Indian Financial System

 The Indian Financial System is one of the most important aspects of the economic development of
our country. This system manages the flow of funds between the people (household savings) of the
country and the ones who may invest it wisely (investors/businessmen) for the betterment of both the
parties.
The features of the Indian Financial system:
 It plays a vital role in the economic development of the country as it encourages both savings and
investment  It helps in mobilising and allocating one’s savings  It facilitates the expansion of
financial institutions and markets  Plays a key role in capital formation  It helps forms a link
between the investor and the one saving  It is also concerned with the Provision of funds
 Components of Indian Financial System  There are four main components of the Indian Financial
System. This includes:  Financial Institutions  Financial Instrument  Financial Services 
Financial Markets
Introduction  Financial Institutions in India are divided in two categories. The first type refers to
the regulatory institutions and The second type refers to the intermediaries.
The regulators are assigned with the job of governing all the divisions of the Indian financial system.
These regulatory institutions are responsible for maintaining the transparency and the national interest
in the operations of the institutions under their supervision.
The Concept. of Financial System
 Financial System
Saving Finance Investment
◦ Capital Formation
◦ Economic Growth
Evolution of Financial System  3000BCE: Banking Originates in Mesopotamia in the form of
storage of valuables at temples and palaces.  1200 BCE: Cowrie shells were used as money in
China. This form of Money existed in some parts of Africa.  687 BCE: Crude coins were developed
in Lydia. Lydians are credited to have been the first people to coin money on open retail outlets. 
From 660 BCE to 770 : Gold , Silver coins are used.  1156: The first noted foreign exchange
contract signed.  1300: The first paper currency was invented by Chinese.  1401: Bank of
Barcelona founded.  1659: First British Cheque was issued.
Evolution of Financial System  1835: East India Co. was authorized to issue the Indian rupee which
was accepted as legal tender.  1950: India introduces its own coinage on August, 15.  1990-99 :
Banking Operations are computerized and Internet Banking and e-commerce came into being in India.
The regulatory bodies of the financial institutions in India are as follows: Reserve Bank of India
(RBI) Securities and Exchange Board of India (SEBI) Central Board of Direct Taxes (CBDT)
Central Board of Excise & Customs
 Apart from the Regulatory bodies, there are the Intermediaries that include the banking and non-
banking financial institutions. Some of the specialized
 Unit Trust of India (UTI)  Securities Trading Corporation of India Ltd. (STCI)  Industrial
Development Bank of India (IDBI)  Industrial Reconstruction Bank of India (IRBI), now (Industrial
Investment Bank of India)  Export - Import Bank of India (EXIM Bank)  Small Industries
Development Bank of India (SIDBI)  National Bank for Agriculture and Rural Development
(NABARD)  Life Insurance Corporation of India (LIC)  General Insurance Corporation of India
(GIC)  Shipping Credit and Investment Company of India Ltd. (SCICI)  Housing and Urban
Development Corporation Ltd. (HUDCO)  National Housing Bank (NHB)
Evolution of the Indian Financial System  Barter
 Money Lender
 Chit Funds
 Indigenous Banking
Societies Joint- Stock Banks Banks
 Consolidation  Commercial Banks  Nationalization  Investment Banks  Development
Financial Institutions  Investment/ Insurance Companies  Stock Exchange  Market Operations 
Specialized Financial Institutions  Merchant Banking  Universal Banking

 F low of funds (savings)

low of financial services Incomes , and financial claims
Seekers of funds (Mainly business firms and government)
Suppliers of funds (Mainly households)
Advantages of Informal Financial System  Low Transaction Costs.  Minimum default risk. 
Transparency of Procedures. Disadvantages of Informal Financial System  Wide range of interest
rates.  Higher rates of interest.  Unregulated.
Interaction Among the Components.
 Interdependent  Interactive  Close Links  Competing with each other.
Functions of a Financial System
 Mobilize and allocate savings.  Monitor corporate performance.  Provide payment and
settlement System.  Optimum allocation of risk-bearing and reduction.  Disseminate price related
information.  Offer portfolio adjustment facility.  Lower the cost of transaction.  Promote the
process of financial deeping and broading.
Basic elements of well functioning Financial System.  A strong legal and regulatory environment. 
Stable money.  Sound public finances and public debt management.  A central bank  Sound
banking system.  Information System.  Well- Functioning securities market.
Financial System Designs
 Bank Based Market Based
•Provide attractive terms to both investors and borrowers. •Facilitate diversification. •Allow risk-
sharing. •Allow financing of new technology. •Exposure to market risk. •Free- rider Problem.
•Close relationship with parties. •Provide tailor made contracts. •Efficient inter temporal risk sharing.
•No. Free rider Problem. •Retards innovation and growth •Impedes competition.
Financial Markets  Money Market- for short-term funds (less than a year) ◦ Organised (Banks) ◦
Unorganised (money lenders, chit funds, etc.)
 Capital Market- for long-term funds ◦ Primary Issues Market ◦ Stock Market ◦ Bond Market
Financial Institutions  Includes institutions and mechanisms which ◦ Affect generation of savings by
the community ◦ Mobilization of savings ◦ Effective distribution of savings  Institutions are banks,
insurance companies, mutual fundspromote/mobilise savings  Individual investors, industrial and
trading companies- borrowers
Financial instruments  Enable channelizing funds from surplus units to deficit units  There are
instruments for savers such as deposits, equities, mutual fund units, etc.  There are instruments for
borrowers such as loans, overdrafts, etc.  Like businesses, governments too raise funds through
issuing of bonds, Treasury bills, etc.  Instruments like PPF, KVP, etc. are available to savers who
wish to lend money to the government
Financial Services.
 FUND BASED  Underwriting of or investment in share, debenture, bonds etc. of new issues. 
Dealing in secondary market activities.  Participating in money market instruments  Involving in
equipment leasing, hire purchase, venture capital, etc.  Dealing in foreign exchange market
activities.  NON FUND BASED (Fee Based)  This is also called as Fee-based activity. Customers
expect more from financial services companies. A wide range of variety of services, are being
provided. Such as  Managing the capital issues.  Making arrangement for the placement of capital
& debt.  Arrangement of funds from financial institutions.  Assisting in the process of getting all
Govt. and other clearances.
