Intro to IFS

8/3/2019 Intro to IFS

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Vishal Shah


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Existence of a well organized financialsystem

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

Money and monetary assets

Mobilize the saving Promotes investment


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Financial System of any country consists of Financial markets Financial intermediation, and Financial instruments or financial

products

Suppliers of funds(Mainly households)Flow of financial services

Incomes, and financialclaims

Seekers of funds

(Mainly business firms

and government)

Flow of funds (savings)


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Non- OrganizedOrganized

Money lenders

Local bankers

Traders

Landlords

Pawn brokers

Chit Funds

Regulators

Financial Institutions

Financial Markets

Financial services


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Barter

Money Lender

Nidhi's/Chit Funds

Indigenous Banking

Cooperative Movement

Societies Banks

Joint-Stock Banks


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Consolidation

Commercial Banks

Nationalization

Investment Banks

Development Financial Institutions

Investment/Insurance Companies

Stock Exchanges

Market Operations

Specialized Financial Institutions

Merchant Banking

Universal Banking


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Financial System

Savers Lenders Households Foreign

Sectors

Investors

Borrowers

Corporate Sector

Govt.Sector

Un-organized

Sector

Economy

Interrelation--Financial system & Economy


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Organized Indian Financial System

Money MarketInstrument

Capital MarketInstrument

Forex

Market

Capital

Market

Money

Market

Credit

Market

Primary Market

FinancialInstruments FinancialMarkets FinancialIntermediaries

Secondary Market

Regulators


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Mechanism which allows people to trade

Affected by forces of supply and demand

Process used

In Finance, Financial markets facilitates


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Capital markets facilitate the transfer of capital(i.e. financial) assets from one owner to another.

They provide liquidity.

Liquidity refers to how easily an asset can betransferred without loss of value.

A side benefit of capital markets is that thetransaction price provides a measure of the value

of the asset.


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Mobilization of Savings & acceleration of CapitalFormation

Promotion of Industrial Growth Raising of long term Capital Ready & Continuous Markets Proper Channelisation of Funds Provision of a variety of Services


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Stock Market was for a privileged few

Archaic systems - Out cry method

Lack of Transparency - High tones costs

No use of Technology Outdated banking system

Volumes - less than Rs. 300 cr per day

No settlement guarantee mechanism - Highrisks


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1994-Equity Trading commences on NSE 1995-All Trading goes Electronic

1996- Depository comes in to existence

1999- FIIs Participation- Globalization

2000- over 80% trades in Demat form

2001- Major Stocks move to Rolling Sett

2003- T+2 settlements in all stocks

2003 - Demutualization of Exchanges


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Each scam has brought in reforms - 1992 / 2001 Screen based Trading through NSE Capital adequacy norms stipulated Dematerialization of Shares - risks of fraudulent

paper eliminated Entry of Foreign Investors Investor awareness programs Rolling settlements Inter-action between banking and exchanges


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Corporatisation of exchange memberships

Banning of Badla / ALBM

Introduction of Derivative products - Index /Stock Futures & Options

Reforms/Changes in the margining system STP - electronic contracts

Margin Lending

Securities Lending


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22 Stock Exchanges, Over 10000 Electronic Terminals at over 400 locations

all over India.

9108 Stock Brokers and 14582 Sub brokers

9644 Listed Companies

2 Depositories and 483 Depository Participants

128 Merchant Bankers, 59 Underwriters

34 Debenture Trustees, 96 Portfolio Managers 83 Registrars & Transfer Agents, 59 Bankers to Issue

4 Credit Rating Agencies


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Indian Capital Market

Market Instruments Intermediaries

Primary Secondary

Equity DebtHybrid

Regulator

BrokersInvestment BankersStock ExchangesUnderwriters

SEBI

Players

Corporate IntermediariesCRA Banks/FI FDI /FIIIndividual


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Growth Pattern of the Indian Stock Market


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Growth Pattern of the Indian Stock MarketSl.No.

As on 31stDecember

1946 1961 1971 1975 1980 1985 1991 1995

1 No. ofStock Exchanges

7 7 8 8 9 14 20 22

2 No. ofListed Cos. 1125 1203 1599 1552 2265 4344 6229 8593

3No. of StockIssues ofListed Cos.

1506 2111 2838 3230 3697 6174 8967 11784

4 Capital of Listed

Cos. (Cr. Rs.)

270 753 1812 2614 3973 9723 32041 59583

5Market value ofCapital of ListedCos. (Cr. Rs.)

971 1292 2675 3273 6750 25302 110279

478121

6Capital perListed Cos. (4/2)(Lakh Rs.)

24 63 113 168 175 224 514 693

7

Market Value ofCapital per ListedCos. (Lakh Rs.)(5/2)

86 107 167 211 298 582 1770 5564

8

Appreciated valueof Capital per

358 170 148 126 170 260 344 803


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ADR / GDR

Equity Debt

EquityShares

PreferenceShares

Debentures Zero couponbonds

DeepDiscount

Bonds

Hybrid


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Establishment of Development banks &Industrial financial institution.

