$$ Final Indian Finanacial System 2$

Indian Financial System
1 Thakur College Of Science & Commerce

E XECUTIVE S UMMARY
In 1990s, the balance of payments position facing the country had become
critical and foreign exchange reserves had depleted to dangerously low
levels i.e. $585 million, which was sufficient for financing just one week of
India's exports.
Since the initiation of reforms in the early 1990s, the Indian economy has
achieved high growth in an environment of macroeconomic and financial
stability.
The period has been marked by broad based economic reform that has
touched every segment of the economy. These reforms were designed
essentially to promote greater efficiency in the economy through promotion
of greater competition.
The story of Indian reforms is by now well-documented, nevertheless, what

is less appreciated is that India achieved this acceleration in growth while
maintaining price and financial stability.
As a result of the growing openness, India was not insulated from

exogenous shocks since the second half of the 1990s. These shocks, global
as well as domestic, included a series of financial crises in Asia, Brazil and
Russia, 9/11 terrorist attacks in the US, border tensions, sanctions imposed
in the aftermath of nuclear tests, political uncertainties, changes in the
Government, and the current oil shock. Nonetheless, stability could be
maintained in financial markets.

Indeed, inflation has been contained since the mid-1990s to an average of

around five per cent, distinctly lower than that of around eight per cent per
annum over the previous four decades. Simultaneously, the health of the
financial sector has recorded very significant improvement.
India's path of reforms has been different from most other emerging market
economies: it has been a measured, gradual, cautious, and steady process,
devoid of many flourishes that could be observed in other countries.
Reforms in these sectors have been well-sequenced, taking into account the
state of the markets in the various segments.
The main objective of the financial sector reforms in India initiated in the
early 1990s was to create an efficient, competitive and stable financial sector
that could then contribute in greater measure to stimulate growth.
For efficient price discovery of interest rates and exchange rates in the
overall functioning of financial markets, the corresponding development of
the money market, Government securities market and the foreign exchange
market became necessary. Reforms in the various segments, therefore, had
to be coordinated. In this process, growing integration of the Indian
economy with the rest of the world also had to be recognized and provided
for.
Till the early 1990s the Indian financial system was characterized by
extensive regulations such as administered interest rates, directed credit
programmes, weak banking structure, lack of proper accounting and risk

management systems and lack of transparency in operations of major

financial market participants. Such a system hindered efficient allocation of
resources.
Financial sector reforms initiated in the early 1990s have attempted to

overcome these weaknesses in order to enhance efficiency of resource
allocation in the economy.
Simultaneously, the Reserve Bank took a keen interest in the development

of financial markets, especially the money, government securities and forex
markets in view of their critical role in the transmission mechanism of
monetary policy. As for other central banks, the money market is the focal
point for intervention by the Reserve Bank to equilibrate short-term liquidity
flows on account of its linkages with the foreign exchange market.
Similarly, the Government securities market is important for the entire debt
market as it serves as a benchmark for pricing other debt market
instruments, thereby aiding the monetary transmission process across the
yield curve.
The Reserve Bank had, in fact, been making efforts since 1986 to develop
institutions and infrastructure for these markets to facilitate price discovery.
These efforts by the Reserve Bank to develop efficient, stable and healthy
financial markets accelerated after 1991. There has been close co-ordination
between the Central Government and the Reserve Bank, as also between
different regulators, which helped in orderly and smooth development of the
financial markets in India.

INDIAN FINANCIAL SYSTEM
 Introduction
 Features of Financial System
 Role of Financial System
 Back Drop of Financial System
 Indian Financial System from 1950 – 1980
 Indian Financial System Post 1990’s

INTRODUCTION
The financial system or the financial sector of any country consists of:-
(a) specialized & non specialized financial institution
(b) organized &unorganized financial markets and
(c) Financial instruments & services which facilitate transfer of funds.
Procedure & practices adopted in the markets, and financial inter

relationships are also the parts of the system. These parts are not always
mutually exclusive. For example, the financial institution operate in
financial market and are, therefore a part of such market. The word system
in the term financial system implies a set of complex and closely connected
or inters mixed institution, agents practices, markets, transactions, claims, &
liabilities in the economy. The financial system is concerned about money,
credit, & finance – the terms intimately related yet some what different from
each other. Money refers to the current medium of exchange or means of
payment. Credit or Loan is a sum of money to be returned normally with
Interest it refers to a debt of economic unit. Finance is a monetary resources
comprising debt & ownership fund of the state, company or person.

FEATURES OF FINANCIAL SYSTEM -:
1. It provides an Ideal linkage between depositors savers and

Investors Therefore it encourages savings and investment.
2. Financial system facilitates expansion of financial markets
over a period of time.
3. Financial system should promote deficient allocation of
financial resources of socially desirable and economically
productive purpose.
4. Financial system influence both quality and the pace of
economic development.
ROLE OF FINANCIAL SYSTEM:
The role of the financial system is to promote savings & investments in

the economy. It has a vital role to play in the productive process and in
the mobilization of savings and their distribution among the various
productive activities. Savings are the excess of current expenditure over
income. The domestic savings has been categorized into three sectors,
household, government & private sectors.
The savings from household sector dominates the domestic savings

component. The savings will be in the form of currency, bank deposits,
non bank deposits, life insurance funds, provident funds, pension funds,
shares, debentures, bonds, units & trade debts. All of these currency &
deposits are voluntary transactions & precautionary measures. The

savings in the household sector are mobilized directly in the form of

units, premium, provident fund, and pension fund. These are the
contractual forms of savings. Financial actively deals with the
production, distribution & consumption of goods and services. The
financial system will provide inputs to productive activity. Financial
sector provides inputs in the form of cash credit & assets in financial
for production activities.
The function of a financial system is to establish a bridge between the

savers and investors. It helps in mobilization of savings to materialize
investment ideas into realities. It helps to increase the output towards
the existing production frontier. The growth of the banking habit helps
to activate saving and undertake fresh saving. The financial system
encourages investment activity by reducing the cost of finance risk. It
helps to make investment decisions regarding projects by sponsoring,
encouraging, export project appraisal, feasibility studies, monitoring &
execution of the projects.

An overview of Financial System and Financial Markets in India

MINISTRY OF FINANCE
Financial Institutions RBI SEBI IRDA
Insurance company
Mutual Fund Venture Capital Capital Market

Fund
LIC & GIC &

Other Other
Commercial NBFC Money Market
Banks
Primary Secondary
Market Market
Development Investment Sectoral State Level

Banks Banks Banks Financial
Institution Government
Stock Security
Exchange Market

BACK DROP OF INDIAN FINANCIAL SYSTEM
At the time of independence, India had a reasonably diversified financial

system in terms of intermediaries but a somewhat narrow focus on terms of
Industry’s share in credit doubled,

agriculture, rural areas, SSI, exports still RRBs setup
neglected
1980s 1990s
1947 1970s
1960s
NABARD, EXIM, SIDBI,

Nationalisation of Banks to NHB setup
Credit to Industry / Govt
ensure credit allocation as per doubled
Neglected: long term, agricultural, and rural area credit plan priorities Highly segmented financial
Need for specialized FIs felt.
market, highly restricted
DFIs, SFCs, UTI, Co-op Banks setup.
intermediation, i.e., a lack of a long term capital market and the relative
neglect of agriculture in particular and rural areas in general.
As India embarked on a process of industrialization and growth, RBI set up

Development Financial Institutions (DFI’s) and State Finance Corporations
(SFC’s) as providers of long term capital. Agriculture’s need for credit was
met by cooperative banks. UTI was set up to canalize resources from retail
investors to the capital market.
In essence, the understanding that requirement of financial needs for

accelerated growth and development was best met by specialized financial

intermediaries who performed specialized functions influenced financial

market architecture.
To ensure that these specializations were adhered to, financial intermediaries

developed and promoted by the Reserve Bank of India had significant
restrictions on both the asset and liabilities side of their balance sheets.
In the 1950s and 1960s, despite an expansion of the commercial banking

system in terms of both reach and mobilization of resources, agriculture still
remained under funded and rural areas under banked. Whereas industry’s
share in credit disbursed almost doubled between 1951 and 1968, from 34 to
67.5%, agriculture got barely 2% of available. Credit to exports and small
scale industries were relatively neglected as well.
In view of the above, it was decided to nationalize the banking sector so that
credit allocation could take place in accordance in plan priorities.
Nationalization took place in two phases, with a first round in 1969 followed
by another in 1980.
By the mid-seventies it was felt that commercialized banks did not have
sufficient expertise in rural banking and hence in 1975 Regional Rural
Banks (RRBs) were set up to help bring rural India into the ambit of the
financial network. This effort was capped in 1980 with the formation of
National Bank for Agriculture and Rural Development (NABARD), which
was to function as an apex bank for all cooperative banks in the country,
helping control and guide their activities. NABARD was also given the
remit of regulating rural credit cooperatives.

Following with the logic of specialization, the 1980s saw other DFIs with
specific remits being set up – e.g. The EXIM Bank for export financing, the
Small Industries Development Bank of India (SIDBI) for small scale
industries and the National Housing Bank (NHB) for housing finance.
Long term finance for the private sector came from DFIs and institutional
investors or through the capital market. However both price and quantity of
capital issues was regulated by the Controller of Capital Issues.
At least one indicator of the fact that the strategy paid off in deepening
financial intermediation is the near doubling of the M3/GDP (see Error:
Reference source not found Error: Reference source not found For more
details on various types of money supplies) ratio from 24.1% in 1970/71 to
48.5 in 1990/91. Over the same period, bank credit to the commercial sector
as a proportion of GDP more than doubled from 14.3 to 30.2%. However
net bank credit to government (including lending by the Reserve Bank)
doubled as well, from 12 to 24.6%.
Therefore the deepening of financial intermediation had occurred with an

increase in the draft by both the commercial sector and the government on
financial resources mobilized.
At the end of the 1980s then the Indian financial system was characterized
by segmented financial markets with significant restrictions on both the
asset and liability side of the balance sheet of financial intermediaries as
well as the price at which financial products could be offered.

In the Indian context segmentation meant that competition was muted. In a

scenario where price was determined from outside the system and targets
were set in terms of quantities, there was no pressure for non-price
competition as well. As a result the financial system had relatively high
transaction costs and political economy factors meant that asset quality was
not a prime concern. Therefore even though the Indian financial system at
the end of 1980s had achieved substantial expansion in terms of access, this
had come at the cost of asset quality. In addition, was the fact that the draft
of the government on resources of the financial system had increased
significantly. This in itself need necessarily was not a problem but over this
period, i.e., the 1980s, the composition of government expenditure was
changing as well, with shift towards current rather than capital expenditure.
In addition, in the absence of a reasonably liquid market for government
securities, an increase in net bank lending to the government meant that the
asset side of banks’ balance sheets tended to become increasingly illiquid.
The impetus for change came from one expected and one unexpected
quarter - first, the importance of prudential capital adequacy ratios was
underlined by the announcement of BaselI norms (see Error: Reference
source not found Error: Reference source not found) That banks were
expected to adhere to; second the macroeconomic crisis of 1990-91.
The reform process that followed accelerated the process of liberalization

already begun in the 1980s and began a series of measured and deliberate
steps to integrate India into the global economy, including the global
financial network.

Briefly however, given the problems facing the financial system and
keeping in mind the institutional changes necessary to help India financially
integrate into the global economy, financial reform focused on the
following: improving the asset quality on bank balance sheets in particular
and operational efficiency in general; increasing competition by removing
regulatory barriers to entry; increasing product competition by removing
restrictions on asset and liability sides of financial intermediaries; allowing
financial intermediaries freedom to set their prices; putting in place a market
for government securities; and improving the functioning of the call money
market.
The government security market was particularly important not only

because it was decided the RBI would no longer monetize the fiscal deficit,
which would now be financed by directly borrowing from the market, but
also monetary policy would be conducted through open market operations
and a large liquid bond market would help the RBI sterilise, if necessary,
foreign exchange movements.

