Unit 1: Introduction to

Indian Financial System

Unit 2: Introduction to
Financial Markets - I
(Capital Markets)

Dr Haritika Chhatwal
TOPICS TO STUDY
• Introduction to Indian Financial System, Structure of Financial System, List
of Institutions, Role of RBI, Commercial Banks, NBFCs, PDs, FIs,
Cooperative Banks, CRR, SLR; Equity & Debt Market; IRDA
• Overview of Capital Market; Stock Exchange; Commonly used Terms;
Types of Capital Issues; Financial Products/ Instruments including ASBA,
QIP; SEBI; Registration of Stock Brokers, Sub-brokers, Share Transfer
Agents, etc. QIBs
• Introduction of Money Market, Instruments of Money Market, Interbank
Lending, T-Bills, Certificate of Deposit, Commercial Paper, Repo, G-Secs;
ADs, FEMA, LIBOR, MIBOR, etc. Advantages & Disadvantages of Money
Market, Difference between Capital & Money Markets
Introduction to Indian Financial System
Indian Financial System

Informal Formal

RBI
Moneylender
•

SEBI
Local broker /non bank
financial intermediaries ,
chit fund companies MOF

Other regulatory
bodies
Structure of Financial System & List of Institutions
❑Banking and non-banking: Banking institutions = creators + purveyors of credit
. liabilities of banks are part of the money supply
❑ Non-banking financial institutions are purveyors of credit- Developmental fi
nancial institutions (DFIs), Non-banking financial companies (NBFCs) as well as
housing finance companies (HFCs)

❑Term finance-Industrial Development Bank of India (IDBI), the Industrial Credit

and Investment Corporation of India (ICICI), the Industrial Financial Corporation
of India (IFCI), the Small Industries Development Bank of India (SIDBI), and the
Industrial Investment Bank of India (IIBI).
Structure of Financial System & List of Institutions
❑Specialised- Export Import Bank of India (EXIM), the Tourism Finance
Corporation of India (TFCI), ICICI Venture, the Infrastructure Development
Finance Company (IDFC)
❑Sectoral- National Bank for Agricultural and Rural Development (NABARD)
and the National Housing Bank (NHB).
❑ Investment-mutual funds Unit Trust of India (UTI), public sector and private
sector mutual funds and insurance activity of Life Insurance Corporation (LIC),
General Insurance Corporation (GIC)
❑State-level- e State Financial Corporations (SFCs) and State Industrial
Development Corporations (SIDCs) which are owned and managed by the
State governments
Role of RBI
The Reserve Bank of India Act, 1934 was commenced on Apri1, 1935.
The Bank was constituted for the need of following:
i. Issuer of currency

❑
(a)Agricultural Sector
(b)Industrial Finance
(c)Credit Delivery
Commercial
Banks
Commercial banks are financial institutions that are primarily engaged in
❑ accepting deposits
❑providing loans and credit facilities for-profit organizations
❑Issuing and clearing cheques
❑Maintaing accounts
❑Providing safekeeping services
❑Currency exchange
❑Overdraft facility
❑Investments
❑Forex services
❑Insurance products
❑Financial Advice
Types of Commercial Banks.
❑Public Sector Banks-State Bank of India, Punjab National Bank, and Bank of
Baroda
❑Private Sector Banks:The banks which have been setup in the 1990s under the
guidelines of the Narasimham Committee are referred to as new private sector
banks -HDFC Bank, ICICI Bank, and Axis Bank.

❑Foreign Banks= Citibank, Standard Chartered Bank, and HSBC Bank.

❑Regional Rural Banks- Narmada Jhabua Gramin Bank, Pragathi Krishna Gramin
Bank, and Baroda Uttar Pradesh Gramin Bank.

❑Co-operative Banks- Urban Co-operative Banks and Rural Co-operative Banks

BANK PERFORMANCE MEASURES
Loan Ratio % = total amount of loans/total amount of deposits for the same
period.
NBFCs
1. Chit Funds: Chit funds are savings institutions. It has regular members who
make periodic subscriptions to the fund. The beneficiary may be selected by
drawing of lots. Chit fund is more popular in Kerala and Tamilnadu. Rbi has no
control over the lending activities of chit funds.
2. Nidhis:-Nidhis operate as a kind of mutual benefit for their members only. The
loans are given to members at a reasonable rate of interest. Nidhis operate
particularly in South India.
3. Loan Or Finance Companies: Loan companies are found in all parts of the
country. Their total capital consists of borrowings, deposits and owned funds.
They give loans to retailers, wholesalers, artisans and self-employed persons.
They offer a high rate of interest along with other incentives to attract deposits.
They charge high rate of interest varying from 36% to 48% p.a.
4. Finance Brokers: They are found in all major urban markets specially in cloth,
grain and commodity markets. They act as middlemen between lenders and
borrowers. They charge commission for their services.
PD
• Public deposit is the source of fund for private and non-banking companies. It means to
accept fund from public in the form of deposit. The interest on these deposits is more than
interest which is given by banks and post offices.
• The Reserve Bank of India (RBI) prescribes a number of regulatory uses of ratings.
The RBI requires that a NBFC must have minimum investment grade credit rating if it
intends to accept public deposits. As per money market regulations of the RBI, a
corporate must get an issue of CP rated and can issue such paper subject to a
minimum rating. SEBI has also stipulated that ratings are compulsory for all public
issue of debentures. SEBI has also made mandatory for acceptance of public deposit
by Collective Investment Schemes.
• the Merchant Banker who has been granted registration by the RBI to act as a
primary or satellite dealer may carry on such activity subject to the condition that it
shall not accept or hold public deposit
What is meant by DFHI?