Legislative measures

Growing public confidence Increasing awareness of investment

opportunities


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Growth of underwriting business

Setting up of SEBI Mutual Funds

Credit Rating Agencies


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Lack of transparency

Physical settlement Variety of manipulative practices

Institutional deficiencies

Insider trading


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Market for short-term money and financial assetsthat are near substitutes for money.

Short-Term means generally period upto one year

and near substitutes to money is used to denoteany financial asset which can be quickly convertedinto money with minimum transaction cost


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It is a place for Large Institutions and governmentto manage their short-term cash needs

It is a subsection of the Fixed Income Market

It specializes in very short-term debt securities

They are also called as Cash Investments


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Lack of Integration

Lack of Rational Interest Rates structure

Absence of an organized bill market Shortage of funds in the Money Market

Seasonal Stringency of funds and fluctuations in

Interest rates

Inadequate banking facilities


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Treasury Bills

Commercial Paper

Certificate of Deposit

Money Market Mutual Funds

Repo Market


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Segment Issuer Instruments

Government CentralGovernment Zero Coupon Bonds, Coupon Bearing Bonds,Capital Index Bonds, Treasury Bills.

PublicSector

Government

Agencies /StatutoryBodies

Govt. Guaranteed Bonds, Debentures

Public SectorUnits

PSU Bonds, Debenture, Commercial Paper

Private CorporateDebentures, Bonds, Commercial Paper, FloatingRate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits

Banks Certificate of Deposits, Bonds

FinancialInstitutions

Certificate of Deposits, Bonds


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Securities and Exchange Board of India (SEBI)

Reserve Bank of India

Ministry of Finance


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Securities and Exchange Board of India(SEBI) was first established in the year1988

Its a non-statutory body for regulatingthe securities market

It became an autonomous body in 1992


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Regulates Capital Market.

Checks Trading of securities.

Checks the malpractices in securities market.


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It enhances investor's knowledge on market byproviding education.

It regulates the stockbrokers and sub-brokers.

To promote Research and Investigation


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It tries to develop the securities market.

Promotes Investors Interest.

Makes rules and regulations for the securitiesmarket.


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Sole Control on Brokers

For Underwriters

For Share Prices

For Mutual Funds


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Established on April 1, 1935 in accordance withthe provisions of the RBI Act, 1934.

The Central Office of the Reserve Bank has been in

Mumbai.

It acts as the apex monetary authority of thecountry.


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Monetary Authority:

Formulation and Implementation of monetarypolicies.

Maintaining price stability and ensuring adequateflow of credit to the Productive sectors.

Issuer of currency:

Issues and exchanges or destroys currency and coins. Provide the public adequate quantity of supplies of

currency notes and coins.


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Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations Maintain public confidence, protect depositors' interest

and provide cost-effective banking services.

Authority On Foreign Exchange:

Manages the Foreign Exchange Management Act, 1999. Facilitate external trade, payment, promote orderly

development and maintenance of foreign exchange

market.

Functions Of RBI


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Developmental role:

Performs a wide range of promotional functions tosupport national objectives.

Related Functions:

Banker to the Government: performs merchant bankingfunction for the central and the state governments.Maintains banking accounts of all scheduled banks.

Functions Of RBI


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(a) Bank Rate:The Bank Rate was kept unchanged at 6.0 per cent.

(b) Reverse Repo Rate:

The Repo rate is around 7 per cent and Reverse repo

rate is around 6.10 per cent.(c) Cash Reserve Ratio:

The cash reserve ratio (CRR) of scheduled banks iscurrently at 5.0 per cent.


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Pre-reforms period

Steps taken

Objectives

Conclusion


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The period from the mid 1960s to the early 1990s.

Characterized by:

Administered interest rates

Industrial licensing and controls

Dominant public sector

Limited competition

High capital-output ratio


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Banks and financial institutions acted as a depositagencies.

Price discovery process was prevented.

Government failed to generate resources forinvestment and public services.

Till 90s it was closed, highly regulated, and

segmented system.


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Economic reforms initiated in June 1991.

The committee appointed under the

chairmanship of M Narasimham. He submitted report with all the

recommendations

Government liberalized the various sectors in

the economy.

Reform of the public sector and tax system.


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Reorientation of the economy

Macro economic stability

To Increase competitive efficiency in theoperations

To remove structural rigidities and inefficiencies

To attain a balance between the goals of financialstability & integrated & efficient markets


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Reduce the level of state ownership in banking

Lift restrictions on foreign ownership of banks

Spur the development of the corporate-bondmarket

Strengthen legal protections


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Deregulate the insurance industry

Drop proposed limits on pension reforms

Increase consumer ownership of mutual-fundproducts

Introduce a gold deposit scheme


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Speed up the development of electronicpayments.

Separate the RBI's regulatory and central-bank

functions

Lift the remaining capital account controls

Phase out statutory priority lending and

restrictions on asset allocation


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The financial system is fairly integrated, stable,efficient.

Weaknesses need to be addressed.

The reforms have been more capital centric innature.

Foreign capital flows and foreign exchange reserveshave increased but absorption of foreign capital is

low.


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Thank you

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Intro to IFS

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