INDIAN FINANCIAL SYSTEM FROM 1950 TO

1980 –
Indian Financial System During this period evolved in response to the

objective of planned economic development. With the adoption of mixed
economy as a pattern of industrial development, a complimentary role was
conceived for public and private sector. There was a need to align financial
system with government economic policies. At that time there was
government control over distribution of credit and finance. The main
elements of financial organization in planned economic development are as
follows:-
1. Public ownership of financial institutions –

The nationalization of RBI was in 1948, SBI was set up in 1956, LIC came
in to existence in 1956 by merging 245 life insurance companies in 1969, 14
major private banks were brought under the direct control of Government of
India. In 1972, GIC was set up and in 1980; six more commercial banks
were brought under public ownership. Some institutions were also set up
during this period like development banks, term lending institutions, UTI
was set up in public sector in 1964, provident fund, pension fund was set up.
In this way public sector occupied commanding position in Indian Financial
System.
2. Fortification Of Institutional structure –

Financial institutions should stimulate / encourage capital formation in the
economy. The important feature of well developed financial system is

strengthening of institutional structures. Development banks was set up with

this objective like industrial finance corporation of India (IFCI) was set up
in 1948, state financial corporation (SFCs) were set up in 1951, Industrial
credit and Investment corporation of India Ltd (ICICI)was set up in 1955. It
was pioneer in many respects like underwriting of issue of capital,
channelisation of foreign currency loans from World Bank to private
industry. In 1964, Industrial Development of India (IDBI).
3. Protection of Investors –
Lot many acts were passed during this period for protection of investors in
financial markets. The various acts Companies Act, 1956 ; Capital Issues
Control Act, 1947 ; Securities Contract Regulation Act, 1956 ; Monopolies
and Restrictive Trade Practices Act, 1970 ; Foreign Exchange Regulation
Act, 1973 ; Securities & Exchange Board of India, 1988.
4. Participation in Corporate Management –

As participation were made by large companies and financial instruments it
leads to accumulation of voting power in hands of institutional investors in
several big companies financial instruments particularly LIC and UTI were
able to put considerable pressure on management by virtual of their voting
power. The Indian Financial System between 1951 and mid80’s was broad
based number of institutions came up. The system was characterized by
diversifying organizations which used to perform number of functions. The
Financial structure with considerable strength and capability of supplying
industrial capital to various enterprises was gradually built up the whole
financial system came under the ownership and control of public authorities
in this manner public sector occupy a commanding position in the industrial

enterprises. Such control was viewed as integral part of the strategy of

planned economy development.
INDIAN FINANCIAL SYSTEM POST 1990’S
The organizations of Indian Financial system witnessed transformation after

launching of new economic policy 1991. The development process shifted
from controlled economy to free market for these changes were made in the
economic policy. The role of government in business was reduced the
measure trust of the government should be on development of infrastructure,
public welfare and equity. The capital market an important role in allocation
of resources. The major development during this phase are:-
1. Privatisation of Financial Institutions –

At this time many institutions were converted in to public company and
number of private players were allowed to enter in to various sectors:
a) Industrial Finance Corporation on India (IFCI): The pioneer

development finance institution was converted in to a public
company.
b) Industrial Development Bank of India & Industrial Finance
Corporation of India (IDBI & IFCI): IDBI & IFCI ltd offers their
equity capital to private investors.
c) Private Mutual Funds have been set up under the guidelines
prescribed by SEBI.

d) Number of private banks and foreign banks came up under the RBI
guidelines. Private institution companies emerged and work under the
guidelines of IRDA, 1999.
e) In this manner government monopoly over financial institutions has
been dismantled in phased manner. IT was done by converting public
financial institutions in joint stock companies and permitting to sell
equity capital to the government.
2. Reorganization of Institutional Structure –

The importance of development financial institutions decline with shift to
capital market for raising finance commercial banks were give more funds
to investment in capital market for this. SLR and CRR were produced; SLR
earlier @ 38.5% was reduced to 25% and CRR which used to be 25% is at
present 5%. Permission was also given to banks to directly undertake
leasing, hire-purchase and factoring business. There was trust on
development of primary market, secondary market and money market.
3. Investors Protection –
SEBI is given power to regulate financial markets and the various
intermediaries in the financial markets.

FINANCIAL MARKET
 Money Market
 Call Money Market
 Commercial Paper
 Certificate of Deposit
 Treasury Bill Market
 Money Market Mutual Fund
 Capital Market
 International Capital Market

MONEY MARKET AND GOVT. SECURITIES MARKET
Money market deal with short term monetary assets and claims, which are
generally from one day to one year duration.
Govt. securities on the other hand are also called dated securities to denote
that they are generally long term in nature and are issued by state and central
govt. under their borrowing programmes and duration of more than one
year, generally of 5 years and above.
These securities being long term in nature are also traded in govt. securities
market between institution and banks also on the stock exchanges- debt
segments.
MONEY MARKET
One of the important function of a well developed money market is to
channelize saving into short term productive investments like working
capital. Call money market, treasury bills market and markets for
commercial paper and certificate of deposit are some of the example of
money market.
CALL MONEY MARKET

The call money markets form a part of the national money market, where
day –today surplus funds, mostly of banks are traded . The call money
loans are very short term in nature and the maturity period of this vary from
1 to 15 days. The money which is lent for one day in this market is known as

“call money”, and if it exceeds one day (but less than 15 days), is referred as
“notice money” in this market any amount could be lent or borrowed at a
convenient interest rate . Which is acceptable to both borrower and lender
.these loans are consider as highly liquid as they are repayable on demand
at the option of ether the lender or borrower.
PURPOSE
Call money is borrowed from the market to meet various requirements of

commercial bill market and commercial banks. Commercial bill market
borrower call money for short period to discount commercial bills.
Banks borrower in call market to:
1:- Fill the temporary gaps, or mismatches that banks normally face.
2:- Meet the cash Reserve Ratio requirement.
3: - Meet sudden demand for fund, which may arise due to large payment
and remittance.
Banks usually borrow form the market to avoid the penal interest rate for not
meeting CRR requirement and high cost of refinance from RBI. Call money
helps the banks to maintain short term liquidity position at comfortable
level.
LOCATION
In India call money markets are mainly located in commercial centers and
big industrial centers and industrial center such as Mumbai, Calcutta,
Chennai, Delhi and Ahmedabad. As BSE and NSE and head office of RBI

and many other banks are situated in Mumbai; the volume of funds involved
in call money market in Mumbai is far bigger than other cities.
PARTICIPANTS
Initially, only few large banks were operating in the bank market. however
the market had expanded and now scheduled , non scheduled commercial
banks foreign banks ,state , district, and urban cooperative banks , financial
institution such as LIC,UTI,GIC, and its subsidiaries , IDBI, NABARD,
IRBI, ECGC, EXIM Bank, IFCI, NHB , TFCI, and SIDBI, Mutual fund
such as SBI Mutual fund . LIC Mutual funds. And RBI Intermediaries like
DFHI and STCI are participants in local call money markets. However RBI
has recently introduced restriction on some of the participants to phase them
out of call money market in a time bound manner.
Participant in call money market are split into two categories
1:- BORROWER AND LENDER:-

This comprises entities those who can both borrower and lend in this
market, such as RBI, intermediaries like DFHI, and STCI and commercial
banks.
2:- ONLY LENDER: -

This category comprises of entities those who can act only as lender, like
financial institution and mutual funds.

CALL RATES
The interest paid on call loan is known as the call rates. Unlike in the case of
other short and long rates. The call rate is expected to freely reflect the day
to day availability and long rates. These rates vary highly from day to day.
Often from hour to hour. While high rates indicate a tightness of liquidity
position in market. The rate is largely subject to be influenced by sources of
supply and demand for funds.
The call money rate had fluctuated from time to time reflecting the seasonal
variation in fund requirements. Call rates climbs high during busy seasons in
relation to those in slack season. These seasonal variations were high due to
a limited number of lender and many borrowers. The entry of financial
institution and money market mutual funds into the call market has reduced
the demand supply gap and these fluctuations gradually came down in
recent years.
Though the seasonal fluctuations were reduced to considerable extent, there

are still variations in the call rates due to the following reason:
1:- large borrower by banks to meet the CRR requirements on certain dates
cause a gate demand for call money. These rates usually go up during the
first week to meet CRR requirements and decline afterwards.
2:- the sanction of loans by banks, in excess of their own resources compel
the bank to rely on the call market. Banks use the call market as a source of
funds for meeting dis-equilibrium of inflow and out flow of fund s.

3:- the withdrawal of funds to pay advance tax by the corporate sector leads
to steep increase in call money rates in the market.
COMMERCIAL PAPER
Commercial paper are short term, unsecured promissory notes issued at a

discount to face value by well- known companies that are financial strong
and carry a high credit rating . They are sold directly by the issuers to
investor, or else placed by borrowers through agents like merchant banks
and security houses the flexible maturity at which they can be issued are one
of the main attraction for borrower and investor since issues can be adapted
to the needs of both. The CP market has the advantage of giving highly rated
corporate borrowers cheaper fund than they could obtain from the banks
while still providing institutional investors with higher interest earning than
they could obtain form the banking system the issue of CP imparts a degree
of financial stability to the systems as the issuing company has an incentive
to remain financially strong.
THE FEATURES OF CP
1. They are negotiable by endorsement and delivery.
2. They are issued in multiple of Rs 5 lakhs.

3. The maturity varies between 15 days to a year.
4. No prior approval of RBI is needed for CP issued.
5. The tangible net worth issuing company should not be less than 4
lakhs
6. The company fund based working capital limit should not less than Rs
10 crore.

7. The issuing company shall have P2 and A2 rating from CRISIL and
ICRA.
CERTIFICATE OF DEPOSIT
Certificate of Deposits,. Instruments such as the Certificates of Deposit

(CDs introduced in 1989), Commercial Paper (CP introduced in 1989),
inter-bank participation certificates (with and without risk) were
introduced to increase the range of instruments. Certificates of Deposit
are basically negotiable money market instruments issued by banks and
financial institutions during tight liquidity conditions. Smaller banks
with relatively smaller branch networks generally mobilise CDs. As CDs
are large size deposits, transaction costs on CDs are lower than retail
deposits
FEATURES OF CD
1. All scheduled bank other than RRB and scheduled cooperative
bank are eligible to issue CDs.
2. CDs can be issued to individuals, corporation, companies, trust,
funds and associations. NRI can subscribe to CDs but only on a
non- repatriation basis.
3. They are issued at a discount rate freely determined by the
issuing bank and market.
4. They issued in the multiple of Rs 5 lakh subject to minimum
size of each issue of Rs is 10 lakh.

5. The bank can issue CDs ranging from 3 month t 1 year ,

whereas financial institution can issue CDs ranging from 1 year
to 3 years.
TREASURY BILLS MARKET:-
Treasury bills are the main financial instruments of money market. These
bills are issued by the government. The borrowings of the government are
monitored & controlled by the central bank. The bills are issued by the RBI
on behalf of the central government. The RBI is the agent of Union
Government. They are issued by tender or tap. The bills were sold to the
public by tender method up to 1965. These bills were put at weekly
auctions. A treasury bill is a particular kind of finance bill. It is a promissory
note issued by the government. Until 1950 these bills were also issued by
the state government. After 1950 onwards the central government has the
authority to issue such bills. These bills are greater liquidity than any other
kind of bills. They are of two kinds: a) ad hoc, b) regular.
Ad hoc treasury bills are issued to the state governments, semi government
departments & foreign ventral banks. They are not marketable. The ad hoc
bills are not sold to the banks & public. The regular treasury bills are sold to
the general public & banks. They are freely marketable. These bills are sold
by the RBI on behalf of the central government.
The treasury bills can be categorized as follows:-

1) 14 days treasury bills:-

The 14 day treasury bills has been introduced from 1996-97. These
bills are non-transferable. They are issued only in book entry system
they would be redeemed at par. Generally the participants in this
market are state government, specific bodies & foreign central banks.
The discount rate on this bill will be decided at the beginning of the
year quarter.
These bills were introduced in 1998. The treasury bills in India issued
on auction basis. The date of issue of these bills will be announced in
advance to the market. The information regarding the notified amount
is announced before each auction. The notified amount in respect of
treasury bills auction is announced in advance for the whole year
separately. A uniform calendar of treasury bills issuance is also
announced.
The 91 days treasury bills were issued from July 1965. These were
issued tap basis at a discount rate. The discount rates vary between
2.5 to 4.6% P.a. from July 1974 the discount rate of 4.6% remained
uncharged the return on these bills were very low. However the RBI
provides rediscounting facility freely for this bill.
The 182 days treasury bills was introduced in November 1986. The
chakravarthy committee made recommendations regarding 182 day

treasury bills instruments. There was a significant development in this

market. These bills were sold through monthly auctions. These bills
were issued without any specified amount. These bills are tailored to
meet the requirements of the holders of short term liquid funds. These
bills were issued at a discount. These instruments were eligible as
securities for SLR purposes. These bills have rediscounting facilities.
The 364 treasury bills were introduced by the government in April

1992. These instruments are issued to stabilise the money market.
These bills were sold on the basis of auction. The auctions for these
instruments will be conducted for every fortnight. There will be no
indication when they are putting auction. Therefore the RBI does not
provide rediscounting facility to these bills. These instruments have
been instrumental in reducing, the net RBI credit to the government.
These bills have become very popular in India.
Money Market Mutual Funds (MMMFs)

The benefits of developments in the various in the money market like
cell money loans. Treasury bills, commercial papers and certificate of
deposits were available only to the few institutional participants in the
market. The main reason for this was that huge amounts were
required to be invested in these instruments, the minimum being Rs.
10 lack, which was beyond the means of individual money markets to
small investors.

MMMFs are mutual funds that invest primarily in money market

instruments of very high quality and of very short maturities.
MMMFs can be set up by very high quality and of very short
maturities. MMMFs can be set up by commercial bank, RBI and
public financial institution either directly or through their existing
mutual fund subsidiaries. The guidelines with respect to mobilization
of funds by MMMFs provide that only individuals are allowed to
invest in such funds.
Earlier these funds were regulated by the RBI. But RBI withdrew its
guidelines, with effect form March 7, 2001 and now they are
governed by SEBI.
The schemes offered by MMMfs can either by open – ended or close-

ended. In case of open- ended schemer, the units are available for
purchase on a continuous basis and the MMMFs would be willing to
repurchase the units. A close –ended scheme is available for
subscription for a limited period and is redeemed at maturity.
The guidelines on the on MMMfs specify a minimum lock – in period

of 15 days during which the investor cannot redeem his investment.
The guidelines also stipulate the minimum size of the MMMF to be
Rs. 50 crore and this should not exceed 2% of the aggregate deposits
of the latest accounting year in the case of banks and 2% of the long-
term domestic borrowings in the case of public financial institutions.

