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Indian Financial System

Study Material > Economics
  • Financial system is an arrangement which facilitates the process of transferring financial resources from from savers to the investors. With financial resources, the investors develops productive assets in the country viz, land, buildings plants and machineries.
  • The financial system transfers the financial resources from savers to investors in two ways :-
    1. By mobilization of resources:- Financial system mobilizes savings of numerous small investors to make them available for productive purposes.
    2. By intermediation:- By intermediating between savers and investors to enable transfer from surplus units,that is savers, to deficit units that is investors, who buy physical assets with those savings.
  • For undertaking both of these functions namely intermediation and mobilization of savings - a large network of financial institutions exist. These institutions form the foundation of the financial system. In course of time, the financial the financial system has expanded and strengthened financial intermediation.

Structure of the financial sector

  • Financial sector in India comprises of:-
    1. Financial assets
    2. Financial markets
    3. Financial intermediaries or Financial Institutions

Financial assets

  • It include unit shares, debentures, certificate of deposits, life insurance policies etc. These are the instruments traded in the financial markets through financial intermediaries.

Financial intermediaries or Financial Institutions

  • Financial Institutions are primarily engaged in the collection and mobilization of Savings and converting it into investment. Financial Institutions include all banks and non-banking Financial Institutions.

 

 

Financial markets

  • Financial market is a broad term describing any market place where trading of securities including equities, bonds currencies and derivatives occurs. Financial markets are classified into:- 
    1. Money market for short term funds(For period less than 1 year)
    2. Capital market for long term funds (For period more than 1 year)

Money Market

  • Indian Money market is among the emerging money markets of the world. It is further sub divided into:- 
    1. Organised Money Market
    2. Un-Organised Money Market

 Un-Organised Money Market 

  • This is comparatively an older money market of India. There is no systematic regulatory framework for them. It includes traditional sources like indigenous bankers, and money lenders.
  • Indigenous bankers are individual firms which receive deposits and give loans and thereby operate as banks. Their activities are not regulated and so, they belong to unorganised segment of the money market.
  • Money lenders are normally individuals but they are heterogeneous in nature.
  • In the absence of institutional sources, the money lenders were dominant players in the Indian rural areas before and after the Independence.
  • The unorganised form of lending is criticized due to its exploitative nature and very high rates of interest. Despite of various measures taken by the government and the Reserve Bank of India, dependence on unorganised form of credit has not come down.

Organised Money Market

  • The organised sector of the money market in India includes the Reserve Bank of India, commercial banks including Indian private banks and foreign banks, specified Financial Institutions and sub-markets of the money market. But the main constituents of the organised sector of money markets are the sub markets of the money market. These are: 
    1. Call money/noticemoney/term money market 
    2. Treasury Bill market
    3. Commercial Bill market
    4. Certificate of Deposit Market
    5. commercial paper market
    6. The REPO Market

 

 

Need for money market

  • Long term investments in the form of productive assets are prerequisite condition for the growth of an economy. Funds for long term investments are raised through: 
    1. Borrowings from the banks or the Financial Institutions or 
    2. Through the security market by issuing shares or debentures.
  • These long term funds are supplied by Capital market. In business processes there is always a need of short funds which fulfills the need of day-to-day fund mismatch for the continuous production process.
  • These short term funds are supplied through money market. Hence in a healthy economy both capital market and money market go hand in hand.

Functions of Money Maket

  • Money market helps in effective implementation of the RBI’s monetary policy.
  • Money market helps to maintain demand and supply equilibrium with regard to short term funds.
  • They cater to the short term fund requirements of the government.
  • They help in maintaining liquidity in the economy.

 Instruments of money market

  • Call money/Notice money/Term money :- 
    1. Call Money:- If the borrowing or lending of funds is for one day it is called call money.
    2. Notice Money:- If the borrowing or lending of funds is for 2 to 14 days it is called notice money.
    3. Term Money: - If the borrowing or lending of fund is for more than 14 days it is called term money.
  • Note:- Market where these instruments are traded are called call/notice/term money market.

