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Prof. NILIMA DAS

INDIAN FINANCIAL

SYSTEM

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Financial System

Existence of a well organized financialsystem

Promotes the well being and standard ofliving of the people of a country

Mobilize the saving

Promotes investment

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Financial System of any country consistsof financial markets, financial

intermediation and financial instrumentsor financial products

Suppliers of funds(Mainly households)

Flow of financial services

Incomes , and financial

claims

Seekers of funds

(Mainly business firms

and government)

Flow of funds (savings)

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Barter

Money Lender

Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks

Evolution of Financial System

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Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

Market Operations

Merchant Banking

Universal Banking

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Indian Financial System

Non-OrganizedOrganized

Regulators

Financial Institutions

Financial Markets

Financial services

Money lenders

Indigenous bankers

Trader

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Organized Indian Financial System

Money Market

InstrumentCapital Market

Instrument

Forex

Market

Capital

Market

Money

Market

Credit

Market

Primary Market

Financial

InstrumentsFinancial

Markets

Financial

Intermediaries

Secondary Market

Regulators

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What is meant by securities? The definition of Securities as per the Securities

Contracts Regulation Act (SCRA), 1956, includes

instruments such as shares, bonds, stocks or other

marketable securities of similar nature.

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Which are the securities one caninvest in? Shares

Government Securities

Derivative products Mutual Funds etc.

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various options available forinvestment?

One may invest in

Physical

assets

Financial

assets

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1. Physical assets -real estate, gold/ jewellery,

commodities etc.

2. Financial assets - fixed deposits with banks,

small saving instruments with post offices,

insurance/provident/pension fund etc.

or securities market related

instruments like shares, bonds, debentures

etc.

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various Short-term financial optionsavailable for investment?

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Savings Bank Account Savings Bank Account is often the first

banking product people use, which offers low

interest (4%-5% p.a.).

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Money Market or Liquid Fundsinvest in extremely short-term fixed income

instruments and thereby provide easy liquidity.

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Fixed Deposits with Banks Referred to as term deposits .

minimum investment period is 30 days.

Fixed Deposits with banks are for investors with low

risk appetite, and may be considered for 6-12 monthsinvestment period.

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various Long-term financial optionsavailable for investment?

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Post Office Savings Availed through any post office.

Monthly Income Scheme is a low risk saving instrument. It providesan interest rate of around 8% per annum, which is paid monthly.

Minimum amount, which can be invested, is Rs. 1,000/-

and additional investment in multiples of 1,000/-.

Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (ifheld Jointly) during a year.

It has a maturity period of 6 years.

Premature withdrawal is permitted if deposit is more than one yearold.

A deduction of 5% is levied from the principal amount if withdrawnprematurely.

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Public Provident Fund A long term savings instrument with a maturity of

15 years

interest payable at 8% per annum compounded

annually.

A PPF account can be opened through a

nationalized bank at anytime during the year and

is open all through the year for depositing money. Tax benefits can be availed for the amount

invested and interest accrued is tax-free.

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Company Fixed Deposits These are six months to three or to five years

borrowings by companies at a fixed rate ofinterest which is payable monthly, quarterly,

semiannually or annually. They can also be cumulative fixed deposits

where the entire principal along with the interestis paid at the end of the loan period.

The rate of interest varies between 6-9% perannum for company FDs.

The interest received is after deduction of taxes.

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Bonds A bond is generally a promise to repay the

principal along with a fixed rate of interest on a

specified date, called the Maturity Date.

fixed income (debt) instrument.

period of more than one year .

The central or state government, corporations and

sell bonds.

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Mutual Funds A Mutual Fund is a trust that pools the savings of a number of investors

who share a common financial goal.

The money thus collected is then invested in capital market instruments

such as shares, debentures and other securities.

The income earned through these investments and the capital appreciation

realized are shared by its unit holders in proportion to the number of units

owned by them.

It is a substitute for those who are unable to invest directly in equities or

debt because of resource, time or knowledge constraints.

most suitable investment for the common man as it offers an opportunity to

invest in adiversified,

professionally managed basket of securities ,

at a relatively low cost.

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Legislations The five main legislations governing the

securities market are:

(a) the Securities Contracts (Regulation)

Act, 1956, preventing undesirable transactions

in securities by regulating the business of

dealing in securities.

(b) the Companies Act, 1956, which is a

uniform law relating to companies throughout

India.

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(c) the SEBI Act, 1992 for the protection of interests

of investors and for promoting development of and

regulating the securities market.

(d) the Depositories Act, 1996 which provides forelectronic maintenance and transfer of ownership of

dematerialized securities.

(e)the Prevention of Money Laundering Act, 2002

which prevents money laundering and provides for

confiscation of property derived from or involved in

money laundering.

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Regulators The regulators ensure that the market participants behave in a

desired manner so that the securities market continue to be a

major source of finance for corporate and government and the

interest of investors are protected.

The responsibility for regulating the securities market is shared

by

1. Department of Economic Affairs (DEA),

2. Department of Company Affairs (DCA),

3. Reserve Bank of India (RBI),

4. Securities and Exchange Board of India (SEBI) and

5. Securities Appellate Tribunal (SAT).

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What is SEBI and what is its role?

The Securities and Exchange Board of India (SEBI)

is the regulatory authority in India established under

Section 3 of SEBI Act, 1992.

It provides for establishment of Securities andExchange Board of India (SEBI) with statutory

powers for

(a) protecting the interests of investors in securities

(b) promoting the development of the securities market

and

(c)regulating the securities market.

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functions

(a) Regulating the business in security market.

(b) Registering and regulating the working of allintermediaries who may be associated with securities

markets in any manner.

(c) Registering and regulating the working of venture

capital funds .

(d) Promoting and regulating self-regulatory

organizations.

(e) Prohibiting fraudulent and unfair trade practicesrelating to securities markets.

(f) promoting investors' education and training of

intermediaries of securities markets;

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(g) prohibiting insider trading in securities

(h) regulating substantial acquisition of shares and take-

over of companies.

(i) calling for information from, undertaking inspection,

conducting inquiries and audits of the stock

exchanges, mutual funds, other persons associated

with the securities market, intermediaries and self-

regulatory organisations in the securities market.

(j) levying fees or other charges for carrying out the

purpose of this section.

(k) conducting research for the above purposes.

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