Financial System

It is a set of institutional arrangements through which financial surpluses are mobilized from units generating surplus income and transferring them to the others, who are in need of them and as a result surplus funds come into the main stream of production and hence develop the economy. Every modern economy is based on a sound financial system. Financial system comprises of the following: Financial Markets; Capital Market; and Money Market Financial Institutions and Intermediaries; and Public Financial Institutions; Banks; Non-Banking Financial Companies; and Insurance Organisations. Financial Products. Some of the Financial Products are as follows: Equity shares with equal rights; Equity shares with differential rights; Sweat Equity Shares; Preference Shares; Debentures; Treasury Bills; Commercial Bills; Commercial Paper; Certificate of Deposit; Global Depository Receipts; American Depository Receipts; Foreign Currency Convertible Bonds; and Derivatives, etc

Financial Markets
Financial Market helps in allocation of savings to investment and provides a variety of investment options to savers as well as various forms of raising finances to corporates. A. Capital Market is a market for financial investments that are direct or indirect claims to the capital. It is wider than the Securities Market and embraces all forms of lending and borrowing. B. The Securities Market refers to the markets for those financial instruments or claims or obligations that are commonly and readily transferable by sale. C. There are two components of Securities Market. They are: i. Primary Market Provides the channel for sale of new securities by way of public issue, rights issue, bonus issue, etc... ii. Secondary Market Provides the channel for dealing with previously issued securities through stock exchanges or otherwise. Secondary market is of two types. They are:

a) Spot Market refers to the market where the securities are traded for immediate delivery and payment. b) Future Market refers to the market where the secirotoes are traded for future delivery and payment. D. Capital Market is regulated by Securities and Exchange Board of India and Ministry of Finance. Functions of Securities Market / Capital Market 1. It provides a market place for sale / purchase of securities 2. A person, who cannot carry on a particular activity independently, can invest into the securities, through the primary or secondary market, into the securities of a company which is carrying on that particular activity. 3. A person, who wants to start an activity but does not have resources, can attract enough investments, through primary market, from the other like-minded people to make a start. 4. Securities Market comprises of approximately 14,000 listed companies and hence allows an individual to diversify his risk by investing in difference ventures, resulting in overall success. E. Money Market refers to the market where borrowers and lenders exchange shortterm funds to solve their liquidity needs. Here, the funds exchange hands for up to one year. Furtherm money market has two components, namelym formal money market such as RBI, Commercial Banks, Co-operative Banks, UTI, etc and informal money market such as Chit Funds, Nidhis, etc F. There were number of provisions under the various Acts which used to hinder the growth of economy and industry. Over a period of time, all such provisions have been scrapped. Some are: 1. Capital Issues (Control) Act, 1947, a restrictive law, was replaced by SEBI Act, 1992, a progressive law; 2. Free pricing of issues was allowed; 3. FERA replaced by FEMA; 4. SEBI DIP Guidelines, 2000 replaced by SEBI (Issue of Capital and Disclosre Requirements) Regulations, 2009; 5. 23 Stock exchanges have been set up over a period of time in order to provide liquidity to the large number of investors. 6. A number of Mutual Munds have been set up for better investment options; 7. Investment norms for NRIs have been liberalized; 8. FII were allowed access to Indian Capital Market on registration with SEBI; 9. Depositories concept was introduced for the fast, inexpensive and hasslefree transaction of securities; 10. Indian Companies were permitted to tap foreign markets by issuing ADR, GDR and FCCB; 11. Foreign Companies have been allowed to tap Indian Markets by issuing IDR;

12. Credit Rating was made compulsory for raising finance through debt instruments; 13. A number of new financial products like zero interest bonds, deep discount bondsm sweat equity shares, etc. have been introduced; 14. Corporate Governance concept has been introduced for the listed companies, which lead to more transparency and better compliances; 15. Introduction of Stock Invest Scheme; 16. Introduction of abridged prospectus; 17. Lock-in period for promoter quota shares has been prescribed to protect the small investors. 18. Requirement of finalization of basis of allotment in the presence of Stock Exchange representatives. 19. SEBI has prescribed code of conduct for advertisement of public issue; 20. Companies have been allowd to buy-back their own shares and certain specified securities. Financial Institutions and Intermediaries 1. Public Financial Institutions: They assist the industry by providing debts, in the form of loans and working capital facilities, as well as equity. They focus only on debts and in that too on loans, both rupee and foreign currency. Examples are IFCI, SIDBI, SFC 2. Banks: They assist in the form of loans and working capital facilities, as well as equity. 3. Non Banking Financial Companies: They assist for equipment lease, hire purchase finance, bills discounting, venture capital, housing finance, etc. Examples are Tata Finance, Escorts Finance, DCM Finance, etc. 4. Insurance Organisation: They assist by participating in their equity. LIC and GIC together with its 3 subsidiaries National Insurance, Oriental Insurance and New India Assurance are the government controlled organizations for the life and non-life business respectively. Even private players like ICICI prudential, Birla Sunlife, Tata AIG entered the insurance business field.

Functions of Financial System Regulation of currency through RBI Banking Functions through Bank Management of national reserves of international currency Credit control by RBI Supply and deployment of funds for productive use Maintaining liquidity Conclusion Capital Market got developed by introduction of SEBI in place of Capital Issues (Control) Act, 1947, before which there were no organised capital market; rare cases of public issue; loans subject to stringent conditions; few financial institutions and intermediaries. The Securities Contracts (Regulation) Act, 1956, SEBI Act, 1992 and Depositories Act, 1996 are administered by Ministry of Finance, Government of India. Ministry of Finance and SEBI are the principal executive authority in respect of the above three said Acts. Apart from the above authorities, SAT (Securities Appellate Tribunal) is the quasi judicial authority with regard to those three Acts.