INDIAN FINANCIAL SYSTEM

COH335/COM 333
HARESH R
Assistant Professor
Department of Commerce
CHRIST(Deemed To Be University), Bengaluru
UNIT - 1
FINANCIAL SYSTEM
• An institutional framework existing in
a country to enable financial
transactions.
• The term financial system is a set of
inter-related activities/services
working together to achieve some
predetermined purpose or goal.
`
• A set of complex and closely connected instructions,
agents, practices, markets, transactions, claims and
liabilities relating to financial aspects of an economy
may be referred to as financial system.
• A financial system is a set of :
* markets
* institutions
* instruments/assets
* services
which foster savings and channels them to their most efficient use.
The major stakeholders:
* savers
* intermediaries
* users
Features of Financial System
• Ideal linkage
• Facilitates expansion of financial markets
• Efficient allocation of financial resources
• Influences quality and pace of economic development
FINANCIAL SYSTEM - CONTD
• An intermediary and facilitates the flow of funds
from the areas of surplus to the areas of deficit.
• A composition of various institutions, markets,
regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.
• Comprises of set of subsystems of financial
institutions, financial markets, financial instruments
and services which helps in the formation of capita.
• It provides a mechanism by which savings are
transformed to investment.
FINANCIAL SYSTEM - DEFINITION
• According to Prasanna Chandra, “financial system
consists of a variety of institutions, markets and
instruments related in a systematic manner and
provide the principal means by which savings are
transformed into investments”.
FINANCIAL SYSTEM - STRUCTURE
Functions of Financial System
• Savings
• Finance
• Investment Capital formation  Economic growth
Funds Flowing through the Financial System
• Indirect Finance: An institution stands between lender and borrower.
• A loan from a bank or finance company to buy a car/house
• Direct Finance: Borrowers sell securities directly to lenders in the
financial markets.
• provides financing for governments and corporations.
Financial Markets
• Financial markets refers to the institutional arrangements for dealing
in financial assets (stocks, bank deposits) and credit
instruments(loans, bonds, etc.)
• Negotiated loan markets & Open markets
• Financial markets  Credit markets
• Individuals, firms and institutions
• Credit  short term & long term
Classification of Financial Markets
Financial
Markets

Organised Unorganized
Market Market

Capital Money Money Indigenous

Market Market Lenders Bankers

Industrial
Securities Long-term
Market Govt. Loans Market
Securities
Market
Primary
Market
Secondary
Market
Financial Instruments
• The written legal obligation of one party to transfer
something of value, usually money, to another party at
some future date, under certain conditions.
• Short, Medium, Long term, Time Deposits, MFs,
Insurance Policies.
Interaction Among the Components
• Interdependent
• Interactive
• Close Links
• Competing with each other
Functions of Financial Markets
• Mobilize and allocate savings
• Provide payment and settlement system
• Price discovery process
• Provision for liquidity
• Low cost of transaction and information
• Limits and reduces the risk
UNIT - 2
Money Market
• Money Market is a very important segment of a
financial system.
• Monetary assets of short-term nature up to one year
and financial assets that are close substitutes for
money are dealt in the Money Market.
• Mostly Government, banks and financial institutions
dominate this market.
• Money Market instruments have the characteristics of
• liquidity (quick conversion into money),
• minimum transaction cost and no loss in value.
Money Market - Contd
• According to Crowther, “Money market is a collective
name given to various firms and institutions that deal
in the various grades of near money”.
• The Reserve Bank of India is the most important
constituent of Indian money market. RBI describes
money market as “the centre for dealings, mainly of a
short-term character, in monetary assets, it meets the
short-term requirements of borrowers and provides
liquidity or cash to lenders”.
Functions of Money Market
Money market performs the following functions:
1. Facilitating adjustment of liquidity position of commercial
banks, business undertakings and other non-banking financial
institutions.
2. Enabling the central bank to influence and regulate
liquidity in the economy through its intervention in the
market and control on the creation of credit.
3. Providing a reasonable access to users of short term funds
to meet their requirements quicky at reasonable costs.
4. Providing short term funds to government institutions.
Functions of Money Market
5. Enabling businessmen to invest their temporary surplus funds for short
period.
6. Facilitating flow of funds to the most important uses.
7. Money market plays a crucial role in financing both internal as we as
international trade.
8. Money market provides short-term funds to businessmen, industrialists,
traders etc. to meet their day-to-day requirements of working capital.
Payers in Money Market
• Central Bank(RBI)
• Government
• Financial Institutions/Institutional Investors
• Corporates, Private Individuals, Partnerships and companies.
• Mutual Funds
• FII’s (Foreign Institutional Investors)
Structure of the Money Market
Importance of Money Market
• Development of trade & industry
• Development of capital market(resource mobilization
to capital market)
• Smooth functioning of commercial banks
• Effective central bank control(slump & boom)
• Formulation of suitable monetary policy
• Non-inflationary source of finance to government
• Helps in determining interest rates
• Helps the government to raise short term funds at
ease
Reforms in the Money Market
• New Instruments
• New Participants
• Changes in the operating procedures of monetary
policy
• Fine tuning of liquidity management operations
• Technological infrastructure
MONEY MARKET
– Treasury Bills
INSTRUMENTS
– Call/Notice Money Market and Short-term Deposit Market
– Commercial Papers (CPs)
– Certificates of Deposits (CDs)
– Commercial Bills (CBs)
– Collateralized Borrowing and ending Obligation (CBO)
– Repo Market
– Government Securities
– Gilt-edged (Government ) Securities
– Money at Call and Short Notice
– Inter-Corporate Deposits
– Bills Rediscounting
Treasury Bills(T-Bills)
• T-Bills are short-term instruments(up to one year)
used by the government to raise short-term funds.
• They are thus useful in managing short-term liquidity.
At present, the Government of India issues three
types of treasury bills through auctions, namely 14-
day, 91-day, 182-day and 364-day.
• There are no treasury bills issued by State
Governments.
Benefits of Investing in Treasury Bills
• No tax deducted at source
• Zero default risk being sovereign paper
• Highly liquid Money Market instrument
• Better returns especially in the short term
• Transparency
• Simplified settlement
• High degree of tradability and active secondary market facilitates
meeting unplanned fund requirements.
Commercial Papers
• Introduced in 1990
• Short-term borrowings by corporates, financial
institutions, primary dealers from the money market
• Commercial paper (CP) is a popular instrument for
financing working capital requirements of companies.
• Can be issued in the physical form (Usance
Promissory Note) or demat form
• When issued in physical form are negotiable by
endorsement and delivery and hence, highly flexible.
• The highly reputed companies (Blue Chip companies) are the major
player of commercial paper market.
• Issued subject to minimum of Rs. 5 lacs and in the multiple of Rs. 5
lacs after that
• Maturity is 7 days to 1 year
• Unsecured and backed by credit rating of the issuing company
• Issued at discount to the face value
Advantages of CPs
1) It is quick and cost effective way of raising working capital.
2) Best way to the company to take the advantage of short term
interest fluctuations in the market
3) It provides the exit option to the investors to quit the
investment.
4) They are cheaper than a bank loan.
5) As commercial papers are required to be rated, good rating
reduces the cost of capital for the company.
6) It is unsecured and thus does not create any liens on assets of
the company.
Disadvantages of CPs
1) It is available only to a few selected blue chip and profitable companies.