Treasury Bill

  • There are two types of bills viz treasury bills and commercial bills. Treasury bills ot T bills are issued by the central government, commercial bills are issued by the Financial Institutions.
  • Treasury bills are basically instruments for short term (maturity is less than 1 year) borrowing by the Government of India, issued as promissory notes under discount. It is issued by the Reserve Bank of India on behalf of the Government of India.
  • The interest received on them is the discount, which is the difference between the price at which they are issued and their redemption value. These are the lowest risk category instruments for the short term.
  • Need for Issuing Treasury Bill: The necessity for issuing treasury bills .arises because of the periodic nature of receipts of Government while the Government expenditure is on a continuing basis. Taxes are payable to the Government after quarterly intervals or so, but Government has to meet its expenditure on daily or monthly basis. Thus, to bridge this mis-match between the timings of Government receipts and expenditure, Government borrows money on short-term basis by issuing Treasury Bills.
  • Types of treasury bills: There are four types of treasury bills
    1. 14 days T-bill
    2. 91 days T-bill
    3. 182 days T-bill
    4. 365 days T-bill
  • In recent time RBI has been issuing only 91 days and 365 days T bills. The Treasury Bills are sold through auctions.
  • States are not allowed to issue treasury bills.
  • Banks are the major buyers of treasury bills in India as they are allowed to keep their Statutory Liquidity ratio (SLR) in the form of treasury bills.
  • Treasury bills are also used for Open Market Operations (OMO) by the RBI.

Commercial bills

  • The Commercial bills are issued by the All India Financial Institutions, Non Banking Finance Companies, Scheduled Commercial Banks, Merchant Banks, Co-operative Banks and the Mutual Funds.
  • Commercial bills of exchange are Negotiable Instruments drawn by the seller or drawer of the goods on the buyer or drawee of the good for the value of the goods delivered. These bills are called Trade Bills this Trade bills are called commercial bills, when they are accepted by commercial banks. Commercial Bills are tradable in the market. Commercial bill market is not very developed in India and the traders still depend on traditional modes of payment.
  • Commercial Bill of Exchange is a negotiable instrument i.e. it may be negotiated (or endorsed/transferred) any number of times till its maturity. When the discounting bank falls short of liquidity, it may negotiate the bill in favour of any other bank/financial institution or the Reserve Bank of India and may receive payment of the bill less re-discounting charges (i.e. interest for the unexpired period of the bill). This process is called re-discounting of Commercial Bills and may be undertaken several times, till the date of maturity of the bill.
  • But important pre-conditions are that the bill should arise out of a genuine trade transaction, must be accepted by the buyer's banker either singly or jointly with him and the period of maturity should not exceed 90 days.
  • Commercial bill of exchange, thus, is an instrument through which the banks/financial institutions/mutual funds may park their surplus funds for a shorter period as they can afford. Thus liquidity imbalances in the financial system are removed or minimised.
  • Treasury bills and commercial bills are similar type of instruments but the difference is that treasury bill is a public instrument used by the Government of India while commercial bills are private instruments used by the private sector.

Certificate of Deposit (CD)

  • Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form or as a Usance Promissory Note against funds deposited at a bank or other eligible financial institution for a specified time period. Certificates of Deposit (CDs) were introduced in India in 1989.This is the next lowest risk category investment option. Certificate of Deposit were one of RBI’s measures to deregulate the cost of funds for banks and Financial Institutions (FIs). Minimum amount of a CD should be Rs.1 lakh.
  • Some features of Certificate of Deposit 
    1. Certificate of Deposit can be issued by
      1. Scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks}; and
      2. Select All-India Financial Institutions (FIs) that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.
    2. Investors:- CDs can be issued to individuals, corporations, companies (including banks and PDs), trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also subscribe to CDs, but only on non-repatriable basis, which should be clearly stated on the Certificate. Such CDs cannot be endorsed to another NRI in the secondary market.
    3. Maturity:- The maturity period of Certificate of Deposits issued by Banks may range from 3 months to 12 months while those issued by specified Financial Institutions may range from 1 to 3.
    4. CDs in physical form are freely transferable by endorsement and delivery. CDs in demat form can be transferred as per the procedure applicable to other demat securities. There is no lock-in period for the CDs.
    5. Banks / FIs cannot grant loans against CDs. Furthermore, they cannot buy-back their own CDs before maturity. 
    6. Banks / FIs should issue CDs only in dematerialised form. However, according to the Depositories Act, 1996, investors have the option to seek certificate in physical form.
    7. These are similar to fixed deposit instruments but have some special features.
    8. CDs were one of RBIs measures to deregulate the cost of funds for banks and FIs.
    9. Certificate of Deposits are to be issued at a discount to the face value.
  • Certificate of Deposits are a popular avenue for companies to invest their short-term surpluses because Certificate of Deposits offer n risk-free investment opportunity at rates of interest higher than Treasury bills and term deposits, beaides being fairly liquid. For the Issuing Banks, Certificate of Deposits provide another source of mobilizing funds in

Commercial Paper (CP)

  • Commercial Paper is a short-term usance promissory note with fixed maturity, issued by creditworthy and highly rated corporations. It is negotiable by endorsement and delivery.
  • It was introduced in India in 1990 on the recommendation of the Vaghul committee.
  • It was introduced in India in 1990 with a view to enabling highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors. Subsequently, primary dealers and all-India financial institutions were also permitted to issue CP to enable them to meet their short-term funding requirements for their operations.
  • CP can be issued either in the form of a promissory or in a dematerialised form through any of the depositories approved by and registered with SEBI. Banks, FIs and PDs can hold CP only in dematerialised form.
  • Methods of Issuing Commercial Paper: Only Scheduled Banks can act as issuing and paying agents. CPs can be issued as a promissory note or in a dematerialised form. Underwrit is not permitted. CPs are issued at a discount to face value. Discount rate is freely determined by the issuing company. CPs are freely transferable.
  • Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are eligible to issue CP. A corporate would be eligible to issue CP provided –
    1. The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore.
    2. Company has been sanctioned working capital limit by bank/s or all-India financial institution/s; and
    3. The borrowal account of the company is classified as a Standard Asset by the financing bank/s/ institution/s.
  • All eligible participants shall obtain the credit rating for issuance of Commercial Paper either from Credit Rating Information Services of India Ltd. (CRISIL) or the Investment Information and Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such other credit rating agency (CRA) as may be specified by the Reserve Bank of India from time to time, for the purpose. The minimum credit rating shall be A- [As per rating symbol and definition prescribed by Securities and Exchange Board of India (SEBI)].
  • CP can be issued for maturities between a minimum of 7 days and a maximum of up to one year from the date of issue.However,the maturity date of the CP should not go beyond the date up to which the credit rating of the issuer is valid.
  • Individuals, banking companies, other corporate bodies (registered or incorporated in India) and unincorporated bodies, Non-Resident Indians (NRIs) and Foreign Institutional Investors (FIIs) etc. can invest in CPs. However, investment by FIIs would be within the limits set for them by Securities and Exchange Board of India (SEBI) from time-to-time.
  • Scheduled Commercial Banks have been the predominant investors in CPs

Banker's Acceptance (BA)

  • A banker's acceptance (BA) is a short-term debt instrument issued by a company that is guaranteed by a commercial bank. Banker's acceptances are issued as part of a commercial transaction.
  • These instruments are similar to T-Bills, are frequently used in money market funds and are traded at a discount from face value on the secondary market, which can be an advantage because the banker's acceptance does not need to be held until it matures.

