Financial Markets : Functions & Classifications

Financial System
Refers to:

the system of borrowing & lending of funds, or demand for and supply of funds of individuals, institutions, companies and Government
Classified as:

Industrial Finance; Agriculture finance Development finance Govt. finance (Govt. Securities Mkt.) International finance (Forex market)
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Financial System
Comprises of:
Institutions which operate Financial Markets
Financial Instruments with which financial system put to operation

Indian Financial System: Phases

I- upto 1951- post-independence period initiation of planned economic development II- between 1951 & mid-eighties- period of planned economic growth III- after the early nineties responding to liberalisation/deregulation environment

Financial Markets- Significance

Intermediaries for Mobilisation of savings & Channeling these to Industrial ventures Influences Capital Formation
Indispensable for economic growth

Financial Markets- Significance

Mobilisation & Channelising of Savings

Intermediary between those having surplus funds &

those who need Provides new instruments of savings & investment Generate values Generates new avenues of employment

Operationalises Financial System must for Real sector

Financial Markets
Financial Service Industry Gaining prominence & heralded by: Liberalisation Evolution of Technology Rise in computer literacy Internet facility Objective: To Generate value for Customers

Financial Markets
Money Markets: Short-term monetary assets- Commercial banks,
& Reserve Bank of India Objectives:-equilibrating mechanism for evening out short- term surpluses & deficiencies focal point of RBI intervention for influencing liquidity access to users of short-term funds

Capital Market :long-term sources

: Facilitates buying & selling of securities like, shares & debentures : Primary/new issue market, & secondary market Regulated by SEBI

Forex Market : Foreign Exchange Market

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Financial System
System Approach

Indian Capital Market

Gilt-edged market, or Govt. Securities Industrial Securities Market
New Issue Market Old Issues Market (Stock Exchanges)

Development Financial Institutions (DFIs):

IFCI; ICICI, SFCs; IDBI; IIBI; UTI

Financial Intermediaries, or Non-banking financial cos.

Merchant Banks; Mutual Funds; Leasing Cos. Venture Capital Cos; Others
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Capital Market : Functions

Liquidity : to facilitate conversion of assets into cash
To enable transfer of securities from one person to another without loss in value To minimise transaction cost

Pricing of Securities:
To have fair price To have a transparent system
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Capital Market : Segments

Primary market : New Issue market Secondary Market: deals with securities which have already been issued

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Capital Market : Segments

Primary market : New Issue market Companies issue new shares to raise finances (IPO) Companies interact with investors directly Issuers include: companies, Government. Banks, FIs & Mutual funds Securities include: share, bonds. Mutual funds schemes Market Participants: Merchant bankers, registrars, bankers, underwriters Issue Offers: IPO or Initial Public Offer : First Public Offer FPO or Follow-on Offering : Offer by an existing Co. which had issued earlier Prospectus: describes terms of the Issue & defines the rights & responsibilities of the issuers and investors, financials of Co., promoters & tentative issue price; to be filed before SEBI
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Public Issue vs. Private Placement

Private placement : when a co. offers securities privately to a few investors i.e less than 50 Significant method to mobilise funds as:
Easier & subject to less compliance Cost effective Time effective Tailored to co. needs

However lacks transparency

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Capital Market : Intermediaries

Merchant bankers Underwriters Credit rating agencies Stock brokers Secondary market may also include:
Over the counter (OTC) market Derivatives market In stock market price is influenced by demand & supply while in OTC market prices are negotiated between buyers & sellers
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Primary Capital Market in India

Sale of New Securities
IPOs are public issues of securities by new companies for the first time FPOs: Public offering by established Cos to individuals & institutions

Public issues to public by private sector cos. not enthused till 1980 :
Small & narrow capital base Easy availability of loan capital Fear of loss of control Highly regulated environment
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Capital Market : Secondary Market

Secondary Market: deals with securities which have already been issued
Securities traded in Stock Exchanges where listed Price of a share influenced: information of company Company does not interact with investors, rather they interact themselves Listed Co.: who have signed a listing agreement with SEs; whose shares can be bought & sold in the Stock Exchange regulated by SEBI; 4975 Cos. Listed

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Secondary Market : Types of Securities Traded on SEs

Securities divided into categories based on type, level of trading/value traded. BSE divides securities into categories as: A group stocks that are most liquid; heavily traded daily B group traded regularly but not to the level of A group F group securities represent fixed income securities G group represent government securities traded by retail investors Z group represent most illiquid stocks, failed to comply with listing agreements, or have not addressed to investors complaints

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Securities and Exchange Board of India (SEBI)