• Discount And Finance House of India Ltd (DFHI) DFHI was set up in March 1988
by Reserve Bank of India jointly with public sector banks and all India Financial
Institutions to develop the money market and to provide liquidity to money
market instruments as a sequel to Vaghul Working Group recommendations.
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 and put in place an improved, efficient
secondary market trading system. This was to encourage holding of Government
Securities on large scale and make the market more vibrant and liquid.
❑DFHI was set up by RBI along with public sector banks and financial institutions 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 in terms of net worth
(Rs. 1,059 crores as on March 31, 2008)
❑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 who have since shed this role.
FI
• A Financial Institution is an organization that manages money-related and
financial exchanges like deposits, loans, investments, and currency exchange.
Types of Financial Institutions
• Fixed-Term Credit institutions – Their main activity is direct lending through
fixed-term loans and investments.
• Refinancing Institutions – They fund their refinancing mainly to banks and non-
bank institutions.
For example:
– The National Bank for Agriculture and Rural Development (NABARD)
– The Small Industries Development Bank of India (SIDBI)
– The National Housing Bank (NHB).
• Investment Institutions – They invest their assets primarily in financial
securities.
For example:
– Life Insurance Corporation (LIC)
Major financial institutions in India:
The Reserve Bank of India was established in 1935. It aims to organize the
financial framework and promote economic stability in India. The bank acts
as the regulator for the operation of the various commercial banks and
other financial institutions in India. The bank formulates various interest
rates and policies too. It also offers assistance to central government
and institutions.
Commercial Banks
There are three types of Commercial Banks in India:
1. Foreign Banks
2. Private Banks
3. Public Sector Banks
Commercial banks go about various activities such as taking deposits,
lending for various purposes. They can even collect taxes on behalf of
institutions and the central government.
• Insurance Companies
• Insurance companies offer damage protection. They deal with life insurance,
transport insurance, car insurance, etc. They collect the small savings from investors
and then reinvest these savings in the market. The insurance companies are
collaborating with different foreign insurance companies after the liberalization
process. This move aimed to expand the Indian insurance market.
• Credit Rating Agencies
• The credit rating agencies in India were mainly formed to assess the condition of the
financial sector. It also finds different options for more improvement. The credit rating
agencies offer various services as:
• Operation upgradation
• Training to employees
• Analyze new projects and find out the weak sections in it
• Rate different sectors
• The two most important credit rating agencies in India are:
• CRISIL
• ICRA
• Securities and Exchange Board of India
• The Securities and Exchange Board of India was established in 1992. It
aims to protect the interests of investors. It also monitors market
conditions, register institutions, and are dedicated to risk management.
• Specialized Financial Institutions
• Specialized Financial Institutions in India are government companies
established to support various sectors. They affect the overall
development of the Indian economy.
• The significant institutions falling under this category include:
• Board for Industrial & Financial Reconstruction
• Export-Import Bank Of India
• Small Industries Development Bank of India
• National Housing Bank
Cooperative Banks
• Cooperative banks fi ll in the gaps of banking needs of small and medium
income groups not adequately met through by the public and private sector
banks. The cooperative banking system supplements the efforts of the
commercial banks in mobilising savings and meeting the credit needs of the
local population. The cooperative credit sector in India comprises rural
cooperative credit institutions and urban cooperative banks. The rural
cooperative credit institutions comprise of institutions such as state
cooperative banks, district central cooperative banks, and primary agricultural
credit societies, which specialise in short-term credit, and institutions such as
state cooperative agriculture and rural development banks and primary
cooperative agriculture and rural development banks, which specialise in
long-term credit.
NBFC
• NBFCs are financial intermediaries engaged primarily in the business of
accepting deposits and delivering credit. They play an important role in
channelising the scarce financial resources to capital formation. NBFCs
supplement the role of the banking sector in meeting the increasing fi
nancial needs of the corporate sector, delivering credit to the unorganised
sector and to small local borrowers. But they differ from banks in many
ways. An NBFC can accept deposit but not demand deposits and hence,
they cannot raise low-cost funds through savings or current accounts.
Moreover, it is not a part of the payment and settlement system, cannot
issue cheques drawn on itself and cannot borrow from the RBI.
Certificate of Deposit
• Certificate of Deposit or CD is a fixed-income financial instrument governed
under the Reserve Bank and India (RBI) issued in a dematerialized form.
• The amount at payout is assured from the beginning.
• A CD can be issued by any All-India Financial Institution or Scheduled
Commercial Bank. They are issued at a discount provided on face value.
• Like a fixed deposit (FD), a CD’s purpose is to denote in writing that you have
deposited money in a bank for a fixed period and that bank will pay you
interest on it based on the amount and duration of your deposit.
Difference Between CD vs FD
• Difference Between CD vs FD
• There is no major difference between a certificate of deposit and a fixed
deposit. They are one and the same.
• Fixed deposits are even referred to as CDs or time deposits by certain banks.
They come with the same term period, a minimum requirement for a deposit,
and high-interest rates compared to traditional savings accounts. One
difference is that CDs are freely negotiable while FDs are not.
Features of CD
• Here are some salient features of CD’s and how they compare to other financial instruments.
• CDs can be issued in India for a minimum deposit of ₹1 lakh and in subsequent multiples of it.
• Scheduled Commercial Banks (SCBs) and All-India Financial Institutions are eligible to issue a
CD. Cooperative Banks and RRBs cannot issue a CD.
• CDs issued by SCBs have in term period anywhere between 3 months to a year.
• CDs issued by financial institutions have a term period ranging from 1–3 years.
• Similar to dematerialized securities, CDs in dematerialized forms are transferable through
means of endorsement or delivery.
• There is no lock-in required for a CD.
• One cannot issue a loan against a CD.
• A certificate of deposit is fully taxable under the Income Tax Act.
• A CD cannot be publicly traded.
• Banks are not permitted to buy back a CD before its maturity.
Commercial Paper
❑Commercial paper is an unsecured short-term debt instrument corporations issue
to raise funds. It is a promissory note that promises the holder a fixed return at
maturity. Commercial paper typically has a maturity period of less than
a year, usually from one to 270 days.
❑It is generally sold at a discount to face value, which means that investors can
earn a return by buying the commercial paper at a discount and holding it until
maturity.
❑One of the main characteristics of commercial paper is that large, creditworthy
corporations typically issue it with a high credit rating. These companies use
commercial paper to meet their short-term financing needs, such as
financing inventory, payroll, or accounts payable.
•
• The government does not insure commercial paper, which means that investors
risk losing their investment if the issuer defaults.
• Commercial paper is subject to interest rate risk, which means that its value
may fluctuate with changes in interest rates.
Difference between CD vs Commercial Paper
• A CD is issued by financial institutions and banks. Commercial papers are
issued by primary dealers, large corporations and Financial Institutions.
• A certificate of deposit requires a minimum investment of ₹1 lakh and
thereafter permits multiples of it. A commercial paper, on the other hand, is
issued for investments of at least ₹5 lakhs and in multiples of ₹5 lakh,
thereafter.
CRR, SLR
• Reserve requirements are of two types: (i) cash reserve requirements
(CRR) and (ii) statutory liquidity ratio (SLR). They are techniques of
monetary control used by the Reserve Bank to achieve specifi c macro-
economic objectives. The CRR refers to the cash that banks have to
maintain with the Reserve Bank as a certain percentage of their total
demand and time liabilities (DTL) while

• SLR refers to the mandatory investment that banks have to make in

government securities.
Prime lending rate (PLR)
• The prime lending rate (PLR) is the minimum lending rate charged by the
bank from its best corporate customers or prime borrowers.
LAF (Liquid Adjustment Facility)
• LAF (Liquid Adjustment Facility) is operated through repos and reverse
repos. The LAF is a tool of day-to-day liquidity management through the
absorption or injection of liquidity by way of sale or purchase of securities
followed by their repurchase or resale under the repo/reverse repo
operations. It provides a mechanism for injection and absorption of liquidity
available to banks and to overcome mismatches in supply and demand from
time to time
Call/notice money market

