Introduction to Financial MAnagement, Part-II (Unit-1)

7/27/2019 Introduction to Financial MAnagement, Part-II (Unit-1)

1/21

Introduction to Financial ManagementPart II (Unit - I)

Financial Environment of Indiaor

Structure of Financial System in India


2/21

Financial System

The economic development of any country depends on the existence of awell organized financial system.

Financial system supplies the necessary financial inputs for production ofgoods and services which will turn promote the well being standard ofliving of the people of a country.

Financial system provides the intermediation between savers andinvestors and also promotes faster economic development of a country.

There are three pillars of Financial System:

1. Financial Markets;

2. Financial Institutions and

3. Financial Assets / Securities


3/21

(A) Financial Markets

Financial Markets can be referred to as those centres andarrangements which facilitate buying and selling of financial assets,

claims and services. Sometimes, we do find the existence of a specificplace or location for a financial market as in the case of StockExchange.

Types of Financial Markets

Unorganized Markets: In these markets, there are a number of moneylenders, indigenous bankers, traders etc. who lend money to the public.There are also private finance companies, chit funds etc. whoseactivities are not controlled by the Reserve Bank of India (RBI). Thereare no standardized rules and regulations for governing the financial

dealings.

However, the RBI has already taken some steps to bring theunorganized sector under the organized fold.


4/21

Organized Markets: In these markets, there are standardized rulesand regulations for governing the financial dealings. These markets are

subject to strict supervision and control by RBI.

The organized markets are further classified into 1. Money Market

and 2. Capital Market.

Money Market

The RBI defines the money market as, a market for short-term

financial assets that are close substitutes for money, facilitates the

exchange of money for financial claims.

However it is also a market for the lending and borrowing of short-term

funds.


5/21

Features of Money Market:

The major institutions in the money market are Central Bank andCommercial Bank.

It is a market for short-term loanable funds for a period of not exceedingone year;

This market supplies funds for financing current business operations and

working capital requirements of industries; The instruments that are dealt in a money market are bills of exchange,commercial papers, treasury bills, certificates of deposit etc;

It deals with financial assets having a maturity period upto one year only;

It deals with only those assets which can be converted into cash readily

without loss and with minimum transaction cost; Transactions have to be conducted without the help of brokers;


6/21

Types of Money Market Instruments:

1. Bills of Exchange: A commercial bill is one which arises out of a credit

transaction. A bill of exchange contains a written order from the creditorto the debtor, to pay a certain sum, to a certain person, after a certain

period.

2. Commercial Papers: It is an unsecured promissory note, negotiable in

nature, issued with a fixed maturity by a Joint Stock Companyapproved by RBI.

3. Certificate of Deposits: These are short-term deposit instruments issued

by banks and financial institutions to raise lumsum of money.

4. Treasury Bills: It isalso apromissory note issued by the Government

under discount for short-term borrowings for a specified period. The

Government promises to pay the specified amount mentioned therein to

the bearer on the due date.


7/21

5. Repo: Repo stands for repurchase. The borrower repurchase the securitiesfrom the lenders with an agreement at the end of the fixed period at a pre-determined price. The difference between the purchase price and originalprice is called cost of borrowings or Repo Rate. Repo transactions are

conducted in the money market to manipulate short-term interest rate andmanage liquidity level.

Types of Money Market:

1. Call Money Market / Inter Bank Call Market: It refers to the market forshort term loans (say one day to fourteen days). These loans arerepayable on demand at the option of either lender or the borrower.These loans are given to the brokers and dealers in stock exchange.

2. Commercial Bills Market / Discount Market: It refers to the marketwhere short-term trade bills are discounted by financial intermediaries(like commercial banks).

3. Treasury Bill Market: It refers to the market where treasury bills arebought and sold. Treasury bills are enjoy high degree of liquidity since

they are issued by the Government.


8/21

Capital Market

The capital market is a market for financial assets which have a long or

indefinite maturity period. It deals with long term securities (e.g.: Equity

Shares, Preference Shares, Debentures or Bonds etc.).