Structure of capital market

CAPITAL MARKET
Secondary Market
Primary Market
Listing Trading Practices of Settlements

& Clearing
Method of Quantum Costs of

Issue of Issue Issue
Public Right Issue Bonus Private

Issue Issue Placement
Players Operation

Companies (Issuer) Instruments
Interest Rates
Intermediaries (Merchant
Banks FIIs & Broker)
Procedures
Investor (Public)
CAPITAL MARKET
Capital market is market for long term securities. It contains financial

instruments of maturity period exceeding one year. It involves in long
term nature of transactions. It is a growing element of the financial
system in the India economy. It differs from the money market in terms
of maturity period & liquidity. It is the financial pillar of industrialized
economy. The development of a nation depends upon the functions &
capabilities of the capital market.
Capital market is the market for long term sources of finance. It refers to
meet the long term requirements of the industry. Generally the business
concerns need two kinds of finance:-
1. Short term funds for working capital requirements.
2. Long term funds for purchasing fixed assets.
Therefore the requirements of working capital of the industry are met by the
money market. The long term requirements of the funds to the corporate
sector are supplied by the capital market. It refers to the institutional
arrangements which facilitate the lending & borrowing of long term funds.
IMPORTANCE OF CAPITAL MARKET

Capital market deals with long term funds. These funds are subject to
uncertainty & risk. Its supplies long term funds & medium term funds to the
corporate sector. It provides the mechanism for facilitating capital fund
transactions. It deals I ordinary shares, bond debentures & stocks &
securities of the governments. In this market the funds flow will come from
savers. It converts financial assets in to productive physical assets. It
provides incentives to savers in the form of interest or dividend to the
investors. It leads to the capital formation. The following factors play an
important role in the growth of the capital market:-
• A strong & powerful central government.
• Financial dynamics
• Speedy industrialization
• Attracting foreign investment
• Investments from NRI’s
• Speedy implementation of policies
• Regulatory changes
• Globalization
• The level of savings & investments pattern of the household sectors
• Development of financial theories
• Sophisticated technological advances.
PLAYERS IN THE CAPITAL MARKET

Capital market is a market for long term funds. It requires a well structured
market to enhance the financial capability of the country. The market consist
a number of players. They are categorized as:-
1. Companies

2. Financial intermediaries
3. Investors.
I. COMPANIES:
Generally every company which is a public limited company can access
the capital market. The companies which are in need of finance for
their project can approach the market. The capital market provides
funds from the savers of the community. The companies can mobilize
the resources for their long term needs such as project cost, expansion
& diversification of projects & other expenditure of India to raise the
capital from the market. The SEBI is the most powerful organization to
monitor, control & guidance the capital market. It classifies the
companies for the issue of share capital as new companies, existing
unlisted companies& existing listed companies. According to its
guidelines a company is a new company if it satisfies all the following:-
a) The company shall not complete 12 months of commercial
operations.
b) Its audited operative results are not available.
c) The company may set up by entrepreneurs with or without
track record.
A company which can be treated as existing listed company, if its
shares are listed in any recognized stock exchange in India. A company
is said to be an existing unlisted company if it is a closely held or
private company.
II. FINANCIAL INTERMEDIARIES:

Financial intermediaries are those who assist in the process of

converting savings into capital formation in the country. A strong
capital formation process is the oxygen to the corporate sector.
Therefore the intermediaries occupy a dominant role in the capital
formation which ultimately leads to the growth of prosperous to the
community. Their role in this situation cannot be. The government
should encourage these intermediaries to build a strong financial
empire for the country. They are also being called as financial
architectures of the India digital economy. Their financial capability
cannot be measured. They take active role in the capital market. The
major intermediaries in the capital market are:-
a) Brokers.
b) Stock brokers & sub brokers
c) Merchant bankers
d) Underwriters
e) Registrars
f) Mutual funds
g) Collecting agents
h) Depositories
i) Agents
j) Advertising agencies
III. INVESTORS:
The capital market consists many numbers of investors. All types
of investor’s basic objective is to get good returns on their
investment. Investment means, just parking one’s idle fund in a

right parking place for a stipulated period of time. Every parked

vehicle shall be taken away by its owners from parking place after
a specific period. The same process may be applicable to the
investment. Every fund owner may desire to take away the fund
after a specific period. Therefore safety is the most important
factor while considering the investment proposal. The investors
comprise the financial investment companies & the general public
companies. Usually the individual savers are also treated as
investors. Return is the reward to the investors. Risk is the
punishment to the investors for being wrong selection of their
investment decision. Return is always chased by the risk. An
intelligent investor must always try to escape the risk & attract the
return. All rational investors prefer return, but most investors are
risk average. They attempt to get maximum capital gain. The
return can be available to the investors in two types they are in the
form of revenue or capital appreciation. Some investors will prefer
for revenue receipt & others prefer capital appreciation. It depends
upon their economic status & the effect of tax implications.
STRUCTURE OF THE CAPITAL MARKET IN INDIA

The structure of the capital market has undergone vast changes in recent
years. The Indian capital market has transformed into a new appearance over
the last four & a half decades. Now it comprises an impressive network of
financial institutions & financial instruments. The market for already issued
securities has become more sophisticated in response to the different needs
of the investors. The specialized financial institutions were involved in

providing long term credit to the corporate sector. Therefore the premier
financial institutions such as ICICI, IDBI, UTI, and LIC & GIC constitute
the largest segment. A number of new financial instruments & financial
intermediaries have emerged in the capital market. Usually the capital
markets are classified in two ways:-
A. On the basis of issuer
B. On the basis of instruments
On the basis of issuer the capital market can be classified again two types:-
a) Corporate securities market
b) Governments securities market
On the basis of financial instruments the capital markets are classifieds into
two kinds:-
a) Equity market
b) Debt market
Recently there has been a substantial development of the India capital
market. It comprises various submarkets.
Equity market is more popular in India. It refers to the market for equity
shares of existing & new companies. Every company shall approach the
market for raising of funds. The equity market can be divided into two
categories (a) primary market (b) secondary market. Debt market represents
the market for long term financial instruments such as debentures, bonds,
etc.
PRIMARY MARKET

To meet the financial requirement of their project company raise their

capital through issue of securities in the company market.
Capital issue of the companies were controlled by the capital issue control
act 1947. Pricing of issue was determined by the controller of capital issue
the main purpose of control on capital issue was to prevent the diversion of
investible resources to non- essential projects. Through the necessity of
retaining some sort of control on issue of capital to meet the above purpose
still exist . The CCI was abolished in 1992 as the practice of government
control over the capital issue as well as the overlapping of issuing has lost
its relevance in the changed circumstances.
SECURITIES & EXCHANGE BOARD OF INDIA
INTRODUCTION:
It was set up in 1988 through administrative order it became statutory body
in 1992. SEBI is under the control of Ministry of Finance. Head office is at
Mumbai and regional offices are at Delhi, Calcutta and Chennai. The
creation of SEBI is with the objective to replace multiple regulatory
structures. It is governed by six member board of governors appointed by
government of India and RBI.
OBJECTIVES OF SEBI:
1. To protect the interest of investors in securities.
2. To regulate securities market and the various intermediaries in the
market.
3. To develop securities market over a period of time.

POWERS AND FUNCTIONS OF SEBI:

(1) ISSUE GUIDELINES TO COMPANIES:-
SEBI issues guidelines to the companies for disclosing information
and to protect the interest of investor. The guidelines relates to issue
of new shares, issue of convertible debentures, issue by new
companies, etc. After abolition of capital issues control act, SEBI was
given powers to control and regulate new issue market as well as
stock exchanges.
(2) REGULATION OF PORTFOLIO MANAGEMENT

SERVICES:-
Portfolio Management services were brought under SEBI regulations
in January 1993. SEBI framed regulations for portfolio management
keeping securities scams in mind. SEBI has been entrusted with a job
to regulate the working of portfolio managers in order to give
protections to investors.
(3) REGULATION OF MUTUAL FUNDS:-

The mutual funds were placed under the control of SEBI on January
1993. Mutual funds have been restricted from short selling or carrying
forward transactions in securities. Permission has been granted to
invest only in transferable securities in money market and capital
market.
(4) CONTROL ON MERCHANT BANKING:-

Merchant bankers are to be authorized by SEBI, they have to follow

code of conduct which makes them responsible towards the investors
in respect of pricing, disclosure of/ in the prospectus and issue of
securities, merchant bankers have high degree of accountability in
relation to offer documents and issue of shares.
(5) ACTION FOR DELAY IN TRANSFER AND

REFUNDS:-
SEBI has prosecuted many companies for delay in transfer of shares
and refund of money to the applicants to whom the shares are not
allotted. These also gives protection to investors and ensures timely
payment in case of refunds.
(6) ISSUE GUIDELINES TO INTERMEDIARIES:-

SEBI controls unfair practices of intermediaries operating in capital
market, such control helps in winning investors confidence and also
gives protection to investors.
(7) GUIDELINES FOR TAKEOVERS AND MERGERS:-

SEBI makes guidelines for takeover and merger to ensure
transparency in acquisitions of shares, fair disclosure through public
announcement and also to avoid unfair practices in takeover and
mergers.
(8) REGULATION OF STOCK EXCHANGES

FUNCTIONING:-

SEBI is working for expanding the membership of stock exchanges to

improve transparency, to shorten settlement period and to promote
professionalism among brokers. All these steps are for the healthy
growth of stock exchanges and to improve their functioning.
(9) REGULATION OF FOREIGN INSTITUTIONAL

INVESTMENT (FIIS):-
SEBI has started registration of foreign institutional investment. It is
for effective control on such investors who invest on a large scale in
securities.
TYPES OF ISSUE
A company can raise its capital through issue of share and debenture by
means of :-
PUBLIC ISSUE :-
Public issue is the most popular method of raising capital and involves
raising capital and involve raising of fund direct from the public .
RIGHT ISSUE :-
Right issue is the method of raising additional finance from existing
members by offering securities to them on pro rata basis.
A company proposing to issue securities on right basis should send a

letter of offer to the shareholders giving adequate discloser as to how
the additional amount received by the issue is used by the company.

BONUS ISSUE:-
Some companies distribute profits to existing shareholders by way of
fully paid up bonus share in lieu of dividend. Bonus share are issued in
the ratio of existing share held. The shareholder do not have to nay
additional payment for these share .
PRIVATE PLACEMENT :-
private placement market financing is the direct sale by a public limited
company or private limited company of private as well as public sector
of its securities to a limited number of sophisticated investors like UTI ,
LIC , GIC state finance corporation and pension and insurance funds the
intermediaries are credit rating agencies and trustees and financial
advisors such as merchant bankers. And the maximum time – frame
required for private placement market is only 2 to 3 months. Private
placement can be made out of promoter quota but it cannot be made
with unrelated investors.
SECONDRY MARKET
The secondary market is that segment of the capital market where the
outstanding securities are traded from the investors point of view the
secondary market imparts liquidity to the long – term securities held by
them by providing an auction market for these securities.
The secondary market operates through the medium of stock exchange

which regulates the trading activity in this market and ensures a measure
of safety and fair dealing to the investors.

