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INDIAN FINANCIAL SYSTEM

CIA-1

ISHDEV SINGH DHEER


1620217-4 BBA B
Financial Markets
Financial Market is one where people trade financial securities, commodities and value at low
transaction costs and at prices that reflect demand and supply. Examples of financial markets
include the New York Stock Exchange (resale of previously issued stock shares), the U.S.
government bond market (resale of previously issued bonds), and the U.S. Treasury bills
auction (sales of newly issued T-bills).
The Financial Market serves six basic functions:
 Borrowing and Lending
 Price Determination
 Information Aggregation & Coordination
 Risk Sharing
 Liquidity
 Efficiency

The different types of financial markets are:


 Capital Market: It is a market where buyers and sellers engage in trade of financial
securities like bonds, stocks, etc. It consists of primary and secondary market. It is the
market for longer term securities, generally those with more than one year of maturity.
For Example: Corporate stocks, Residential mortgages, State and local government
bonds, bank commercial loans etc.
Capital Market is sub-divided into two types on the basis of nature of security traded:
 Bond Market: It provides financing through the issuance of bonds.
 Stock Market: It provides financing through the issuance of stocks.
 Money Market: It is the market where financial instruments with high liquidity and
very short securities are traded. It is the market for shorter-term securities, generally
those with one year or less remaining to maturity.
For Example: Eurodollar deposits, Negotiable certificates of deposits (CD’s), Bankers
acceptance, U.S. Treasury Bills, Commercial Bills, Municipal Notes etc.
About Nigeria:
Nigeria is a middle-income, mixed economy and emerging market, with expanding
manufacturing, financial, service, communications, technology and entertainment sectors. It is
ranked as the 21st-largest economy in the world in terms of nominal GDP, and the 20th-largest
in terms of purchasing power parity. It is the largest economy in Africa; its re-emergent
manufacturing sector became the largest on the continent in 2013, and it produces a large
proportion of goods and services for the West African subcontinent. In addition, the debt-to-
GDP ratio is 11 percent, which is 8 percent below the 2012 ratio.

Previously hindered by years of mismanagement, economic reforms of the past decade have
put Nigeria back on track towards achieving its full economic potential.

Money Market in Nigeria:


The instruments commonly used in the Nigerian money market are treasury bills, banker’s unit
fund, commercial bills, eligible development stocks, ordinary trade bills, the Nigerian
certificate of deposit etc.

1. Treasury Bills: These are short term securities issued by the Federal Government of Nigeria
at a regular schedule actions to refinance it trading issues. These also help to finance deposits.
The government further sell bills on a regular basis to smoothen out the uneven flow from
corporate and individual tax receipts. They are sold at a discount maturity within 91 days from
the day of issue. It provides the government with a highly flexible and relatively cheap means
of borrowing cash and securities.

2. Treasury Certificates: These are similar to the treasury bills and are a medium- term
government security which matures after a period of one to two years and is intended to bridge
the gap between the treasury bill and long-term government securities.

3.Eligible development stocks: Eligible development stocks are money market instruments
used by the Nigerian government to finance the long-term development projects. These have a
maturity life of three years and above.
4.Ordinary Trade Bills: This is drawn by ordinary reputable commercial firms and accepted
by a bank or acceptance house and are secured on stock of manufactured goods ot other stock
in trade. These bills are not eligible for rediscount at the CBN (Central Bank Of Nigeria) and
hence not popular with banks except when secured on exports produced.

5. Stabilization Securities: These are special purposes which the law authorizes the Central
Bank of Nigeria to issue and sell compulsorily to banks at any interest rate and such conditions
as the Central Bank may deem it for the purpose of mopping up excess liquidity of banks. The
instrument is not an instrument of the government but that of the Central Bank.

6. Commercial papers:These are short-term promissory notes issued by the CBN and their
maturities vary from 50 to 270 days, with varying denominations (sometimes #50,000 or more).
They are debt that arise in the course of commerce.

Commercial papers may also be sold by major companies (blue-chips-large, old, safe, well-
known, national companies) to obtain a loan. Here, such notes are not backed by any collateral,
rather, they rely on the high credit rating of the issuing companies.

