commerce
- 36 -
MONEY MARKET
V.E.S college of arts, science and commerce
- 37 -
funds
and
corporate
from
this
market.
Before
such
Discount market:-
Function of RBI:
The RBI functions within the framework of a mixed economic system.
With regard to framing various policies, it is necessary to maintain close
and continuous collaboration between the government and the RBI. In the
V.E.S college of arts, science and commerce
- 49 -
Role of RBI:The principal role played by the RBI includes the following:
1) Information provider
V.E.S college of arts, science and commerce
- 50 -
3) Supervisor
As the principal regulatory authority over the Indian financial system, the
RBI is expected to exercise supervision over the Indian financial system.
This aspect has been entrusted to the board of financial supervision set up
under RBI regulation in 1994. Commercial banks, financial institution,
V.E.S college of arts, science and commerce
- 51 -
2) Development function
a) Promoting investors education
b) Training of intermediaries.
SEBI Guidelines:-
--
10%
--
20%
--
15%
--
20%
--
10%
2) Secondary market
Stock exchange:1) Board of directors of stock exchange has to be reconstituted so as
to include non-members, public representatives, and government
representatives to the extent of 50% of total number of members.
2) Capital adequacy norms have been laid down for members of
various stock exchanges depending upon their turnover of trade
and various other factors.
3) Working hours for all the stock exchanges has been fixed to be
from 12 noon to 3 pm.
4) All the recognized stock exchanges will have to inform about the
transaction within 24 hours.
5) Guidelines have been issued for introducing the system of market
making in less liquid scrips in a phased manner in all stock
exchanges.
Brokers:1) Registration of brokers and sub-brokers is made compulsory.
DERIVATIVES MARKET
V.E.S college of arts, science and commerce
- 58 -
Forwards:-
Features of option contract:1) Option contract are exchange traded contract and enjoy the benefit
of novation.
2) Option contract are standardized in terms of number of securities.
3) All option contracts for a given calendar month mature on last
Thursday of the month in India.
4) Option which can be exercised on any day up to the maturity date
are called American options which can be exercised only on
maturity date are called European options.
5) Option do not provide 100% hedge against future liabilities due to
their standardized nature.
6) Options always involve payment of premium to the option seller on
the date of contract. This premium is non-refundable due to this
factor options tend to be costlier than forward contract or future
contract.
SWAPS:It is a derivative instrument which can be used by the investors and
commercial banks for the following function:
1) Hedging exchange risk
2) Funding operations
3) Eliminating maturity mis-matches
V.E.S college of arts, science and commerce
- 63 -
Foreign exchange market:It can be defined as a virtual market being a electronically connected
network of international banks, brokers and service providers which
provide the environment for putting through foreign exchange
transaction. It facilitates the transfer of purchasing power denominated in
one currency to another. Structure of foreign exchange market: The
foreign exchange market can be divided into two parts. They are as
follows:
The exchange of bank notes, bank drafts, currency, and travelers cheques
between private customers, tourists and banks takes place in the retail
market. The RBI has granted two types of money changers licences to
certain established firms, hotels, shops and other organisation to deal in
currency notes, coins, and travellers cheques to a limited extent. While
the full-fledged money changers can undertake both purchase and sale
transaction with the public, restricted money changers can only
purchase foreign currency from the foreign tourists.
The organization of foreign exchange market:V.E.S college of arts, science and commerce
- 67 -
Presently, there are 84 banks in India who have been authorized to deal in
foreign exchange and they are known as Authorized Dealers, and the
public has to conduct all their foreign exchange transaction through them.
Of these, foreign banks and bigger Indian banks are more active, giving
two way quotes. The market operates from the major centers such as
Mumbai, Delhi, Calcutta, Bangalore, Kochi and Ahmedabad, with
Mumbai accounting for the major part of the transaction. These
authorized dealers have formed an organization called Foreign Exchange
Dealers Association of India (FEDAI, which sets the ground rules for
fixation of commission and other charges. A large part of the inert-bank
transaction is conducted through 40 exchange brokers who are specialist
in matching supplies and demands of banks and who work for a
commission.
Inter-bank market:The inter-bank market can thus be said to have two parts. They are direct
and indirect. In the direct market, banks quote buying and selling prices
directly to each other and all participating banks are the market makers. It
has been sometimes characterized as decentralized, continuous, openbid, double-auction market. In the indirect market, the bank puts orders
with brokers who put them on books, and try to match purchases and
sales orders for different currencies. They charge commission to both the
buyers and the sellers. The operation of the inter-bank market is
controlled by a self regulatory organization called Foreign Exchange
Dealers Association of India (FEDAI).
The functions of FEDAI are as follows:V.E.S college of arts, science and commerce
- 68 -
Financial instruments
V.E.S college of arts, science and commerce
- 69 -
Shares:
V.E.S college of arts, science and commerce
- 70 -
Shares basically represent the own capital. Joint stock companies collect
their long term capital through the issue of shares to the investors. This is
basically called as stock financing. Share can be classified as equity
shares or preference shares. Shares basically constitute the ownership
securities. Investment in shares is as risky as well as profitable.
Transaction in shares takes place in the primary and secondary market.
The shares which are available for investment are classified into different
categories such as blue chip shares, growth shares, speculative shares,
income shares and so on. Nowadays trading of shares takes place only in
demat form.
Debentures and Bonds:Investors having surplus funds can invest it in debentures and bond issued
by the companies. Debentures and bonds both represent creditor ship
securities. Debentures indicate loan given to the company at a specific
rate of interest and on certain terms and conditions. Debentures are more
popular than shares due to the safety and security available. Companies
issue different types of debentures for the convenience of the investors. In
India, bonds and debentures are also issued by the public sector
companies and the financial institutions. For example: IDBI issues flexi
bonds, deep discount bonds, retirement bonds, growing interest bonds
and regular interest bonds. Such infrastructure bonds are popular among
the investors and their response is encouraging. They are over-subscribed
in many occasions. This is basically because of the tax benefit.
Innovative Debt Instruments:Innovation has been the key behind the success of many companies and it
forms an integral part of all planning and policy decision. This has helped
them to tune with the changing times and changing customer needs.
Accordingly, many innovative financial instruments have come into the
financial market in recent times. Some of them are as follows:
BIBLIOGRAPHY:Books referred:
Financial markets and Institution - L.M Bhole
Financial markets and services
- M.Y Khan
- Bhandgar
Serial
TOPICS
Page
No.
1
no.
Introduction and structure of financial 1
2
3
4
5
6
7
8
9
10
11
system
Financial markets : Introduction
Capital market
Primary market
Secondary market
Money market
Reserve Bank of India
Securities and Exchange Board of India
Derivatives Market
Foreign Exchange Market
Financial Instruments
4
7
15
31
38
49
53
59
66
70