• Call/notice money market is by far the most visible market as the day-to-day
surplus funds, mostly of banks, are traded there. The call money market is a
market for very short-term funds repayable on demand and with a maturity
period varying between one day to a fortnight. Commercial banks borrow
money from other banks to maintain a minimum cash balance known as cash
reserve requirement (CRR).
Equity Market;
• Equity market is a place where stocks and shares of companies are traded. The equities
that are traded in an equity market are either over the counter or at stock exchanges. Often
called as stock market or share market, an equity market allows sellers and buyers to deal
in equity or shares in the same platform.
• First things first, it is important to begin with a good understanding of what is equity market
in the Indian context. Equity market, often called as stock market or share market, is a place
where shares of companies or entities are traded. The market allows sellers and buyers to
deal in equity or shares in the same platform.

• The secondary market operates through two mediums, namely, the over-thecounter
(OTC) market and the exchange-traded market. The OTC markets are informal markets
where trades are negotiated. Most of the trades in government securities take place in
the OTC market. All the spot trades where securities are traded for immediate delivery
and payment occur in the OTC market
Types of Equity Market

Equity markets comprise structured trading and investment and can be

defined into two types of platforms, i.e., primary and secondary markets.
Primary market
❑Each company plans to offer its shares for public trading must start with
Initial Public Offering or IPO. In this process, the company offers a part of its
total equity to the public for raising capital initially. Once the IPO is complete,
the stocks so offered are listed on the stock exchange for further trading.
❑The entire process of introducing the IPO by a company takes place in the
primary market. In other words, this market comprises only the
IPO introduction and investment.
Secondary market
❑Once the shares have already been listed on either of the exchanges, further trading for them
is held in the secondary market. Here, the initial investors get an opportunity to exit their
investments via stock sale in this live equity market. These stocks can comprise shares, along
with other types of securities that can include convertible bonds, corporate bonds, etc.
❑While investors who failed to purchase shares in the primary market can do so here, it also
opens up an opportunity for a wide range of traders to invest in such stocks.
❑Also, another typical characteristic of the secondary equity market is that trading here is
usually done via intermediaries known as stockbrokers.
❑Shares and securities in India are primarily traded through two stock exchanges, i.e., NSE and
BSE.
NSE or National Stock Exchange
• Established back in 1992, the National Stock Exchange aimed to bring transparency in
the equity share market of India. Currently, NSE holds the 12th spot in the ranking of
the world’s biggest stock exchanges.
• As the first exchange in the country, it came up with an end-to-end automated
electronic system to facilitate stock trading for investors. Trading in the capital market
on NSE started in 1994 while the year 2000 saw the commencement of derivatives
trading on this platform.
BSE or Bombay Stock Exchange
• Situated in Mumbai’s Dalal Street, the Bombay Stock Exchange was established back in
1875. As against NSE, BSE ranks 11th globally in terms of stock exchange market size and
operations. Also, with a median trading speed of 6 microseconds, it also stands as the
fastest stock exchange in the world.
Equity Trading in the Stock Market
• Trading in the equity market primarily entails the seller fixing a price and a buyer agreeing to
pay that price to purchase the security, thus executing a sale. In a general context, the
understanding of what is equity in the share market extends to all types of shares and
securities traded that are also termed as stock. Equity and stock are thus used
interchangeably for the purpose of trading.
Procedures Involved in the Equity Market
• An equity market does not solely serve to facilitate trading. It is functioning also
encompasses other procedures. Here’s a gist of these procedures.
Trading
• As explained earlier, trading is a fundamental procedure that involves buying and selling of
securities belonging to listed companies. The procedure is completed through the screen-
based automated system, with brokering agents providing these services to individual
traders against stipulated fees. It serves as an open platform where buyers and sellers can
place an order as per trade option availability.
'Debt Instrument'
• Debt instrument represents a contract whereby one party lends
money to another on pre-determined terms with regards to rate
and periodicity of interest, repayment of principal amount by the
borrower to the lender. In the Indian securities markets, the term
y bond' is used for debt instruments issued by the Central and
State governments and public sector organizations and the term
debenture' is used for instruments issued by private corporate
sector.
Derivative

• Derivative is a product whose value is derived from the value of one or

more basic variables, called underlying. The underlying asset can be
equity, index, foreign exchange (forex), commodity or any other asset.
Derivative products initially emerged as hedging devices against
fluctuations in commodity prices and commodity-linked derivatives
remained the sole form of such products for almost three hundred years.
The financial derivatives came into spotlight in post-1970 period due to
growing instability in the financial markets. However, since their
emergence, these products have become very popular and by 1990s, they
accounted for about two-thirds of total transactions in derivative
products.
Mutual Fund
• A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools
money from individuals/corporate investors and invests the same in a variety of different financial
instruments or securities such as equity shares, Government securities, Bonds, debentures etc.
• Mutual funds can thus be considered as financial intermediaries in the investment business that collect
funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors.
• The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to
an appreciation in the value of the units held by investors.
• The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund
scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual
Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government
securities.
• The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others
are a mix of equity and bonds. Investors are also given the option of getting dividends, which are
declared periodically by the mutual fund, or to participate only in the capital appreciation of the
scheme.
What does 'price discovery through Book Building Process' mean

