M.

COM, I YEAR

FINANCIAL SERVICES,
MARKETS AND
INSTITUTIONS
A brief and handy note

1
INDIAN FINANCIAL SYSTEM
1.
2.
3.
4.
5.

In 1947, financial system was semi-organized and narrow structure.

Lack of growth in industrial sector.
Non-supportive or Non-responsive financial intermediaries.
Government planned to create financial institution.
Nationalization of RBI-the process started in 1948. On 1 st January 1949 legal
announcement was made.
6. 1948-56 Nationalization of Imperial Bank as SBI.
7. In 1956, 245 Life insurance companies were nationalized as LIC.
8. In 1969-Nationalization of 14 commercial banks.
9. In 1980, 10 more commercial banks were nationalized.
10.General Insurance companies organized as General Insurance Corporation
(GIC).
DEVELOPMENT BANK/FINANCIAL INSTITUTIONS
1.
2.
3.
4.

Gap fillers in institutional credit.

Develop the backward region, small & new entrepreneurs.
Lending support to financial institution.
Advisory function.

1948-IFCI-Industrial Financial Corporation of India was set up at all India level.

1951-SFC-State Financial Corporations were started at regional levels under the
State Financial Corporation Act, 1951. SFCs provide medium and long term
finance to medium and small industries.
1955-ICICI-Indian Credit &Investment Corporation of India was established to
meet the growing needs of the private corporate sector. It directed the flow of
foreign currency loans from the World Bank to industrial securities market.
1958-RCI-Refinance Corporation of India was established to provide refinance to
banks against term loans granted by them to medium and small industries.
1964-IDBI-Industrial Development Bank of India was set up on July 1, 1964, as
a subsidiary of the RBI. Subsequently IDBI became an apex institution providing
finance and coordinating the activities of all the financial institutions. Further, State
Industrial Development Corporations were created at the state level to meet
the financial requirements of the States and to promote balanced regional
development.
1964-UTI-Unit Trust of India was started.
1964-RCI was merged with the IDBI.
1971-IRCI-Industrial Reconstruction Corporation of India was set up jointly by
the IDBI and LIC to rehabilitate sick mills. In March 1985, the IRCI was reconstructed
into a statutory corporation, namely Industrial Reconstruction Bank of India (IRBI).
Subsequently IRBI became sick due to financing of sick industries. After
reconstructing the same, it is at present called Industrial Investment Bank of India

2
(IIBI). It provides finance for expansion, diversification and modernization of
industries.
The Small industries Development Bank of India which is the wholly owned
subsidiary of IDBI commenced its operations on April 2, 1990. The SIDBI administers
the Small Industries Development Fund and the National Equity fund.
OBJECTIVES OR FUNCTIONS OF FINANCIAL SERVICES
1.
2.
3.
4.
5.

Fund raising.
Fund deployment.
Specialized services.
Regulation (SEBI, RBI, IRDA)
Economic growth.

Specialized Services:
1.
2.
3.
4.
5.
6.
7.
8.

Credit rating.
Venture Capital.
Lease financing.
Mutual funds.
Merchant Banking.
Credit cards.
House finance.
Banking & Insurance.

CHARACTERISTICS OF FINANCIAL SERIVICES:

1.
2.
3.
4.
5.

Intangibility.
Customer Orientation
Inseparability.
Perishability.
Dynamism.

CONSTITUENTS OF FINANCIAL MARKET:

1.
2.
3.
4.

Market Players.
Instruments.
Specialized Institutions.
Regulatory bodies.

Market Players: Mutual funds, Stock brokers, Consultants, Underwriters, Financial

Institutions, and Merchant Bankers-These people are part of the market.
Instruments: Receipts Pass book, Bond, Certificates, Policy Documents, Mutual
fund statements.
Specialized Institutions: Acceptance house, Discount houses, Credit rating
agencies, Venture capital organization.