SEBI established in April 1988 as an administrative body to develop & regulate securities markets & to protect the investors SEBI Act 1992 with statutory powers for:
Protecting the interests of investors in securities; Promoting development of securities markets and Regulating the securities markets

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SEBI : Functions
Development & Regulation of Capital Markets: Regulate business in SEs & other securities markets; Register & regulate capital market intermediaries; Register & regulate working of MFs.; Prohibit fraudulent & unfair trade practices in securities markets Promote investors education & training of intermediaries of securities markets; Prohibit insider trading in securities; Prohibit substantial acquisition of shares & takeover of cos.; Perform such other functions as may be prescribed

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Stock Market
Secondary Market : 23 stock Exchanges in India Bombay Stock Exchange: established in 1875 National Stock Exchange Developments since 1994
Screen-based trading Electronic Delivery Rolling settlement since 2002
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Mutual Funds
Pooling of savings of small investors & investing the same in diverse securities to benefit of reduced risks & high returns from diversified portfolio MF : three entities Sponsor who promotes MF Trust with a board of trustees Management Company: a separate co. which manages funds mobilised under various schemes

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Mutual Funds : Features/Benefits

Savings mobilisation Investment avenue Professional Management Liquidity Diversified investment Better liquidity Tax benefits Low transaction costs
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Mutual Funds: Operational Classification

Open-ended scheme: liquidated on continuous basis;

better liquidity, not listed, no intermediaries

Close-ended scheme: Liquidated (repurchased) only after expiry of specified period, quoted in the market, NAV Interval scheme: a close-ended scheme with a feature that it remains open during a particular period

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Mutual Funds: Return-based classification

Income fund scheme Growth fund scheme Conservative fund scheme: also known as middle-of-the-road funds; blends features of

income as well as growth

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Open-ended and Closed ended schemes

Feature Open-ended Close-ended

Subscription Open throughout the currency of scheme Corpus Exit Liquidation Maturity Listing Liquidity Funds raised keeps varying Easy and convenient exit, any time Can be liquidated any time No maturity period

Open only for limited period Corpus is fixed for all time No exit till the closure of scheme Can be liquidated only at the end of specified period Fixed maturity period

No listing & not traded on Listed & traded on SE SE Through re-purchase at NAV Through trading in SE
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Mutual Funds in India

Public Sector mutual Fund: UTI in 1964 Objective: to mobilise small savings & to channel these into productive sectors to accelerate economic development 1987: Govt. Commercial banks permitted to setup subsidiaries to start mutual funds-SBI, Canara bank 1990 Economic Reforms & liberalisation foreign cos. & private cos. allowed to start mutual fundsSEBI
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Government Securities Market

Comprises securities issued by Central Govt., State Govts. & State sponsored entities, like development financial institutions, infrastructure financing cos. Public sector enterprises Mainly a debt market: Central Govt. raises money through dated securities & treasury bills. State Govts. raise money through state development loans. Funds raised primarily through private placement
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Government Securities
Borrowing of Government State Govts. Central Govt. Long-term Dated Securities Treasury bills Short-term Govt. Securities held by Commercial banks, LIC

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Foreign Exchange Market

Forex Market where the currency of one country of exchanged for the currency of another country. Transactions channeled through inter-bank market, a wholesale market in which major banks trade A worldwide net work of telephones, telex, satellite, computer network between participants including banks, foreign exchange dealers arbitrageurs & speculators
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Foreign Exchange Market: International

Key Participants: importers & exporters who need foreign currency; traders who make a market in foreign currencies; foreign exchange brokers; speculators Essentially an over the counter market. No central location rather located in banks, investment banks, communicate through network system
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Foreign Exchange Market: India

Key participants: RBI, banks & business undertakings Regulated by RBI Foreign Exchange Transactions : by business houses & banks; Not speculative Relatively small market

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Euro Issue
Funds raised from abroad by Indian Cos. Include:
Foreign Currency Convertible bonds (FCCB) Global Depositary Receipts (GDRs) American Depository Receipts (ADRs)

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Indian Money Market -Structure

Organised Banking Sector Unorganised Banking Sector Sub-markets
Call money market Bill market
Commercial Bills Treasury Bills (90 days)

364 days bill market Certificates of Deposits (CDs) Commercial Paper (CPs)

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Reserve Bank of India

Traditional functions:
Proves currency & operates clearing system for banks Formulates & implements monetary & credit policies Functions as bankers bank Supervises operations of credit institutions Regulates foreign exchange transactions Moderates fluctuations in exchange value of rupee Functions to develop Indian financial system: Integrate unorganised financial sector with organised one; Encourage extension of commercial banking system in rural areas; Influences allocation of credit Promote development of new institutions

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Financial System
System Approach

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Thank You
Good Day

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