Capital Market in Nigeria:


1.Equities: The Nigerian Stock Exchange (NSE), one of the leading markets in Africa by
market capitalization and turnover, provides investors access to outstanding liquidity and
transparency across a wide range of attractive trading segments. At the NSE, investors enjoy
fully-electronic hybrid trading services (order & quote driven) and unlimited diversification
opportunities. A comprehensive range of investment products, including Equities, Exchange
Traded Funds and Bonds, are currently traded on the NSE using its modern and high-
performance trading platform.

Securities traded on the NSE Equities Market are listed on Premium Board, Main Board,
Alternative Securities Market (ASeM), Real Estate Investment Trusts (REITs) and Closed-end
Funds.
2.Bonds: Bonds are debt securities that are issued to lenders of long term loans. It is basically
an ‘’IOU’’ issued by one party to another. The bond holders, or investors, are the lenders, while
the issuer is the borrower. The borrower promises to make periodic interest payments (called
coupons) on the bond, as well as to repay the original loan (the principal) to the bond holder
on a stipulated date (the maturity date).

The common types of bonds listed and traded on The NSE are:

 Federal Government Bonds - are issued by the Federal Government of Nigeria (FGN)
via the Debt Management Office, and listed on the NSE. The income earned on FGN
bonds is tax free.

 State/Local Government Bonds - are issued by is a state or local government. Just


like FGN bonds, no Value Added Tax is charged on the proceeds of state and local
government bonds.

 Supranational Bonds - bonds are issued by supranational organizations or institutions,


such as the African Development Bank and the World Bank. Like government bonds,
they have a high credit rating, and are regarded as the safest bond investments.

 Corporate Bonds - are issued by private and/or public companies. They normally have
higher interest rates than government bonds. Some corporate bonds can be converted
to equity if certain provisions are met – such bonds are called convertible bonds.

3.Exchnage Traded Funds: Exchange Traded Funds (ETFs) are securities that track the
performance of an index or basket of assets. They are listed on an exchange and traded much
like stocks. ETFs derive their performance from the index or underlying assets they track. ETFs
provide investors with the opportunity to diversify their investments and gain exposure to
various investment strategies and asset classes, including;
Local Fixed Income
Local Equities
International Markets
Commodities
Currency
Multi-Asset
The Nigerian Stock Exchange (NSE) is the leading ETF markets in the West African region in
terms of number of listing, turnover value and capitalization. NSE offers a fully electronic
trading platform that delivers the benefits of deep liquidity, transparency and tremendous speed
and efficiency.

4.Derivatives: Derivatives are contracts whose values are based on an agreed-upon underlying
financial asset, index or security. Common underlying instruments include: bonds,
commodities, currencies, interest rates, market indexes and stocks.

5.Mutual Funds: The Nigerian Stock Exchange (NSE) offers a comprehensive list of Mutual
Funds to help one meet your savings and investment goals and priorities.

A Mutual Fund is an investment vehicle made up of a pool of funds collected from numerous
investors for the purpose of investing in securities such as stocks, bonds, money market
instruments and similar assets. Mutual Funds are operated by professional fund managers, who
invest the fund's capital and attempt to produce capital gains and income for the investors.

INDIA:
The economy of India is a developing mixed economy. It is the world's sixth-largest economy
by nominal GDP and the third-largest by purchasing power parity (PPP). The country ranks
141st in per capita GDP (nominal) with $1723 and 123rd in per capita GDP (PPP) with $6,616
as of 2016. After 1991 economic liberalization, India achieved 6-7% average GDP growth
annually. In FY 2015 and 2017 India's economy became the world's fastest growing major
economy surpassing China.
The long-term growth prospective of the Indian economy is positive due to its young
population, corresponding low dependency ratio, healthy savings and investment rates, and
increasing integration into the global economy
Money Market in India:
Major Players in Money Market: -
 RBI
 Central Government
 State Governments
 Banks
 Financial Institutions
 Micro Finance Institutions
 Foreign Institutional Investors (FII)
 Mutual Funds

1. Treasury Bills:
Treasury bills, also known as Zero Coupon Bonds are the instrument of short term borrowing
with maturity period of less than one year.