Repurchase Agreement

  • Repurchase agreement is also know as Repo.It is a money market instrument .In this one party sell his asset usually government securities  to other party and agreed to buy this asset on future agreed date . The seller pays an interest rate, called the repo rate, when buying back the securities. This is like a short term loan given by buyer of security to seller of security to meet immediate financial needs.

Participants in Money Market

  • The major participants who supply the funds and demand the same in the money market are as follows:
    1. Reserve Bank of India: Reserve Bank of India is the regulator over the money market in India. As the Central Bank, it injects liquidity in the banking system, when it is deficient and contracts the same in opposite situation.
    2. Banks: Commercial Banks and the Co-operative Banks are the major participants in the Indian money markat. They mobilise the savings of the people through acceptance of deposits and lend it to business houses for their short term working capital requirements. While a portion of these deposits is invested in medium and long-term Government securities and corporate shares and bonds, they provide short-term funds to the Government by investing in the Treasury Bills. They employ the short-term surpluses in various money market instruments.
    3. Discount and Finance House of India Ltd. (DFHI): Discount and Finance House of India (DFHI) was set-up by the Reserve Bank of India jointly with public sector banks and All-India Fipancial Institutions. It was incorporated on 3 March 8, 1988 under the Companies Act, 1956 and commenced its business operatians from April 25, 1988. , The main objective of establishing DFHI was "to facilitate the smoothening of the short-term liquidity imbalances by developing an active money market, and integrating the various segments of the money market." Discount and Finance House of India Ltd. provides liquidity in the money 'market by dealing in the money market instruments, including Treasury Bills. It deals in Treasury Bills in the primary market and secondary market as well.DFHI deals both ways in the money market instruments. Hence, it has helped in the growth of secondary market, as well as those of the money market instruments.
    4. Financial and Investment Institutions: These institutions (eg. LIC, UTI, GIC, Development Banks, etc.) have been allowed to participate in the call money market as lenders only.
    5. Corporates: Companies create demand for funds from the banking system. They raise short-term funds directly from the money market by issuing commercial paper. Moreover, they accept public deposits and also indulge in intercorporate deposits and investments. 
    6. Mutual Funds: Mutual funds also invest their surplus funds in various money market instruments for short periods. They are also permitted to participate in the Call Money Market. Money Market Mutual Funds have been set up specifically for the purpose of mobilisation of short-term funds for investment in money market instruments.

Indian Capital Market

  • The process of industrial growth requires the development of the capital market, which provides, long-term finance to entrepreneurs. The capital market is a wide term and includes all transactions involving long-term funds.
  • The development banks, commercial banks, financial institutions and stock exchanges, are its important components. The Securities and Exchange Board of India (SEBI) is the regulator over the Capital Market.
  • The demand for long term capital comes predominantly from private sector manufacturing industries, agriculture sector, trade and the government agencies, while the supply of funds for the capital market comes largely from individual and corporate savings, banks, insurance companies, specialized financing agencies and the surplus of governments. The Indian capital market is broadly divided into the Gilt-edged Market and the Industrial Securities Market.
  • In the capital market, we largely deals with the securities such as equity shares, preferential shares, bonds and debentures issued by corporate, semi-Government organizations and Governments.
  • Indian capital market is broadly divided into: 
    1. Gilt-edged Market and
    2. Industrial Securities Market.

Gilt-edged Market

  • The market for the sale and purchase of government and semi-government securities, backed by the Reserve Bank of India.
  • The term Gilt-edged means ‘of the best quality’ as the risk of default by the government is negligible, and these securities are highly liquid hence called gilt-edged securities.
  • The open market operations of the RBI are also conducted in such securities.

Industrial securities market

  • It refers to the market which deals in equities and debentures of the corporate. It is further divided into:
    1. Primary market:- In this market new issues of the companies are purchased and sold.
    2. Secondary market:- This is the market for buying and selling of existing companies.

Primary Market

  • The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time.

