Financial Services Introduction

2. Finance
The term "finance" in our simple understanding
it is perceived as equivalent to 'Money'. We read about
Money and banking in Economics, about Monetary
Theory and Practice and about "Public Finance". But
finance exactly is not money, it is the source of
providing funds for a particular activity. Thus public
finance does not mean the money with the
Government, but it refers to sources of raising
revenue for the activities and functions of a
Government.

3. The Indian financial system comprises a set of financial
institutions, financial markets and financial infrastructure.
Moreover, the economic development of a nation is reflected
by the progress of the various economic units, broadly
classified into corporate sector, government and household
sector. While performing their activities these units will be
placed in a surplus/deficit/balanced budgetary situations.
There are areas or people with surplus funds and there are
those with a deficit. A financial system or financial sector
functions as an intermediary and facilitates the flow of funds
from the areas of surplus to the areas of deficit. A Financial
System is a composition of various institutions, markets,
regulations and laws, practices, money manager, analysts,
transactions and claims and liabilities.
Indian Financial System

4. Flow of Financial System

5. The word "system", in the term "financial system",
implies a set of complex and closely connected or
interlined institutions, agents, practices, markets,
transactions, claims, and liabilities in the economy. The
financial system is concerned about money, credit and
finance-the three terms are intimately related yet are
somewhat different from each other. The activities
include production, distribution, exchange and holding
of financial assets of different kinds by financial
institutions, banks and other intermediaries of the
market. In nutshell, financial market, financial
assets, financial services and financial institutions
constitute the financial system.
Financial System

6. Broadly, organizational structure of financial
system includes of the following three components
Financial Markets
Financial Institutions & Intermediaries
Financial Products
Structure of Financial System
Syste

7. A Financial Market can be defined as the
market in which financial assets are created or
transferred. As against a real transaction that
involves exchange of money for real goods or
services, a financial transaction involves
creation or transfer of a financial asset.
Financial Assets or Financial Instruments
represents a claim to the payment of a sum of
money sometime in the future and /or periodic
payment in the form of interest or dividend.
Financial Markets

8.  Money Market - The money market is a wholesale debt market
for low-risk, highly-liquid, short-term instrument. Funds are
available in this market for periods ranging from a single day up
to a year. This market is dominated mostly by government,
banks and financial institutions.
 Capital Market - The capital market is designed to finance the
long-term investments. The transactions taking place in this
market will be for periods over a year.
 Forex Market - The Forex market deals with the multicurrency
requirements, which are met by the exchange of
currencies. Depending on the exchange rate that is applicable,
the transfer of funds takes place in this market. This is one of
the most developed and integrated market across the globe.
 Credit Market - Credit market is a place where banks, FIs and
NBFCs purvey short, medium and long-term loans to corporate
and individuals.
Continued….

9. The Securities market has again classified into
TWO interdependent and inseparable segments; they
are
Primary Market: It is also termed as New Issue Market,
provides channel for sale of new securities.
Secondary Market: It is a platform for purchase and
sale of securities by investors. Securities previously
issued are dealt in secondary market
Continued….

10. Constituents of a Financial
System

11. Having designed the instrument, the issuer
should then ensure that these financial assets reach
the ultimate investor in order to garner the requisite
amount. When the borrower of funds approaches the
financial market to raise funds, mere issue of
securities will not suffice. Adequate information of
the issue, issuer and the security should be passed on
to take place. There should be a proper channel
within the financial system to ensure such transfer. To
serve this purpose, Financial intermediaries came
into existence.
Financial Institutions &
Intermediaries

12. This service was offered by banks, FIs, brokers,
and dealers. However, as the financial system
widened along with the developments taking place
in the financial markets, the scope of its operations
also widened. Some of the important
intermediaries operating ink the financial markets
include; investment bankers, underwriters, stock
exchanges, registrars, depositories, custodians,
portfolio managers, mutual funds, financial
advertisers financial consultants, primary dealers,
satellite dealers, self regulatory organizations, etc.
Continued….

13. Financial Institutions are broadly classified into FOUR
categories; they are
 Development Financial Institutions:
National Level Banks - IDBI, IFCI, ICICI, SIDBI.
Regional Level Banks – SFC, SIDC.
 Commercial Banks – Public, Private & Foreign
 Non Banking Financial Companies – Loans, Venture Capital,
Leasing, Hire purchase, Housing, M & A etc.
 Insurance Organization – LIC & GIC
GIC has four subsidiaries i.e. National Insurance, New India
Assurance Co. Ltd. United India Assurance Company
Limited & Oriental Insurance.
Continued…..

14. The Indian financial system witnessed a
significant growth in new financial instruments.
The attraction of the instruments for both the
corporate sector and the investor lies in that on
one hand investor gets a reasonable return and
issuer gets credit on reasonable terms. A wide
instruments are available in Indian financial
markets.
Financial Products

15. The legislative framework before SEBI came into
being consisted of three major Acts governing the capital
markets;
Capital Issues (Control) Act, 1947
Companies Act, 1956
Securities Contracts (Regulation) Act, 1956
Public Debt Act, 1942
Income Tax Act, 1961
Banking Regulation Act, 1949
Market Regulation

16. Government’s approval is mandatory for companies to
tapping household savings
Modification in regulation from time to time for raising
capital for national resources.
Central Government determine the amount, types and
price of the issue.
Cancelled and Replaced by SEBI Act in 1992
Capital Issues (Control) Act 1947