Economic Development
 Three-fourths of the Indian people were engaged in agriculture working with primitive tools and
techniques, as either destitute landless laborers, highly insecure, or small-plot holders.  The literacy
rate stood at 14 percent, and the average life expectancy was thirty-two years.
 The country has experienced an increase in per capita income—especially since the 1980s—as well
as reductions in poverty and infant mortality rates.  These improvements are not insignificant when
it compare with the later superior performance of China and South Korea, countries with a
comparable level of development in the 1950s.  It reveals that India’s performance remains below
its potential.
 The government in the 1950s adopted a very particular strategy of economic development  rapid
industrialization  Investments in the creation of public enterprises.
FACTORS AFFECTING ECONOMIC DEVELOPMENT
 Economic development implies an improvement in economic welfare through higher real incomes
and other welfare indices such as improved literacy, better infrastructure, reduced poverty and better
health care.  Economic development requires a degree of political stability, investment and mixture
of public and private initiatives to increase economic potential.
Economic reformation
Reforms In the Financial System Economic Reformation activate in June 1991. View two broad
objectives 1. Reorientation of the economic from one that was statist, state-dominated, and highly
controlled to one that is marketfriendly. 2. Macro-economic stability by substantially reducing fiscal
deficits and the govt. draft on society’s savings.
Financial System in the pre- reforms period.  Closed  Highly regulated by the government. 
Segmented. AIM OF FINANCIAL SYSTEM REFORMS Structural Transformation. Financial
Efficiency and stability. Integration of Financial Markets.
Evolution of Banking System in India  Universal Banking  Merchant Banking  Specialised
Financial Institutions  Investment Bank  Nationalised Banks  Commercial Banks  Joint Stock
Banks  Coperative Movements  Societies  Banks  Indiginous Banking  Chit Funds  Money
Lenders  Barter
 Universal Bank: A universal bank participates in many kinds of banking activities and is both a
Commercial Bank and an Investment Bank as well as providing other Financial Services such as
Insurance. These are also called full-service financial firms, although there can also be full-service
investment banks which provide asset management, trading, and underwriting.  Examples: BNP
Paribas, Credit Agricole and Society General of France, HSBC, Standard Chartered and RBS. 
Merchant Banking : A merchant bank is a financial institution that engages in Underwriting and
business loans, catering primarily to the needs of large enterprises and high net worth individuals. In
the British market, the term merchant bank refers to an investment Bank.
 Specialised Financial Institutions :The list of specialized financial institutions in India mainly
includes, Export-Import Bank Of India, Board for Industrial & Financial Reconstruction, Small
Industries Development Bank of India, National Housing Bank.  An investment bank is a financial
intermediary that specializes primarily in selling securities and underwriting the issuance of new
equity shares to raise capital funds. This is different from a commercial Paper, which specializes in
deposits and commercial loans.
 A bank that issue stock and requires shareholders to be held liable for the company's debt.. In other
words, a joint stock bank combines features of a general partnership, in which owners of a company
split profits and liabilities, and a public- traded company, which issues stock that shareholders are able
to buy and sell on an exchange. A joint-stock bank is not owned by a government.
FNANCIAL MARKET & INSTITUTION
 UNIT-II  CAPITAL MARKET
 RASHMI R. DAS
CAPITAL MARKET
CAPITAL MARKET
The market where investment instruments like bonds, equities and mortgages are traded is known as
the capital market. The primal role of this market is to make investment from investors who have
surplus funds to the ones who are running a deficit.
 The Capital Market facilitated the economic growth through the following measures:  Issuing of
Primary Securities in the Primary Security market. Cash Flow Surplus sector Deficit sector  Issue of
Secondary Securities in the Primary Security Market. Cash Flow Surplus sector Financial
Intermediaries.
 The capital market offers both long term and overnight funds. The different types of financial
instruments that are traded in the capital markets are: > equity instruments > credit market
instruments, > insurance instruments, > foreign exchange instruments, > derivative instruments.
Nature of capital market
The nature of capital market is brought out by the following facts: It Has Two Segments It Deals
In Long-Term Securities It Performs Trade-off Function It Creates Dispersion In Business
Ownership It Helps In Capital Formation It Helps In Creating Liquidity
Functions of Capital Market  Mobilise long- term savings to finance long –term investments. 
Provide risk capital in the form of equity to entrepreneurs.  Encourage broader ownership of
productive assets.  Provide liquidity.  Lower the cost of transactions.  Improve the efficiency of
capital allocation.  Disseminate information efficiency for enabling participants.  Enable quick
valuation.  Provide insurance against market risk.
Types of capital market
There are two types of capital market: Primary Capital market, Secondary Capital market
Primary Capital Market
 It is that market in which shares, debentures and other securities are sold for the first time for
collecting long-term capital. This market is concerned with new issues. Therefore, the primary
Capital market is also called NEW ISSUE MARKET.
In this market, the flow of funds is from savers to borrowers (industries), hence, it helps directly in
the capital formation of the country.
The money collected from this market is generally used by the companies to modernize the plant,
machinery and buildings, for extending business, and for setting up new business unit.
Features of Primary Capital Market
It Is Related With New Issues It Has No Particular Place It Has Various Methods Of Float
Capital: Following are the methods of raising capital in the primary market: i) Public Issue ii)
Offer For Sale iii) Private Placement iv) Right Issue v) Electronic-Initial Public Offer It comes
before Secondary Market
MEANING OF NEW ISSUE MARKET  It refers to the set-up which helps the industry to raise the
funds by issuing different types of securities.  These securities are issued directly to the investors
(both individuals as well as institutional) through the mechanism called primary market or new issue
market.  The securities take birth in this market.