India has a long tradition of trading in securities going back to nearly

200 years. The first India stock exchange established at Mumbai in
1875 is the oldest exchange in Asia. The main objective was to protect
the character status and interest of the native share and stock broker.
BOMBAY STOCK EXCHANGE

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich
heritage, now spanning three centuries in its 133 years of existence. What is
now popularly known as BSE was established as "The Native Share & Stock
Brokers' Association" in 1875.
BSE is the first stock exchange in the country which obtained permanent
recognition (in 1956) from the Government of India under the Securities
Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in the
development of the Indian capital market is widely recognized. It migrated
from the open outcry system to an online screen-based order driven trading
system in 1995. Earlier an Association of Persons (AOP), BSE is now a
corporatised and demutualised entity incorporated under the provisions of
the Companies Act, 1956, pursuant to the BSE (Corporatisation and
Demutualisation) Scheme, 2005 notified by the Securities and Exchange
Board of India (SEBI). With demutualisation, BSE has two of world's best
exchanges, Deutsche Börse and Singapore Exchange, as its strategic
partners.
Over the past 133 years, BSE has facilitated the growth of the Indian

corporate sector by providing it with an efficient access to resources. There

is perhaps no major corporate in India which has not sourced BSE's services
in raising resources from the capital market.
Today, BSE is the world's number 1 exchange in terms of the number of

listed companies and the world's 5th in transaction numbers. The market
capitalization as on December 31, 2007 stood at USD 1.79 trillion . An
investor can choose from more than 4,700 listed companies, which for easy
reference, are classified into A, B, S, T and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an
iconic stature , and is tracked worldwide. It is an index of 30 stocks
representing 12 major sectors. The SENSEX is constructed on a 'free-float'
methodology, and is sensitive to market sentiments and market realities.
Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral
indices. BSE has entered into an index cooperation agreement with
Deutsche Börse. This agreement has made SENSEX and other BSE indices
available to investors in Europe and America. Moreover, Barclays Global
Investors (BGI), the global leader in ETFs through its iShares® brand, has
created the 'iShares® BSE SENSEX India Tracker' which tracks the
SENSEX. The ETF enables investors in Hong Kong to take an exposure to
the Indian equity market.
BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-
denominated futures trading of SENSEX in the U.S. The tie-up enables

eligible U.S. investors to directly participate in India's equity markets for the
first time, without requiring American Depository Receipt (ADR)
authorization. The first Exchange Traded Fund (ETF) on SENSEX, called
"SPIcE" is listed on BSE. It brings to the investors a trading tool that can be
easily used for the purposes of investment, trading, hedging and arbitrage.
SPIcE allows small investors to take a long-term view of the market.
BSE provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. It has a nation-wide reach with a presence in
more than 450 cities and towns of India. BSE has always been at par with
the international standards. The systems and processes are designed to
safeguard market integrity and enhance transparency in operations. BSE is
the first exchange in India and the second in the world to obtain an ISO
9001:2000 certification. It is also the first exchange in the country and
second in the world to receive Information Security Management System
Standard BS 7799-2-2002 certification for its BSE On-line Trading System
(BOLT).
BSE continues to innovate. In recent times, it has become the first national
level stock exchange to launch its website in Gujarati and Hindi to reach out
to a larger number of investors. It has successfully launched a reporting
platform for corporate bonds in India christened the ICDM or Indian
Corporate Debt Market and a unique ticker-cum-screen aptly named 'BSE
Broadcast' which enables information dissemination to the common man on
the street.

In 2006, BSE launched the Directors Database and ICERS (Indian

Corporate Electronic Reporting System) to facilitate information flow and
increase transparency in the Indian capital market. While the Directors
Database provides a single-point access to information on the boards of
directors of listed companies, the ICERS facilitates the corporates in sharing
with BSE their corporate announcements.
BSE also has a wide range of services to empower investors and facilitate
smooth transactions:
Investor Services: The Department of Investor Services redresses grievances

of investors. BSE was the first exchange in the country to provide an amount
of Rs.1 million towards the investor protection fund; it is an amount higher
than that of any exchange in the country. BSE launched a nationwide
investor awareness programme- 'Safe Investing in the Stock Market' under
which 264 programmes were held in more than 200 cities.
The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates
on-line screen based trading in securities. BOLT is currently operating in
25,000 Trader Workstations located across over 450 cities in India.
BSEWEBX.com: In February 2001, BSE introduced the world's first

centralized exchange-based Internet trading system, BSEWEBX.com. This

initiative enables investors anywhere in the world to trade on the BSE

platform.
Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a

real-time basis the price movements, volume positions and members'
positions and real-time measurement of default risk, market reconstruction
and generation of cross market alerts.
BSE Training Institute: BTI imparts capital market training and certification,
in collaboration with reputed management institutes and universities. It
offers over 40 courses on various aspects of the capital market and financial
sector. More than 20,000 people have attended the BTI programmes
Awards
• The World Council of Corporate Governance has awarded the Golden

Peacock Global CSR Award for BSE's initiatives in Corporate Social
Responsibility (CSR).
• The Annual Reports and Accounts of BSE for the year ended March
31, 2006 and March 31 2007 have been awarded the ICAI awards for
excellence in financial reporting.
• The Human Resource Management at BSE has won the Asia - Pacific
HRM awards for its efforts in employer branding through talent
management at work, health management at work and excellence in
HR through technology
Drawing from its rich past and its equally robust performance in the recent
times, BSE will continue to remain an icon in the Indian capital market.

NATIONAL STOCK EXCHANGE
The National Stock Exchange of India Limited has genesis in the report of
the High Powered Study Group on Establishment of New Stock Exchanges,
which recommended promotion of a National Stock Exchange by financial
institutions (FIs) to provide access to investors from all across the country
on an equal footing. Based on the recommendations, NSE was promoted by
leading Financial Institutions at the behest of the Government of India and
was incorporated in November 1992 as a tax-paying company unlike other
stock exchanges in the country.
On its recognition as a stock exchange under the Securities Contracts

(Regulation) Act, 1956 in April 1993, NSE commenced operations in the
Wholesale Debt Market (WDM) segment in June 1994. The Capital Market
(Equities) segment commenced operations in November 1994 and
operations in Derivatives segment commenced in June 2000.
NSE's mission is setting the agenda for change in the securities markets in
India. The NSE was set-up with the main objectives of:
• establishing a nation-wide trading facility for equities, debt

instruments and hybrids,

• ensuring equal access to investors all over the country through an

appropriate communication network,
• providing a fair, efficient and transparent securities market to
investors using electronic trading systems,
• enabling shorter settlement cycles and book entry settlements
systems, and
• Meeting the current international standards of securities markets.
The standards set by NSE in terms of market practices and technology have
become industry benchmarks and are being emulated by other market
participants. NSE is more than a mere market facilitator. It's that force
which is guiding the industry towards new horizons and greater
opportunities.
The logo of the NSE symbolises a single nationwide securities trading

facility ensuring equal and fair access to investors, trading members and
issuers all over the country. The initials of the Exchange viz., N, S and E
have been etched on the logo and are distinctly visible. The logo symbolises
use of state of the art information technology and satellite connectivity to
bring about the change within the securities industry. The logo symbolises

vibrancy and unleashing of creative energy to constantly bring about change

through innovation.
CORPORATE STRUCTURE
NSE is one of the first de-mutualised stock exchanges in the country, where
the ownership and management of the Exchange is completely divorced
from the right to trade on it. Though the impetus for its establishment came
from policy makers in the country, it has been set up as a public limited
company, owned by the leading institutional investors in the country.
From day one, NSE has adopted the form of a demutualised exchange - the
ownership, management and trading is in the hands of three different sets of
people. NSE is owned by a set of leading financial institutions, banks,
insurance companies and other financial intermediaries and is managed by
professionals, who do not directly or indirectly trade on the Exchange. This
has completely eliminated any conflict of interest and helped NSE in
aggressively pursuing policies and practices within a public interest
framework.
The NSE model however, does not preclude, but in fact accommodates
involvement, support and contribution of trading members in a variety of
ways. Its Board comprises of senior executives from promoter institutions,
eminent professionals in the fields of law, economics, accountancy, finance,
taxation, and etc, public representatives, nominees of SEBI and one full time
executive of the Exchange.

While the Board deals with broad policy issues, decisions relating to market
operations are delegated by the Board to various committees constituted by
it. Such committees includes representatives from trading members,
professionals, the public and the management. The day-to-day management
of the Exchange is delegated to the Managing Director who is supported by
a team of professional staff.
STRUCTURE OF INTERNATIONAL CAPITAL MARKET

INTERNATIONAL
CAPITAL MARKETS
INTERNATIONAL INTERNATIONAL
BOND MARKET EQUITY MARKET
FOREIGN EURO FOREIGN EURO

BONDS BOND EQUITY EQUITY
AMERICAN GLOBAL
YANKEE EURO/
DEPOSITORY DEPOSITORY
BONDS DOLLAR RECIEPTS RECIEPTS
SAMURAI EURO/ IDR/

BONDS YEN EDR
BULLDOG EURO/
BONDS POUNDS
INTERNATIONAL CAPITAL MARKETS
ORIGIN

The genesis of the present international markets can be teased to 1960s,

when there was a real demand for high quality dollar-denominated bonds
form wealthy Europeans (and others) who wished to hold their assets their
home countries or in currencies other then their own. These investors were
driven by the twin concerns of avoiding taxes in their home country and
protecting themselves against the falling value of domestic currencies. The
bonds which were then available for investment were subjected to
withholding tax. Further it is was also necessary to register to address these
concerns. These were issued in bearer forms and so, there was no of
ownership and tax was withheld.
Also, until 1970, the International Capital Market focused on debt financing
and the equity finances were raised by the corporate entities primarily in the
domestic markets. This was due to the restrictions on cross-border equity
investments prevailing unit then in many countries. Investors too preferred
to invest in domestic equity issued due to perceived risks implied in foreign
equity issues either related to foreign currency exposure or related to
apprehensions of restrictions on such investments by the regulator.
Major changes have occurred since the ‘70s which have witnessed
expanding and fluctuating trade volumes and patterns with various blocks
experiencing extremes in fortunes in their exports/imports. This was the was
the period which saw the removal of exchange controls by countries like the
UK, franc and Japan which gave a further technology of markets have
played an important role in channelizing the funds from surplus unit to
deficit units across the globe. The international capital markets also become
a major source of external finance for nations with low internal saving. The

markets were classified into euro markets, American Markets and Other
Foreign Markets.
THE PLAYERS
Borrowers/Issuers, Lenders/ Investors and Intermediaries are the major
players of the international market. The role of these players is discussed
below.
BORROWERS/ISSUERS
These primarily are corporates, banks, financial institutions, government and
quasi government bodies and supranational organizations, which need forex
funds for various reasons. The important reasons for corporate borrowings
are, need for foreign currencies for operation in markets abroad,
dull/saturated domestic market and expansion of operations into other
countries.
Governments borrow in the global financial market to adjust the balance of

payments mismatches, to gain net capital investments abroad and to keep a
sufficient inventory of foreign currency reserves for contingencies like
supporting the domestic currency against speculative pressures.
LENDERS/INVESTORS
In case of Euro-loans, the lenders are mainly banks who possess inherent
confidence in the credibility of the borrowing corporate or any other entity
mention above in case of GDR it is the institutional investor and high net

worth individuals (referred as Belgian Dentists) who subscribe to the equity

of the corporates. For an ADR it is the institutional investor or the individual
investor through the Qualified Intuitional Buyer who put in the money in the
instrument depending on the statutory status attributed to the ADR as per
statutory requirements of the land.
INTERMEDIARIES
LEAD MANGERS
They undertake due diligence and preparation of offer circular, marketing
the issues and arranger for road shows.
UNDERWRITERS
Underwriters of the issue bear interest rate/market risks moving against
them before they place bonds or Depository Receipts. Usually, the lend
managers and co-managers act as underwriters for the issue.
CUSTODIAN
On behalf of DRs, the custodian holds the underlying shares, and collects
rupee dividends on the underlying shares and repatriates the same to the
depository in US dollars/foreign equity.
Apart from the above, Agents and Trustees, Listing Agents and Depository
Banks also play a role in issuing the securities.
THE INSTRUMENTS

The early eighties witnessed liberalization of many domestic economies and

globalization of the same. Issuers form developing countries, where issue of
dollar/foreign currency denominated equity shares were not permitted, could
access international equity markets through the issue of an intermediate
instrument called ‘Depository Receipt’.
A Depository Receipt (DR) is a negotiable certificate issued by a depository

bank which represents the beneficial interest in shares issued by a company.
These shares are deposited with the local ‘custodian’ appointed by the
depository, which issues receipts against the deposit of shares.
The various instruments used to raise funds abroad include: equity, straight
debt or hybrid instruments. The following figure shows the classification of
international capital markets based on instruments used and market(s)
accessed.
EURO EQUITY
GLOBAL DEPOSITORY RECEIPTS (GDR):

A GDR is a negotiable instrument which represents publicly traded local-
currency equity share. GDR is any instrument in the from of a depository
receipt or certificate created by the Overseas Depository Bank outside India
and issued to non-resident investors against the issue of ordinary shares or
foreign currency convertible bonds of the issuing company. Usually, a
typical GDR is denominated in US dollars whereas the underlying shares
would be denominated in the local currency of the Issuer. GDRs may be – at

the request of the investor – converted into equity shares by cancellation of

GDRs through the intermediation of the depository and the sale of
underlying shares in the domestic market through the local custodian.
GDRs, per se, are considered as common equity of the issuing company and
are entitled to dividends and voting rights since the date of its issuance. The
company transactions. The voting rights of the shares are exercised by the
Depository as per the understanding between the issuing Company and the
GDR holders.
FOREIGN EQUTIY
AMERICAN DEPOSITORY RECEIPTS (ADR):

ADR is a dollar denominated negotiable certificate, it represents a non-US
company’s publicly traded equity. It was devised in the last 1920s to help
Americans invest in overseas securities and assist non-US companies
wishing to have their stock traded in the American Markets. ADRs are
divided into 3 levels based on the regulation and privilege of each
company’s issue.
I. ADR LEVEL – I:
It is often step of an issuer into the US public equity market. The
issuer can enlarge the market for existing shares and thus
diversify to the investor base. In this instrument only minimum
disclosure is required to the sec and issuer need not comply with

the US GAAP (Generally Accepted Accounting Principles). This

type of instrument is traded in the US OTC Market.
The issuer is not allowed to raise fresh capital or list on any one
of the national stock exchanges.
II. ADR LEVEL – II:

Through this level of ADR, the company can enlarge the investor
base for existing shares to a greater extent. However, significant
disclosures have to be made to the SEC. The company is allowed
to List on the American Stock Exchange (AMEX) or New York
Stock Exchange (NYSE) which implies that company must meet
the listing requirements of the particular exchange.
III. ADR LEVEL – III:

This level of ADR is used for raising fresh capital through Public
offering in the US Capital with the EC and comply with the
listing requirements of AMEX/NYSE while following the US-
GAAP.
DEBT INSTRUMENTS

EUROBONDS
The process of lending money by investing in bonds originated during the
19th century when the merchant bankers began their operations in the
international markets. Issuance of Eurobonds became easier with no
exchange controls and no government restrictions on the transfer of funds
in international markets.
THE INSTRUMENTS
EUROBONDS
All Eurobonds, through their features can appeal to any class of issuer or
investor.
The characteristics which make them unique and flexible are:
a) No withholding of taxes of any kind on interests payments
b) They are in bearer form with interest coupon attached
c) They are listed on one or more stock exchanges but issues are
generally traded in the over the counter market.
Typically, a Eurobond is issued outside the country of the currency in

which it is denominated. It is like any other Euro instrument and through
international syndication and underwriting, the paper is sold without any
limit of geographical boundaries. Eurobonds are generally listed on the
world's stock exchanges, usually on the Luxembourg Stock Exchange.
a) FIXED-RATE BONDS/STRAIGHT DEBT BONDS:

Straight debt bonds are fixed interest bearing securities which are
redeemable at face value. The bonds issued in the Euro-market
referred to as Euro-bonds, have interest rates fixed with reference
to the creditworthiness of the issuer. The interest rates on dollar
denominated bonds are set at a margin over the US treasury yields.
The redemption of straights is done by bullet payment, where the
repayment of debt will be in one lump sum at the end of the
maturity period, and annual servicing.
b) FLOATING RATE NOTES (FRNs):

FRNs can be described as a bond issue with a maturity period
varying from 5-7 years having varying coupon rates - either
pegged to another security or re-fixed at periodic intervals.
Conventionally, the paper is referred to as notes and not as bonds.
The spreads or margin on these notes will be above 6 months
USOR for Eurodollar deposits.
FOREIGN BONDS

These are relatively lesser known bonds issued by foreign entities for
raising medium to long-term financing from domestic money centers in
their domestic currencies. A brief note on the various instruments in this
category is given below:
a) YANKEE BONDS:
These are US dollar denominated issues by foreign borrowers
(usually foreign governments or entities, supranational and highly
rated corporate borrowers) in the US bond markets.
A bond denominated in U.S. dollars and is publicly issued in the

U.S. by foreign banks and corporations. According to the
Securities Act of 1933, these bonds must first be registered with
the Securities and Exchange Commission (SEC) before they can
be sold. Yankee bonds are often issued in trenches and each
offering can be as large as $1 billion.
Due to the high level of stringent regulations and standards that

must be adhered to, it may take up to 14 weeks (or 3.5 months) for
a Yankee bond to be offered to the public. Part of the process
involves having debt-rating agencies evaluate the creditworthiness
of the Yankee bond's underlying issuer.
Foreign issuers tend to prefer issuing Yankee bonds during times

when the U.S. interest rates are low, because this enables the
foreign issuer to pay out less money in interest payments.

b) SAMURAI BONDS:
A yen-denominated bond issued in Tokyo by a non-Japanese
company and subject to Japanese regulations. Other types of yen-
denominated bonds are Euro/yens issued in countries other than
Japan.
Samurai bonds give issuers the ability to access investment capital

available in Japan. The proceeds from the issuance of samurai
bonds can be used by non-Japanese companies to break into the
Japanese market, or it can be converted into the issuing company's
local currency to be used on existing operations. Samurai bonds
can also be used to hedge foreign exchange rate risks.
These are bonds issued by non-Japanese borrowers in the domestic

Japanese markets.
c) BULLDOG BONDS:
These are sterling denominated foreign bond which are raised in
the UK domestic securities market.
A sterling denominated bond that is issued in London by a

company that is not British.
These sterling bonds are referred to as bulldog bonds as the

bulldog is a national symbol of England.
d) SHIBOSAI BONDS:

These are the privately placed bonds issued in the Japanese

markets.
EURONOTES
Euronotes as a concept is different from syndicated bank credit and is

different from Eurobonds in terms of its structure and maturity period.
Euronotes command the price of a short-term instrument usually a few
basic points over LIBOR and in many instances at sub – LIBOR levels.
The documentation formalities are minimal (unlike in the case of
syndicated credits or bond issues) and cost savings can be achieved on that
score too. The funding instruments in the form of Euronotes possess
flexibility and can be tailored to suit the specific requirements of different
types of borrowers. There are numerous applications of basic concepts of
Euronotes. These may be categorized under the following heads:
a) COMMERCIAL PAPER:
These are short-term unsecured promissory notes which repay a
fixed amount on a certain future date. These are normally issued at a
discount to face value.
b) NOTE ISSUANCE FACILITIES (NIFs):

The currency involved is mostly US dollars. A NIF is a medium-
term legally binding commitment under which a borrower can issue
short-term paper, of up to one year. The underlying currency is
mostly US dollar. Underwriting banks are committed either to

purchase any notes which the borrower b unable to sell or to provide

standing credit. These can be re-issued periodically.
c) MEDIUM-TERM NOTES (MTNs):

MTNs are defined as sequentially issued fixed interest securities
which have a maturity of over one year. A typical MTN program
enables an issuer to issue Euronotes for different maturities. From
over one year up to the desired level of maturity. These are
essentially fixed rate funding arrangements as the price of each
preferred maturity is determined and fixed up front at the time of
launching. These are conceived as non-underwritten facilities, even
though international markets have started offering underwriting
support in specific instances.
A Global MTN (G-MTN) is issued worldwide by tapping Euro as

well as the- US markets under the same program.
Under G-MTN programs, issuers of different credit ratings are able

to raise finance by accessing retail as well as institutional investors.
In view of flexible access, speed and efficiency, and enhanced
investor base G-MTN programs afford numerous benefits to the
issuers.
Spreads paid on MTNs depend on credit ratings, treasury yield

curve and the familiarity of the issuers among investors. Investors
include Private Banks, Pension Funds, Mutual Funds and Insurance
Companies.

FOREIGN EXCHANGE AND FOREIGN EXCHANGE

MARKETS –
OVERVIEW
In today’s world no country is self sufficient, so there is a need for exchange
of goods and services amongst the different countries. However, unlike in
the primitive age the exchange of goods and services is no longer carried out
on barter basis. Every sovereign country in the world has a currency which
is a legal tender in its territory and this currency does not act as money
outside its boundaries. So whenever a country buys or sells goods and
services from or to another country, the residents of two countries have to
exchange currencies. So we can imagine that if all countries have the same
currency then there is no need for foreign exchange.
FOREIGN EXCHANGE IN INDIA

In India, foreign exchange has been given a statutory definition. Section 2
(b) of Foreign Exchange Regulation Act, 1973 states:
‘Foreign exchange’ means foreign currency and includes:
• All deposits, credits and balances payable in any foreign currency and
any drafts, traveler’s cheques, letters of credit and bills of exchange ,
expressed or drawn in Indian currency but payable in any foreign
currency,
• Any instrument payable, at the option of drawee or holder thereof or
any other party thereto, either in Indian currency or in foreign
currency or partly in one and partly in the other.

For India we can conclude that foreign exchange refers to foreign money,
which includes notes, cheques, bills of exchange, bank balances and
deposits in foreign currencies.
ABOUT FOREIGN EXCHANGE MARKET

Particularly for foreign exchange market there is no market place called the
foreign exchange market. It is mechanism through which one country’s
currency can be exchange i.e. bought or sold for the currency of another
country. The foreign exchange market does not have any geographic
location. The market comprises of all foreign exchange traders who are
connected to each other through out the world. They deal with each other
through telephones, telexes and electronic systems. With the help of Reuters
Money 2000-2, it is possible to access any trader in any corner of the world
within a few seconds.
WHO ARE THE PARTICIPANTS IN FOREIGN

EXCHANGE MARKETS?
The main players in foreign exchange markets are as follows:
1. CUSTOMERS
The customers who are engaged in foreign trade participate in foreign
exchange markets by availing of the services of banks. Exporters
require converting the dollars in to rupee and importers require
converting rupee in to the dollars as they have to pay in dollars for the
goods/services they have imported.

2. COMMERCIAL BANKS
They are most active players in the forex market. Commercial banks
dealing with international transactions offer services for conversion of
one currency in to another. They have wide network of branches.
Typically banks buy foreign exchange from exporters and sells
foreign exchange to the importers of the goods. As every time the
foreign exchange bought and sold may not be equal banks are left
with the overbought or oversold position. The balance amount is sold
or bought from the market.
Nowadays, in international foreign exchange markets, the

international trade turnover accounts for a fraction of huge amounts
dealt, i.e. bought and sold. The balance amount is accounted for either
by financial transactions or speculation. Banks have enough financial
strength and wide experience to speculate the market and banks does
so. Which is popularly known as the trading in the forex market.
Commercial banks have following objectives for being active in the

foreign exchange markets.
• They render better service by offering competitive rates to their

customers engaged in international trade;
• They are in a better position to manage risks arising out of exchange
rate fluctuations;
• Foreign exchange business is a profitable activity and thus such banks
are in a position to generate more profits for themselves;

• They can manage their integrated treasury in a more efficient manner.

• In India Reserve Bank of India has given license to the commercial
banks to deal in foreign exchange under section 6 Foreign Exchange
Regulation Act, 1973, which are called the Authorized Dealers (ADs).
3. CENTRAL BANK
In all countries central banks have been charged with the
responsibility of maintaining the external value of the domestic
currency. Generally this is achieved by the intervention of the bank.
Apart from this central banks deal in the foreign exchange market for
the following purposes:
1) Exchange rate management: It is achieved by the intervention
though sometimes banks have to maintain external rate of the
domestic currency at a level or in a band so fixed.
2) Reserve management: Central bank of the country is mainly
concerned with the investment of countries foreign exchange reserve
in a stable proportions in range of currencies and in a range of assets
in each currency. For this bank has to involve certain amount of
switching between currencies.
4. EXCHANGE BROKERS
Forex brokers play a very important role in the foreign exchange
markets. However the extent to which services of forex brokers are
utilized depends on the tradition and practice prevailing at a particular
forex market center. In India as per FEDAI guidelines the A Ds are
free to deal directly among themselves without going through brokers.

The forex brokers are not allowed to deal on their own account all
over the world and also in India.
5. OVERSEAS FOREX MARKETS

Today the daily global turnover is guestimated to be more than US $
1.5 trillion a day. The international trade however constitutes hardly 5
to 7 % of this total turnover. The rest of trading in world forex
markets is constituted of financial transactions and speculation. As we
know that the forex market is 24-hour market, the day begins with
Tokyo and thereafter Singapore opens, thereafter India, followed by
Bahrain, Frankfurt, Paris, London, New York, Sydney, and back to
Tokyo.
FORWARD EXCHANGE CONTRACT
WHAT IS THE NEED FOR FORWARD EXCHANGE

CONTRACT?
The risk on account of exchange rate fluctuations, in international trade
transactions increases if the time period needed for completion of
transaction is longer. It is not uncommon in international trade, on account
of logistics, the time frame can not be foretold with clock precision.
Exporters and importers alike, can not be precise as to the time when the

shipment will be made as sometimes space on the ship is not available,

while at the other, there are delays on account of congestion of port etc.
In international trade there is considerable time lag between entering in to a

sales/purchase contract, shipment of goods, and payment. In the meantime,
if exchange rate moves against the party who has to exchange his home
currency in to foreign currency, he may end up in loss. Consequently,
buyers and sellers want to protect them against exchange rate risk. One of
the methods by which they can protect themselves is entering in to a foreign
exchange forward contract.
We can see from the daily report of the Vadilal Industries Limited (Forex
division) that the rupee fell down nearly 25 paise in a day.
The date of this fluctuation is 25th May 2000. Now let suppose that the
exporter has dealt
FORWARD EXCHANGE FORWARD CONTRACT

Forward exchange forward contract is a contract wherein two parties agree
to deliver certain amount of foreign exchange at an agreed rate either at a
fixed future date or during a fixed future period. If the merchants are sure
about the remittance or the payment of the foreign exchange then they can
choose the fix date forward exchange contract, in which they are bound by
the date on which they have to meet their part of liability in the agreement.
If the customers are not sure about the date of remittance or the payment of
the foreign exchange they can enter in to the option period forward
exchange contract. Both the types are explained below.

1. FIXED DATE FOREIGN EXCHANGE FORWARD

CONTRACT
If under the foreign exchange forward contract, foreign exchange is to
be delivered at fixed date, the contract is known as fixed date foreign
exchange forward contract.
2. OPTION FOREIGN EXCHANGE FORWARD

CONTRACT
If under the foreign exchange forward contract, foreign exchange is to
be delivered in future, during a specified period, the contract is known
as option foreign exchange forward contract. In this type of contract
there is no option for taking/ delivery of foreign exchange. Such
contracts provide for option as far as date of delivery of foreign
exchange is concerned. While entering in to a option forward contract
first date and the last date for exercising option for giving /taking
delivery of foreign exchange is always fixed.
In India, like developed countries, there are not many instruments

available for hedging foreign exchange risk. As a result the merchants
have to hedge their foreign exchange exposures through forward
contracts only.
For merchants this is the only tool available to minimize the risk due
to adverse foreign exchange fluctuation
.