2) By issuing commercial paper, the credit available from the banks may get
reduced.

3) Issue of commercial paper is very closely regulated by the RBI guidelines.

Certificate of Deposit (CD)
• The CDs are negotiable term-deposits accepted by commercial bank
from bulk depositors at market related rates.
• Introduced in India during 1989
• CD is in dematerialised form or as a Usance Promissory Note(UPN)
against funds deposited at a bank or other eligible financial institution
for a specified time period.
• Also Known as negotiable certificate of Deposit.
Eligibility
• CDs can be issued by
• (i) scheduled commercial banks {excluding Regional Rural Banks and Local Area Banks};
and
• (ii) select All-India Financial Institutions (FIs) that have been permitted by RBI to raise
short-term resources within the umbrella limit (prescribed in paragraph 3.2 below) fixed
by RBI.
Minimum Size of Issue and Denominations
• Minimum amount of a CD should be Rs.1 lakh, i.e., the minimum deposit that
could be accepted from a single subscriber should not be less than Rs.1 lakh,
and in multiples of Rs. 1 lakh thereafter.
Investors
• CDs can be issued to individuals, corporations, companies (including banks
and PDs), trusts, funds, associations, etc.
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.
Advantages of CDs
• Convenient instruments to depositors to earn higher return.
• Offer maximum liquidity as they are transferable by endorsement &
delivery.
• For issuing bank it is a vehicle to raise resources in times of need and
improve their lending capacity.
• Also an ideal instrument for banks with short-term surplus funds to
invest in attractive rates.
Disadvantages of CDs
• Stamp duty
• Development of secondary market.(DFHI has been designated to
trade in the CDs in secondary market.
• Lock-in Period.
Call and Notice Money Market
• The market for extremely short-period.
• Funds are transacted on overnight basis.
• Participants are mostly banks.
• Also called Inter-Bank Money Market.
• Under notice money market funds are transacted for 2 days and 14
days period.
• The lender issues a notice to the borrower 2 to 3 days before the
funds are to be paid. On receipt of notice, borrower have to repay the
funds.
Transactions in Call Money Market
• To commercial banks to meet large payments, large remittances to
maintain liquidity with the RBI and so on.
• To the stock brokers and speculators to deal in stock exchanges and
bullion markets.
• To the bill market for meeting matures bills.
• To the Discount and Finance House of India and the Securities Trading
Corporation of India to activate the call market.
• To individuals of very high status for trade purposes to save interest
on O.D or cash credit.
Participants
• The participants in this market can be classified into categories viz.
• Those permitted to act as both lenders and borrowers of call loans.
• Those permitted to act only as lenders in the market.
• The first category includes all commercial banks. Co-operative banks,
DFHI and STCI. In the second category LIC, UTI, GIC, IDBI, NABARD,
specified mutual funds etc., are included. They can only lend and they
cannot borrow in the call market.
Deficiencies of Indian Money Market
• Dichotomy (Existence of two markets –
Organized & Unorganized)
• Absence of Integration
• Diversity in rates of Interest
• Seasonality of money market
• No contact with foreign markets
• Shortage of funds
• limited Instruments
• limited Secondary Market
• limited Participants
• High Volatility
• Heavy stamp duty
• Transactions are mainly in cash
• Lack of transparency
Recent Developments in Indian Money Market