FUNCTIONS OF NEW ISSUE MARKET  The main function of new issue market is to facilitate
transfer resources from savers to the users.  It plays an important role in mobilizing the funds from
the savers and transferring them to the borrowers.  The main function of new issue market can be
divided into three service functions:
 1. Origination: It refers to the work of investigation, analysis and processing of new project
proposals. Origination starts before an issue is actually floated in the market. It includes a careful
study of the technical, economic and financial viability to ensure the soundness of the project and
provides advisory services.  2. Underwriting: It is an agreement whereby the underwriter promises
to subscribe to a specified number of shares or debentures in the event of public not subscribing to the
issue. Thus it is a guarantee for the marketability of shares. Underwriters may be institutional and
non-institutional. 3. Distribution: It is the function of sale of securities to ultimate investors. Brokers
and agents who maintain regular and direct contract with the ultimate investors, perform this service.
METHODS OF FLOATING NEW ISSUES  The various methods which are used in the floating
(cost of the security + underwriting fees + legal fees +registration fees. ) of securities in the new issue
market are:  Public issues  Offer for sale  Placement  Right issues
Public issues or Initial public offering (IPO)  The issuing company directly offers to the general
public/institutions a fixed number of securities at a stated price or price band through a document
called prospectus. This is the most common method followed by companies to raise capital through
issue of the securities.
Offer of sale  It consists in outright sale of securities through the intermediary of issue houses or
share brokers.  It consists of two stages: the first stage is a direct sale by the issuing company to the
issue house and brokers at an agreed price.  In the second stage, the intermediaries resell the above
securities to the ultimate investors. The issue houses purchase the securities at a negotiated price and
resell at a higher price. The difference in the purchase and sale price is called turn or spread.
Right Issue
 When a listed company proposes to issue securities to its existing shareholders, whose names
appear in the register of members on record date, in the proportion to their existing holding, through
an offer document, such issues are called ‘Right Issue’. This mode of raising capital is the best suited
when the dilution of controlling interest is not intended.
Private placement
 It involves sale of securities to a limited number of sophisticated investors such as financial
institutions, mutual funds, venture capital funds, banks, and so on.  It refers to sale of equity or
equity related instruments of an unlisted company or sale of debentures of a listed or unlisted
company.
Preferential Issue
 An issue of equity by a listed company to selected investors at a price which may or may not be
related to the prevailing market price is referred to as preferential allotment in the Indian capital
market.  In India preferential allotment is given mainly to promoters or friendly investors to ward
off the threat of takeover.
Book-Building/Price Band
 It is a process used for marketing a public offer of equity shares of a company.  Book building is
a process wherein the issue price of a security is determined by the demand and supply forces in the
capital market  The Price at which securities will be allotted is not known in advance to the investor.
Only an indicative price range is known. (Also called price band and it should not be more than 20%
of the floor price).
Kinds of Offer Documents
 Draft Prospectus  Draft Letter of Offer  Prospectus  Abridged Prospectus  Shelf Prospectus
 Information Memorandum  Red-Herring Prospectus
WHAT IS BOOK BUILDING?
 IT IS A PROCESS WHEREIN THE INVESTORS DETERMINE THE PRICE OF THE SHARES
 OPTION IS GIVEN TO INVESTORS TO SUBSCRIBE AT THE FLOOR PRICE OR ABOVE
AT THEIR DISCRETION  IT IS A PROCESS USED FOR MARKETING A PUBLIC OFFER OF
EQUITY SHARES OF A COMPANY.
FEATURES OF BOOK BUILDING
 THE ISSUER COMES OUT WITH AN ISSUE WITHOUT FINALISING THE ISSUE PRICE 
THE FLOOR PRICE AND THE CAP PRICE ARE ANNOUNCED JUST BEFORE THE OPENING
OF THE ISSUE  THE ISSUER HAS THE LIBERTY TO REVISE THE OFFER PRICE UPWARD
OR DOWNWARD
FEATURES OF BOOK BUILDING
 RETAIL INDIVIDUAL BIDDERS COULD BID AT CUT OFF PRICE IF THE TOTAL VALUE
OF SECURITIES APPLIED IS LESS THAN Rs.1,00,000/
 RETAIL BIDDERS TO PAY THE BID MONEY ALONG WITH APPLICATION
 TO REGISTER THE BID THROUGH AN ONLINE TERMINAL OF NSE OR BSE AT AN
AUTHRISED BID CENTER
PRICE DISCOVERY
 IT IS LARGELY BASED ON THE TOTAL SUBSCRIPTIONS RECEIVED  THE PRICE AT
WHICH THE ISSUE GETS SUBSCRIBED ATLEAST ONE TIME  THE BOOK RUNNING
LEAD MANAGERS IN CONSULTATION WITH THE ISSUER WOULD DETERMINE THE
PRICING OF THE SHARES
THE PROCESS OF BIDDING  THE ISSUER TO APPOINT A BOOK RUNNER (NORMALLY
A MERCHANT BANKER)  THE ISSUER ANNOUNCES THE PRICE BAND AND BID
SHARES  THE ISSUER APPOINTS SYNDICATE MEMBERS WITH WHOM THE
INVESTORS COULD REGISTER THEIR BIDS
KEY FACTORS
Price Band & Cut-off Price
Categories of Investors
Red Herring Prospectus
Book Building Process
Escrow Account
Minimum Lot size
Basis of Allotment
Margin Amount
Revision of BidsBook Building Process
Bidding Period & Bidding Centers
Key Players
The Investors The Issuer Book Running Lead Managers Syndicate Members Bidding Centers Escrow
Bankers Registrars With the support of The stock exchanges The Depositories The Postal System
Process of Bidding
Submission of Bid form by Investor
Acceptance of the Bid form by SM
Registration of bids on SE module
Acknowledgement of Bids to Investor
Banking of bid amount
Analysis of bids and display of demand
Process of Allotment
Price discovery & Allocation
Issue of CAN & collection of balance monies
Filing of prospectus
Allotment
Refund of excess monies received
Crediting of shares in Investor's DP A/c
Escrow Account
In a book building process, since the margin amount collected
is not the application money, the same will be deposited in an
escrow account. After the discovery of the price, the money
lying in the escrow account is transferred on the designated
date either in full or to the extent of the shares proposed to be
issued to the public issue account before allotment / allocation
of shares by the Board of Directors of the issuer
Secondary Market  The secondary market is that market in which the buying and selling of the
previously issued securities is done. The transactions of the secondary market are generally done
through the medium of stock exchange. The chief purpose of the secondary market is to create
liquidity in securities.