Methods of floatation of new issues

  • There are three ways in which a company may raise capital in the primary market.
    • Public Issue
    • Rights Issue
    • Private Placement
  • Public Issue: The most important mode of issuing securities is by issuing prospectus to the public. If the issue has been made for the first time, by a corporate body, it is known as Initial Public Offer (IPO).
  • Rights Issue: A rights issue involves selling securities in the primary market by issuing rights to the existing shareholders. In this method the company gives the privilege to its existing shareholders for the subscription of the new shares on pro rate basis.
  • Private Placement: A Public Issue is a costly affair involving Press advertisements, brokers, fees and Press conference, etc. Therefore, some of the companies find it easy and cheaper to raise funds through private placement of bonds and shares. In this method, the securities are issued to some selected investors like banks or financial institutions. The private placement agreement is undertaken when the issue size is not very big and the issuer does not want to spend much, on floating the issue.

    Secondary Market

  • The secondary market of securities is an important component of the capital market. It is the market where shares, bonds, debentures and other securities are traded. Once these securities are floated, subscribed to and issued to the public, they are traded in the secondary market, which is called 'Stock Market'. 

Stock Exchange

  • Stock exchange is the market for already issued(secondary) shares, debentures, semi-government bonds and other securities. There are a number of stock exchanges in the country. Bombay Stock Exchange (BSE) is the oldest Stock Exchange in Asia and established in 1875. It is synonymous with Dalal Street. During the last decade, National Stock Exchange (NSE) with its wide network across the country, has become the premier stock exchange in the country. Another new nation-wide exchange is 'Over The Counter Exchange of India (OTCEI).
  • Two types of transaction takes place in stock exchange. These are 
    1. Investment Transaction: Sale/Purchase of securities undertaken with the long-term prospect relating to their yield and price.
    2. Speculative Transaction: Sale/Purchase of securities undertaken with short-term gain from differences in yield and price. In this, delivery of securities or the payment of full price is rare. Speculative transaction are of different type:
      1. Spot transaction.
      2. Cash transaction.
      3. Forward transaction.
  • On the recommendation of the Narshimhan Committee, SEBI was given the power to control and regulate the new issues market as well as stock exchange through Amendment of the Capital Issues Control Act, 1947.
  • List of Stock Exchanges in the country :
    1. UP Stock Exchange, Kanpur.
    2. Vadodara Stock Exchange, Vadodara.
    3. Coimbatore Stock Exchange, Coimbatore.
    4. Bombay Stock Exchange, Mumbai.
    5. Over the Counter Exchange of India, Mumbai.
    6. National Stock Exchange, Mumbai.
    7. Ahmedabad Stock Exchange, Ahmedabad.
    8. Bangalore Stock Exchange, Bangalore.
    9. Bhubhaneshwar Stock Exchange, Bhubhaneshwar.
    10. Calcutta Stock Exchange, Kolkata.
    11. Cochin Stock Exchange, Cochin.
    12. Delhi Stock Exchange, Delhi.
    13. Guwahati Stock Exchange, Guwahati.
    14. Hyderabad Stock Exchange, Hyderabad.
    15. Jaipur Stock Exchange, Jaipur.
    16. Canara Stock Exchange, Mangalore.
    17. Ludhiana Stock Exchange, Ludhiana.
    18. Chennai Stock Exchange, Chennai.
    19. MP Stock Exchange, Indore.
    20. Magadh Stock Exchange, Patna.
    21. Pune Stock Exchange, Pune.
    22. Saurashtra Stock Exchange, Rajkot.
    23. Capital Stock Exchange Kerala Ltd. Thiruvananthapuram.