Features of Capital Market:

It is a market for long-term funds exceeding a period one year; This market supplies funds for financing the fixed capital requirements

of trade and commerce as well as long-term requirement of Government;

This market deals in instruments like Equity or Ordinary Shares,

Preference Shares, Debentures or Bonds etc.

Development banks and Insurance companies play a dominant role inthis market;

Transactions take place at a Stock Exchange;

Transactions are conducted only through authorized dealers.


9/21

Type of Issues in Capital Market:

Public Issue: Public Issue is the most popular method of raising long

term capital from the public.

Right Issue: Right Issue is the method of raising additional finance from

existing members by offering securities (i.e. shares and debentures) to

them on pro rata basis.

Bonus Issue: Sometimes companies distribute profits to existing

shareholders by way of fully paid bonus shares in lieu of dividend.

Bonus shares are issued in the ratio of existing shares held. The

shareholders do not have to make any additional payment for these

shares.

Private Placement: Private placement is a method of direct selling of

securities (shares and debentures) by a public limited company or

private limited company or jointly to a limited number of sophisticated

investors (like UTI, LIC, GIC etc.).


10/21

Types of Capital Market:

Industrial Securities Market: It is a market for industrial securities, (equity shares, preference shares, debentures or bonds etc.). It is a

market where industrial concerns raise their long-term capital or debt

by issuing appropriate instruments.

Government Securities Market: It is called Gilt-Edged securitiesmarket. It is a market where Government securities (e.g. Stock

certificates, Bearer bonds etc.) are traded. In India, long-term

securities are traded in the capital market while short-term securities

are traded in the money market.

Long-term Loans Market: Development banks and commercial banks

play a significant role in this market by providing long-term loans (e.g:

Mortgaged Loan, Term Loan etc.) to corporate customers.


11/21

Segments of Capital Market:

Primary or New Issue Market: Primary Market is a market for newissues or new financial claims. The primary market deals with those

securities which are issued to the public for the first time. A company

may raise its long-term capital in a primary market in different ways,

such as, public issue, right issue etc.

Secondary Market: Secondary Market is a market for those securities

which have already passed through the primary market and are

traded in this market. This market deals with old existing securities.

This market consists of all Stock Exchanges recognized by the Govt.of India and are regulated by Securities Exchange Board of India

(SEBI).


12/21

Components of Secondary Market:

Stock Exchange:

The market where second hand securities are bought and sold is

referred to as stock market. (i.e, the market where existing or old

securities are traded).

It is an association, organization or body of individuals whether

incorporated or not, established for the purpose of assisting, regulating

and controlling the business of buying, selling and dealing of securities;

The first organized stock exchange in India is Bombay Stock Exchange

(BSE) was started in Bombay in 1875 with the formation of the Native

Share and StockBrokersAssociation.


13/21

Functions of Stock Exchange:

Liquidity and Marketability: It provides liquidity to securities since securities can

be converted into cash at any time according to the intention of the investors byselling them at the listed prices.

Safety of Funds: Itensure safety of funds invested because they have to function

under strict rules and regulations and the bye-laws.

Supply of Long-term Funds: The securities traded in stock market are negotiable

and transferable in character. When a security is transacted, one investor is

substituted by another, but the company is assured of long term availability of

funds.

Promotion of Investment: It mobilise the savings of the public and promote

investment through capital formation.

Marketing of New Issues: If the new issues are listed in the stock market, they are

readily acceptable to the public. Thus stock market helps in marketing of new

issues also.


14/21

Over the Counter Exchange of India (OTCEI):The OTCEI was recognized as a stock exchange under the Securities

Contract (Regulation) Act, 1956 and was incorporated as a company u/s25 of the Company Act, 1956 on 22nd September, 1990. The OTCEI was

promoted jointly by ICICI, IDBI, UTI, LIC GIC etc. This exchange has

mainly linked with broker and dealer through electronic computer

network.

Objectives:

The OTCEI has aroused out of the need to have a second tier market in

the country.

It was set up to provide small and medium companies an access to the

capital market for raising finance in cost effective manner.

The OTCEI was the first ringless, electronic national exchange with a

screen-based trading system listing entirely new set up of companies of

small size.