DERIVATIVES
INTRODUCTION:
The emergence of the market for derivative products, most notably
forwards, futures and options, can be traced back to the willingness of risk-
averse economic agents to guard themselves against uncertainties arising out
of fluctuations in asset prices. By their very nature, the financial markets are
marked by a very high degree of volatility. Through the use of derivative
products, it is possible to partially or fully transfer price risks by locking-in
asset prices.
Introduction of derivatives in the Indian Capital market is the beginning of a

new era, which is truly exciting. Index futures were introduced as the first
exchange traded derivatives product in the Indian Capital Market in June
2000. With introduction of index options, individual stock futures and
options, Indian derivatives market has turned multi-product derivatives
market, at par with the global standards.
Derivatives, worldwide are recognized as Risk Management products. These

products have a long history in India in the unorganized sector, especially in
currency and commodity markets. The availability of these products on
organized exchanges has provided the market with broad-based risk
management tools.
Derivatives also facilitate the creation of new financial products in an

economy. Today, financial markets around the world are undergoing a
profound change in terms of the financial innovation. New financial

products are being architected, on a day-to-day basis, to cater to the specific

needs of both the issuers and investors. To keep pace with the global
markets, Indian Securities Market also needs to develop new financial
products in all the dimensions of the economy including commodities,
securities, currency etc.
In recent years, the market for financial derivatives has grown tremendously
both in terms of variety of instruments available, their complexity and also
turnover. In the class of equity derivatives, futures and options on stock
indices have gained more popularity than on individual stocks, especially
among individual investors, who are major users of index-linked derivatives.
Even small investors find this useful due to high correlation of the popular
indices with various portfolios and ease of use. The lower costs associated
with index derivatives vis-à-vis derivative products based on individual
securities is another reason for their growing use.
DEFINITION OF DERIVATIVES:
Derivative is a product whose value is derived from the value of one or more
basic variables called bases (underling asset, index, or reference rate), in a
contractual manner. The underlying asset can be equity, forex, commodity
or any other asset. For example wheat farmers may wish to sell their harvest
at a future date to eliminate the risk of a change in prices by that date. Such
a transaction is an example of a derivative. The price of this derivative is
driven by the spot price of wheat which is the “underlying”.

T YPES OF DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and
options and since this project revolves around futures and options, it will be
discussed in greater detail later on. For now we take a brief look at the
various derivatives contracts that have come to be used.
 FORWARDS:
A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at today’s pre-
agreed price.
 FUTURES:
A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. In simpler words,
futures are forward contracts quoted in an exchange.
 OPTIONS:
Options are of two types: - Calls and Puts. Calls give the buyer the right
but not the obligation to buy a given quantity of the underlying asset at a
given price on or before a given future date. Puts give the buyer the right,
but not the obligation to sell a given quantity of the underlying asset at a
given price on or before a given date.

 WARRANTS:
Options generally have lives of up to one year, the majority of options
traded on options exchanges having a maximum maturity of nine months.
Longer dated warrants are called warrants and are generally traded over
the counter.
 LEAPS:
The acronym LEAPS mean Long-Term Equity Anticipation Securities.
These are options having a maturity of up to three years.
 BASKETS:
Basket options are options on portfolios of underlying assets. The
underlying asset is usually a moving average or a basket of assets. Equity
index options are a form of basket options.
 SWAPS:
Swaps are private agreements between two parties to exchange cash
flows in the future according to prearranged formula. They can be
regarded as portfolios of forward contracts. The two commonly used
swaps are:
(A) INTEREST RATE SWAPS:

These entail swapping only the interest related cash flows
between the parties in the same currency.
(B) CURRENCY SWAPS:

These entail swapping both principal and interest between the

parties, with the cash flows in one direction being in a different
currency than those in the opposite direction.
 SWAPTIONS:
Swaptions are options to buy or sell a swap that will become operative at
the expiry of the options. Thus a swaption is an option on a forward
swap. Rather than have calls and puts, the swaptions market has receiver
swaptions and payer swaptions. A receiver swaption is an option to
receive fixed and pay floating. A payer swaption is to pay fixed and
receive floating.
FORWARD CONTRACT
INTRODUCTION:
A forward contract, as it occurs in both forward and futures markets, always
involves a contract initiated at one time; performance in accordance with the
terms of the contract occurs at a subsequent time. It is a simple derivative
that involves an agreement to buy/ sell an asset on a certain future date at an
agreed price. This is a contract between two parties, one of which takes a
long position and agrees to buy the underlying asset on a specified future
date for a certain specified price. The other party takes a short position,
agreeing to sell the asset at the same date for the same price.

For example, when one orders a car, which is not in stock, from a dealer, he
is buying a forward contract for the delivery of a car. The price and
description of the car are specified.
The mutually agreed price in a forward contract is known as the delivery

price. The delivery price is chosen in such a way that the value of the
forward contract to both the parties is zero, so that it costs nothing to take
either a long or a short position. On maturity, the contract is settled so that
the holder of the short position delivers the asset to the holder of the long
position, who in turn pays a cash amount equal to the delivery price. The
value of a forward contract is determined, chiefly by the market price of the
underlying asset.
Forward contracts are being used in India on a large scale in the foreign
exchange market to hedge the currency risk. Forward contracts, being
negotiated by the parties on one to one basis, offer them tremendous
flexibility to articulate the contract in terms of price, quantity, quality (in
case of commodities), delivery time and place.
From the simplicity of the contract and its obvious usefulness in resolving
uncertainty about the future, it is not surprising that forward contracts have
had a very long history.
THE FORWARD PRICE

The forward price of a contract is the delivery price, which would render a
zero value to the contract. Since upon initiation of the contract, the delivery

price is so chosen that the value of the contract is nil, it is obvious that when
a forward contract is entered into, the delivery price and forward price are
identical. As time passes the forward price could change but the delivery
price would remain unchanged. Generally, the forward price at any given
time varies with the maturity of the contract so that the forward price of a
contract to buy or sell in one month would be typically different from that of
a contract with time of three months or six months to maturity.
FUTURES CONTRACT
INTRODUCTION
A futures contract is a type of forward contract with highly standardized and
closely specified contract terms. As in all forward contracts, a futures
contract calls for the exchange of some good at a future date for cash, with
the payment for the good to occur at a future date. The purchaser of a futures
contract undertakes to receive delivery of the good and pay for it, while the
seller of a future promises to deliver the good and receive payment. The
price of the good is determined at the initial time of contracting.
In a crude sense, futures markets are an extension of forward markets. These

markets, being organized/ standardized, are very liquid by their own nature.
Therefore, liquidity problem, which persists in the forward market, does not
exist in the futures market. In futures market, clearing corporation/ house
becomes the counter-party to all the trades or provides the unconditional
guarantee for their settlement i.e. assumes the financial integrity of the entire
system. In other words, we may say that in futures market, the credit risk of

the transactions is eliminated by the exchange through the clearing

corporation/ house.
OPTIONS
INTRODUCTION TO OPTIONS
We now come to the next derivative product that is traded, namely Options.
Options are fundamentally different from forward and future contracts. An
option gives the holder of the option the right to do something. The holder
need not exercise this right. In contrast, in a forward or futures contract, the
two parties are committed and have to fulfill this commitment. Also it costs
nothing (except margin requirement) to enter into a futures contract whereas
the purchase of the option requires an upfront payment called the option
premium.
TYPES OF OPTION CONTRACTS:
1. CALL OPTION:
A call option gives the buyer the right to purchase a specified
number of shares of a particular company from the option writer
(seller) at a specified price (called the exercise price) up to the
expiry of the option. In other words the option buyer gets a right to
call upon the option seller to deliver the contracted shares anytime
up to the expiry of the option. The contract thus is only a one-way

obligation, i.e. the seller is obliged to deliver the contracted shares

while the buyer has the choice to exercise the option or let the
contract lapse. The buyer is not obliged to perform.
POSITION GRAPH:
Intrinsic value
Lines
+
+ Premium
b
Premium
Stock Price Stock
Price
_ _
Intrinsic value Lines
(a) Buy A Call (b) Write a Call
An option buyer starts with a loss equivalent to the premium paid. He has to
carry on with the loss till the stock market price equals the exercise price as
shown in (a). The intrinsic value of the option up to this price remains zero,
and thus runs along the X-axis. As the stock price increases further, the loss
starts reducing and gets wiped out as soon as the increase equals the

premium, represented on the graph by point ‘b’, also called the break even
point. The profitability line starts climbing up at an inclination of 45 degrees
after crossing the X-axis at b and from thereon moves into the positive side
of the graph. The inclined line beyond the point ‘ b’ indicates that the option
acquires intrinsic value and is, thus referred to as the intrinsic value line.
The position graph (b) represents the profitability status of the writer who
does not own the stock i.e. naked or an uncovered writer. The graph is
logically the inverse of that for the option buyer.
1. PUT OPTION
A put option gives a buyer the right to sell a specified number of
shares of a particular stock to the option of the writer at a specific
price (called exercise price) any time during the currency of the
option. The seller of a put option has the obligation to take
delivery of underlying asset. When put position is opened, the
buyer pays premium to the put seller. If the price of underlying
asset rises above the strike price and stays there, the put will expire
worthless. The seller of put will keep the premium as his profit and
the put buyer will have a cost to purchase right.
Put buyers are bearish, they believe that the price of the underlying asset
will fall and they may not be able to sell the asset at a higher price. Put
sellers are bullish, as they believe that the price of the underlying asset will
rise.
Position Graph:

Intrinsic Value Line
Stock Price
_ Premium
SWAPS
Swap can be defined as a financial transaction in which two counter parties
agree to exchange streams of payments, or cash flows, over time. Two types
of swaps are generally seen i.e. interest rate swaps and currency swaps.
Two more swaps being introduced are commodity swaps and the tax rate
swaps, which are seen to be an extension of the conventional swaps. A swap
results in reducing the borrowing cost of both parties.

FINANCIAL INSTITUTION
ALL INDIA DEVELOPMENT BANK
 Industrial Development Bank

 Industrial Finance Corporation of India
 Industrial Investment Bank of India
 Export Import Bank of India
 State Financial Corporation
 State Industrial Development Corporation
INVESTMENT INSTITUTIONS
 Life insurance Corporation

 General Insurance Corporation
 Unit trust of India
 Mutual Funds
BANKS
 Reserve Bank of India

 Commercial Banks
 Scheduled Banks

 Regional Rural Banks
NON BANKING FINANCIAL CORPORATION
 Investment Trust
 NIDHIS
 Merchant Banks
 Hire Purchases Finance Company
 Lease Finance Company
 Housing Finance Companies
 National Housing Bank
 Venture Capital Funding Companies
ALL INDIA DEVELOPMEN T BANKS
INDUSTRIAL DEVELOPMENT BANK OF INDIA

IDBI was established in 1964 as a subsidiary of the RBI by an act of the
parliament and was made a wholly owned govt. of India undertaking in
1975. It was established with the main objective of serving as an apex
financial institution to coordinate the functioning of all other financial
institution. Planning ,promoting and developing functioning of all other
financial institution .industries to fill the gaps in the industrial structure of
the country providing technical administrative assistance for promoting or
expansion of industry . undertaking market and investment research survey
n connection with the development of industry and to provide finance
keeping in view national priorities irrespective of the financial attractiveness
of project are its other objective IDBI finance industries directly & also
support state financial corporation and state industrial development
corporations by providing refinance and through the bill rediscounting scale
IDBI was transformed from finance institution to commercial bank in the
year 2004.

INDUSTRIAL FINANCE CORPORATION OF INDIA

IFCI is the first financial institution to be established in India in 1948 by an
act of parliament with objective of providing medium and long term finance
to industrial concerns eligible for financing under the act. The sector for
which the IFCI provides finance extend through the industrial spectrum of
the country.
INDUSTRIAL INVESTMENT BANK OF INDIA

The IIBI first came into existence as a central government corporation with
the name Industrial Reconstruction Corporation of India in 1971. Its basic
objective was to finance the reconstruction and rehabilitation of sick and
closed industrial unit. Its name was changed to Industrial reconstruction
bank of India and it was made the principal credit and reconstruction agency
in the country in 1985 through the RBI act 1984. The bank started co-
ordinary similar work of the institutions and banks preparing schemes for
reconstructions by reconstructing the liabilities appraising schemes of
merger & amalgamation of sick company and providing financial assistance
for modernization expansion, diversification and technological up gradation
of sick units.
In March 1987, in line with the ongoing policies of financial and economic
reforms, IRBI was converted into a full-fledged development financial
institution. It was renamed as Industrial Investment Bank of India ltd. And
was incorporated as company under the companies act 1956. Its entire

equity is finance for the establishment of new industrial project as well as

for expansion diversification and modernization of existing industrial
enterprises. It provides financial assistance in the form of term loans,
subscription to debenture equity shares and deferred payment guarantees.
IIBI is now also active ion merchant banking and its services includes inter
alia, structuring suitable instrument for public rights issues preparation of
prospective offer documents and working as a lead manager it also offers its
services for debt syndication and package of services for merger and
acquisition.
THE EXPORT IMPORT BANK OF INDIA .