Commodities exchange 

  • A commodities exchange is an exchange where various commodities and derivatives products are traded. Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them.
  • These contracts can include spot prices,  forwards,  futures  and  options on futures. Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.
  • There are several stock exchanges in India and major of them are as follows:
    1. Multi Commodity Exchange of India Limited (MCX)
    2. National Commodity and Derivative Exchange Limited (NCDEX)
    3. Indian National Multi-Commodity Exchange (NMCE)
    4. Indian Commodity Exchange Limited (ICEX)

National Stock Exchange (NSE)

  • On the basis of the recommendations of high powered Pherwani Committee, the National Stock Exchange was incorporated in November, 1992, by Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of India (ICICI), Industrial Finance Corporation of India (IFCI), all insurance corporations, selected Commercial Banks and others. In April, 1993, it was recognized as a stock exchange and commenced operations in 1994. In October, 1995, NSE became largest stock exchange in the country.

Bombay Stock Exchange (BSE)

  • Established in 1875, BSE is Asia's first stock exchange and one of India's leading exchange groups. Over the past 137 years, BSE has facilitated the growth of the Indian corporate sector by providing it and efficient capital raising platform.
  • Around 5000 companies are listed on BSE making it world's number one exchange in terms of listed members.
  • BSE is first exchange in India and second in the world to obtain an ISO 9001:2000 certification.
  • The Bombay Stock Exchange launched BSE Carbonex, the first carbon based thematic index in the country. Which takes a strategic view of organisational commitment to climate change mitigation. This Index has been launched with the aim of creating a benchmark and increasing awareness about the risks posed by the climate change.

Over The Counter Exchange of India (OTCEI)

  • Lack of liquidity and transparency long settlement periods and benami transactions are a few examples adversely affected investors. In order to overcome this inefficiencies, OTCEI was incorporated in 1990, under the Companies Act, 1956. OTCEI is the first screen based Nationwide Stock Exchange in India created by Unit Trust of India (UTI), Industrial credit and Investment Corporation of India (ICICI), Industrial Development Bank of India (IDBI), SBI capital markets, Industrial Finance Corporation of India (IFCI) General Insurance Corporation (GIC) and its subsidiaries and Bank Financial Services.

Financial Benchmarks

  • Financial benchmarks are standard rates primarily used for pricing, valuation and settlement purposes in financial markets and contracts. These rates like interest rate or foreign exchange rate are followed by several institutions and countries in financial transactions. For example, the LIBOR or London Inter Bank Offer Rate is the standard interest rate that some of the world’s leading banks charge themselves when taking and giving loans in European markets. The LIBOR is relevant for financial markets in different countries and across different currencies including the Pound Sterling, US Dollar, Japanese Yen etc. It is the world’s most widely-used benchmark for short-term interest rates -say upto one year.
  • The relevance of LIBOR is not just confined to those who takes such short-term loans. For example, if an Indian company is borrowing from the European market (bank), the interest rate it has to pay is usually estimated based upon the LIBOR rate.
  • Here, the Indian company has to pay an interest rate of LIBOR rate plus the coverage for the risk that the European lender has to bear.

Benchmark interest rates in India: MIBOR and MIBID

  • In India, there are several such benchmarks for interest rate, foreign exchange rate etc. The MIBOR (Mumbai Interbank Offer Rate) and MIBID (Mumbai Interbank Bid Rate) are the two interest rate benchmarks in the Indian Interbank market where most of the transactions are done in Mumbai. Following are some of the snapshot points about these two rates.
  • MIBOR and MIBID are interest rate benchmarks.
  • Both are benchmark interest rate prevailing in Mumbai Inter-Bank Money Market.
  • MIBOR is the Indian equivalent of LIBOR.
  • MIBOR is loan interest rate; it is the rate at which a lender would like to charge.
  • MIBID is the interest rate that a borrower like to pay while getting a loan.
  • MIBOR is the offer rate. Or it is the rate at which the lender offer loans on the other hand, MIBID is the bid rate or the rate at which a borrower seeks a loan.
  • MIBOR is the rate offered/asked by lenders whereas MIBID is the bid rate quoted by borrowers. Both offer and bid are part of loan obtaining activities.