 If an individual has bought some security and he now wants to sell it, he can do so through the
medium of stock exchange to sell or purchase through the medium of stock exchange requires the
services of the broker presently, their are 24 stock exchange in India. .
Features of Secondary Market
 It Creates Liquidity  It Comes After Primary Market  It Has A Particular Place  It Encourage
New Investments
Functions of Capital Market
 Mobilise long-term saving to finance long-term investment.  Provide risk capital in the form of
equity or quasi-equity to entrepreneurs.  To facilitate liquidity and marketability of the outstanding
equity and debt. Instruments.  To contribute to economic growth through allocation of funds to the
most efficient channel (Company –wide and industry wide factors). Such valuation facilitates the
measurement of the cost of capital.  To provide instant valuation of securities.  To ensure a
measure of safety & fair dealing.  To induce companies to improve performance and fair dealing to
protect investors.
CAPITAL MARKET RISK  Investment in long term financial instruments is accompanied by high
capital market risks. Since there are two types of capital markets- the stock market and the bond
market. So risks are present in both the market.
Risk in the Stock Market
 Stock prices keep fluctuating over a wide range unlike the bank deposits or government bonds.
The efficient market hypothesis shows the effect of fundamental factors in changing the price of the
stock market.
The Efficient Market Hypothesis shows that all price movements are random whereas there are
plenty of studies that reflect the fact that there is a specific trend in the stock market prices over a
period of time. Research has shown that there are certain psychological factors that shape the stock
market prices.
Sometimes the market behaves illogically to any economic news. The stock market prices can be
diverted in any direction in response to press releases, rumors and mass panic.
 The stock market prices are also subject to speculation. In the short run the stock market prices may
be very volatile due to the occurrences of the fast market changing events.
Risk in the Bond Market Capital market risk in the bond market arises due to interest rate changes.
There is an inverse relationship existing between the interest rate and the price of the bond. Hence the
bond prices are sensitive to the monetary policy of the country as well as economic changes.
INDIAN CAPITAL MARKET The Indian Capital Market is one of the oldest capital markets in
Asia which evolved around 200 years ago. Chronology of the Indian capital markets >1830s: Trading
of corporate shares and stocks in Bank and cotton Presses in Bombay. >1850s: Sharp increase in the
capital market brokers owing to the rapid development of commercial enterprise.
>1860-61: Outbreak of the American Civil War and ' Share Mania ' in India. >1894: Formation of the
Hamada Shares and Stock Brokers Association. >1908: Formation of the Calcutta Stock Exchange
Association.
The pattern of growth in the Indian capital markets in the post independence regime can be analyzed
from the following graphs:
The following diagram shows the trend in the no. of listed companies participating in the Indian
Capital Market. Here again we register a sharp rise after 1980. The number of stocks issued by the
listed companies also shows a similar trend:

CAPITAL MARKET INVESTMENT  Capital market investment takes place through the bond
market and the stock market. The capital market is basically the financial pool in which different
companies as well as the government can raise long term funds. Capital market investment that
takes place through the bond and the stock market may be elucidated in the following heads.
Capital market investments in the stock market The stock market is basically the trading ground
capital market investment in the following: i) Company’s stocks ii) Derivatives iii) Other securities
The capital market investments in the stock market take place by: 1) Small individual stock
investors 2) Large hedge fund traders. The capital market investments can occur either in: 1) The
physical market by a method known as the open outcry.
2) Trading can also occur in the virtual exchange where trading is done in the computer network. 
The investors in the stock market have the liberty to buy or sell the stock that they are holding at their
own discretion unlike the case of government securities, bonds or real estate. The stock exchanges
basically function as the clearing house for such liquid transactions. The capital market investments
in the stock market are also done through the derivative instruments like the stock options and the
stock futures.
Capital Market Investments in the Bond Market  The bond market is a financial market where the
participants buy and sell debt securities. The bond market is also differently known as the debt,
credit or fixed income market. There are different types of bond markets based on the different
types of bonds that are traded. They are:  Corporate,  Government and agency,  Municipal, 
Bonds backed by mortgages & assets,  Collateralized Debt Obligation.
 The bonds, except for the corporate bonds do not have formal exchanges but are traded over-
thecounter. Individual investors are attracted to the bond market and make investments through the
bond funds, closed-end-funds or the unit investment trusts. Another way of investing directly in the
bond issue is the Exchange-traded-funds. The capital market investment in the bond market is done
by:  Institutional investors  Governments, traders and  Individuals.
thank you
Money Market  Money market means market where money or its equivalent can be traded. 
Money Market is a wholesale market of short term debt instrument and is synonym of liquidity..
Money Market is part of financial market where instruments with high liquidity and very short term
maturities ie one or less than one year are traded.
Due to highly liquid nature of securities and their short term maturities, money market is treated as a
safe place. Hence, money market is a market where short term obligations such as treasury bills,
call/notice money, certificate of deposits, commercial papers and repos are bought and sold.
Characteristics of Money market
 It is a single market but a collection of markets for several instruments.  A wholesale market for
short term debt instrument.  Its principal feature is honor where the creditworthiness of the
participants is important.  The Main Players are RBI, DFHI, Mutual Funds, Banks, NBFCs, State
Govt., Provident Funds, etc.
Functions of the Money Market.  Provide balancing mechanism to even out the demand for and
supply of short term funds.  Provide a focal point for Central Bank intervention for influencing
liquidity and general level of interest rates in the economy.  Provide reasonable access to suppliers
and users of short term funds to fulfill their borrowings and investment requirements at an efficient
market clearing price.
Benefits of an Efficient Money Market.  Provide a stable source of funds to banks.  Encourage
development of non-bank entities.  Facilitates government market borrowing.  Makes effective
monetary policy actions.  Helps in pricing different floating interest products.
