Indian Financial System

INDIAN FINANCIAL SYSTEM: INTRODUCTION: Well organized financial system supports economic development of the country. Financial system is the system which supplies financial inputs for the production of goods and services to promote the well being and standard of living of the people of a country. Financial system is the broader term which includes Financial Market and Financial Institutions which support the system of providing financial inputs for production and productivity. The major assets traded in the Financial market are Money and monetary Assets. The responsibility of financial market is to mobilize the savings in the forms of money and monetary assets and invest them in to the productive venture for overall economic development of the nation. The study of the above reveals that the financial system acts as mediator between saver and investors to promote faster economic development.

Functions of Indian Financial System: • •

Provision of Liquidity Mobilization of Savings

Concepts used in Indian Financial System. • • • • •

Financial Assets. Financial Intermediaries Financial Markets Financial Rate of Return Financial Instruments.

Financial Assets: Financial assets are those which are used for Production or consumption or for further creation of assets. Financial assets are different from physical assets as physical assets are not useful for further production of goods or for earning income. Classification of Financial Assets: •

A: Marketable Assets a. Shares b. Government Securities c. Bonds d. MFs

B: Non-Marketable Assets a. Bank Deposits b. Provident Fund c. LIC Schemes d. PO Certificates

Financial Intermediaries; These are the organizations which intermediate and facilitate financial transaction for both individuals and companies. Therefore, financial intermediaries are financial institutions and investing institutions to facilitate financial transactions in financial markets which may be organized or un-organized. Classification of financial Intermediaries: Capital Market intermediaries : Financial corporation/LIC Money Market Intermediaries. : Commercial banks/Cooperative banks

Financial Markets: The Places where financial transactions take place. Therefore, financial market may be centre or arrangement which facilitates buying and selling of financial assets. Classification of Financial Markets: a. Unorganized Market b. Organized Market Organized Market: In this market, standardized rules and regulation exists to govern the financial dealings of participants. These markets are under direct control of RBI and other regulatory bodies. Classification of Organized market: a. Capital Market b. Money Market

CAPITAL MARKET: This is the market for financial assets which have a long and indefinite maturity. Hence, this market deals with long term securities. Capital market is again divided in to three types, viz, a. Industrial Securities Market b. Government Securities Market c. Long Term Loan Market

Long Term Loan market: • • •

Term Loan market Market for Mortgage Market For Financial guarantees

Industrial Securities Market: • •

Primary Market Secondary Market

Primary Market: It is new issue market which deals with those securities which are issued to the public for the first time and borrower issues new securities for long term funds. This market facilitate capital formation. Company raises capital in primary Market in three ways; a. Public Issue (IPO) b. Right Issue c. Private Placement.

Instruments in Primary Market: • • • • • • • •

SPN (Secured Premium Note) Equity Share Preference Share Debentures Zero Interest Bond Deep Discount Bond Option Bond Bonds with Warrants.

Players in the Primary Markets: • • • • •

Merchant Bankers Registrars Collecting and co-coordinating Bankers Underwriters and Brokers Advertising Agency.

Functions of New Issue Market: – Origination – Underwriting – Distribution.

Regulations of New Issue Market: •

Company must have been registered under the Companies act;1956

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Company must have obtained the permission from the comptroller of Capital Issue.

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Company must have appointed Bankers and Underwriter for the issue

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Company must have been listed in the recognized Stock Exchange in India

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Company must have raised the minimum issue within the prescribed period.

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Company will have to attach the Prospectus with every application for Share Subscription.

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Company shall have to return the share money deposited by the public in the collection centre if share are not allotted within the prescribed period.

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Allotment shall have to be made as per the direction of the SEBI.

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Issue of shares will be only at par if the Company is completely new one.

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Issue of shares by new company established by existing company (with 5 year Track record) can freely issue shares at premium

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Private and closely held company shall be permitted to price their issue freely.

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Existing listed company will be allowed to raise fresh capital by freely pricing issue provided promoter’s contribution is 50% on 1st 100 Corers, 30% on next 100 corers and 15% on the balance issue.

SECONDARY MARKET: Introduction: The market where existing securities are traded is referred to Secondary Market or Stock Market. In this market, purchases and sale of securities of Government, semigovernment, public bodies and Shares and Debentures of Joint stock Companies are effected. The securities of Government are traded in the stock market as a separate component called Guilt Edged market. Another component of stock market deals with stock and share of joint stock companies called market for stock and shares or STOCK MARKET.

Definition of Stock Exchange: As per SCR Act,1956 “ A Stock Exchange is an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities” From the above definition, it is clear that the stock exchange is not involved in buying and selling of securities. It establishes set of rules which must be followed by all the participants in buying and selling of securities to systematize and control the trading process.