Mumbai Inter-Bank Offer Rate (MIBOR)

  • MIBOR is the interest rate that a bank is willing to charge from a borrower in the Mumbai Interbank money market (which is spread all across India).Effectively MIBOR is the average interest rate charged by banks from other banks (usually for loans on very short term like one or one month etc.). There are different short term MIBOR loan schemes extending from fixed overnight (One day) to 3-month funds.  The interest rates are published every day. This rate is given to first class borrowers and lending institutions, and is based on an average of lending rates offered by major banks throughout India.
  • MIBOR is calculated on the basis of data collected from the panel of 30 banks and primary dealers.
  • The significance of MIBOR as a benchmark interest rate is that it can be used as a standard by other lenders in various financial markets while fixing the interest rate on loans. For example, a bank can fix its lending rate for a corporate based on MIBOR plus an additional rate depending upon the riskiness of the borrower. This is the significance of MIBOR. But MIBOR is yet to be developed as a financial benchmark for lending.

MIBID

  • MIBID is the rate at which banks would like to borrow/take loans from other banks. Hence, MIBID is quoted by borrower banks to obtain funds. In this context, MIBID rate would be lower than the MIBOR rate (as there is difference between lending rate and deposit rate).
  • The function of both MIBOR and MIBID is to act as financial benchmarks. Here, the MIBID/MIBOR rate is used as bench mark rate for majority of deals struck in the derivative market. The rate/value of Interest Rate Swaps (IRS), Forward Rate Agreements (FRA), Floating Rate Debentures and Long Term Deposits are determined on the basis of MIBOR/MIBID.

LIBOR(London Inter-Bank Offered Rate)

  • It is the average of interest rates provided by leading banks in London that they would be charged if borrowing from other banks. It is used as a global benchmark interest rate by many banks around the world.

Sources of Capital

  • Share capital: Capital raised through issue of shares is called share capital. According to the provisions of the Indian Companies Act 1956, every company has the right to raise capital through issue of shares.
  • Debentures: Company can also issue debentures for raising capital. Debentures are debt instruments. In debentures, maturity period and interest rate is pre-decided.
  • Merchant Bank: Merchant banks are financial intermediaries between investors and entrepreneurs. They provide services like management of new issues, arrangement of loan, financial advice etc.
  • Leasing and Hire-purchase Companies: This type of financial institutions is especially helpful in small and medium enterprise sector. Their working is flexible and suits these type of enterprises for their diversified needs.
  • Mutual Funds: Mutual funds are specialized financial entities involved in collecting small savings from investors and then investing it in the financial market.
  • Venture Capital Funds: It is a type of fund, which provides early stage, high risk, high growth potential, startup companies, and their funding requirements. These funds usually invest in companies with a novel technology or in high technology industries. Venture capital can also include managerial and technical expertise. The Venture capital funds are important in any country because they provide the opportunity to entrepreneurs to take risk and enter into areas which otherwise not explored.
  • Angel Investor: It is an individual with large financial resources, who provides capital to a business startup in exchange of equity or convertible debt. They provide the initial seed money or ongoing support to the company to carry it through difficult times. They are more interested in helping the business succeed than making super-profits and in this sense, they are different from venture capital. Usually, Angel Investors belong to the entrepreneurs family or friends.
  • Hedge Fund: It is an aggressively managed portfolio of investments that uses advanced investment strategies such as long, short, leveraged and derivative positions in both domestic and international markets to generate high returns. Hedge funds are typically not open for investment to the general public and only accept investments from a small group of people, who can provide very large initial minimum investment.
  • Sovereign Wealth Fund: It is a pool of money derived from a country's financial resources. For the purpose of investing in areas, which will benefit the country's economy and people in the future. The funding for a sovereign wealth fund comes from the accumulated reserves with a country's Central Bank, due to budget and trade surpluses.
  • Non Bank Financial Companies (NBFC): NBFCs help in giving liquidity to the capital market. Further, NBFCs also lend to investors for investing in capital market.

