Indian Financial System

Indian Financial System

Introduction

Composition
Functions
Saving Function Liquidity Function Payment Function Risk Function Policy Function

Financial Markets
Defined as the market in which financial assets are created or transferred.

These assets represent a claim to the payment of a sum of money sometime in the future and/or periodic payment in the form of interest or dividend.

Classification
Money market (Short term instrument)

Capital markets (Long term instrument)

The most important distinction between the two:

The difference in the period of maturity.

Money Market
Main Function
To channelize savings into short term productive investments like working capital .

Instruments in Money Market

Call money market Treasury bills market Markets for commercial paper Certificate of deposits Bills of Exchange Money market mutual funds Promissory Note

Call Money Market

Part of the national money market

Day-to day surplus funds mainly of banks are traded

Short term in nature Maturity of these loans vary from 1 to 15 days Lent for 1 day: Call money Lent for more than 1 day but less than 15 days: Notice money Convenient interest rate Highly liquid loan repayable on demand

Commercial Papers
Unsecured Promissory note.
Issued by well known companies with strong and high credit rating. Sold directly by the issuers to investors or through agents like merchant banks and security houses. Flexible Maturity Low interest rates with compared to banks. Imparts a degree of financial stability to the system.

Promissory Note
Referred as note payable in accounting It is a contract detailing the terms of a promise by one party (the maker) to pay a sum of money to the other (the payee). The obligation may arise from the repayment of a loan or from another form of debt.

For example, in the sale of a business, the purchase price might be a combination of an immediate cash payment and one or more promissory notes for the balance.

Certificates of deposits
Defined as short term deposit by way of promissory notes. Greater flexibility to investors in the deployment of surplus funds.

Permitted by the RBI to banks

Maturity of not less than 3 months and upto 1 year.

Transferable in nature
Free negotiability and limited flexibility

Money market mutual funds

Invest primarily in money market instruments of very high quality. RBI and public financial institution can set it either directly or through its existing subsidiaries. MMMF
Open Ended Close Ended

Capital Markets
Provided resources needed by medium and large scale industries. Purpose for these resources
Expansion Capacity Expansion Investments Mergers and Acquisitions

Deals in long term instruments and sources of funds

Main Activity
Functioning as an institutional mechanism to channelize funds from those who save to those who needed for productive purpose. Provides opportunities to various class of individuals and entities.

Structure of Capital Markets

Primary Markets
When companies need financial resources for its expansion, they borrow money from investors through issue of securities. Securities issued a) Preference Shares b) Equity Shares c) Debentures Equity shares is issued by the under writers and merchant bankers on behalf of the company. People who apply for these securities are: a) High networth individual b) Retail investors c) Employees d) Financial Institutions e) Mutual Fund Houses f) Banks One time activity by the company.

Secondary Markets
The place where such securities are traded by these investors is known as the secondary market. Securities like Preference Shares and Debentures cannot be traded in the secondary market. Equity shares are tradable through a private broker or a brokerage house. Securities that are traded are traded by the retail investors.

Helps in mobilising the funds for the investors in the short run.

Inflation
Cost Push (Cost-push inflation occurs when businesses respond
1. 2. 3. 4. to rising costs) Component costs Rising labour costs Higher indirect taxes imposed by the government A fall in the exchange rate

a) b) c) d) e) f) g) h)

Increase in cost of raw materials Shortage of Supplies Natural calamities Industrial Disputes Increase in Exports Increase in Wages Increase in Transportation Cost Huge Expenditure on Advertisement

 Demand Pull
when aggregate demand and output is growing at an unsustainable rate leading to increased pressure on scarce resources A depreciation of the exchange rate Higher demand from a government (fiscal) stimulus Monetary stimulus to the economy Faster economic growth in other countries Improved business confidence Repayment of Past Internal Debt

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

STOCK EXCHANGE IN INDIA

WHAT IS STOCK EXCHANGE

Stock exchange is that organized market place where trading of shares is done in terms of sale and purchase. That sale & purchase is done by the customers,DIIs,FIIs.It also facilitates the issue and redemption of securities like dividends.