3
Regulatory Bodies: RBI, IRDA, Central Government, SEBI, Finance Ministry of
Central Government etc., (they focus and monitor)

GROWTH OF FINANCIAL SERVICES IN INDIA

MERCHANT BANKING ERA

INVESTMENT COMPANYS ERA

FINANCIAL

FINANCIAL

MODERN SERVICES ERA

INSTITUTION

SYSTEM
DEPOSITARIES ERA
LEGISLATIVE ERA

FOREIGN INSTITUTIONAL INVESTORS

FINANCIAL MARKET

DEFINITION OF INDIAN MONEY MARKET:

Centre in which financial institutions congregate for the purpose of dealing
impersonally in monetary assets. JSG Wilson.
MEANING OF INDIAN MONEY MARKET:
Large, wholesale market where Crores of Rupees of Low risk, unsecured, short term
debt instruments are issued and traded every day.
Treasury bills, Commercial paper, Commercial bills, Certificate of deposits. These are
the popular instruments which are often traded in money market.
CHARACTERISTICS OF DEVELOPED MONEY MARKET OR FEATURES:
1.
2.
3.
4.

Integrated structure between sub-markets.

Free flow of funds between sub-markets.
A high degree of specialization.
A single price for each of the instruments traded.

4
INDIAN CAPITAL MARKET
DEFINITION: (Common, unique)
A Market for borrowing & lending long term capital funds required by business
enterprise.
CHARACTERISTICS OF CAPITAL MARKET:
1. Securities Market: It mainly deals with shares & debentures. Another name
for shares & debentures is securities.
2. Security Price: Prices of these securities are based on the demand and
supply.
3. Participants: Who are all dealing with Indian capital market, are considered
to be its participants. (ex) Stock exchanges, Brokers, Foreign institutional
investors, Indian Institutional investors custodians, portfolio depositories,
merchant bankers, share transfer agents, underwriters, venture capital
funds, mutual funds, regulators etc.,
4. Location: It does not confine to any specific location. Wherever the business
is being taken place all those places are considered to be Indian Capital
Market.
FUNCTIONS OF CAPITAL MARKET:
1. Allocation function.
2. Liquidity function.
3. Other functions.
1. Indicative function
2. Savings & Investment function
3. Transfer function
4. Merger function
CONSTITUENTS OF INDIAN CAPITAL MARKET:
CONSTITUENTS OF INDIAN CAPITAL

GUILT EDGED SECURITIES

GUILT EDGED SECURITIES:

INDUSTRIAL SECURITIES
MARKET

PRIMARY MARKET
(NEW ISSUE MARKET)

SECONDARY
MARKET

5
1. Government and semi-government securities.
2. Guaranteed return on investment.
3. Institutional based investors have to do certain percentage as per law. Indian
Institutional investors have to buy some percentage of shares when the
government issue bonds.
4. Heavy volume of transaction.
SECONDARY MARKET:
1. Deal with securities already issued by companies.
2. Buying & selling of shares & debentures.
3. Stock exchange or share Market.
NEW ISSUE MARKET (NIM):
It is the backbone of secondary market.
FUNCTIONS OF NIM:
1. Transfer function: transfer resources from saver to entrepreneurs.
2. Investigative function: Merchant bankers & other agencies, technical
analysis, economical, financial analysis, legal aspects & environmental
factors.
3. Advisory services: Determining the type, Mix, timing, size, selling
strategies of investments, terms & conditions of issue.
4. Guarantee function: Function of underwriting.
5. Distribution function: Sale of securities to ultimate investors, Brokers and
dealers are involved, they act as mediators between investors and issuers.
DIFFERENCE BETWEEN NIM & SECONDARY MARKET:
ASPECTS
Issue of Securities
Location
Transfer of Securities
Administrative set up
AIM
Price Movement

NIM
Fresh
No proper Location
Company to a person
Not Required
Long term borrowing
Secondary market
movement

SECONDAY MARKET
Existing
A place or proper location
Person to person
Required
Liquidity trading
Various factors

PLAYERS OR PARTIES INVOLVED IN NIM:

Players or parties means, who are all part of it or who are all playing a role in NIM.
1.
2.
3.
4.
5.

Managers to issue. (Administrative power)

Registrar to issue. (Financial power)
Underwriters.
Bankers.
Advertising agencies.

6
6. Financial Institutions.
7. Government & Statutory agencies or bodies.
MANAGERS TO ISSUE:
1. Appointed by Issuing Company.
2. Manages the entire activity.
3. Merchant banking division, subsidiary of commercial banks, foreign banks,
private banks and private agencies can act as a managers to issue.
DUTIES ARE:
1.
2.
3.
4.

Drafting prospectus.
Preparing expenses budget.
Determining the appropriate timing of the issue.
Advising the company on various aspects of the issue.

REGISTRAR TO ISSUE:
1. Appointed with the consultation of the manager.
2. SEBI has given guidelines.
GENERAL DUTIES ARE:
1.
2.
3.
4.
5.
6.
7.