• Book Building is basically a process used in IPOs for

efficient price discovery. It is a mechanism where, during
the period for which the IPO is open, bids are collected
from investors at various prices, which are above or
equal to the floor price. The offer price is determined
after the bid closing date.
What is the main difference between offer of shares through book building
and offer of shares through normal public issue?
Price at which securities will be allotted is not known in case of
offer of shares through Book Building while in case of offer of
shares through normal public issue, price is known in advance to
investor. Under Book Building, investors bid for shares at the floor
price or above and after the closure of the book building process
the price is determined for allotment of shares. In case of Book
Building, the demand can be known everyday as the book is being
built. But in case of the public issue the demand is known at the
close of the issue.
Risk management
• Risk management is another specific procedure associated with stock markets. As investing in
the equity market involves risk, the comprehensive system of risk management ensures that
investors’ interest remains protected while exercising any curbs on frauds from a company’s end.
• The system also enables the stock market to remain updated with any changing trading
mechanisms and hedge possible market failures.
Settlement and clearing
• Every investment or trading made throughout the day is cleared and settled by the end of this
particular day. A stock exchange does this through a well-defined cycle of settlement. In Indian
exchanges, the T+2 cycle is adopted for such settlements, which means the settlements are made
within two days after the trade has been concluded for a specific day, considered day 1.
• An equity market comes with immense opportunities for individuals to fulfil their financial
requirements for the future via strategic trading and investment. Such gains can help ride off the
increasing inflationary pressure and the consequent strain on finances due to rising prices. It is thus
ideal to get accustomed to the basics of the stock market along with its regulations for disciplined
earning via investment and trading in the long run.
STOCK MARKET INDEX
❑The stock market index is a barometer of market behaviour. It reflects market
direction and indicates day-to-day fluctuations in stock prices.
❑ The market index reflects expectations about the behaviour of the economy as a
whole. It is a precursor of economic cycles.
❑The function of a stock index is to provide investors with information regarding the
average share price in the market.
❑A well-constructed index captures the overall behaviour of the market and
represents the return obtained by a typical portfolio investing in the market.
❑An ideal index must represent changes in the prices of scrips and reflect price
movements of typical shares for better market representation.
❑Stock index is a barometer of a nation’s economic health as market prices reflect
expectations about the economy’s performance. Stock markets tend to be buoyant
when the economy is expected to do well.
❑Stock indices are termed as leading economic indicators as they indicate what is
going to happen in the economy in the future. The returns generated in the stock
market are based on future expectations. The future streams of expected
returns from the companies are discounted to arrive at their present value
known as market price.
❑A good market index incorporates a set of scrips which have high market
capitalisation and high liquidity.
❑Market capitalisation is the sum of the market value of all the stocks included in
the index. The market value is derived by multiplying the price of the share by the
number of equity shares out-standing.
❑ Liquidity is reflected in the ability to buy or sell a scrip at a price close to the
current market price. In other words, the bid–ask spread is minimum.
• The index on a day is calculated as the percentage of the aggregate market
value of the set of scrips incorporated in the index on that day to the average
market value of the same scrips during the base period. For example, the BSE
Sensex is a weighted average of prices of 30 select stocks and S&P CNX Nifty of
50 select stocks.
Methodologies for Calculating the Index
Market Capitalisation Weighted
❑1. Full market capitalisation method: In this method, the number of shares
outstanding multiplied by the market price of a company’s share determines
the scrip’s weightage in the index. The shares with the highest market
capitalisation would have a higher weightage and would be most influential
in this type of index. Examples: S&P 500 Index in USA and S&P CNX Nifty in
India.
❑2. Free-float market capitalisation method: Free-float is the percentage of
shares that are freely available for purchase in the markets. It excludes
strategic investments in a company such as the stake held by government,
controlling shareholders and their families, the company’s management,
restricted shares due to IPO regulations, and shares locked under the
employee stock ownership plan. In this methodology, the weight of a scrip
is based on the free-float market capitalisation.
Free-float market capitalisation reflects the investible market capitalisation
which may be much less than the total. Closely held companies would have a
much lower weightage and companies with high free-float, i.e., higher investible
shares, would be rewarded. Companies which provide high shareholder value
but have less free-float would be marginalised. The BSE has taken a lead on
free-floating the indices. It made a beginning by launching on July 11, 2001, the
country’s first free-float index, ‘BSE-TECK Index,’ an index for technology,
entertainment, communication, and other knowledge-based sectors. The BSE
has introduced this methodology in the case of the BSE sensex since
September 1, 2003. Now the BSE sensex is a free-float sensex.
3. Modified capitalisation weighted: This method seeks to limit the influence
of the largest stocks in the index which otherwise would dominate the
entire index. This method sets a limit on the percentage weight of the largest
stock or a group of stocks. The NASDAQ-100 Index is calculated by using this
method.
IRDA
• IRDA is Insurance Regulatory and Development Authority of India. It is an entity owned
by the India Government; it controls India’s insurance industry. IRDA headquarter is
located in Hyderabad since 2001.
• The key functions of IRDA are listed below.
• IRDA is accountable for the policymaking and supervision of all Indian insurance firms.
• It ensures the privacy of policyholders about claim resolution, policy surrender value,
and so on.
• It lays down the credentials, code of ethics and skill required for insurance
intermediaries & agents.
• The code of conduct for surveyors & loss assessors is mentioned.
• The operation of the Tariff Advisory Committee is overseen by it.
• It controls investment by insurance firms in funds.
• The percentage of life insurance and general insurance activities in the rural or social
sector are specified.
• Adjudicates the conflicts among insurers and intermediaries of insurance.
• Prevents insurance policies from fraud and misspelling.
• Guarantees speedy claims settlement.
Overview of Capital Market;
• Every modern economy is based on a sound financial system which helps in
production, capital and economic growth by encouraging savings habits,
mobilising savings from households and other segments and
• Allocating savings into productive usage such as trade, commerce, manufacture
etc
• Various factors influence the capital market and its growth. These include level
of savings in the household sector, taxation levels, health of economy,
corporate performance, industrial trends and common patterns of living.
The functions of a good financial system are manifold
(a) regulation of currency
(b) banking functions
(c) performance of agency services and custody of cash reserves
(d) management of national reserves of international currency
(e) credit control
(f) administering national, fiscal and monetary policy to ensure stability
of the economy
(g) supply and deployment of funds for productive use
(h) maintaining liquidity.
Long term growth of financial system is ensured through:
(a)education of investors
(b)giving autonomy to FIs to become efficient under competition
(c)consolidation through mergers
(d)facilitating entry of new institutions to add depth to the market
(e)minimising regulatory measures and market segmentation
Financial Markets
Money Market

The money market refers to the market where borrowers and lenders
exchange short-term funds to solve their liquidity needs. Money market
instruments are generally financial claims that have low default risk,
maturities under one year and high marketability.
Capital Market
❑The Capital Market is a market for financial investments that are direct or indirect
claims to capital. It is wider than the Securities Market and embraces all forms of
lending and borrowing, whether or not evidenced by the creation of a negotiable
financial instrument.
❑The Capital Market comprises the complex of institutions and mechanisms through
which intermediate term funds and long-term funds are pooled and made available
to business, government and individuals.
❑The Capital Market also encompasses the process by which securities already
outstanding are transferred.
❑The capital market and in particular the stock exchange is referred to as the
barometer of the economy.
❑Government’s policy is so moulded that creation of wealth through products and
services is facilitated and surpluses and profits are channelised into productive
uses through capital market operations.
❑Reasonable opportunities and protection are afforded by the Government through
special measures in the capital market to get new investments from the public and the
Institutions and to ensure their liquidity.
 NEED FOR CAPITAL MARKET
• It is an important and efficient conduit to channel and mobilize funds to
enterprises, both private and government.
– It provides an effective source of investment in the economy.
– It plays a critical role in mobilizing savings for investment in productive
assets, with a view to enhancing a country’s long-term growth prospects, and
thus acts as a major catalyst in transforming the economy into a more
efficient, innovative and competitive marketplace within the global arena.
–Medium for risk management by allowing the diversification of risk in the
economy.
– A well-functioning capital market tends to improve information quality as
it plays a major role in encouraging the adoption of stronger corporate
governance principles, thus supporting a trading environment, which is
founded on integrity.
– Capital market has played a crucial role in supporting periods of
technological progress and economic development
– Among other things, liquid markets make it possible to obtain financing
for capital.
– Capital markets make it possible for companies to give shares to their
employees via ESOPs.
– Capital markets provide a currency for acquisitions via share swaps.
– Capital markets provide an excellent route for disinvestments to take
place.
– Venture Capital and Private Equity funds investing in unlisted companies get
an exit option when the company gets listed on the capital markets
– The existence of deep and broad capital market is absolutely crucial in
spurring the growth our country.
FUNCTIONS OF THE CAPITAL MARKET

– To mobilize resources for investments.