Types of Financial Markets.

Money Market:Investement for short term. E.g Treasury Bills, Commercial Papers. Capital Market: Long Term Investment 1. Primary Market 2. Secondary Market.: Equity Shares.

INTRODUCTION :
There are 23 stock exchanges in the India. Mumbai's (earlier known as Bombay), Bombay Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for over two thirds of the total trading volume in the country. Established in 1875, the exchange is also the oldest in Asia. Among the twenty-two Stock Exchanges recognised by the Government of India under the Securities Contracts (Regulation) Act, 1956, it was the first one to be recognised and it is the only one that had the privilege of getting permanent recognition .

Name of Indian stock exchange:

1.Bombay stock exchange(Mumbai) 2.National stock exchange(Mumbai) 3.Banglore stock exchange 4.Utter pradesh stock exchange(kanpur) 5.Magadh stock exchange(Patna) 6.Ahmedabad stock exchange 7.vadodara stock exchange(Baroda) 8.Bhubaneswar stock exchange 9.Calcutta stock exchange(kolkata) 10.Madras stock exchange

Cont.
11.Cochin stock exchange 12.coimbatore stock exchange 13.Gauhati stock exchange 14.Hydrabad stock exchange 15.Madhya pradesh stock exchange(indore) 16.Jaipur stock exchange 17.Ludhina stock exchange 18.Mangalore stock exchange 19.Pune stock exchange 20.saurashtrakutch stock exchange 21. OTC Exchange of India.

Cont.
Bombay stock exchange : it has 30 Blue chips companies sripted. Name:1.ACC 2.BAJAJ 3.AIRTEL 4.BHEL 5.CIPLA 6.DLF 7.GRASIM 8.GUJRAT AMBUJA 9.HDFC 10.HDFC BANK

CONT
11.HERO HONDA 12.HINDALCO 13.HUL 14.ICICI BANK 15.INFOSYS 16.ITC 17.L&T 18.MARUTI 19.NTPC 20.ONGC

CONT
21.RANBAXY 22.RELIANCE COMMUNICATION 23.RELIANCE ENERGY 24.RIL 25.SATYAM 26.SBI 27.TCS 28.TATA MOTERS 29.TATA STEEL 30.WIPRO

THE TOP TEN SINGLE DAY FALLS OF THE SENSEX HAS :

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Jan 21, 2008 --- 1,408.35 points Jan 22, 2008 --- 857 points Feb 11, 2008 --- 833.98 points May 18, 2006 --- 826 points Dec 17, 2007 --- 769.48 points Oct 17, 2007 --- 717.43 points Jan 18, 2007 --- 687.82 points Nov 21, 2007 --- 678.18 points Aug 16, 2007 --- 642.70 points Apr 2, 2007 --- 616.73 points

BSE CHART

NSE
The National Stock Exchange (NSE), located in Bombay, is India's first debt market. It was set up in 1993 to encourage stock exchange reform through system modernization and competition. It opened for trading in mid-1994. It was recently accorded recognition as a stock exchange by the Department of Company Affairs.

SPECULATION :
Definition : it involves the buying,holding,selling,shortterm selling of stocks,bonds.commodities,currencies,collectibles or any valuable financial instrument to profit from fluctuations in its price as opposed to buying it for use or for income via method like dividends or interest.

Kinds of speculation
Bull Market (Tejiwala): In case of that they purchase the shares at current prices to sell at a higher price in the near future and makes a profit if his expectations come true.he is also called a long buyer. Bear Market (Mandiwala) : He sells security in the hope that he will be able to buy them back at lesser price.It is also called short selling.