Regulatory Framework

  • In India, the Capital market is regulated by the Capital Markets Division of the Department of Economic Affairs, Ministry of Finance.
  • SEBI: SEBI came into existence through a Resolution of the Government of India dated 12th April, 1988. Later, it acquired statutory recognition and status after the enactment of the Securities and Exchange Board of India Act, 1992. SEBI has been constituted as a corporate body.

Functions of SEBI

  • SEBI has been designated as the sole regulatory authority over the securities market. It has been entrusted with the duty-
    1. To protect the interests of investors in securities.
    2. To promote the development of securities market.
    3. To regulate the securities market.
    4. To prohibit fraudulent and unfair trade practices in securities market.
    5. To promote awareness among investors and training of intermediaries about safety of market.
    6. To prohibit insider trading in securities market.
    7. To regulate huge acquisition of shares and takeover of companies.

Reforms in Capital Market of India

  • The capital market has witnessed major reforms in the 1990s and thereafter. It is on the verge of growth. Thus, the Government of India and SEBI have taken a number of measures in order to improve the working of the Indian Stock Exchanges and to make it more progressive and vibrant.
  • The major reforms undertaken include:
    1. SEBI: SEBI was primarily set up to regulate the activities of the merchant banks, to control the operations of mutual funds, to work as a promoter of the stock exchange activities and to act as a regulatory authority of new issue activities of companies. The SEBI was set up with the fundamental objective, “to protect the interest of investors in securities market and for matters connected therewith or incidental there to.”
    2. Credit Rating Agencies: Three credit rating agencies viz the Credit Rating Information Services of India Limited (CRISIL-1998), the Investment Information and Credit Rating Agency of India Limited (ICRA-1991), and Credit Analysis and Research Limited (CARE) were set up in order to assess the financial health of different financial institutions and agencies related to the stock market activities.
    3. Merchant Banking Activities: Many Indian and foreign Commercial Banks have set up their merchant banking divisions in the last few years. These divisions provide financial services such as underwriting facilities, issue organising, Consultancy Services etc. It has proved as a helping hand to factors related to the capital market.
    4. Growth of Electronic Transactions: Due to technological development in the last few years, the physical transaction with more paperwork is reduced. Now, paperless transactions are increasing at a rapid rate. It saves money, time and energy of investors. Thus, it has made investing safer and hassle-free encouraging more people to join the capital market.
    5. Growing Mutual Fund Industry: The growing of mutual funds in India has certainly helped the capital market to grow.
    6. Growing Stock exchanges: The growth of Stock Exchanges in India is increasing. Initially the BSE was the main exchange, but now after the setting up of the NSE and the OTCEI, Stock Exchanges have spread across the country.
    7. Insurance sector reforms: Indian Insurance sector has also witnessed massive reforms in last few years. The Insurance Regulatory and Development Authority(IRDA) was set up in 2000. It paved the entry of the private insurance firms in India. As many insurance companies invest their money in the capital market, it has expanded.
    8. Commodity trading: Along with trading of ordinary securities, the trading in commodities is also recently encouraged.
  • Apart from these reforms, the setting up of Clearing Corporation of India Limited(CCIL), venture funds etc, have resulted into the tremendous growth of Indian Capital Market.

Unit Trust of India

  • Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. 
  • It was set up to mobilises savings of small investors through sale of units and channelizes them into corporate investments mainly by way of secondary capital market operations.

Some famous world’s stock Indices

1

NewYork Stock Exchange

United States

2

NASDAQ

United States

3

London Stock Exchange

United Kingdom

4

Tokyo Stock Exchange

Japan

5

Frankfurt Stock Exchange

Germany

6

Shanghai Stock Exchange

China

7

BME Spanish Exchanges

Spain

8

Italian Stock Exchange

Italy

9

Hong Kong Stock Exchange

China S.A.R.

10

Shenzhen Stock Exchange

China

11

Korea Exchange

Korea

12

SWX Swiss Exchange

Switzerland

13

Toronto Stock Exchange

Canada

 


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