– To facilitate buying and selling of securities.
– To facilitate the process of efficient price discovery
– To facilitate settlement of transactions in accordance with the
predetermined time schedules.
Primary Market
• The primary market provides the channel for sale of new securities, while the
secondary market deals in securities previously issued. The issuer of securities
sells the securities in the primary market to raise funds for investment and/or to
discharge some obligation. In other words, the market wherein resources are
mobilised by companies through issue of new securities is called the primary
market. These resources are required for new projects as well as for existing
projects with a view to expansion, modernisation, diversification and
upgradation. The Primary Market (New Issues) is of great significance to the
economy of a country. It is through the primary market that funds flow for
productive purposes from investors to entrepreneurs. The latter use the funds
for creating new products and rendering services to customers in India and
abroad. The strength of the economy of a country is gauged by the activities
of the Stock Exchanges. The primary market creates and offers the
merchandise for the secondary market.
Secondary Market
• The secondary market enables those who hold securities to adjust their
holdings in response to changes in their assessment of risk and return. They
also sell securities for cash to meet their liquidity needs. The price signals,
which subsume all information about the issuer and his business including
associated risk generated in the secondary market, help the primary market in
allocation of funds. Secondary market essentially comprises of stock
exchanges which provide platform for purchase and sale of securities by
investors. The trading platform of stock exchanges are accessible only through
brokers and trading of securities is confined only to stock exchanges.
• The stock market or secondary market ensures free marketability,
negotiability and price discharge.
• This secondary market has further two components, First, the spot market
where securities are traded for immediate delivery and payment, The other is
futures market where the securities are traded for future delivery and payment.
Another variant is the options market where securities are traded for
conditional future delivery. Generally, two types of options are traded in the
options market. A put option permits the owner to sell a security to the writer
of the option at a pre-determined price before a certain date, while a call
option permits the buyer to purchase a security from the writer of the
option at a particular price before a certain date.
Stock Exchange

• Stock exchange is taken as a barometer of the economy of a country. It

is the most dynamic and organised component of capital market.
Especially, in developing countries like India, the stock exchanges play a
cardinal role in promoting the level of capital formation through effective
mobilisation of savings and ensuring investment safety. It is equally
important to have the understanding of the governance of Stock
Exchanges, and the services they provide to investors.
Types of Capital Issues;
Financial Products/ Instruments

• PG 43 icsi
QIP
• A qualified institutional placement (QIP) was initially a designation of a securities issue
given by the Securities and Exchange Board of India (SEBI). The QIP allows an Indian-
listed company to raise capital from domestic markets without the need to submit any
pre-issue filings to market regulators. The SEBI limits companies to only raising money
through issuing securities.
• QIPs are helpful for a few reasons. Their use saves time as the issuance of QIPs and the
access to capital is far quicker than through a follow-on public offer (FPO). The speed is
because QIPs have far fewer legal rules and regulations to follow, making them much
more cost-efficient. Further, there are fewer legal fees .
SEBI
• SEBI stands for Securities and Exchange Board of India. It is a statutory
regulatory body that was established by the Government of India in 1992 for
protecting the interests of investors investing in securities along with regulating
the securities market. SEBI also regulates how the stock market and mutual
funds function.
• Objectives of SEBI
• Following are some of the objectives of the SEBI:
• 1. Investor Protection: This is one of the most important objectives of setting up
SEBI. It involves protecting the interests of investors by providing guidance and
ensuring that the investment done is safe.
• 2. Preventing the fraudulent practices and malpractices which are related to
trading and regulation of the activities of the stock exchange
• 3. To develop a code of conduct for the financial intermediaries such as
underwriters, brokers, etc.
• 4. To maintain a balance between statutory regulations and self regulation.
Functions of SEBI
• SEBI has the following functions
• 1. Protective Function
• 2. Regulatory Function
• 3. Development Function
Protective Function:
• The protective function implies the role that SEBI plays in protecting the
investor interest and also that of other financial participants. The protective
function includes the following activities.
• a. Prohibits insider trading: Insider trading is the act of buying or selling of the
securities by the insiders of a company, which includes the directors,
employees and promoters. To prevent such trading SEBI has barred the
companies to purchase their own shares from the secondary market.
• b. Check price rigging: Price rigging is the act of causing unnatural
fluctuations in the price of securities by either increasing or decreasing the
market price of the stocks that leads to unexpected losses for the investors.
SEBI maintains strict watch in order to prevent such malpractices.
• c. Promoting fair practices: SEBI promotes fair trade practice and works
towards prohibiting fraudulent activities related to trading of securities.
• d. Financial education provider: SEBI educates the investors by conducting
online and offline sessions that provide information related to market insights
and also on money management.
Regulatory Function:
• Regulatory functions involve establishment of rules and regulations for
the financial intermediaries along with corporates that helps in efficient
management of the market.
• a. SEBI has defined the rules and regulations and formed guidelines and
code of conduct that should be followed by the corporates as well as the
financial intermediaries.
• b. Regulating the process of taking over of a company.
• c. Conducting inquiries and audit of stock exchanges.
• d. Regulates the working of stock brokers, merchant brokers.
Developmental Function:
• Developmental function refers to the steps taken by SEBI in order to
provide the investors with a knowledge of the trading and market function.
The
• following activities are included as part of developmental function.
• 1. Training of intermediaries who are a part of the security market.
• 2. Introduction of trading through electronic means or through the
internet by the help of registered stock brokers.
• 3. By making the underwriting an optional system in order to reduce cost
of issue.
Purpose of SEBI
• The purpose for which SEBI was setup was to provide an environment that
paves the way for mobilsation and allocation of resources.It provides
practices, framework and infrastructure to meet the growing demand.
• It meets the needs of the following groups:
• 1. Issuer: For issuers, SEBI provides a marketplace that can utilised for
raising funds.
• 2. Investors: It provides protection and supply of accurate information
that is maintained on a regular basis.
• 3. Intermediaries: It provides a competitive market for the intermediaries
by arranging for proper infrastructure.
Registration of Stock Brokers,
• Stock-broker means a member of stock exchange and they are the
intermediaries who are allowed to trade in securities on the exchange of
which they are members. They buy and sell on their own behalf as well as
on behalf of their clients. A sub-broker is one who works along with the
main broker and is not directly registered with the stock exchange as a
member.