17.  All aspects of Company from Formation to Winding – Up
 Deals with New issue, Allotments and transfer of securities and various aspects
relating to Company management.
 Standard Disclosure to Public , Investors Community to avoid risk factor.
 Regulates Underwriters in Premium, Discount, Bonus Issue, Right Issue, Payment
of Dividends, Supply of Annual Reports and other Information to Companies
Drawbacks
 Split into various agencies and their provisions scattered into number of status
 Inefficiency in enforcement of Regulations.
 Not allocated the resources to the best possible investments, leads to low
allocational Efficiency
 Informational Efficiency was low to investors to make their decision regarding
details of prospectus, adequate and accurate information .
 Due to this SEBI framed regulations and guidelines to improve efficiency of
markets, enhance transparency, check unfair trade practices and ensure
international standards in market practices.
Companies Act 1956

18. Stock Exchanges, through a process of recognition and
continued supervision
Contracts in Securities
Listing of securities on Stock exchanges
The Regulatory jurisdiction on stock exchanges
was passed over to SEBI on enactment of SEBI Act in
1992 from Central Government by amending SC(R)
Act.
Securities Contract (Regulation)
Act 1956

19. Practice of resource allocation among different
competing entities was discontinued.
Secondary market overcame the geographical barriers by
moving to screen-based trading.
Traders enjoy counterparty guarantee.
Physical security certificate have almost disappeared.
Settlement period has shortened to two days.
Some of the other following major principal reforms
measures undertaken since 1992 and they are discussed
below; they are
Securities Exchange Board of
India

20.  Repeal of the Capital Issue (Control) Act 1947 was ceased away in May
1992.
 Capital Issue (Control) Act was abolished and the market was allowed to
allocate resources to competing uses & users
 Indian companies were allowed access to international capital market
through issue of ADR, GDR.
 To ensure effective regulation, of the market SEBI Act was enacted as
Statutory powers
 Protecting the interest of investors
 Promoting the development of the Indian Securities market
 Regulating the securities market.
 Regulatory jurisdiction extends over corporate in issue of capital and
extended to securities.
 SEBI can specify the matters to be disclosed and standard disclosed
required for investors protection.
Continued….

21.  SEBI has the full right to direct the intermediaries and other
persons associated with the securities market; they are
 Development of securities market
 Conduct of any Inquiries
 Audits and Inspection of all concerned with arbitrate activities.
In short, it has given necessary autonomy and authority to
regulate and develop an orderly securities market In the year
Depository Act, 1996 is also administered by SEBI
A high level committee on capital markets has been set up
to ensure co-ordination among the regulatory agencies in
financial markets
Continued….

22.  High Standards of Integrity and fair dealing, comply with all the
requirements with due skill, diligence & Care and disclose the
whole truth.
 Fuller disclosure of relevant information about the issue and nature
of securities, so that investor can take informed decision.
 SEBI has placed a responsibility on the lead managers to give a due
diligence certificate about the Pros & Cons of prospectus.
 SEBI has raised standards of disclosures in public issue to enhance
the level of investors protection
Guidelines for Disclosure &
Investor Protection

23.  Improved the availability of timely information.
 Information technology helps to disseminate the information
about listed companies and market intermediaries.
 Equity Research & Credit rating has improved the quality of
information.
 SEBI recently started a system for Electronic Data Information
Filing and Retrieval System (EDIFAR) to facilitate electronic
filing of public domain information by companies
Improved Disclosures by Listed
Companies

24. Functions of Good Financial
System
Regulation of Currency
Banking Functions
Performance of agency services & Custody of Cash Reserves
Management of National Reserves of International Currency
Credit Control
Administering National, fiscal and Monetary Policy to
ensure stability of the economy
Supply and Deployment of funds for productive use
Maintaining Liquidity

25. Long Term Growth of Financial
Markets
Education of Investors
Giving autonomy to Foreign Investors to become efficient
under competition
Consolidation through Mergers
Facilitating entry of new institutions to add depth to the
market
Minimizing Regulatory Measures and Market
Segmentation

26. Financial System & Economic
Development
 Indian financial system is of critical importance for the global
economy and its financial markets.
 Instability of interest rates, currency values, and stock index prices
represent great headaches for financial planners and forecasters.
 Central purpose of Indian financial system is to support healthy
competition, capital formation, and new product development.
 Creating a wide collection of new savings instruments, Indian
financial system encourage the mobilization of savings and provide a
rich variety of risk repackaging services, increasing the flow of funds
between savers and investors, and simulating the growth of financial
inter-mediation services.
 Finally, the Indian financial system increase market efficiency by
providing information to decision-makers and planners.

27. Financial Sector Reforms in
India
 November 1992 NSE came into Incorporation
 April 1993 Recognition as a stock exchange
 June 1994 Wholesale Debt Market segment goes live
 March 1995 Establishment of Investor Grievance Cell
 April 1995 Establishment of NSCCL, first Clearing Corporation
 October 1995 Became largest stock exchange in the country
 April 1996 Commencement of clearing and settlement by NSCCL
 April 1996 Launch of S&P CNX Nifty
 December 1996 Commencement of trading/settlement in DEMAT A/c
 December 1996 Launch of CNX Nifty Junior
 January 2000 Launch of NSE Research Initiative
 February 2000 Commencement of Internet Trading

28. Introduction to Derivatives
Derivatives is a product whose value is derived from
the value of one or more basic variables, called bases in a
contractual manner.
All Derivatives are based on some “Cash” products.
The underlying asset can be
 Equities.
 Commodities.
 Foreign Exchange and
 Bonds of Different types (Short & Long Term).