Functions of Stock Exchange: • • • • • • • • •

It provides liquidity and Marketability of securities It provides safety of funds It helps to supply long term funds It helps to provide flow of capital to profitable venture. It motivates to improve performance It promotes investment It reflects the Economic conditions of the country It provides information of continuous price movement of stock in the market. It helps investors to take suitable decision for investment or withdrawal.

Listing of Securities: Meaning of Listing: It means securities are admitted to be traded on a recognized stock exchange. It is compulsory for those companies which offer shares and debentures to the public for subscriptions by means of issuing a prospectus. Without listing, the company cant go for public issue as per the restriction imposed by SEBI and the underwriting is not possible. It also grants to the company to list their securities in more than one stock exchange in India. However, they must submit themselves to the various regulatory measures of the stock exchange concerned as well as SEBI.

Advantages of Listing: • • • • •

Buying and Selling Securities Ensure Liquidity Wide publicity Assure Finance Protect Investors

Demerits of Listing • • •

Leads to Speculation Degrades companies reputation Disclosure of information.

Listing Procedure: •

Company has to apply for Listing in the prescribed format along with the following details. – – – – – – – – – – –

Certified copy of Memorandum and Articles of Association Prospectus, underwriting agreement with vendors and promoters. Specimen copy of share and debenture certificates, letter of call, allotment, acceptance and renunciation Audited financial statement. Copies of advertisement offering any securities for subscription Copy of agreement with managerial personnel. Particular of dividend and bonus paid during last 10 years. A brief history of company. A statement of distribution of share. Particulars of share forfeited. Listing agreement and Receipt of annual listing fee.

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At least 60% of securities must be offered to the public for subscription

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Minimum issued capital should be 3 crores.

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The issue must be opened at least for a period of 2 days.

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There must be at least 10 public shareholders for every 1 lakh share of fresh issue and 20 in case of subsequent issue.

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A company with 5 crore paid up capital must list its securities in more than one stock exchange. Listing in regional stock exchange is compulsory.

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Company should pay interest on excess application money received.

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Articles of the company must provide every information related to shares.

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Expenditure of Public Issue must within the limit fixed by SEBI from time to time.

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Share allotment to promoters must be submitted.

Obligation after Listing – – – – – –

Information of Board meeting, declaration of dividend, right issue and bonus Information about change of company’s directorate Information about new issue of shares, right share etc. Information about change of capital structure. Information of change of company’s principal business. Copies of all circular, notice and information sent to shareholders are to be sent to stock exchange.

SECURITIES AND EXCHANGE BOARD OF INDIA Organization: In the Defence Rule of India, 1943, provision were made to check the flow of capital in to the production of essential commodities during the II World War period. This provision was temporary and after the war, it was culminated in to the Capita Issue (Control) Act, 1947. The objectives of this act were; • • •

Growth of Company with Sound capital structure Avoid overcrowding of capital issue Ensure orderly and healthy growth of capital markets with adequate protection to investor. For achieving these objectives, an office of the Comptroller of Capital Issue (CCI) was set up to regulate the capital issue in the country. CCI was vested with the power to approve the kind of instruments, size, timing and premium of issue. It was proved that the Capita Issue (Control) Act, 1947 were totally inadequate to regulate the growing dimensions of capital market activity. The government realized the necessity of creating a more secure environment for the business to grow. This led to enactment of companies act and Securities Contract (Regulation) Act, 1956. Due to remarkable changes in the industrial policy during 6th Five year plan, it was necessary for the government to control the activities of stock market of high importance. Government tried to erode the Malpractices and defiencies of Capital market and to achieve this Government set up an apex body to develop and regulate Stock Market in India. This led to set up of Securities and Exchange Board of India on April 12, 1988 and it took almost 4 years for the government to bring about a separate legislation in the name of Securities and Exchange Board of India Act, 1992 conferring statutory power.

Objective: • • •

Protection of investor’s interest Regulate securities market to ensure fair practice. Promote efficient services of brokers, bankers, etc to make them professional

Functions Section 11 SEBI Act, 1992 Functions of SEBI are classified in to two categories; • REGULATORY FUNCTIONS • DEVELOPMENTAL FUNCTIONS

Regulatory Functions; •

Regulation of stock exchange and self regulatory organization

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Regulate the Registration and functions of Brokers, Sub-brokers, bankers, underwriter, portfolio manager and other intermediaries in the stock market

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Regulation of mutual fund investments

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Prohibition of fraudulent and unfair trade practice Prohibit insider trading

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Regulate substantial acquisition of shares and take over of the company

Developmental Function • • • •

Promote investor’s education Training intermediaries Conducting research and publishing information for market participants Develop code of conduct and promote fair practices