• Sub-broker means any person not being a member of stock exchange who
acts on behalf of a stock broker as an agent or otherwise for assisting the
investors in buying, selling or dealing in securities through such stock
brokers..
SEBI (STOCK BROKERS AND SUB-BROKERS)
REGULATIONS, 1992
• SEBI (Stock Brokers & Sub-Brokers) Regulations, 1992 were notified by
SEBI in exercise of the powers conferred by section 30 of SEBI Act, 1992
and came into effect on 23rd October, 1992. Chapter II of the Regulations
contains Regulation 3 to 10 which deals with registration of Stock Brokers.
An application by a stock broker for grant of a certificate of registration
shall be made through the Stock exchange, of which he is admitted as a
member. The stock exchange shall forward the application form to SEBI as
early as possible but not later than 30 days from the date of its receipt.
SEBI may require the applicant to furnish such further information or
clarifications regarding the dealings in securities and related matters
Share Transfer Agents
• ‘Share Transfer Agent’ means:
• (i) any person who on behalf of any body corporate, maintains the records of
holders of securities issued by such body corporate and deals with all matters
connected with the transfer and redemption of its securities;
• (ii) the department or division, by whatever name called, of a body corporate
performing the activities as share transfer agents if at any time the total
number of holders of its securities issued exceed one lakh.
• The Registrars to an Issue and Share Transfer Agents constitute an important
category of intermediaries in the primary market. They render very useful
services in mobilising new capital and facilitating proper records of the details
of the investors, so that the basis for allotment could be decided and
allotment ensured as per SEBI Regulations.
•.
• They also render service to the existing companies in servicing the share
capital contributed by the investors. The system of share transfers gives
liquidity to the investment and helps the investors to easily acquire or dispose
off shares in the secondary market. The share transfer agents who have the
necessary expertise, trained staff, reliable infrastructure and SEBI licence
render service to the corporates by undertaking and executing the transfer
and transmission work relating to the company’s shares and securities. Thus,
they have a role to play both in the primary and the secondary markets
QUALIFIED INSTITUTIONS PLACEMENT
• A Qualified Institutions Placement means allotment of eligible securities by a
listed issuer to qualified institutional buyers on private placement basis in
terms of SEBI (ICDR) Regulations. This QIP is different from offer of
securities to qualified institutional buyers in an IPO
Eligible securities for the purpose of QIP
• Eligible Securities include equity shares, non-convertible debt instruments
along with warrants and convertible securities other than warrants.
QUALIFIED INSTITUTIONAL BUYER (QIB)
A QIB means –
(i) A mutual fund, venture capital fund, alternative investment fund and foreign venture capital
investor registered with SEBI;
(ii) A foreign portfolio investor other than Category III foreign portfolio investor registered with
SEBI;
(iii) A public financial institution as defined in section 2(72) of the Companies Act, 2013;
(iv) A scheduled commercial bank;
(v) A multilateral and bilateral development financial institution;
(vi) A state industrial development corporation;
(vii) An insurance company registered with the Insurance Regulatory and Development Authority;
(viii) A provident fund with minimum corpus of twenty five crore rupees;
(ix) A pension fund with minimum corpus of twenty five crore rupees;
(x) National Investment Fund set up by the Government of India published in the Gazette of India;
(xi) Insurance funds set up and managed by army, navy or air force of the Union of India;
(xii) Insurance funds set up and managed by Department of Posts, India;
(xiii) Systemically Important Non-Banking Financial Companies.
Introduction of Money Market,
• Money market instruments have the characteristics of liquidity (quick
conversion into money), minimum transaction cost and no loss in value.
Excess funds are deployed in the money market, which in turn is availed of to
meet temporary shortages of cash and other obligations. Money market
provides access to providers and users of short-term funds to fulfill their
investments and borrowings requirements respectively at an efficient market
clearing price. It performs the crucial role of providing an equilibrating
mechanism to even out short-term liquidity, surpluses and deficits and in the
process, facilitates the conduct of monetary policy. The money market is one
of the primary mechanism through which the Central Bank influences liquidity
and the general level of interest rates in an economy. The Bank’s
interventions to influence liquidity serve as a signaling-device for other
segments of the financial system.
• The money market functions as a wholesale debt market for low-risk, highly
liquid, short term instruments. Funds are available in this market for periods
ranging from a single day upto a year. Mostly government, banks and
financial institutions dominate this market. It is a formal financial market
that deals with short-term fund management. There are a few types of
players in money market
• Government is an active player in the money market and in most of the
economies; it constitutes the biggest borrower in this market. Both,
Government securities (G-secs) and Treasury bill (T-bill) is a security issued
by RBI on behalf of the Government of India to meet the latter’s borrowing
for financing fiscal deficit. Apart from functioning as a banker to the
government, the Central Bank (RBI) also regulates the money market and
issues guidelines to govern the money market operations.
• Another dominant player in the money market is the banking industry. Banks
mobilize deposits of savers in lending to investors of the economy. This process
is known as credit creation. However, banks are not allowed to lent out the entire
amount for extending credit for investment. In order to promote certain
prudential norms for healthy banking practices, most of the developed
economies require all commercial banks to maintain minimum liquid and cash
reserves in form of Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio
(CRR) framed under the policies of Central Banks. The banks are required to
ensure that these reserve requirements are met before directing deposits on
their credit plans. If banks fall short of these statutory reserve requirements, the
deficit amount can be raised using the money market.
• Other institutional players like financial institutions, corporates, mutual funds
(MFs), Foreign institutional investors (FIIs) etc. also transact in money market to
fulfill their respective short term finance deficits and short falls. However, the
degree of participation of these players depends largely on the regulations
formulated by the regulating authorities in an economy. For instance, the level of
participation of the FIIs in the Indian money market is restricted to investment in
government securities only
Instruments of Money Market
• Treasury bills- are short term borrowing instruments issued by the Government of
India. These are the oldest money market instruments that are still in use. The
Treasury bill does not pay any interest, but are available at a discount of face value at
the time of issue. Treasury Bills can be classified in two ways i.e. based on maturity
and bases on type. These are the safest instruments as they are backed by a
government guarantee. The rate of return, also known as risk-free rate, is low for
treasury bills like T-364, T-182 and so on, as compared to all other instruments.