Identifying the collection centre and collecting banker.

Collect application from various centres.
Reclassify the valid application for allotment.
Finalize the bases of allotment with stock exchanges approval.
Arrange for dispatch of share certificate.
Arrangement to pay brokerage & underwriting commission.
Assist the company in getting the shares listed in the stock exchange.

UNDERWRITERS:
1. Contract between company & underwriters.
2. Underwriter guarantees subscription.
3. Financial institutions, Banks & approved investment company can act as
underwriters.
4. At the time of appointment the company verifies:
1. His financial strength.
2. Experience in primary market.
3. Past underwriting performance.
4. Outstanding underwriting commitment.
5. Investor clientele. (pronounced as clainclit means contacts)
6. Unsubscribed shares will be taken up by him.
7. If not company can claim damage.
BANKERS:
1. They collect application money & application forms.
2. They charge commission for their service.

7
3. If the issue is big, more than one banker may be appointed.
4. They may be called coordinating banker or collecting banker.
ADVERTISING AGENCY:
At the time of appointment the company can see:
1.
2.
3.
4.
5.

The competency (Calibre)

Past record.
Quotation from various agencies.
Consult the manager for appointment.
Give wide publicity in media.

FINANCIAL INSTITUTIONS:
1.
2.
3.
4.

Sometimes they underwrite.

Extend term loans.
Manager sends a copy of all documents.
Loan size will be decided based on the document.

GOVERNMENT & STATUTORY BODIES OR AGENCIES:

1.
2.
3.
4.
5.
6.

SEBI
Registrar of companies.
RBI in case of issue involving foreign investment.
Stock Exchange.
Industrial licensing authority(Giving license to start the business)
Pollution control authority etc.,

PROBLEMS OF NEW ISSUE MARKET:

1. In effective mobilization of savings: Around 5% of financial savings come
to the stock market. Entire savings is not invested in stock market. Influence
of foreign institutional investors.
2. Functional & Institutional Gap: Merchant bankers and other middle men
are not playing their role. Investors are not got attracted on NIM. The
message is not being carried to the public or investors.
3. Risk aversion: Capital damage. Public is not interested in equity. Preference
is given for safety.
4. Inordinate delay in the Allotment process: Loss of interest for investors,
time delay in allotment, sometimes shares are not allotted, refund will be in
the form of cheque.
5. Problems of the company:
1. Rosy pictures about projected turnover, profit etc.,
2. Exaggerated claims in the prospectus.
3. False information about oversubscription.
TYPES OF NEW ISSUE:

TYPES OF NEW ISSUE

PUBLIC ISSUE

OFFER FOR SALE

PLACEMENT

RIGHTS ISSUE

PUBLIC ISSUE: (Company is offering its shares to public)

1. Issuing company offers to public
2. Fixed number of shares
3. Through a legal document called prospectus.
CONTENTS OF THE PROSPECTUS: (What all to be mentioned)
1. Company name
2. Address of Companys Registrar office.
3. Existing & Proposed business activities.
4. Location of the industry.
5. List of Directors.
6. Minimum subscription.
7. Date of opening & close of subscription.
8. Details of Institutional underwriters.
9. Declaration of listing the shares.
10.Future plans of the company. (such as business expansion, turnover
expansion, profitability expansion etc.,
MERITS OF PUBLIC ISSUE:
1.
2.
3.
4.
5.
6.

No intermediaries.
Reaches a large section of investing public.
Wide distribution of shares.
Increases the performance of the company.
No Discrimination or partiality.
Transparency.

DEMERITS OR DISADVANTAGES OF PUBLIC ISSUE:

1.
2.
3.
4.
5.

High cost. (At every state it has to meet certain expenses)

Contract with underwriters.
Damage for any misleading statement in prospectus.
Lengthy procedure.
Suitable for large issues.

RIGHTS ISSUE:

9
DEFINITION: According to section 81 of Indian Companies Act 1956, A Company
which issue new shares either after two years of its formation or after one year of
its first issue of shares, whichever is earlier has to offer to existing holders.
1.
2.
3.
4.
5.
6.

Existing Company.
Listed in the Stock Exchange.
Offer to Existing shareholders.
Existing shareholders have the right to sale or transfer.
Detailed circular to existing shareholders.
Sufficient time to be given.