The EXIM Bank was set up in 1982 to coordinate the activity of the various
institutional engaged in trade finance it helps Indian exporter in extending
credit to their overseas customer by providing long term finance to them it
also provides financial assistance to bank in extending credit for export and
export linked imports it also provides advisory services and information to
exports.
STATE FINANCIAL CORPORATION .

At the beginning of the fifties the govt. found that of achieving rapid
industrialization separate institution should be set up that cater exclusively
to the needs of the small medium sector therefore the SFC was act passed by
the parliament in 1951 to enable the state govt. establish SFC the basic
objective for which the SFC was set up was to provide financial assistance
to small and medium scale industries estates. The SFC provides finance in
the form of log term loan, by underwriting issue of share and debentures

and standing guarantee for loans raised from other institution and form the
general public.
STATE INDUSTRIAL DEVELOPMENT CORPORATIONS.

The SIDCS have been set up to facilitate rapid industrial growth in the
respective state. In addition to providing finance , the SIDC identify and
sponsor project in the participation of private entrepreneurs.
INVESTEMENT INSTITUITONS
LIFE INSURANCE CORPORATION OF INDIA .

The LIC was established in 1956 by amalgamation and nationalization of
245 private insurance companies by an enactment of parliament . the main
business of LIC is to provide life insurance and it has almost a monopoly in
this business. The LIC act permits it invest up to 10 percent of the
investable funds in the private sector . it provides finance by participating in
a consortium with other institution and does not undertake independent
appraisal of projects.
GENERAL INSURANCE CORPORATION OF INDIA
The GIC was establish in 1974 with the nationalization of general insurance
business in country it can invest up to 30 % of the fresh accrual of funds in
the private sector . like the LIC the GIC also provides finance by

participating in consortium based on the appraisal made by other financial

institutions but does not independently provide the finance.
UNIT TRUST OF INDIA

The UTI was founded in 1964 under the UTI act 1963. Initially 50% of the
capital of the trust was contributed by the RBI while the rest was brought in
by the SBI and its associates, LIC ,GIC, and other financial institutions. In
1974 the holding of RBI was transferred to the IDBI making the UTI an
associate of IDBI . the primary objective of UTI is to mobilize the savings in
the countries and channelize them in to productive corporate investments.
UTI provides assistance by underwriting debenture and share , subscription
to public and right issue of share and debenture subscription to provide
private placement and bridge finance. In January . 2003 UTI split in to two
part UTI – 1 and UTI-2 . UTI-1 has given all the assured return scheme and
unit scheme 64 and it is being administrated by central govt. UTI-2
entrusted with the task of managing NAV-based schemes. UTI -2 is being
managed by SBI, PNB,BOB and LIC.
MUTUAL FUNDS
Mutual funds serves the purpose of mobilizing of funds from various
categories of investors and channelizing them into productive investment.
Apart form UTI. Mutual fund sponsored by various bank subsidiaries,
insurance organizations private sector financial institutions DFI and FII have
come up . these mutual fund work within the framework of SEBI regulation
which prescribe the mechanism for setting up of a mutual fund , procedure
of registration its constitution and the duties, functions and responsibility of
the various parties involved.


BANK
THE RESERVE BANK OF INDIA
The Reserve Bank of India is the central bank of the country entrusted with
monetary stability, the management of currency and the supervision of the
financial as well as the payments system.
Established in 1935, its functions and focus have evolved in response to the
changing economic environment. Its history is not only intrinsically
interwoven with the economic and financial history of the country, but also
gives insights into the thought processes that have helped shape the
country's economic policies.
The Reserve Bank of India is the central bank of the country. Central banks
are a relatively recent innovation and most central banks, as we know them
today, were established around the early twentieth century.
The Reserve Bank of India was set up on the basis of the recommendations
of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II
of 1934) provides the statutory basis of the functioning of the Bank, which
commenced operations on April 1, 1935.
The RBI has 22 regional offices, most of them in state capitals like Bhopal,
Hyderabad, Jaipur, Nagpur, Kolkata etc.

HISTORY OF THE RBI
The Bank began its operations by taking over from the Government the
functions so far being performed by the Controller of Currency and from the
Imperial Bank of India, the management of Government accounts and public
debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon,
Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue
Department. Offices of the Banking Department were established in
Calcutta, Bombay, Madras, Delhi and Rangoon.
Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve
Bank continued to act as the Central Bank for Burma till Japanese
Occupation of Burma and later up to April, 1947. After the partition of
India, the Reserve Bank served as the central bank of Pakistan up to June
1948 when the State Bank of Pakistan commenced operations. The Bank,
which was originally set up as a shareholder's bank, was nationalized in
1949.
The RBI was established by legislation in 1934, through the RBI Act of
1934. The RBI started functioning from April 1st 1935. This represented the
culmination of a long series of efforts to set up an institution of this kind in
the country. The RBI was originally constituted as a Shareholders’ Bank
with a share capital of Rs.5 Crore. In view of the need of close integration
between its policies and those of the government, it was nationalized in
1949.

With liberalization, the Bank's focus has shifted back to core central banking
functions like Monetary Policy, Bank Supervision and Regulation, and
Overseeing the Payments System and onto developing the financial markets.
The sequences of events leading to the formation of the RBI are summarized
in the figure:
Presidency Bank
Imperial Bank of India
Central Banking Enquiry Committee, 1931
Reserve Bank of India Act, 1934
Constitution of RBI, April 1st 1935
Nationalization of the RBI. 1949
ESTABLISHMENT OF THE RESERVE BANK OF INDIA
In India, the urgent need for a central banking institution was recognized
when the 3 presidency banks – Bank of Madras, Bank of Bombay & Bank
of Bengal were amalgamated in 1921 to form the Imperial Bank.

In 1926, the Hilton-Young Commission recommended the establishment of

a central bank. A bill was passed in the Central Legislature in January 1927
but was dropped. A fresh bill was introduced on September 8th, 1923 and
was received.
Thus the Reserve Bank of India was established by legislation in 1934

through the Reserve Bank of India Act 1934. The Act provides the statutory
basis of functioning of the bank which commenced operations on April 1st,
1935.
CENTRAL BOARD
The Reserve Bank's affairs are governed by a central board of directors. The
Board is appointed by the Government of India in keeping with the Reserve
Bank of India Act. The Board of Directors is comprised of:
1. A governor and not more that 4 deputy governors appointed by the

Central Government.
2. Four Directors nominated by the Central Government, one from each
of the 4 Local Boards.
3. Ten Directors nominated by the Central Government
4. One government official nominated by the Central Government.
The Governor & Deputy Governor hold office for such periods not
exceeding 4 years as may be fixed by the Central Government at the time of
their appointment and are eligible for reappointment. The Government
official holds office during the pleasure of the Central Government. The
Governor, in his absence, appoints a deputy Governor to be the chairman on

the Central Board. Meetings of the Central Board are required to be held not
less than 6 times in each year & at least once in a quarter.
Central Board of RBI
4 Local Boards at Chennai, Kolkata, Internal Organization & Management:

Mumbai & New Delhi
This consists of about 25 departments
18 branches in major cities of the training establishments & research
country. institutions.
LOCAL BOARDS
For each of the 4 regional areas of the country, there is a Local Board with
headquarters in Kolkata, Chennai, and Mumbai & New Delhi. Local Boards
consist of 5 members each, appointer by the Central Government for a term
of 4 years. The Local Board members elect from amongst themselves the
chairman of the Board. The Regional Directors of the bank offices in
Kolkata, Chennai, and Mumbai & New Delhi are the ex-officio secretaries
of the Local Boards at the Centers. The functions of Local Boards are
reviewed by the Central Board from time to time.

Its functions include advising the Central Board on local matters and
representing territorial and economic interests of local cooperative and
indigenous banks & to perform such other functions as delegated by Central
Board from time to time.
INTERNAL ORGANIZATION & MANAGEMENT
The Governor is the Chief Executive Architect of the RBI. The Governor
has the powers of general superintendence and direction of affairs and
business of the Bank. The Executive General Managers are in between the
Deputy Governors and Chief General Managers of central office
departments.
Formulating of policies concerning monetary management, regulation and

supervision of banks, non banking institutions, financial institutions, and co-
operative banks, extension of exchange resources and rendering of advice to
the Government on economic and financial matters are also done by the
RBI.
MAIN FUNCTIONS
The Reserve Bank of India was constituted to:
• Regulate the issue of banknotes

• Maintain reserves with a view to securing monetary stability
• Operate the credit and currency system of the country to its advantage

• Promote financial and economic development jeopardizing monetary

stability
• Set up many financial institutes provide development of finance and
foster financial markets.
CORE FUNCTIONS:
Following are the core functions of the Reserve Bank of India:
• Operating monetary policy for maintaining price stability and

ensuring adequate financial resources for development process.
• Promotion of an efficient financial system.
• Meeting currency requirement of the public
•
Reserve Bank of India
Issue of Foreign Pa
Banker to Banker to Monetary & Clearing
Currency Exchange Sy
Government Banks Credit Policy Hose Agent
Notes Management Man

MONETARY AUTHORITY:
The Reserve Bank of India constantly works towards keeping inflation

under check and ensuring adequate supply of liquidity for the productive
sector as also towards financial stability. It also formulates, implements and
monitors the monetary policy.
REGULATOR AND SUPERVISOR OF THE FINANCIAL

SYSTEM:
• Prescribes broad parameters of banking operations within which the

country's banking and financial system functions.
• Objective: maintain public confidence in the system, protect
depositors' interest and provide cost-effective banking services to the
public.
• Permitting banks to fix their own position limits as per international
terms & aggregating gap limits.
DEVELOPMENTAL ROLE
• Performs a wide range of promotional functions to support national

objectives.
• Provides rural credit.
• Setting up of institutional framework.
• Service area approach.
• Financing the industries.
• Provision of finance to information technology and software industry.
• Infrastructure financing

ISSUER OF CURRENCY
The Reserve Bank of India ensures good quality coins and currency notes in
adequate quantity by:
• Issuing and exchanges or destroys currency and coins not fit for
circulation.
• Mopping up notes and coins unfit for circulation
• Advising the Government on designing of currency notes with the
latest security features.
MANAGER OF FOREIGN EXCHANGE
The Reserve Bank of India is mainly empowered with authority under the
Foreign Exchange Management Act (FEMA) 1999 to regulate foreign
exchange operation. As such, rules and regulations relating to non-resident
accounts are issued by the RBI. The RBI also formulates policies to
facilitate external trade and payments, facilitates foreign investments in
India and Indian investments abroad and promotes orderly development of
foreign exchange markets
BANKER TO THE GOVERNMENT
The RBI acts as a Banker to the Government under section 20 of the RBI
Act of 1934. Section 21 provides that the Government should entrust its
money remittance, exchange and banking transactions in India to the RBI.

The RBI maintains accounts of central and state governments. It performs

merchant banking function for the central and the state governments. It also:
• Encourages development and orderly functioning of Government

securities market
• Advises central and state governments in better cash management.
PAYMENT SYSTEMS
• Negotiated dealing system for security dealing.

• Establishment of clearing corporation of India Ltd. (CCIL) for
settlement of security deals.
• Introduction of Real Time Gross Settlement (RTGS)
• Electronic payment facilities like Electronic Clearing System (ECS),
Electronic Funds Transfer (EFT), and National Electronic Funds
Transfer (NEFT) and Cheque truncation.
• Providing messaging network and encryption facilities for secured
messaging through the Institute for Development and Research in
Banking Technology (IDRBT).
BANKERS' BANK
The Reserve Bank of India acts as a banker to all scheduled banks.

Commercial banks including foreign banks, co-operative banks & regional
rural banks are eligible to be included in the second schedule of the Reserve
Bank of India Act subject to fulfilling conditions laid down under Section 42
(6) of the Reserve Bank of India Act 1934..

SUPERVISOR OF THE FINANCIAL SYSTEM
Prescribes regulations for sound functioning of banks and financial

institutions, including non-banking finance companies
• Promotes best practices in risk management and corporate governance

to protect depositors' interest and to enhance public confidence in the
financial system of the country
• Encourages use of technology in banks to provide cost-effective
service to consumers.
BOARD FOR FINANCIAL SUPERVISION
The Reserve Bank of India performs this function under the guidance of the
Board for Financial Supervision (BFS). The Board was constituted in
November 1994 as a committee of the Central Board of Directors of the
Reserve Bank of India.
OBJECTIVE
Primary objective of BFS is to undertake consolidated supervision of the

financial sector comprising commercial banks, financial institutions and
non-banking finance companies.
CONSTITUTION OF THE BOARD
The Board is constituted by co-opting four Directors from the Central Board
as members for a term of two years and is chaired by the Governor. The

Deputy Governors of the Reserve Bank are ex-officio members. One Deputy
Governor, usually, the Deputy Governor in charge of banking regulation and
supervision, is nominated as the Vice-Chairman of the Board.
BFS MEETINGS
The Board is required to meet normally once every month. It considers

inspection reports and other supervisory issues placed before it by the
supervisory departments.
BFS through the Audit Sub-Committee also aims at upgrading the quality of
the statutory audit and internal audit functions in banks and financial
institutions. The audit sub-committee includes Deputy Governor as the
chairman and two Directors of the Central Board as members.
The BFS oversees the functioning of Department of Banking Supervision

(DBS), Department of Non-Banking Supervision (DNBS) and Financial
Institutions Division (FID) and gives directions on the regulatory and
supervisory issues.
FUNCTIONS OF THE BFS
Some of the initiatives taken by BFS include:
i. restructuring of the system of bank inspections

ii. introduction of off-site surveillance,
iii. strengthening of the role of statutory auditors and
iv. Strengthening of the internal defenses of supervised institutions.