• Commercial papers- commercial papers is an unsecured money market instruments

issued in the form of promissory note. It was introduced In India in 1990 with the
objectives of enabling corporate borrowers diversify their sources of short-term
borrowing and to provide an additional investment instrument to investors.
Commercial paper is a money-market security issued (sold) by large corporations to
obtain funds to meet short-term debt obligations and is backed only by an issuing
bank or company’s promise to pay the face value on the maturity date specified on
the note.
Instruments of Money Market
• Certificate of Deposit- A certificate of deposit (CD) is issued directly by a commercial
bank, but it can be purchased through brokerage firms. It comes with a maturity date
ranging from three months to five years and can be issued in any denomination. Most
CDs offer a fixed maturity date and interest rate, and they attract a penalty for
withdrawing prior to the time of maturity. Just like a bank’s checking account, a
certificate of deposit is insured by the Federal Deposit Insurance Corporation (FDIC).

• Banker’s acceptance- a banker’s acceptance is a document that promises future

payment that is guaranteed by the commercial bank. It is considered to be a very safe
investment option and is widely used in foreign trade, bankers acceptance are time
drafts which are accepted and guaranteed by the banks and drawn on a deposit at
the bank. The maturity period of banker’s acceptance can range from 30 to 180 days.

• Repurchase Agreements- Also known as repos or buybacks, Repurchase Agreements

are a formal agreement between two parties, where one party sells a security to
another, with the promise of buying it back at a later date from the buyer. It is also
called a Sell-Buy transaction. The seller buys the security at a predetermined time and
amount which also includes the interest rate at which the buyer agreed to buy the
security.
Interbank Lending
• The interbank rate is the rate of interest charged on short-term loans made
between U.S. banks. Banks may borrow money from other banks to ensure
that they have enough liquidity for their immediate needs, or lend money
when they have excess cash on hand. The interbank lending system is
short-term, typically overnight, and rarely more than a week.

• The term interbank rate also refers to the interest rate charged when
banks conduct wholesale transactions in foreign currencies with banks in
other nations.
Certificate of Deposit,
❑Certificate of Deposits (CDs) is a negotiable money market instrument and
issued in dematerialised form or as Usance Promissory Note, against funds
deposited at a bank or other eligible financial institution for a specified time
period. Guidelines for issue of CDs are presently governed by various
directives issued by the Reserve Bank of India, as amended from time to time.
❑CDs can be issued by: (i) scheduled commercial banks excluding Regional
Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) selected all-India
Financial Institutions that have been permitted by RBI to raise short-term
resources within the umbrella limit fixed by RBI.
AGGREGATE AMOUNT
The amount of CDs allowed to be issued by:
(i) Banks: varying according to the requirements keeping in limits the CRR and
SLR requirements as stipulated by RBI.
(ii) Financial Institutions: may issue CDs within the overall umbrella limit fixed by
RBI. As per the prevailing guidelines issued by RBI, an FI can issue CDs
together with other instruments viz., term money, term deposits, commercial
papers and inter corporate deposits, not exceeding 100 per cent of its net
owned funds, as per the latest audited balance sheet.
MINIMUM SIZE OF ISSUE AND DENOMINATIONS
Minimum amount of a CD should be `1 lakh i.e., the minimum deposit that could be
accepted from a single subscriber should not be less than `1 lakh and in the
multiples of ` 1 lakh thereafter. CDs can be issued to individuals, corporations,
companies, trusts, funds, associations, etc. Non-Resident Indians (NRIs) may also
subscribe to CDs, but only on non-repatriable basis which should be clearly stated
in the Certificate. Such CDs cannot be endorsed to another NRI in the secondary
market.
• MATURITY The maturity period of CDs issued by banks should not be less
than 7 days and not more than one year from the date of issue. The FIs can
issue CDs for a period not less than 1 year and not exceeding 3 years from
the date of issue.
• CDs may be issued at a discount on face value. Banks/FIs are allowed to
issue CDs on the basis of floating rate provided the methodology of
compiling the floating rate is objective transparent and market based. The
issuing bank/FI is free to determine the discount/coupon rate. The interest
rate on floating rate CDs would have to be reset periodically in accordance
with a pre-determined formula that indicates the spread over a transparent
benchmark
• RESERVE REQUIREMENTS
• Banks have to maintain the appropriate reserve requirements, i.e., cash reserve
ratio (CRR) and statutory liquidity ratio (SLR), on the issue price of the CDs.
• TRANSFERABILITY
• Physical CDs are freely transferable by endorsement and delivery. – Demat
CDs can be transferred as per the procedure applicable to other demat
securities. – There is no lock-in period for the CDs. 162 EP-CM&SL – Banks/FIs
cannot grant loans against CDs. – Furthermore, they cannot buy-back their
own CDs before maturity
Features of Certificate of Deposit
❑Certificate of deposit in India can be issued for a minimum deposit of Rs. 1 lakh
or in subsequent multiples of it.
❑Certificates of deposit are issued by the Scheduled Commercial Banks (SCBs)
and All-India Financial Institutions. The Cooperative Banks and the Regional
Rural Banks(RRBs) are not eligible for issuing a CD.
❑There is a term period of 3 months to 1 year for CDs that are issued by SCBs,
whereas the term period ranges from 1 year to 3 years for CDs issued by
financial institutions.
❑CDs in dematerialised forms can be transferred through endorsement or
delivery, similar to dematerialised securities.
❑There is no lock-in period for a certificate of deposit.
❑It is fully taxable under the Income Tax Act.
Commercial Paper
❑Commercial paper, also called CP, is a short-term debt instrument
issued by companies to raise funds generally for a time period up to one
year.
❑It is an unsecured money market instrument issued in the form of a
promissory note and was introduced in India for the first time in 1990.

❑Companies that enjoy high ratings from rating agencies often use CPs
to diversify their sources of short-term borrowings. This gives investors
an additional instrument. They are typically issued by large banks or
corporations to cover short-term receivables and meet short-term
financial obligations, such as funding for a new project.
❑CPs have a minimum maturity of seven days and a maximum of up to one
year from the date of issue. However, the maturity date of the instrument
should typically not go beyond the date up to which the credit rating of
the issuer is valid. They can be issued in denominations of Rs 5 lakh .
❑Since such instruments are not backed by collateral, only firms with high
ratings from a recognised credit rating agency can sell such commercial
papers at a reasonable price. CPs are usually sold at a discount to their
face value, and carry higher interest rates than bonds.