CONDITIONS FOR RIGHTS ISSUE: (As per Section 81)

1.
2.
3.
4.
5.

Offer based on Existing Proportion.

Details about no of shares.
Time period not less than 15 days.
Right to transfer the right to others.
If any balance can be given to most beneficial to the company. (i.e. Promotor)

These conditions should be satisfied by the company.

MERITS OF RIGHT ISSUE:
1.
2.
3.
4.
5.
6.

Less Expensive.
No need of prospectus.
No advertisement required.
No underwriting required.
Equitable distribution of shares.
It prevents favourtism & Nepotism.

OFFER FOR SALE:

1. Company issues shares to issue house or brokers at fixed rate.
2. Then issue house resell to investors with margin.
3. Margin is known as Turn or spread.
PLACEMENT:
Company issues shares to limited financial institution, corporate bodies, Net worthy
individuals. Then they sell the shares to investors at suitable price.
STOCK EXCHANGE
DEFINITION: As per the Securities Contract and Regulation Act 1956, An
Association, Organization or Body of individuals whether incorporated or not
established for the purpose of assisting, regulating & controlling business in buying
or dealing in securities.

10
Stock Exchange or Securities market comprises of all the place where buyers &
sellers of stock & bonds or their representatives undertake transactions involving
the sale of securities.
Hasting
CHARACTERISTICS OF STOCK EXCHANGE:
1. An Association of Individuals: (Group of people joining together and
doing the business)
1) Registered body as per law.
2) No business for themselves.
3) Assist, regulate & control trading.
4) Brokers & agents are authorized to deal in trading.
2. Control by the Governing Body: (Separate body is there)
1) Only members can enter in the floor.
2) Members can do trading-They can sit and watch how the trading is
being done.
3) Commission for brokers & dealers.
4) Frame by-laws (Rules & Regulation) of Exchange.
3. Abiding by Rules & Regulations:
1) Function as per Rules & Regulation.
2) Members follow rules otherwise penalized.
3) Members admission is based on Rules.
4. Listed Securities:
1) Listed securities transacted.
2) Enlisting to protect the interest of investors.
3) Procedure for listing.

MANAGEMENT OF STOCK EXCHANGE:

ORIGIN:
a) In India, Second half of 19th Century.
b) First Stock Exchange in 1975 at Mumbai by native Share & Stock Brokers
Association.
c) Later started at Madras, Nagpur, Kanpur, Hyderabad, Bangalore etc.,
d) Securities Contract and Regulation Act Established.
e) At present around six thousand stock brokers & 24 Recognized stock
exchanges.
MANGEMENT:
a) Managed by Governing Board.
b) Director of Board elected from among stock brokers members, public
representatives & Government Nominees.
c) President and Vice President will be appointed by the Government.
d) Major Stock Exchanges managed by CED (Chief Executive Director)

11
e) Small Stock Exchanges managed by the Secretary.
POWERS OF GOVERNING BOARD:
1. To make, amend rules & by-laws of Stock Exchange. (Rules can be made in
the same way it can be changed)
2. To Admit & Expel members.
3. To manage the properties & finance of the stock exchange.
4. To determine the mode & conditions of stock exchange business. (How the
stock exchange business has to be conducted)
5. To supervise, direct & control all activities that affect the stock exchange.
MEMBERS OF STOCK EXCHANGE:
Members here refer to Stock Broker.
A person who obtains license from a stock exchange to do trading business in that
Exchange is called member of that stock exchange.
He applies & gets the license. Individuals & Organization can become brokers if they
want.
QUALIFICATION OF MEMBERS:
According to Securities Contract & Regulation Act 1956:
1.
2.
3.
4.
5.
6.
7.
8.
9.

He should be an Indian Citizen.

Minimum age should be 21 years.
He should not have been adjudged (Declaration of Court) insolvent.
He should not have been convicted for fraud or dishonesty.
He should not have been defaulted by any other Stock Exchange.
He should not be engaged in any business connected with the company.
Minimum qualification- Pass in Higher Secondary.
Individuals or Corporations can become members.
After 5 years of completion, he or she can apply for other Stock Exchange.

CONTROL OVER STOCK EXCHANGE: (How the Stock Exchanges are being
controlled by Indian Government?)
Stock Exchanges in India are controlled by Central government through the
following processes:
1. Granting recognition to Stock Exchanges. (It has the power to start a Stock
Exchange)
2. Listing of Securities
3. Registration of Brokers.
GRANTING RECOGNITION TO STOCK EXCHANGES:
1. In India it is recognized by Central Government.