THE PLAYERS
Reserve Bank of India. SBI , DFHI Ltd (Amalgamation of Discount & Finance House in India
and SBI in 2004). Acceptance Houses. Commercial Banks, Co-operative Banks and Primary
Dealers are allowed to borrow and lend. Specified All-India Financial Institutions, Mutual Funds,
and certain specified entities are allowed to access to Call/Notice money market only as lenders
Individuals, firms, companies, corporate bodies, trusts and institutions can purchase the treasury
bills, CPs and CDs.
Primary Dealers
 The system of Primary Dealers (PDs) in the Government Securities Market was introduced by
Reserve Bank of India in 1995 to strengthen the market infrastructure of Government Securities 
DFHI was set up by RBI in March 1988 to activate the Money Market.  It got the status of Primary
Dealer in February 1996. Over a period of time, RBI divested its stake and DFHI became a subsidiary
of State Bank of India (SBI).  SBI had also set up a subsidiary in 1996 for doing PD business
namely SBI Gilts Limited.  Both these companies were merged in 2004 to become the largest
Primary Dealer in the country  Primary Dealers can also be referred to as Merchant Bankers to
Government of India as only they are allowed to underwrite primary issues of government securities
other than RBI  PDs are allowed the following activities as core activities: 1. Dealing and
underwriting in Government securities. 2. Dealing in Interest Rate Derivatives. 3. Providing broking
services in Government securities. 4. Dealing and underwriting in Corporate / PSU / FI bonds/
debentures. 5. Lending in Call/ Notice/ Term/ Repo/ CBLO market. 6. Investment in Commercial
Papers. 7. Investment in Certificates of Deposit.
8. Investment in debt mutual funds where entire corpus is invested in debt securities.
Role of RBI in Money Market in India.  This market come under the direct purview of RBI
regulations.  The aims of the RBI operations in the money Market are:  1. To ensure the liquidity
and short term interest rates.  2. To ensure an adequate flow of credit to the productive sectors of the
economy.  3. To bring out order in the foreign exchange market.
Evolution of Money Market  1980:-A committee to review the working of the monetary system
under the chairmanship of Sukhamoy Chakravorty was set up in 1985.  1987:-The need to develop
the Money Market Instrument. RBI submitted a report under the chairmanship of N. Vagul.  1988:-
DFHI was set up as a money market institution jointly by RBI, Public sector Banks and Financial
Institutions.
Money Market Instrument
Treasury Bills (T- Bills)
Call/Notice Money Market
Commercial Papers (CPs)
Certificate of Deposits (CDs)
Commercial Bills (CBs)
Collateralized Borrowing and Lending Obligation (CBLO)
TREASURY BILLS  Treasury bills are short-term instrument issued by the Reserve Bank on behalf
of the government to tide over short –term liquidity short fails.  T -Bills are rapid at per on maturity.
It also raise the govt. funds.  The difference between the amount paid by the renderer at the time of
purchase (which is less than the face value) and the amount received on maturity represents the
interest amount on T - Bills and is known as the Discount.  TDS (Tax Deducted Sources) is not
applicable on T - Bills.
Treasury Bills
 T -Bills are issued by Government of India against their short term borrowing requirements with
maturities ranging between 14 to 364 days.  All these are issued at a discount-to-face value. For
example a Treasury bill of Rs. 100.00 face value issued for Rs. 91.50 gets redeemed at the end of it's
tenure at Rs. 100.00.
Who can invest in T -Bill  Banks, Primary Dealers, State Governments, Provident Funds, Financial
Institutions, Insurance Companies, NBFCs, FIIs (as per prescribed norms), NRIs & OCBs can invest
in T-Bills.
Features of T - Bills  They are negotiable securities.  They are highly liquid as they are of shortest
tenure.  There is an absence of default risk.  They have an assured yield, low transaction cost, and
are eligible for inclusion in the securities for SLR purpose.  They are not issued in script form. The
purchase and sales are effected through the Subsidiary General Ledger (SGL) account.  T - Bills are
available for a minimum amount of Rs. 25,000 and in multiples thereof.
 T -bills are the most marketable money market security. Essentially, T -bills are a way for the
government to raise money from the public.  T -bills are short-term securities that mature in one
year or less from their issue date.  They are issued with three-month, six-month and one-year
maturities.  T -bills are purchased for a price that is less than their par (face) value; when they
mature, the government pays the holder the full par value. Effectively, your interest is the difference
between the purchase price of the security and what you get at maturity. For example, if you bought a
90-day T -bill at $9,800 and held it until maturity, you would earn $200 on your investment. This
differs from coupon bond which pay interest semi-annually.
 Treasury bills are issued through a competitive bidding process at auctions. If you want to buy a T -
bill, you submit a bid that is prepared either non- competitively or competitively.  In non-
competitive bidding, you'll receive the full amount of the security you want at the return determined at
the auction.With competitive bidding, you have to specify the return that you would like to receive. If
the return you specify is too high, you might not receive any securities, or just a portion of what you
bid for.  The biggest reasons that T -Bills are so popular is that they are one of the few money
market instruments that are affordable to the individual investors. T -bills are usually issued in
denominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million.  Other
positives are that T -bills (and all Treasuries) are considered to be the safest investments in the world
because the government backs them.
• At present, the Government of India issues three types of treasury bills through auctions, namely,
91-day, 182-day and 364-day. There are no treasury bills issued by State Governments. •
Amount • Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs.
25,000. Treasury bills are issued at a discount and are redeemed at par.
TYPES OF T -BILLS
 On tap bills  Ad hoc bills  Auctioned T - bills
 On Tap bills: On-tap bills, as the name suggests, could be bought from the RBI at any time at an
interest yield of 4.66 %.  Ad hoc Bills: Ad-hoc bills were introduced in 1955. It was decided by the
RBI & Govt. that both would maintain a balance of not less than Rs. 50 crore in Friday & Rs. 4 crore
in other days, free of obligation to pay interest & whenever the balance fall below minimum, the govt.
account would be replenished by the creation of ad hoc. Bills
 Auctioned Bills: These are the most active Money Market Instrument, were introduced in April
1992.  The RBI receives bids in an auction from various participants and issue the bills subject to
market.