This instrument is issued by Reserve Bank of India on behalf of the Central Government for
fulfilling short term requirements of funds. They are issued at discount and are paid at par.

This difference between the issue and the redemption price is the interest payable. They are
highly liquid and no risk of default of payment is there. They are issued of Rs.25, 000 or in
multiples thereof.

For example, suppose an investor purchases a 108 days Treasury bill for Rs. 138,000 having
face value of Rs. 1, 50, 000. On maturity, he receives Rs. 1, 50,000. The difference of Rs. 12,
000 in the issue and redemption price is the interest received by him.

2. Commercial Paper:
Commercial Paper (CP) is a short term unsecured promissory note with maturity period of 15
days to one year. Since it is unsecured, it is issued by the large and creditworthy companies to
meet their short-term fund requirements.

Commercial Paper is issued at discount and redeemed at par. It is negotiable and transferable
by endorsement. The funds raised through Commercial Paper can be used for fulfilling seasonal
and working capital need. For example, for meeting the floatation cost at the time of issue of
shares and debentures i.e. Bridge Financing.

3. Call Money:
Call Money is short term finance used for interbank transactions. It has a maturity period of
one day to fifteen days. All the commercial banks are required to maintain cash balance which
is known as Cash Reserve Ratio (CRR).

The Reserve Bank of India keeps on changing this ratio from time to time thus affecting the
availability of funds, for providing loans, with the banks. Call money is a facility under which
banks borrow money from each other to maintain CRR at rate of interest known as Call Rate.

This rate keeps on changing from day to day and sometimes from hour to hour. The relationship
between call rates and other short-term instruments such as commercial papers, certificates of
deposit etc. is an inverse relationship. An increase in call money rates increases the demand for
other short-term instruments.

4. Certificate of Deposit:
Certificates of deposit are short term instruments issued by commercial banks and financial
institutions to the individuals, corporations and companies. They are unsecured and negotiable.
Such instruments are usually issued by banks when they have a tight liquidity position because
of slow growth of bank deposits but the demand for credit is high.

5. Commercial Bills:
Commercial bill is a bill of exchange used to finance the credit sales of firms. It is a short term,
negotiable and self-liquidity instrument. In case of goods sold on credit, the buyer is liable to
make the payment on a specific date in future.

The seller could either wait till the maturity date or can draw a bill of exchange. When this bill
is accepted by the buyer it becomes a marketable instrument and is called a trade bill. If the
seller wants the funds before the maturity date, he can get the bill discounted from the bank.
When a commercial bank accepts a trade bill it becomes a commercial bill.

6. Repurchase agreement is also known as Repo. It is money market instrument. In this one
party sell his asset usually government securities to other party and agreed to buy this asset on
future agreed date . The seller pays an interest rate, called the repo rate, when buying back the
securities. This is like a short-term loan given by buyer of security to seller of security to meet
immediate financial needs.

Capital Markets:

The regulatory body for the Indian capital markets is SEBI (Securities and Exchange Board of
India).
v Major Players in Money Market: -

1.S.E.B.I
2.Central and State Government
3.Financial Institutions like L.I.C.
4.Financial intermediaries like stock brokers
5.Individuals
6.Corporate houses
7.Insurance companies

Equities

Equity market generally known as stock. In this company want to raise money issue shares in
share market like B.S.E. or N.S.E.to individual or financial institutions who want to invest their
surplus money

Shares can be issued in two ways:

If company issuing share for first time that it is known as I.P.O. (Initial Public Offering ).IPO
of any company issued in primary market and if company issuing shares for second or third
time than it is known as FPO(Follow on Public Offering ) and trading of already issued shares
take place in secondary market.
Share gives ownership right to individuals who subscribe to it, in this way company has to
dilute his ownership right Same way public sector undertakings dilute up to 49 percent of their
ownership and keep remaining 51 percent with them so that they have majority control.
A person earns from shares is company make profit which is distributed among shareholders
know as dividend and if company make loss value of share also falls so shares are high risk
instruments

Bond or Debt

Bond market is also known as Debt market. A debt instrument is used by government or
organization to generate funds for longer duration. The relation between person who invest in
debt instrument is of lender and borrower. This gives no ownership right. A person receives
fixed rate of interest on debt instrument.
If any company or organization want to raise money for long term purpose without diluting his
ownership that it is known as Debentures. These are backed by security so there is no risk
involves but return on these instrument is low as compared to shares. Company pay fixed rate
of interest on debentures.