BENEFITS OF STOCK EXCHANGE

FROM THE POINT OF VIEW OF COMMUNITY: 1.It assist the economis development by providing a body of interested investors. 2.it uploads the position of superior enterprises and assist them in raising further funds. 3.It encourages capital formation 4.Government can undertake projects of national importance and social value raising funds through the sale of its securities on the stock exchange.

FROM THE COMPANY POINT OF VIEW

1.A company whose shares quoted on stock exchange they enjoy better reputation and credit. 2.The market for the shares of such a company is naturally widened. 3.The market price of securities is likely to be higher in relation to its earnings,dividends and property values.This raises the bargaining power of the company in the event of a takeover,merger or amalgamation.

FROM THE INVESTORS POINT OF VIEW

1.Liquidity of the investment is increased 2.The securities dealt on a stock exchange are good collateral security for loans. 3.The stock exchange safeguards interests of investors through strict enforcement of rules and regulations. 4.The present net worth of investments can be easily known by the daily quotations. 5.His risk is considerably less when he holds or purchases listed securities.

 Broker : He is a member of recognized stock exchange who is permitted to do trades on the screen based trading system. Sub-broker: Affilated with the broker.They both purely work on commission bases. STT-Security Transaction Tax: Oct,2004

Rolling Settlement
The trades which are executed during the day are settled on the basis of T+2 basis. where T- is the Trading day. T+2 is the settlement day.

CAUSES OF PRICE FLUCTUATION

1.DAMAND AND SUPPLY 2.BANK RATE 3.SPECULATIVE PRESSURE 4.ACTIONS OF OTHER FINANCIAL INSTITUTIONS 5.CHANGE IN COMPANYS BOARD OF DIRECTORS 6.FINANCIAL POSITION OF THE COMPANY

CONT..
7.TRADE CYCLE 8.POLITICAL FACTORS 9.SYMPATHETIC FLUCTUATIONS 10.OTHER FACTORS: A.EXPECTED MONSOON B.PERSONAL HEALTH OF HEAD OF GOVERNMENT OR CHAIRMAN OF THE COMPANY OIL PRICES IN THE INTERNATIONAL MARKET.

CONT.
D.CHANGES IN EXCHANGE RATE E.BORDER TENSION F.STOCK BROKERS SCAM LIKE HARSHAD MEHTA AND KETHAN PAREKH G.STRIKES AND LOCK-OUT OF THE COMPANY. H.NEW BUDGET PROPOSALS I.LOBERLIZATION AND PRIVATIZATION OF THE COMPANY.

SEBI
It was constituted and made a statutory body by SEBI act 1992.With the coming into effect of SEBI, some of the powers and function exercised by the central government,in respect of regulation of stock exchanges were transferred to the SEBI.

OBJECTIVES OF SEBI
1.Registring and regulating the working of stock brokers,sub-brokers,share transfer agents,who may be associated securities market in any manner. 2.Registering and regulating the working of collective investment scheme including mutual funds. 3.Prohibiting insider trading in securities. 4.Regulating substantial acquisition of shares and takeovers of companies.

Cont
5.Calling for information from,undertaking inspection,conducting inquiries and audits of stock exchanges and intermediaries and self regulatory organizations in the securities market. 6.Performing such function and exercising such powers under the provisions of the capital issues(control) act 1947 and as may be delegated to it by the central government. 7.Performing such other functions as may be prescribed.

HOW RATING IS GIVEN TO THE COMPANY?

Basically rating is given after see the company 'image,management quality,assets quality,auditors quality,accounting accuracy.Rating is not fixed, it may be change.

CREDIT RATING AGENCY IN INDIA

1.CRISIL 2.ICRA 3.CARE

Different Stock Exchanges Around the world.

Dow Jones- America NASDAQ-America Shangia-China Nikee-Japan Hangseng: Hongkong. DAX: Germany. FTSE: London S& P : Standard & Poor.-U.S.A

conclusion
THE STOCK EXCHANGE IS CONSIDERED TO BE THE BAROMETER OF ECONOMIC ACTIVITY.