15/21

Features:

Transaction would take place through satellite communication

telephone lines (i.e screen based trading);

Trading takes place through a network of computers of OTC dealers

located at different places within the same city and even across cities;

It deals in equity shares, preference shares, bonds, debentures andwarrants;

Small and medium sized companies with a paid up capital between Rs.

30 lakhs and 10 crores may be enlisted on OTCEI.

A company which is listed on any other recognized stock exchange in

India is not permitted simultaneously for listing on OTCEI. Members are corporate only.


16/21

National Stock Exchange (NSE):

The National Stock Exchange (NSE) of India was incorporated in

November, 1992 with an equity capital of Rs. 25 crores and promoted

by IDBI, ICICI, LIC, GIC etc.Objectives:

to establish nation wide trading facility for equity shares and debts;

To facilitate equal access to investors across the country;

to enable shorter settlement cycle and

To meet international standard.

Features:

It has a fully automated screen based trading system (i.e. Transaction

would take place through satellite communication telephone lines);

It has three segments: Capital Market, Wholesale Debt Market andDerivatives Market.

The members are: individuals, firms and corporates.

The most popular indices are: S&P CNX 500, S&P CNX Nifty, S&P

CNX Defty, CNX mid-cap 200 etc.


17/21

Bombay Stock Exchange (BSE):

The Bombay Stock Exchange (BSE) is the oldest stock exchange in Asia

and was established as early as 1875 itself. The BSE is a voluntary,

non-profit making association of brokers members.

Features:

It has also a fully automated screen based trading system know as,BSE online Trading System (BOLT) ;

It has also three segments: Capital Market, Wholesale Debt Market

and Derivatives Market.

It has more than 700 members and most of them are individuals. At

present, corporate members are being admitted. The most popular indices are: SENSEX, BSE 200, Dollex, BSE 500 etc.

The BSE dominate the Indian Capital Market by accounting for more

than 60% of all-India turnover;


18/21

(B) Financial Institutions

There is two types of financial institutions in India: 1. Banking and 2.

Non-Banking.

Banking Institutions:

Scheduled Commercial Bank: Scheduled commercial banks are those

included in the second schedule of RBI Act, 1934. In terms of

ownership and function scheduled commercial banks are classified in

four categories: Public Sector Banks, Private Sector Banks, Foreign

Banks in India and Regional Rural Banks.

Public Sector Banks: Public sector banks are those banks in which the

Government has major holdings (e.g. State Bank of India and other

Nationalised banks);

Private Sector Banks: The banks which have been setup in 1990s

under the guidelines of the Narasimham Committee are referred to as

private sector banks (e.g. Citi Bank, HSBC etc).


19/21

Foreign Banks in India: Foreign banks in India (e.g. Standard

Chartered etc.) are those banks who has benefited the Indian Financial

System by enhancing competition, transfer of technology andspecialised skills resulting in higher efficiency and greater satisfaction.

The have also enabled large Indian Companies to access foreign

currency resources from their overseas branches in times of foreign

currency constraints.

Regional Rural Banks: These banks came into existence under the

Regional Rural Banks Ordinance, 1975 for the development of

agriculture, trade and commerce in rural areas and to provide credit

facilities to small and marginal farmers, agricultural labourers and

small entrepreneurs is known as regional rural bank (e.g Paschim

Banga Gramin Bank, Rashtriya Gramin Bikash Bank etc.).


20/21

Non Banking Institution:

Non-Banking Finance Companies (NBFCs): NBFCs are financial

intermediaries engaged in the business of accepting deposits from the

public and delivering credit to the unorganised sector and to small local

borrowers. NBFCs have also a supplement role in meeting the increasing

financial needs of the corporate sector. As compared to the scheduled

commercial banks, they can take quick decisions, assume grater risks,

and tailor-make their services and charges according to the needs of theclients.

Different segments of NBFCs:

Hire Purchase Finance Company;

Loan Company;

Mutual Benefit Finance Company;

Equipment Leasing Company and

Chit Fund Company.


21/21

Thank You

Date post:	02-Apr-2018
Category:	Documents
Upload:	santanu-sarkar
View:	217 times
Download:	0 times

Introduction to Financial MAnagement, Part-II (Unit-1)

Documents