Types of Auctions
 Multiple- price Auction.  Uniform Price Auction.  RBI invites the bids by Price, i.e, the bidders
have to quote the price (Per Rs. 100 face value) of the stock which they desire to purchase. The bank
then decides the cut- off price at which the issue would be exhausted.
 Uniform Price Auction. RBI invites bids in descending order and accepts those that fully absorb the
issue amount. Each winning bidder pays the same (Uniform) price as decided by the RBI.
Call Money Market “Call Money“ means deals in overnight funds "Notice Money“ means deals in
funds for 2 -14 days "Fortnight“ shall be on a reporting Friday basis and mean the period from
Saturday to the second following Friday, both days inclusive
Call Money Market Banks borrow in this market for the following purpose • To fill the gaps or
temporary mismatches in funds • To meet the CRR (cash reserve ratio) & SLR (statutory liquidity
ratio) mandatory requirements as stipulated by the Central bank • To meet sudden demand for funds
arising out of large outflows.
INTRODUCTION  The call/notice money market forms an important segment of the Indian Money
Market.  Under call money market, funds are transacted on overnight basis and under notice money
market, funds are transacted for the period between 2 days and 14 days.
Operation in Call Money Market  Borrowers and lenders contact each other over telephone.  The
borrowers and lenders arrive at a deal specifying the amount of loan and the rate of interest.  After
the deal is over, the lender issues cheque in favour of the borrower.
 The borrower in turn issues call money borrowing receipt.
 When the loan is repaid with interest, the lender returns the duly discharged receipt.
Operation In Call Money Market.  The deal can be directly negotiated by routing it through the
Discount and Finance House of India (DFHI).
 The borrowers and lenders inform the DFHI about their fund requirement and availability at a
specified rate of interest.
 Once the deal is confirmed, the Deal Settlement Advice is exchanged. In case the DFHI borrows, it
issues a call deposit receipt to the lender and receives RBI cheque for the money borrowed. The
reverse takes place in the case of lendings by the DFHI.
 The duly discharged call deposit receipt is surrendered at the time of settlement.
 Call loans can be renewed up to a maximum period of 14 days only and such renewals are recorded
on the back of the deposit receipt by the borrower
Certificate of Deposit
 Certificate of Deposit are the short term tradable time deposits issued by commercial banks and
financial institutions.  CDs are negotiable money market instruments and are issued in
dematerialised form or a usance promissory note, for funds deposited at a bank or other eligible
financial institution for a specified time period.  They are like bank term deposits accounts. Unlike
traditional time deposits these are freely negotiable instruments and are often referred to as Negotiable
Certificate of Deposits
Features of CD • (i) CDs can be issued by all scheduled commercial banks except RRBs • (ii) selected
all India financial institutions, permitted by RBI • Minimum period 15 days • Maximum period 1 year
• Minimum Amount Rs 1 lac and in multiples of Rs. 1 lac • CDs are transferable by endorsement •
CRR (Cash Reverse Ratio) & SLR (Statutory Liquidity Ratio) are to be maintained • CDs are to be
stamped • CDs may be issued at discount on face value
Commercial Paper
 Commercial Paper (CP) is an unsecured money market instrument issued in the form of a
promissory note. Who can issue Commercial Paper (CP) Highly rated corporate borrowers, primary
dealers (PDs) and satellite dealers (SDs) and all-India financial institutions (FIs) To whom issued 
CP is issued to and held by individuals, banking companies, other corporate bodies registered or
incorporated in India and unincorporated bodies, NonResident Indians (NRIs) and Foreign
Institutional Investors (FIIs).  Denomination: min. of 5 lakhs and multiple thereof.  Maturity: min.
of 7 days and amaximum of upto one year from the date of issue
Eligibility for issue of CP
 The tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4
crore;  (b) the working capital (fund-based) limit of the company from the banking system is not
less than Rs.4 crore  and the borrowal account of the company is classified as a Standard Asset by
the financing bank/s.  All eligible participants should obtain the credit rating for issuance of
Commercial Paper  The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by
other agencies
Repos
• It is a transaction in which two parties agree to sell and repurchase the same security. Under such an
agreement the seller sells specified securities with an agreement to repurchase the same at a mutually
decided future date and a price • The Repo/Reverse Repo transaction can only be done at Mumbai
between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State
Govt securities).
Commercial Bills (CBs)
 Commercial bills are negotiable instruments drawn by the seller on the buyer which are, in turn,
accepted and discounted by Commercial banks.
Collateralized Borrowing and Lending Obligation (CBLO) •
It is a money market instrument as approved by RBI, is a product developed by CCIL (Clearing
Corporation of India) CBLO is a discounted instrument available in electronic book entry form for
the maturity period ranging from one day to ninety Days (can be made available up to one year as per
RBI guidelines). • The min. Order lot for auction market is Rs. 50 lakh and in multiples of Rs. 5 lakh
there of. • The operation of CBLO is through the CCIL where the borrowers will submit their ‘Offers’
and the lenders will give their ‘bids’, specifying the discount rate. • The bids & offers through action
screen, which will be opened from 9.45 a.m to 1.30 p.m on every working day. • What is CBLO?
CBLO is explained as under: • An obligation by the borrower to return the money borrowed, at a
specified future date; • An authority to the lender to receive money lent, at a specified future date with
an option/privilege to transfer the authority to another person for value received; • An underlying
charge on securities held in custody (with CCIL) for the amount borrowed/lent.
Investment in Money Market
 Direct investment in Money market Instruments.
 Investment in Money Market Funds.
 Parking Money in Money Market Account.
.
The Stock Market
SECONDARY MARKET / STOCK MARKET
It is a market which deals with the existing securities are resold or treaded. This is also known as
the public market for the trading of company stock and derivatives at an agreed price; these are
securities listed on a stock exchange as well as those only traded privately.