If government want to generate funds to meet long term needs like infrastructure it issues bonds
know as sovereign bonds which are backed by government security so there is no risk

Mutual Funds: These are investment vehicles that allow you to indirectly invest in stocks or
bonds. It pools money from a collection of investors, and then invests that sum in financial
instruments. This is handled by a professional fund manager.
Every mutual fund scheme issues units, which have a certain value just like a share. When you
invest, you thus become a unit-holder. When the instruments that the MF scheme invests in
make money, as a unit-holder, you get money. This is either through a rise in the value of the
units or through the distribution of dividends – money to all unit-holders.
Money Markets contribution in economic development of Nigeria:
Nigerian money market plays an important role in the economic development of the country.
Money market is an important part of the financial sector as it is the key to facilitate the
monetary policy in any economy. It facilitates transfer/transmission of fund in an economy.
Money markets provides an opportunity to banks and other institutions to use their surplus
funds for short period. It provides no need for commercial bank borrowing from the Central
Bank of Nigeria when they run in short supply of cash. The money market helps the
government to easily borrow with a low interest rate on the basis of treasury bill instead of
borrowing from the Central Bank of Nigeria which might lead to inflation. The money market
in Nigeria promotes safety of financial assets and thus encourage savings and investments in
the economy thus accelerating economic growth and increasing the standard of living of an
average Nigerian. Also below it can be seen that how because of the money market instruments
the FDI has increased from less than 50 m to more than 250 m
Capital Markets contribution in economic development of Nigeria:
The latest World Economic Forum Global Competitiveness Index measured the most
problematic factors for doing business in Nigeria with infrastructure deficit topping the list.
Access to finance is the third. The capital market is uniquely placed to address both challenges
to unleash economic growth and job creation in the country. Capital markets are not just
important for raising funds for infrastructure and business expansion, they also engender good
corporate governance and accountability promote transparency enable wealth creation and
distribution foster inclusiveness democratize access to prosperity champion meritocracy. The
Nigerian capital market is being repositioned to do more for Nigerians, providing government
with the funds to fix infrastructure and businesses to create more jobs
The most important role of the Nigerian Capital Market is the mobilization and efficient
allocation of capital for investment purposes. The market puts in place structures for the
mobilization of savings from numerous surplus economic units for the purposes of the
productive process and thus enhances economic growth and development. Also in a recent
study the Nigerian economy has benefitted in the following manner:
 Cash: Enormous sums could be raised on the capital market without the limitations
associated with bank financing.
 Liquidity with Employees: For enterprises, employees could be offered incentive
through stock options. The underlying benefit is the hope that someday the company
will go public and employees would be able to exercise their stock options to create
wealth for themselves.
 Liquidity for Investors: Creating a public market for a stock, raising funds on the capital
market through stock exchange listing result in liquidity for investors.
 Marketability of Shares: Quotation on the stock exchange increase marketability of the
shares. An issued security can be traced and valued easily and can also be used as
collateral for bank loans. This greatly increases the potential on the business and
personal benefit to its owners.
 The capital market also has opened the floodgate to relatively inexpensive fund
surpassing the possibility of self-financing available to indigenous enterprises.
Such funds are usually used for expansion of existing businesses or to cushion
the effect of inflation so that businesses may continue as going concerns. It also
afford indigenous enterprises and entrepreneurs the opportunity to be introduced
into the economy in general through entry into the securities market. This
enables shares that haven been privately held to be offered to the general market
or international market for inflow of foreign investment.