12
2. Recognition under Securities Contract and Regulation Act 1956. (Based on
the provision of this Act they are giving license)
3. Stock Exchange submits application to Central Government.
4. A Copy of bye-laws.
5. A Copy of Constitution, Governing body etc.,
6. Government will scrutinize the application & check for two conditions:
1) The bye-law should protect the interest of
investors.
2) Their intention to follow the conditions of
Central Government.
7. Granting Recognition.
RENEWAL OF RECOGNITION:
Recognition means, getting license. It will be given only for a specific period. Apply
before 3 months prior to expiry of recognition.
WITHDRAWAL OF RECOGNITION:
If they act against the interest of trade, Central Government is empowered to
withdraw the Recognition.
LISTING
MEANING:
(Admission of the shares of a public limited company on a recognized stock
exchange for trading)

OBJECTIVE OF LISTING:
1. To provide Marketability, Liquidity & transferability for the Securities.
2. To ensure fair (decent) dealing in securities.
3. To safeguard the interest of the investors and General investing public.
(Interest-give protection to investors money)
ADVANTAGES OF LISTING:
1. To the Company.
2. To Shareholders or investors.
ADVANTAGES TO THE COMPANY:
1. Broadens & diversify shareholding.
2. Compiles with Statutory provisions. (Section 73 & 81 of Companies Act)
3. Ensures a saving in the cost of rising new capital.

13
ADVANTAGES TO THE SHAREHOLDERS OR INVESTORS:
1.
2.
3.
4.

Ensures liquidity.
Ensures Re-finance facility. (loan against de-mat a/c)
Protect Investors interest. (investors will not get affected)
Income tax concession.

DISADVANTAGES OF LISTING:
1.
2.
3.
4.
5.

Hard rules & Regulation by SEBI. (It will be difficult for them to understand)
Speculators misuse price fluctuations to make money.
Managerial personal misuse available information.
Vital information published may be advantage for competing companies.
High Cost.

LISTING PROCEDURE:
1. Attaching listing application & documents: When the company submit
the application to the stock exchange it has to attach some documents with
the application. The documents to be attached with the application are :
a) Copies of MOA & AOA.
b) Copy of statement in lieu of prospectus. (in lieu of- instead
of)
c) Specimen copy of Share certificate, Debenture certificate,
letters of Allotment, Letter of Acceptance, Transfer receipts,
Renewal Receipts, Letter of Renunciation etc.,
d) Capital Structure details.
e) Statement showing the distribution of shares.
f) Dividends & Bonus details in the last 10 years.
g) Details of shares & Debentures.
h) Brief history of the company.
2. Scrutiny of Listing Application: After receiving the application they have
to check for the following things.
Check Articles for the following provisions:
a) Whether they have used Common transfer form.
b) Fully paid shares should be completely free from lien. (There
should not be any pledging loan against the assets or shares
of the company)
c) If at all, any calls in advance paid, it will carry only interest
not any other benefits.
d) Unclaimed dividends should not be forfeited before the time
limit.
e) Whether 60% of each class of securities was offered to the
public and minimum issued capital should be 3 crores.
f) Whether the company is of fair size, has a broad base capital
structure.
3. Listing agreement:

14
It is an agreement between the Stock exchange and the Company.
It contains or covers,
1)
2)
3)
4)
5)
6)

Letter of Allotment
Share transfer form
Book closure format for payment of dividend
Issue procedure for rights shares
Issue procedure for convertible debentures
Holding of Directors meeting, directors Report, annual
report, resolution etc.,

Once listing agreement is done, one copy of this agreement will be sent to SEBI and
also to Government of India.
OTCEI: (Over the Counter Exchange of India)
In November 1992, it was started in India. It was incorporated under section 25 of
Indian Companies Act 1956. It is being supervised by SEBI and Government of India.
It is being promoted by a group of Institutions, ICICI, IDBI, SBI, IFCI, LIC, GIC, CAN
Bank.
FEATURES OF OTCEI:
1. Use of Modern Technology.
2. Restriction for other stocks. (Small companies are only allowed not for all the
companies, purely meant for small companies)
3. Minimum issued Capital 30 lakhs to 20 crores.
4. Minimum subscription would be 40% or 20 lakhs whichever is higher.
5. Base Capital requirement for member minimum of 4 lakhs.
6. All India Network.
7. Satellite facilities are being used.
8. Deals with Equity shares, preference shares, bonds, debentures etc.,
9. Computerization of transactions.
ADVANTAGES OF OTCEI:
1.
2.
3.
4.
5.