The Audit Sub-committee of BFS has reviewed the current system of

concurrent audit, norms of empanelment and appointment of statutory
auditors, the quality and coverage of statutory audit reports, and the
important issue of greater transparency and disclosure in the published
accounts of supervised institutions.
COMMERCIAL BANK
Commercial banks ordinarily are simple business or commercial concern
which provides various types of financial services to consumers in return for
payments in one form or another such as interest discount, fees, commission,
and so on . their objective is to make profits. However, what distinguish
them from other business concerns ( financial as well as manufacturing ) is
the degree to which they have to balance the principal of profit
maximization with certain other principal . in India especially . banks are
required to modify the performance in profit making if that clashes with
their obligations in such areas as social welfare , social justice , and
promotion of regional balances in development . bank in general have to pay
much more attention to balancing profitability with liquidity.
SCHEDULED BANKS
Scheduled banks are which are included in the second schedule of The
Banking Regulation Act 1949, other are non schedule bank
(a) must have paid up capital and reserve not less than Rs 5 lakh.
(b) it must also satisfy the RBI that its affairs are not conducted in a manner
detrimental t the interests of its depositors. Scheduled banks are required to
maintain a certain amount of reserves with the RBI they in return , enjoy the

facility of financial accommodation and remittance at concessional rates

from the RBI.
REGIONAL RURAL BANKS.

A beginning to set up the RRB was made in later half of 1975 in accordance
with the recommendations of banking commission it was intended that the
RRB would operate exclusively in rural areas and would provide credit and
other facility to small and marginal farmers , agricultural laborer , artisans ,
and small entrepreneurs. They now carry all types of banking business
generally within one to five districts. The RRB can be set up provided by
public sector bank sponsor them . the ownership capital of these banks is
held by the central govt. (50 %) ,concerned state govt. (15 %), and the
sponsor bank (35%) . they are in effect owned by the govt. and there is a
little local participation in ownership and administration of these bank also .
further they have a large number of branches.

CLASSIFICTION OF NBFC:
The various NBFC can be classified as follows:
• Housing Finance Institution (companies)

• Venture Capital Funds
• Factors or Factoring companies
INVESTMENT TRUST OR INVESTMENT COMPANIES
Investment trust are close ended organization, unlike UTI and they have
a fixed amount of authorized capital and a stated amount of issued
capital. Investment trust provides useful service through conserving and
managing property for those who, for some reasons or other cannot
manage their own affairs. Investor of moderate means are provide
facilities for diversification of investment, expert advice on lucrative
investment channels, and supervision of their investment. From the point
of view of the economy, they help to mobilize small savings and direct
tem to fruitful channels. Thy also have a stabilizing effect on stock
market. Unlike in other countries, they render manifold function such as
financing, underwriting, promoting and banking.

Most of these companies are not independent, they are investment

holding companies, formed by the former managing agents, or business
houses. As such, they provide finance mainly to such companies as are
associated with these business houses.
NIDHIS:
Mutual benefit funds or nidhis, as they are called in India, are joint stock
companies operating mainly in south India, particularly in Tamil Nadu.
The source of their funds are share capital, deposits from their members,
and the public. The deposit are fixed and recurring. Unlike other
NBFC’S nidhis also accepts demand deposit to some extent. The loans
given by this institution are mainly for consumption purposes. These
loans are usually secured loans, given against the security of tangible
asset such as house property , gold jewelry, or against share of
companies, LIC policies, and so on. The terms on which loans are given
are quite moderate. The notable points about these institutions are :
a) They offer saving schemes which are linked with the

assurance to make credit available when required by saver’s
b) They make the credit available to those to whom the
commercial banks may hesitate to give credit or whom
commercial banks have not been able to reach,
c) They possess characteristics such as their local character,
easy approachability, and the absence of cumbersome

procedures, which make them suitable for small areas and,

d) Interest rates on their deposit and the loans are comparable to
those of commercial banks, and they work on the sound

principal of the banking. Their operations are similar to those
of unit banks. They are incorporate bodies and are governed
by the directives of the RBI.
MERCHANT BANKS:
It would help in understanding the nature of merchant banking if we
compare it with commercial banking. The MBs offer mainly financial
advice and service for a fee, while commercial banks accepts deposit and
lend money. When MBs do functions essentially as wholesale bankers rather
than retail bankers. It means that they deals with selective large industrial
clients and not with the general public in their fund based activities. The
merchant banks are different from security dealers, trades and brokers also.
They deal mainly in new issues, while the latter deal mainly in existing
securities.
The range of activities undertaken by merchant banks can be understood

from recent advertisement of one of the merchant bankers in India which
mentioned the following service offered by it:
1) Management, marketing and underwriting of new issues,

2) Project promotion services and project finance,
3) Syndication of credit and other facilities,
4) Leasing, including project leasing,

5) Corporate advisory services,

6) Investment advisory services,
7) Bought-out deals,
8) Venture capital,
9) Mutual fund and offshore funds,
10) Investment management including dictionary
management,
11) Investment service for non- resident Indians,
12) Management of and dealing in commercial papers,
In India the merchant banking service are provided by the commercial banks,
All Indian Financial Institutions, private consultancy firms & technical
consultation organizations.
In March 1991, SEBI granted permission to VMC project technologies to act

as the merchant banker and to undertake public issue management, portfolio
management, lead management, and so on. It may be noted that in India, the
permission of the SEBI is required to do merchant banking business.
HIRE PURCHASE FINANCE COMPANIES
Hire purchase involves a system under which term loan for purchases of
goods and services are advanced to be liquidated in stages through a

contractual obligation. The goods whose purchases are thus financed may be a
consumer goods or producer goods or may be simply services such as air
travel.
Hire-purchase credit may be provided by the seller himself or by any financial

institution.
Hire-purchase credit is available in India for a wide range of services. Product

like automobile, sewing machines, radios, refrigerators, TV sets, bicycles,
machinery and equipment, other capital goods, industrial shades, services like
educational fees, medical fees, and so on are now financed with help of such
credit. However unlike in other countries the emphasis in India is on the
provision of installment credit for productive goods & services rather than for
purely consumer goods.
Other suppliers of hire-purchase finance are retail and wholesale traders,

commercial banks, IDBI, ICICI,NSIC,NSIDC, SFCS,SIDCS, Argo-industries
corporations (AICs), and so on.
In the recent past, banks also have increased their business in his field of
installment credit and loans.
IDBI indirectly participate in financing hire purchase business by way of

rediscounting usance bills/promissory notes arising out of indigenous
machinery on deferred payment basis.

LEASE FINANCE COMPANIE:
A lease is a form of financing employed to acquire the use of asset, through

which firm can acquire the use of asset for a stated period without owing
them. Every lease involves two parties : user of asset is known as lessee, and
the owner of the asset is known as the lessor. While these companies may
undertake other activities like consumer credit, car finance, etc. their
predominant activity is leasing.
Lease financing organizations in India include many private sector

manufacturing companies, infrastructure leasing and financial service
limited.(IL&FS), ICICI, IRCI, capital market subsidiaries of leading
nationalized banks, IFC,LIC, GIC, Housing Development Finance
Corporation (HDFC), certain SIDCs and SIICs, and other organizations. The
lessee companies include many leading corporation in both public and private
sectors, and small manufacturing companies.
HOUSING FINANCE COMPANIES:
Housing finance is provide in the form of mortgage loan i.e. it is provided

against the security of immovable property of land and buildings. basically
housing finance loan are given by Hosing and Urban Development
Corporation, the apex Co-operative Housing Financing Societies and housing
brand in different states, central and state government, LIC, Commercial
banks, GIC, and a few private housing companies and nidhis.the government
provide direct loan mainly to their employees. The participation of

commercial and urban co-operative banks in direct in mortgage loans has

been marginal till recently. LIC has been a major supplier of mortgage loan in
indirect and direct forms. It has been giving loans to the state government,
apex cooperative housing societies, HUDCO and so on. In addition it has
been providing mortgage loan directly to individuals under its various
mortgage schemes.
NATIONAL HOUSING BANK:
It was set up in July, 1988 as an apex level housing finance institution as

wholly owned subsidiary of the RBI. It began its operation with the total
capital of Rs.170 crore (Rs 100 crore as share capital, Rs 50 crore as long
term loan from RBI and Rs 20 crore through sale of bounds). In September,
1989 it share capital was raised to Rs150 crore. During 1989-90, it issued its
second series of bonds whose total subscription amounted to Rs60 crore.
These bonds are guaranteed by the central government, and carry an interest
rate of 11.5% per annum. The RBI sanctioned it a long-term loan of Rs25
crore in 1989-90. Further, it can borrow in the USA capital market US$50
million under the USAID government guarantee program. Thus the resources
base of NHB has been made quite strong. The explicit and the primary aim of
NHB is to promote housing finance institution at local and regional levels in
the private & joint sector by providing financial and other support.

VENTURE CAPITAL FUNDING COMPANIES:
The term “venture capital” suggest taking risk in supplying capital. However
supply of risk capital may not be a prime function in certain cases the
emphasis may be on supporting technocrats in setting up projects or on
portfolio management. The term venture capital fund is usually used to denote
mutual fund or institutional investors that provide equity finance or risk little
known, unregistered highly risky, small private businesses, especially in
technology-oriented and knowledge intensive business or industries which
have long development cycles and which usually do not have access to
conventional source of capital because of the absence of suitable collateral
and the presence of high risk. VCFs play an important role in supplying
management and marketing expertise to such units.

BIBLIOGRAPHY
REFERENCE BOOKS & ARTICLES
Financial management for managers – ICFAI University

Financial market & services – Study material of WIMDR
Foreign Exchange Markets – P. Subramaniam
Exchange Markets – Julie Stephens
Rubinstein on Derivatives – Mark Rubinstein
Derivatives FAQ by Ajay Shah and Susan Thomas

World Wide Web:

www.rbi.org.in
www.derivativesindia.com
www.sebi.gov.in
www.indiainfoline.com

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Indian Financial System

1 Thakur College Of Science & Commerce

The story of Indian reforms is by now well-documented, nevertheless, what

As a result of the growing openness, India was not insulated from

2 Thakur College Of Science & Commerce

Indeed, inflation has been contained since the mid-1990s to an average of

3 Thakur College Of Science & Commerce

management systems and lack of transparency in operations of major

Financial sector reforms initiated in the early 1990s have attempted to

Simultaneously, the Reserve Bank took a keen interest in the development

4 Thakur College Of Science & Commerce

INDIAN FINANCIAL SYSTEM

 Features of Financial System

 Role of Financial System

 Back Drop of Financial System

 Indian Financial System from 1950 – 1980

 Indian Financial System Post 1990’s

5 Thakur College Of Science & Commerce

Procedure & practices adopted in the markets, and financial inter

6 Thakur College Of Science & Commerce

FEATURES OF FINANCIAL SYSTEM -:

1. It provides an Ideal linkage between depositors savers and

ROLE OF FINANCIAL SYSTEM:

The role of the financial system is to promote savings & investments in

The savings from household sector dominates the domestic savings

7 Thakur College Of Science & Commerce

savings in the household sector are mobilized directly in the form of

The function of a financial system is to establish a bridge between the

8 Thakur College Of Science & Commerce

An overview of Financial System and Financial Markets in India

Financial Institutions RBI SEBI IRDA

Mutual Fund Venture Capital Capital Market

LIC & GIC &

Development Investment Sectoral State Level

9 Thakur College Of Science & Commerce

BACK DROP OF INDIAN FINANCIAL SYSTEM

At the time of independence, India had a reasonably diversified financial

Industry’s share in credit doubled,

NABARD, EXIM, SIDBI,

As India embarked on a process of industrialization and growth, RBI set up

In essence, the understanding that requirement of financial needs for

10 Thakur College Of Science & Commerce

intermediaries who performed specialized functions influenced financial

To ensure that these specializations were adhered to, financial intermediaries

In the 1950s and 1960s, despite an expansion of the commercial banking

11 Thakur College Of Science & Commerce

Therefore the deepening of financial intermediation had occurred with an

12 Thakur College Of Science & Commerce

In the Indian context segmentation meant that competition was muted. In a

The reform process that followed accelerated the process of liberalization

13 Thakur College Of Science & Commerce

The government security market was particularly important not only

14 Thakur College Of Science & Commerce

INDIAN FINANCIAL SYSTEM FROM 1950 TO

Indian Financial System During this period evolved in response to the

1. Public ownership of financial institutions –

2. Fortification Of Institutional structure –

15 Thakur College Of Science & Commerce

strengthening of institutional structures. Development banks was set up with

4. Participation in Corporate Management –