Final Indian Finanacialsystem

8/7/2019 Final Indian Finanacialsystem

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Indian Financial System

1 Thakur College Of Science & Commerce


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EXECUTIVE SUMMARY

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.


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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


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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.


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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 1990s


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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 -:


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1. It provides an Ideal linkage between depositors savers andInvestors Therefore it encourages savings and investment.

2. Financial system facilitates expansion of financial marketsover a period of time.

3. Financial system should promote deficient allocation offinancial resources of socially desirable and economically

productive purpose.

4. Financial system influence both quality and the pace ofeconomic 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


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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

RBI SEBI IRDA


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Financial Institutions

GIC &

OtherCommercial

Banks

NBFC Money Market

Primary

Market

Secondary

Market

Stock

Exchange

GovernmentSecurity

Market

Development

Banks

Investment

Banks

Sectoral

Banks

State Level

FinancialInstitution


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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

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 (DFIs) and State Finance Corporations

(SFCs) as providers of long term capital. Agricultures 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.

19471960s

Industrys share in credit doubled,agriculture, rural areas, SSI, expo rts still

neglected

Nationalisation of Banks toensure credit allocation as perplan priorities

1980s1970s

NABARD, EXIM, SIDBI,

NHB setup

RRBs setup

1990s

Credit to Industry / GovtdoubledHighly segmented financial

market, highly restricted

Neglected: long term, agricultural, and rural area creditNeed for specialized FIs felt.DFIs, SFCs, UTI, Co-op Banks setup.


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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 industrys

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.


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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.


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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 liberalizationThe 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.


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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.


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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,

14major 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


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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 mid80s 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


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

planned economy development.

INDIAN FINANCIAL SYSTEM POST 1990S

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 pioneerdevelopment finance institution was converted in to a public

company.

b)Industrial Development Bank of India & Industrial FinanceCorporation of India (IDBI & IFCI): IDBI & IFCI ltd offers their

equity capital to private investors.

c) Private Mutual Funds have been set up under the guidelinesprescribed by SEBI.


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d) Number of private banks and foreign banks came up under the RBIguidelines. Private institution companies emerged and work under the

guidelines of IRDA, 1999.

e) In this manner government monopoly over financial institutions hasbeen 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.


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FINANCIAL MARKET

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


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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, whereday 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


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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 fornot

meeting CRR requirement and high cost of refinance fromRBI. 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.


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PARTICIPANTS

Initially,only few large bankswere 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


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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. Theserates 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


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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 Rs10 crore.

7. The issuing company shall have P2 and A2 rating from CRISIL andICRA.

CERTIFICATE OF DEPOSIT


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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 cooperativebank 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 theissuing bank and market.

4. They issued in the multiple of Rs 5 lakh subject to minimumsize 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.


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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.


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2) 28 days treasury bills:-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.

3) 91 days treasury bills:-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.

4) 182 days treasury bills:-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.


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5) 364 days treasury bills:-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.


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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


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CAPITAL MARKET

Companies (Issuer)

Intermediaries (MerchantBanks FIIs & Broker)

Investor (Public)

Instruments

Interest Rates

Procedures


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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


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investors. It leads to the capital formation. The following factors play an

important role in the growth of the capital market:-

y A strong & powerful central government.y Financial dynamicsy Speedy industrializationy Attracting foreign investmenty Investments from NRIsy Speedy implementation of policiesy Regulatory changesy Globalizationy The level of savings & investments pattern of the household sectorsy Development of financial theoriesy Sophisticated technological advances.

PLAYERS IN THE CAPITAL MARKET

Capital market is a market for long term funds. It requires a well structuredmarket to enhance the financial capability of the country. The market consist

a number of players. They are categorized as:-

1. Companies2. Financial intermediaries3. 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


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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


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measured. They take active role in the capital market. The major

intermediaries in the capital market are:-

a) Brokers.b) Stock brokers & sub brokersc) Merchant bankersd) Underwriterse) Registrarsf) Mutual fundsg) Collecting agentsh) Depositoriesi) Agents

j) Advertising agencies

III. INVESTORS:The capital market consists many numbers of investors. All types

of investors basic objective is to get good returns on their

investment. Investment means, just parking ones 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


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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 INDIAThe 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 issuerB.On the basis of instruments

On the basis of issuer the capital market can be classified again two types:-

a) Corporate securities marketb) Governments securities market


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On the basis of financial instruments the capital markets are classifieds into

two kinds:-

a) Equity marketb) 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.


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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.


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(2) REGULATION OF PORTFOLIO MANAGEMENTSERVICES:-

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 ANDREFUNDS:-

SEBI has prosecuted many companies for delay in transfer of shares

and refund of money to the applicants to whom the shares are not


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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 EXCHANGESFUNCTIONING:-

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.


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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


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, 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 thesecondary 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


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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 Brse 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


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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

Brse. 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


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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.


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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 over450 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.


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BSE Training Institute: BTI imparts capital market training and certification,

in collaboration with reputed management institutes and universities. It

offers over40 courses on various aspects of the capital market and financial

sector. More than 20,000 people have attended the BTI programmes

Awards

y The World Council of Corporate Governance has awarded the GoldenPeacock Global CSR Award for BSE's initiatives in Corporate Social

Responsibility (CSR).y 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.

y The Human Resource Management at BSE has won the Asia - PacificHRM 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.


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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:

y establishing a nation-wide trading facility for equities, debtinstruments and hybrids,

y ensuring equal access to investors all over the country through anappropriate communication network,

y providing a fair, efficient and transparent securities market toinvestors using electronic trading systems,

y enabling shorter settlement cycles and book entry settlements systems,and


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y 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


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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 byit. 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.


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STRUCTURE OF INTERNATIONAL CAPITAL MARKET

INTERNATIONAL

CAPITAL

MARKETS

INTERNATIONAL

BOND MARKET

FOREIGN BONDS

YANKEE

BONDS

SAMURAI

BONDS

BULLDOG

BONDS

EURO

BOND

EURO/

DOLLAR

EURO/

YEN

EURO/

POUNDS

INTERNATIONAL

EQUITY MARKET

FOREIGN EQUITY

AMERICAN

DEPOSITORYRECIEPTS

IDR/

EDR

EURO

EQUITY

GLOBAL

DEPOSITORYRECIEPTS


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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 financingand 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


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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 andquasi 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.


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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.


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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


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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

companys 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

companys 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


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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.


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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 paymentsb) They are in bearer form with interest coupon attachedc) 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.


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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 (or3.5 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.


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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.


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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


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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.


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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 countrys

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 areconnected 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.CUSTOMERSThe customers who are engaged in foreign trade participate in foreign

exchange markets by availing of the services of

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