A Rudimentary Financial System

Capital / Funds Maturity Matching Risk diversification Efficiency in Info Processing Cost Contracting Cost

Savers Households Companies Institutions

Financial Intermediary

Investors Firms Govt.

Principal + Returns (Hopefully!)

Indian Financial System

Capital / Funds

Laws Of The Land

Savers Households Companies Institutions

Intermediaries Banks Mutual Funds Insurance Cos. NBFCs Prov. Funds

Investors Firms Govt.

Principal + Returns (Hopefully!)

The Context
Institutions
Banks

Markets
Equity Debt Money

Development Fin Institutions Non Banking Finance Cos Insurance Cos

Primary

Secondary

Derivatives

Non Banking Financial Institutions

A fairly well developed network of non banking financial institutions. Fund based Institutions. -

-All India financial institutions :IDBI, ICICI, IFCI etc. -Investment Institutions :Insurance Companies & Mutual Funds -Small Scale Financing - Small Industries Development Bank Of -India (SIDBI) -Export Import Financing - EXIM Bank Of India -State Level
State Finance Corporations (SFCs) : Eg., KSFC, MSFC and GSFC State Industrial Development & Investment Corporations (SIDCs): Eg., KSIDC, SIICOM, GIIC -Other non banking institutions Leasing and Hire Purchase Companies Investment Companies Venture Capital Funds Non fund based financial intermdiaries Merchant (Investment) bankers provide advice on making and share debenture issues & advise on strategic corporate financial initiatives Brokers : Help in trading in shares, debentures and other securities Portfolio Managers and Advisers : Provide investment advise

Two Views of the Financial Markets

Capital Market : Securities of > one year maturity Banks, Financial Institutions, Mutual Funds, Stock Exchanges, Other private investors such as venture capital funds Money Markets : Deals with instruments of less than one years maturity Call Money Market - Overnight funds Commercial Paper Market - 3 to 12 month maturity typically Govt. Securities Markets Primary Market : Deals with new or first time issue of securities Secondary : Subsequent purchase and sale of securities.

Stock Exchanges
Most important institutions in the Indian Capital Markets Forum for buying and selling equity, debt and convertible instruments, collectively referred to as securities Recently introduced trading of derivatives Performs both primary and secondary market functions Provides funds to firms and liquidity to investors NSE, BSE, OTCEI and 20 other regional SEs Shares have to be listed in order to be traded. In order to be listed companies have to make an Initial Public Offering (IPO). Listing and trading of shares governed by Securities Contracts Regulation Act (SCRA) and listing guidelines of SEs. IPO process governed by SEBI guidelines Bulk of trading activity is in equities Secondary debt market in India is relatively underdeveloped SEBI guidelines to protect investors increase difficulty to make IPOs : Profits + Min. Networth of Rs 10 mn. in 3 out of 5 preceding years Minimum paid up capital of Rs 10 crore for listing on BSE Min paid up capital Rs 5 crores + networth of Rs 25 crores on NSE Min paid up capital of Rs 5 crores on regional Stock Exchanges

Regulatory Framework in India

Statutes Indian Contract Act, 1872 Indian Companies Act, 1956 Securities Contracts Regulation Act, 1956 Securities and Exchange Board of India Act, 1992 Depositories Act,1996 Reserve Bank Of India Act, 1934 Public Debt Act, 1944 Bye Laws of various SEs Certain Industry Specific Acts such as Banking Companies Act, 1949 Indian Electricity Act 1910, Electricity Supply Act, 1948 Institutions Securities and Exchange Board of India Central Listing Authority Stock Exchanges Various company law authorities such as Company Law Board and Dept of Company Affairs Reserve Bank Of India

RBI Role, in brief

Legislations Public Debt Act 1944 - Issue & Service of government debt RBI Act 1934 - RBI sole manager of Public Debt Securities Contract Regulation Act, 1956 Allocation of regulatory responsibility RBI responsible for G-sec and money markets, derivatives based on these securities and all types of repos Indian Contract Act 1872 Companies Act 1956 SEBI Act 1992 Banking Regulation Act 1949 Issuance and trading of G-Secs Regulation of Banks Investments Levers Investment Approval and Transactions Valuation Capital Adequacy Regulation of Primary Dealers Regulation of FIs (Valuation / classification, not investments / portfolio) Regulation of Fixed Income Derivatives Regulation of Corporate Debt Market