HISTORY OF STOCK MARKET (PRE INDEPENDENCE)
YEARS EVENTS 1874 rapidly developing share trading business 1875 "The Native Share and Stock
Brokers' Association" (also known as "The Bombay Stock Exchange") was established in Bombay
1894 Establishment of "The Ahmadabad Share and Stock Brokers' Association" 1908 "The Calcutta
Stock Exchange Association" was formed 1936 Merger of the Lahore Stock Exchange with the
Punjab Stock Exchange
1937
Re-organisation and set up of the Madras Stock Exchange Limited (Pvt.) 1947 "Delhi Stock and Share
Brokers' Association Limited" and "The Delhi Stocks and Shares Exchange Limited" were established
and later on merged into "The Delhi Stock Exchange Association Limited"
POST INDEPENDENCE
In the 1950s, Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and Kohinoor Mills
were the favorite scrips of speculators. The 1980s witnessed an explosive growth of the securities
market in India. The decade of the 1980s was characterized by an increase in the number of stock
exchanges, listed companies, paid up-capital, and market capitalization. The Capital Issues
(Control) Act, 1947 was repealed in May 1992. Major capital market scams took place in the
1990s. Trading of futures commenced from June 2000, and Internet trading was permitted in
February 2000.
Existing structure of the stock exchanges in India
STOCK MARKET
BSE
NSE
OTHERS
BOMBAY STOCK EXCHANGE
 Established in 1875  Oldest stock exchange in Asia & has the 3rd largest number of listed
companies in world, with more than 4000 listed as on Feb 2010.  It became the first stock exchange
to be recognized by the Indian Government under the Securities Contracts Regulation Act.1956. 
Equity market capitalisation of the companies listed on the BSE was US$ 1.28 trillion.
NATIONAL STOCK EXCHANGE
 Established in 1992  It has market capitalization of around Rs 47,01923 crores (7th August 2009)
 It is the largest stock exchange in India & 3rd largest in the world in terms of volume of
transactions.  Its key index is the Nifty. Which based on more than fifty major stocks weighted by
market capitalisation.
Functions of the Secondary Market
 To facilitate liquidity and marketability of the equity & debt. Instrument.  Give contribution to
the economic growth through allocation & mobilization of funds.  To ensure a measure of safety
and fair dealing.
ROLE OF SEBI
 Power to make rule for controlling stock Exchange  To provide license to dealers and brokers 
To Stop fraud in Capital Market  To Control the Merge, Acquisition and Takeover the companies 
To audit the performance of stock market  To make new rules on carry - forward transactions  To
Require report of Portfolio Management Activities  To educate the investors
IMPORTANCE OF STOCK MARKET
Provides a source of funding for organisations. An investment avenue. A source of income for
investors. A source of revenue for government in the form of taxes. A source of employment
opportunities. Meeting place for investors and organisations.
STOCK EXCHANGE AUTHORITY.
Ministry of Finance
SEBIGoverning Body President Vice President Treasurer Secre.
Listing Operations Inspection Training & Research Monitoring
BSE OnLine Trading (BOLT)
Members & Brokers
Trader Work Station
Price Quotation
Complaints
Investor Service & Protection
Clearing & Settlement
Listing of Security  A company has to list its securities on the exchange so that they are available
for trading.  A company can seek listing on more than one stock exchange but it is compulsory to
list on the RSEs.  A security listed on one exchange is permitted for trading on the other. 
Provisions in the listing agreement attempt to ensure liquidity and investor protection in the Stock
market.
Listing of Security
 The stocks, bonds and other securities issued by issuers require listing for providing liquidity to
investors. Listing means formal admission of a security to the trading platform of the Exchange. It
provides liquidity to investors without compromising the need of the issuer for capital and ensures
effective monitoring of conduct of the issuer and trading of the securities in the interest of investors.
Advantages of Listing
1. Liquidity 2. Best Price 3. Regular Information 4. Periodic Reports 5. Transferability 6. Income Tax
Benefit 7. Wide Publicity.
Disadvantages 1. Listed companies are subjected to various regulatory measures of the stock
exchange and SEBI. 2. Essential information has to be submitted by the listed companies to the Stock
Exchanges. 3. AGM and annual reports have to be sent to large no. of shareholders. 4. Public offer
that is itself an expensive exercise. But is prerequisite of the companies shares to be issued.
Qualification for Listing  Minimum issued capital:- 10 crores.  Payment of excess application
money: 15% after 30 days.  Listing on multiple exchanges: paid up capital 5 crores, compulsory
listing on more than one exchange.  The no. of shareholders: 5 for one lakh fresh and for existing its
10.  Appointment of market maker.
Functions
 Give permits trading.
 Unlocks the value of the company.
 Creates wealth effect.
Regulation for Listing of Security.  Before issuing the security the issuer must received an
application to list from CLA (Central Listing Authority) where the applicants shall also specify the
name of the exchange.  The draft offer document will be filled only with the CLA.  CLA may
impose the conditions while granting the letter. The letter is valid for 90 days.
Listing Procedure
 Preliminary discussion: Discussion with Stock Exchanges.  Articles of association approval: it
has to fulfill following requirements. 1. Common form of transfer should be used. 2. Once the shares
are fully paid, they should be free from all lien. 3. The calls carried out in advance are entitled for
interest but not dividends. 4. Free dealing not be restricted by any provision. 5. The company should
comply with the section 205-A of companies act in the case of dividends.
 Draft prospectus approval: getting approval of draft prospectus is the essential pre- requisite for the
security to be listed. Before finalizing the draft prospectus the company authorities should hold a
discussion with Stock Exchange Authorities. The prospectus should clearly state the following. 1.
The name of regional stock exchange and any other Stock Exchange where it intends to list securities.
2. Date of opening of issue and closing. 3. Open for minimum 3 working days and maximum of 10
days.
 Listing Application : any company when it intends to offer shares to the public through prospectus,
should make an application to the Stock Exchange where the share is to be listed. 1. Three certificate
copies of MOA and debenture trust deed. 2. Copies of prospectus, offerfor sale made during last 5
years and circulars and advt. regarding offer made during last five yrs.