•
T-Bills,
• Treasury Bills are short term (up to one year) money market instruments,
they are short term debt instruments issued by the Government of India
and are presently issued in three tenors, namely, 91 days, 182 days and
364 days. They are auctioned by the Reserve Bank of India (RBI) at regular
intervals and issued at a discount to face value.
• T-Bills are issued by the Central Government; Commercial Bills are issued
by financial institutions
G-Secs
• G Secs is Government Securities, which are one of the safest forms of investments
available in India. These securities are issued by the Government of India to raise funds and
are backed by the sovereign guarantee, making them a highly secure investment option.
Investing in G-Secs can provide stable returns with minimal risk, making them a preferred
choice for risk-averse investors.
• Fixed-rate bonds are issued by the government with a predetermined coupon or rate of interest that
remains constant throughout the tenure of the bond, regardless of market fluctuations.
• Floating Rate Bonds, as the name suggests, have an interest rate that fluctuates periodically based on
market rates. The change in interest rates is determined at predetermined intervals that are declared
during the issuance of the bond
• The Central Government issues Sovereign Gold Bonds, allowing entities to invest in gold for an extended
period without the burden of investing in physical gold. The interest earned on such bonds is exempt
from tax. The price of SGBs is linked to the price of gold, and the nominal value of these bonds is
calculated by taking the simple average of the closing prices of 99.99% purity gold three days before the
issuance of the bonds. SGBs are also expressed in units of one gram of gold.
G-Secs
• Inflation-Indexed Bonds are a unique financial instrument in which the principal, as well as the interest earned, is
adjusted to inflation. These bonds are primarily intended for retail investors and are linked to either the Wholesale
Price Index (WPI) or Consumer Price Index (CPI).
• Introduced as a replacement for the 8% Savings Bond in 2018, the 7.75% GOI Savings Bond is a government security
with a fixed annual interest rate of 7.75%. Only individuals, Hindu Undivided Families, and minors with legal guardian
representatives can hold these bonds. Interest earnings from these bonds are taxable as per the investors' applicable
income tax slab. The minimum investment amount is Rs. 1000, and the bonds are issued in multiples of Rs. 1000.
• Bonds with Call or Put Option provides the issuer with the right to buy back the bond (call option) or allows the
investor to sell the bond to the issuer (put option) on a specific date of interest disbursal. Both parties can only
exercise their rights after five years from the issuance date. These bonds can come with a call option only, put option
only, or both.
• Zero-Coupon Bonds do not make interest payments throughout the bond's term, as the name implies. Investors earn
returns on these bonds by the difference between the discounted issuance price and the bond's redemption value at
maturity.
• Cash Management Bills (CMBs) are short-term govt sec bonds offered by the Reserve Bank of India (RBI) to manage
temporary mismatches in the government's cash flow. CMBs have a maturity period of less than 91 days, which means
that they are short-term instruments. They are similar to Treasury Bills, but unlike T-bills, they are not issued
periodically. Instead, they are issued on an ad-hoc basis to meet the government's immediate cash requirements.
ADR
• American Depositary Receipts (ADR) are negotiable security instruments that
are issued by a US bank that represent a specific number of shares in a foreign
company that is traded in US financial markets. ADRs pay dividends in US
dollars and trade like regular shares of stock. Companies can now purchase
stocks of foreign companies in bulk and reissue them on the US market. ADRs
are listed on the NYSE, NASDAQ, AMEX and can be sold over-the-counter.
FEMA
• The main objective for which FEMA was introduced in India was to facilitate
external trade and payments. In addition to this, FEMA was also formulated to
assist orderly development and maintenance of the Indian forex market.
• FEMA outlines the formalities and procedures for the dealings of all foreign exchange
transactions in India.
• Under the FEMA Act, the balance of payment is the record of dealings between the citizen
of different countries in goods, services and assets. It is mainly divided into two categories,
i.e. Capital Account and Current Account.
FEMA –Applicable to
• Foreign exchange.
• Foreign security.
• Exportation of any commodity and/or service from India to a country outside India.
• Importation of any commodity and/or services from outside India.
• Securities as defined under Public Debt Act 1994.
• Purchase, sale and exchange of any kind (i.e. Transfer).
• Banking, financial and insurance services.
• Any overseas company owned by an NRI (Non-Resident Indian) and the owner is 60% or more.
• Any citizen of India, residing in the country or outside (NRI).
The Current Account transactions under the FEMA Act has been categorized into three parts which,
namely-
• Transactions prohibited by FEMA,
• The transaction requires Central Government’s permission,
• The transaction requires RBI’s permission.
LIBOR- London Interbank Offer Rate
• Interest rate that UK banks charge other financial institutions for short-term loans.
The loan maturities vary from one day to one year. LIBOR acts as a benchmarking
base for short-term interest rates for prices of securities such as currency
swaps, interest rate swaps, or mortgages.
• When the rate is weak, the UK economy is usually underperforming. When the rate is
higher, it usually indicates the economy is doing well. It is commonly used by
various central banks as a reference in crafting policies affecting interest rates in
other countries.
• How is LIBOR calculated?
• LIBOR is calculated based on submissions from a group of banks known as panel banks. These
banks submit the interest rates at which they would be willing to lend money to other banks for
various tenors, ranging from overnight to 12 months. The submissions are then averaged to
create the LIBOR rate for each tenor.
MIBOR- The Mumbai Inter-Bank Offered Rate
❑Interest rate benchmark at which banks borrow unsecured funds from one another in
the Indian interbank market.
❑It is currently used as a reference rate for corporate debentures, term deposits, forward
rate agreements.
❑The rate is only offered to first-class borrowers and lending institutions,
❑Calculated daily by the NSE, the Fixed Income Money Market, and the Derivative
Association of India(DAI)
❑It is determined by taking the weighted average of the lending rates of all major banks or
groups of banks throughout India.
• Who are the Usual Market Participants in MIBOR?
❑30 banks and primary dealers.
❑Mixture of public and private sector banks, as well as foreign banks.
❑Public banks –SBI and Central Bank of India;
❑Private banks - Axis Bank Limited and HDFC Bank
❑Foreign banks -Citibank and Deutsche bank;
❑Primary dealers - ICICI Securities Ltd and PNB GILTS Ltd.
• The rates are then calculated by a combination of two methods—polling and
bootstrapping. In the polling method, the rates are taken from a few market
participants and the reference rates are arrived at.
• polling is combined with bootstrapping (statistical method)
• The Indian corporates preferred the external commercial borrowings route to fi
nance their projects. External commercial borrowings are long-term foreign
currency loans.
• A Mifor swap enables a borrower to convert a floating rate foreign currency
loan into a fixed rate rupee denominated one. The fixed interest rate paid in
such a swap is the Mifor. It is the sum of London Inter-Bank Offer Rate (Libor)
and the US dollar-Indian rupee annualised forward premium for the same tenor.