Nationwide listing and trading.

Screen based scripts. (computerized)
No physical delivery.
Fast settlement procedures.
Ensuring investment worthiness to small companies. (For small companiesOTCEI is a biggest support)
6. Highly professional approach.
MUTUAL FUNDS
BENEFITS OF MUTUAL FUNDS:

15
1.
2.
3.
4.
5.
6.
7.
8.

Attractive return on investment.

Minimum risk.
Promote savings among lower & middle class people.
Different types of investment.
Corporate sector made available for common man.
Transparency in Activities.
Liquidity for investors.
Convenience & flexibility (switch over to other schemes is allowed)

TYPES OF MUTUAL FUND:

1. From the point of Investors.
2. From the point of Promotors.
INVESTORS:
1.
2.
3.
4.
5.
6.
7.

Open-ended mutual fund.

Close-ended mutual fund.
Growth oriented mutual fund.
Income oriented mutual fund.
Specialized mutual fund.
Domestic mutual fund.
Off-shore mutual fund.

PROMOTORS:
1. Stock funds.
2. Bond funds.
3. Balanced funds.
4. Index fund.
5. Money market fund.
6. Dual fund.
7. Specialized fund.
8. Taxation fund.
9. Real estate funds.
10.Junk-Bond fund.
DISADVANTAGES OF MUTUAL FUND:
1.
2.
3.
4.
5.
6.

Risk (somebody else is going to play with your money)

Close-ended mutual fund.
Fund manager
New Company
Based on Stock market performance.
Transparency-problem
MERCHANT BANKERS

Merchant Bankers: Banker or banking division. It is in the form of bank, a

Company, a firm or even a proprietary concern.

16
*To provide non-financial services like arrange for funds rather than providing it.
*In 1969-By Grind lays Bank-UK, In India 1973-SBI (State Bank of India)
FUNCTIONS OF MERCHANT BANKERS:
1. Corporate counseling.
2. Project counseling.
3. Capital Structure.
4. Portfolio management.
5. Issue management.
6. Credit syndication.
7. Working Capital Management.
8. Venture Capital Management.
9. Lease finance.
10.Fixed Deposit.
11.Other functions:
a) Treasury management
b) Stock Broking
c) SSI Counseling (Small Scale Industry)
d) Equity research & investment counseling.
e) Assistance to NRI investors.
f) Foreign collaboration.
DEMERITS OR DRAWBACKS OF MERCHANT BANKERS:
1.
2.
3.
4.
5.
6.

Lack of Entrepreneurial ability.

Lack of professionals.
Lack of control.
Unhealthy practices.
Speculation at times.
Misleading the investors.

NBFC: (Non-Banking Financial Corporation)

FINANCIAL SERIVICES OF NBFC:
1.
2.
3.
4.

Provide micro finance (Small traders, formers)

Form Self Help groups in villages.
Provide consultancy services.
Provide training programmes on certain art & arrange finance for selfemployment.
5. Provide loan facility to small farmers.
6. Assist small formers with technology up gradation.
FINANCIAL SERIVICES, MARKETS AND INSTITUTIONS
EVOLUTION OF FINANCIAL SYSTEM IN INDIA:
1. Barter system.
2. Money lenders.

Co-operative Banks

17
3. Nithi and Chit funds.
4. Co-operative movement
5. Joint stock Companies.
6. Consolidation of commercial banks.
Co-operative
7. Nationalization of banks.
8. Investment banks.
9. Development of financial institutions.
10.Investment & Insurance Companies.
11.Stock exchange & Market operations
12.Specialized financial Institutions.
13.Merchant Banking or bankers.
14.Universal Bankers.
FINANCIAL SYSTEM:
1.
2.
3.
4.

Financial
Financial
Financial
Financial

Market (Buying and selling of financial instruments)

Institutions.
services.
Instruments (A paper which carries money)

FINANCIAL INSTITUTIONS:
It consists of Central bank, commercial banks, Co-operative bank, Development
banks, Merchant banks, Hire purchase financing company, leasing company,
factoring company, asset-liability management company, underwriters, mutual fund
companies etc.,
FINANCIAL MARKET & CLASSIFICATIONS:
1.
2.
3.
4.