RBI •The Reserve Bank of India was established by legislation in 1934 through the Reserve
Bank of India Act,1934. •It started functioning in 1stApril 1935. •In the year 1949, it is fully owned
by the government of India. •The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor
sits and where policies are formulated.
Central Board  The Reserve Bank's affairs are governed by a central board of directors. The board is
appointed by the Government of India in keeping with the Reserve Bank of India Act. 
Appointed/nominated for a period of four years  Constitution: ◦ Official Directors  Full-time :
Governor and not more than four Deputy Governors ◦ Non-Official Directors  Nominated by
Government: ten Directors from various fields and two government Officials  Others: four Directors
- one each from four local boards
Local Boards  One each for the four regions of the country in Mumbai, Calcutta, Chennai and New
Delhi  Membership: consist of five members each appointed by the Central Government for a term
of four years  Functions : To advise the Central Board on local matters and to represent territorial
and economic interests of local cooperative and indigenous banks; to perform such other functions as
delegated by Central Board from time to time.
Functions of RBI  Monetary Authority: ◦ Formulates, implements and monitors the monetary
policy. ◦ Objective: maintaining price stability and ensuring adequate flow of credit to productive
sectors.  Regulator and supervisor of the financial system: ◦ Prescribes broad parameters of banking
operations within which the country's banking and financial system functions. ◦ Objective: maintain
public confidence in the system, protect depositors' interest and provide cost-effective banking
services to the public.  Manager of Foreign Exchange ◦ Manages the Foreign Exchange
Management Act, 1999. ◦ Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
 Issuer of currency: ◦ Issues and exchanges or destroys currency and coins not fit for circulation. ◦
Objective: to give the public adequate quantity of supplies of currency notes and coins and in good
quality.  Developmental role Performs a wide range of promotional functions to support national
objectives.  Related Functions Banker to the Government: performs merchant banking function for
the central and the state governments; also acts as their banker.  Banker to banks: maintains banking
accounts of all scheduled banks.
Objectives of Reserve Bank
 To secure monetary stability within the country.  To operate the currency and credit system to the
advantage of the country.  To examine Price stability and ensuring adequate credit availability.
Organization of Reserve Bank
 Central Board of Directors consists of 14 non- executive independent directors nominated by the
government, one Governor and four deputy governors.  Non official Directors 15 in numbers.  4
Local Board. For each regions.  22 regional offices.
Commercial Banks  A commercial bank (or business bank) is a type of financial institution and
intermediary. It is a bank that provides transactional, savings, and money market accounts and that
accepts time deposits.  A commercial bank is a type of bank that provides services such as accepting
deposits, making business loans, and offering basic investment products.  There are 86 Scheduled
commercial banks.  27 public sector banks.  30 foreign Banks.
The role of commercial banks  Commercial banks engage in the following activities:  processing
of payments by way of telegraphic transfer, EFTPOS, internet banking, or other means  issuing
bank drafts and bank cheques  accepting money on term deposit  lending money by overdraft,
installment loan, or other means  providing documentary and standby letter of credit, guarantees,
performance bonds, securities underwriting commitments and other forms of off balance sheet
exposures  safekeeping of documents and other items in safe deposit boxes  cash management and
treasury  merchant banking and private equity financing  traditionally, large commercial banks
also underwrite bonds, and make markets in currency, interest rates, and credit-related securities, but
today large commercial banks usually have an investment bank arm that is involved in the mentioned
activities.
The Role of Commercial Banks in Economic Development  Accelerating the Rate of capital
Formation.  Provision of Finance and credit.  Monetisation of Economy (Support to rural areas) 
Innovations.  Implementation of Monetary Policy.  Encouragement to Right Types of Industry.. 
Development of Agriculture.  Regional Development.  Fulfillment of Socio- Economic objectives.

Functions  Commercial banks accept various types of deposits from public especially from its
clients, including saving account deposits, recurring account deposits, and fixed deposits. These
deposits are payable after a certain time period  Commercial banks provide loans and advances of
various forms, including an overdraft facility, cash credit, bill discounting, money at call etc. They
also give demand and demand and term loans to all types of clients against proper security.
Functions
 Credit creation is most significant function of commercial banks. While sanctioning a loan to a
customer, they do not provide cash to the borrower. Instead, they open a deposit account from which
the borrower can withdraw. In other words, while sanctioning a loan, they automatically create
deposits, known as a credit creation from commercial banks.
The Functions of Agencies
 To collect and clear cheque, dividends and interest warrant.  To make payments of rent, insurance
premium, etc.  To deal in foreign exchange transactions.  To purchase and sell securities.  To act
as trustee, attorney, correspondent and executor.  To accept tax proceeds and tax returns.
The utility functions are
 To provide safety locker facility to customers.  To provide money transfer facility.  To issue
traveller's cheque.  To act as referees.  To accept various bills for payment: phone bills, gas bills,
water bills, etc.  To provide merchant banking facility.  To provide various cards: credit cards,
debit cards, smart cards, etc.
Recent (2012) statistics of Indian Commercial Banks.
Regional Banks
Foreign Banks in India
Commercial Bank
Private Sector Bank
Public Sector Bank
Other Public Sector Bank
SBI & Its Assiciates
New Private Banks
National ized Bank
Old Private Banks
Development Financial Institutions  Development banks are unique financial institutions that act as
catalytic agents in promoting balanced development of the country and thereby aid in the economic
growth of the country.
Objective
 To serve as an agent of development in various sectors, namely,industry,agriculture and
international trade.  To accelerate the growth of the economy.  To allocate resources to high
priority areas.  To foster rapid industrialization, particularly in the private sector, so as to provide
employment opportunities as well as higher production.  To develop entrepreneurial skill.  To
promote the development of rural areas.
Develo pment Banks
Refinan ce Instituti ons
Investm ent instituti on
Spl. Financi al Instituti on
All Financial Institution
All India Financial Institution
State Level Institutions
Other institutions