Money Markets contribution in economic development of India:


The money market contributes in economic development of India in the following manner:
1. It provides short-term funds to public and private institutions needing such financing for
their working capital requirements. It is done by discounting trade bills through commercial
banks, discount houses, brokers and acceptance houses. Thus, the money market helps the
development of commerce, industry and trade within and outside the country.
2. The money market brings equilibrium between the demand and supply of loanable funds.
This it does by allocating savings into investment channels. In this way, it also helps in rational
allocation of resources.
3. The money market removes the necessity of borrowing by the commercial banks from the
Reserve Bank of India. If the former finds their reserves short of cash requirements they can
call in some of their loans from the money market. The commercial banks prefer to recall their
loans rather than borrow from the central bank at a higher rate of interest.
4. The money market helps the government in borrowing short-term funds at low interest rate
on the basis of treasury bills. On the other hand, if the government were to issue paper money
or borrow from the Reserve Bank of India, it would lead to inflationary pressures in the
economy

Capital Markets contribution in economic development of India:

Capital market has a crucial significance to capital formation. For a speedy economic
development, adequate capital formation is necessary. The significance of capital market in
economic development is explained below: -
.
Mobilization of Savings and Acceleration of Capital Formation
In developing countries like India, the importance of capital market is self-evident. !n this
market various types of securities helps to mobilize savings from various sectors of population.
The twin features of reasonable return and liquidity in stock exchange are definite incentives
to the people to invest in securities. This accelerates the capital formation in the country.
Ready and Continuous Market: The stock exchange provides a central convenient place
where buyers and sellers can easily purchase and sell securities. Easy marketability makes
investment in securities more liquid as compared to other assets.

Technical Assistance: An important shortage faced by entrepreneurs in developing countries


is technical assistance. By offering advisory services relating to preparation of feasibility
reports" identifying growth potential and training entrepreneurs in project management" the
financial intermediaries in capital market play an important role.).

Raising Long & Term Capital: The existence of a stock exchange enables companies to raise
permanent capital. The investors cannot commit their funds for a permanent period but
companies require funds permanently. The stock exchange resolves this dash of interests by
offering an opportunity to investors to buy or sell their securities while permanent capital with
the company remains unaffected.

Foreign Capital: Capital markets makes possible to generate foreign capital. Indian firms are
able to generate capital funds from overseas markets by way of bonds and other securities.
Government has liberalized Foreign Direct Investment in the country. This not only brings in
foreign capital but also foreign technology which is important for economic development of
the country./.

Easy Liquidity: With the help of secondary market investors can sell off their holdings and
convert them into liquid cash. Commercial banks also allow investors to withdraw their
deposits" as and when they are in need of funds

Also it is seen that for foreign investors both securities and commodities are favourite spots to
invest. These attract foreign investors as they promise long term growth. In 2004, 13% of the
total PE investments made in the banking & financial services space were in stock exchanges.
Since the beginning of 2007, 17 transactions (including consortium deals) took place with a
disclosed deal value of more than $1.15 billion. Out of this, 8 deals with disclosed value of
more than $268 million happened in 2010 only. In 2010, NSE had 12 foreign investors with a
total foreign investment of 32% compared to BSE which had 8 foreign investors with share of
27% investments. Some of the key US investors active in Indian exchanges are NYSE group,
Atlantic LLC, Goldman Sachs, Morgan Stanley, Citigroup, Northwest Venture Partners,
George Soros, Argonaut ventures. Fidelity, Intel Capital, Merril Lynch, and Bessemer Capital
are some of the US investors. Most of the transactions involving these exchanges have been
secondary in nature

Comparison of Indian and Nigerian Financial Market:


Instrument India Nigeria

Treasury Bills  Issued by RBI.  Issued by Federal Govt. of


 Currency being INR. Nigeria
 Three types i.e 91 days, 182  Currency being Naira
days and 364 days.  Sold at a discount maturity
 Minimum amount of within 91 days of issue
Rs.25,000 and in multiples  Before one could buy T-bill for
of Rs.25,000. as low as N10,000and in
multiples of N1000 thereafter
but as of low the minimum
investment has been increased
to N50,000 in 2017.
Commercial  Maturity ranging from 7  Short term promissory notes
Papers days to 1 year. issued by Central Bank Of
 Currency being INR. Nigeria.
 The face value of  Maturity varying from 50 to
Commercial Paper is in the 270 days
denomination of Rs.0.5  With varying denominations of
million and multiples 50,000 or more
thereof.
Shares  Only has IPO’s and FPO’s  Only has IPO’s and FPO’s
 SEBI is the regulatory  Regulated by Securities and
authority. Exchange Commission of
Nigeria