Capital Market.
Money Market.
Foreign Exchange Market.
Government Securities Market.

Organized

Unorganized

INDIAN MONEY MARKET

ORGANIZED

RESERVE BANK OF INDIA

1.
2.
3.
4.
5.

Commercial Banks
Co-operative banks
Regional rural banks
NABARD
Foreign Banks

UNORGANIZED

1. Indigenous Bankers
2. Money lenders

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In Organized Money Market Rules,

Regulation, Policy, Controlling
Authority is there

FOREIGN EXCHANGE MARKET:

FOREIGN EXCHANGE MARKET
UNDER THE
DIRECT CONTROL
AUTHORISED DEALERS, MONEY CHANGERS, FOREIGN BANKS, IMPORTERS &
EXPORTERS are the Authorized people to deal in the foreign exchange market
or to deal with foreign currency.
GOVERNMENT SECURITIES MARKET:
1. Treasury bills (short period)
2. Bonds (long period)
TREASURY BILLS: Issued by RBI with the advice of Government of India. When it is
issued,it is compulsory for the commercial banks and financial institutions to
purchase it.
BONDS: It is issued for the development activities in India.
LENDING POLICY OF COMMERCIAL BANKS:
1.
2.
3.
4.
5.
6.
7.

Risk factor.
Rate of return.
Diversification (for various purpose)
Provide finance to Government.
Finance to all types of sector.
Finance to all locations.
Satisfy moral & ethical values.

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MONEY MARKET:
MONEY MARKET

BORROWERS

LENDERS

Government
Agriculturalists
Traders
Business man
Commercial
banks
6. NBFCS

1. Central bank
2. Commercial
banks
3. Co-operative
banks
4. Foreign banks
5. NBFCS

1.
2.
3.
4.
5.

FEATURES OR IMPORTANCE OF MONEY MARKET:

1.
2.
3.
4.
5.
6.
7.

Provide short term funds.

Commercial banks role.
Governments role
Channelize the savings into investment.
Inflation Controller.
Funds transfer.
Stimulate Capital Market activities.

ROLE OF CALL MONEY MARKET:

1.
2.
3.
4.
5.

Deal with short period loan. (Maximum 14 days, in practical 7 days)

Repayable based on demand & negotiations.
The main location-Big centers.
LIC, GIC, UTI, IDBI, ICICI, IFC are participate.
It provided for: Bill Market, Interbank use, trading in Stock Exchange, Trading
in Bullion market, to individual traders for saving interest.
6. Initial stage-Brokers operate.

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7. In 1970-RBI prohibited brokers.
8. RBI implement restrictive monetary policy-Call money market will be active.
RBI has liberal policy-Call money market will become dull.
9. It is popularly used in all types of banks.

TREASURY BILLS:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Issued by RBI on behalf of Government.

The purpose is to meet temporary Government deficits.
It is a place where the treasury bills are bought and sold.
It is guaranteed by Government.
Repayment will be on the due date.
Duration may vary from 91 to 364 days.
No trade transactions.
Considered as Finance bill.
Two types:
a) Ordinary bill
b) Ad-hoc bill (Very short period)

Ordinary Treasury bills:

1.
2.
3.
4.

Issued for short term fund requirement.

Issued for public & commercial banks
No restriction for buying and selling
They have secondary market also.

Ad-hoc Treasury bills:

1. Issued in favour of RBI.
2. State Government, Semi-Government departments, foreign central banks can
invest their surplus in this.
CERTIFICATE OF DEPOSITS:
1.
2.
3.
4.
5.
6.
7.

Introduced in 1987.
Popularly known as CD & NCD. (N Negotiable)
Deposit cash with bank & get promissory note from banks.
Amount & maturity date will be mentioned.
It can be traded in the Secondary market.
Holder on the maturity date is eligible for the payment.
Banker will make the payment on the maturity date or due date.

ROLE OF COMMERCIAL PAPERS:

1.
2.
3.
4.
5.

Popularly known as CP.

Introduced by RBI in 1990.
Leading financial institutions can issue.
Unsecured promissory note by the issuer.
Anyone can buy & discount with the commercial banks.

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6. On the due date issuer will make the payment.
7. Interest also paid on the due date.
8. It is another form of fund raising.
9. Credit rating can be obtained.
10.Issuers net worth should be 4 crores.
11.Current ratio should be 1.33:1