• Integration of unorganized sector with the organized sector

• Widening the participants in call money market
• Introduction of innovative instruments
• Offering market rates of interest
• Promotion of bi culture
• Entry of MMMF’s
• Setting up of credit rating agencies
• Adoption of suitable monetary policy
• Establishment of DHFI(Discount & Finance House of India)
• Setting up of Securities Trading Corporation of India td.(STCI)
• Introduction of Non-Cumulative Debentures
UNIT - 3
CAPITAL
MARKET
Capital markets- meaning; Classification of capital market; growth of
stock exchange, stock brokers, functions of stock exchange, Margin
trading, Forward trading, Sensex, Nifty, OTCEI (over the counter
exchange of India), Depositories, SEBI as capital market regulator -
Objectives ,Functions, Powers, Organisation, SEBI and government,
SEBI guidelines on primary markets, secondary markets, book building,
buyback of shares.
Objectives
• Understand the meaning of Capital market.
• Structure of Capital Market in India.
• Stock exchange functions and its growth.
• Conceptual understanding of Sensex, Nifty, OTCEI, Depositories.
• Understand the trends in Indian capital market
Capital Market (Securities Market)
• The capital market is a market for financial
assets(stocks, bonds) which have a long(greater than
one year) or indefinite maturity.
Role of Capital Market
• Indicator of inherent strength of the economy
• Largest source of funds for companies and enhances capita
formation in the country
• Offers number of investment avenues to investors
• Channeling the savings towards optimal allocation of
capital in the country
Functions of Capital Market
• Allocation
• Liquidity
• Others
• Indicative Function(Barometer – of company and also the economy)
• Savings & Investment Function
• Transfer Function
• Merger Function
Participants in CM
• the issuers of securities,
• investors in securities(Individual, corporate, FIIs) and
• the intermediaries( Brokers, Investment Bankers, Stock Exchanges,
Underwriters)
Capital Market
Capital market may be further divided into three types namely :
1. Industrial Securities Market
2. Government Securities Market and
3. Long-term loans Market.
 Capital Market

Industrial Government Long Term Loans

Securities Market Securities Market Market

Primary or New
Issue Market

Secondary Market
or Stock Exchange
Industrial Securities Market
• As the very name implies, it is a market for industrial
securities, namely :
• Equity shares
• Preference shares and
• Debentures or bonds.
• It is a market where industrial concerns raise their
capital or debt by issuing appropriate instruments. It
can be further subdivided into two types. They are
(a) Primary market or New Issue Market,
(b) Secondary market or Stock Exchange.
Government Securities Market
• It is otherwise called Gilt-Edged Securities Market.
• It is a market where government securities are traded. In India there
are many kinds of Government securities short term and long term.
• Long-term securities are traded in capital market while short term
securities are traded in money market.
Long-term Loans Market
• Development banks and commercial banks play a significant roe in
this market by supplying long term loans to corporate customers.
• Long term loans market may further be classified into –
(i) Term loans
(ii) Mortgages and
(iii) Financial Guarantees markets.
The Capital Market has two
interdependent and inseparable
segments, the new issues (primary
market) and the stock (secondary)
market.
PRIMARY MARKET
• Provides the channel for sale of new securities.
• These resources are required for new projects as well
as for existing projects with a view to expansion,
modernisation, diversification and upgradation.
• Provides opportunity to issuers of securities;
government as we as corporates, to raise resources,
requirements of investment and/or discharge some
obligation.
• They may issue the securities at face value, or at a
discount/premium and these securities may take a
variety of forms such as equity, debt etc.
PRIMARY MARKET – Contd.
• The Primary Market issuance is done either through pubic issues or
private placement.
• A pubic issue does not limit any entity in investing while in private
placement, the issuance is done to select people.
• There are two major types of issuers who issue securities.
• The corporate entities issue mainly debt and equity instruments
(shares, debentures, etc.), while the governments (central and state
governments) issue debt securities (dated securities, treasury bills).
Methods of Raising Fund in the Primary Market
(Methods of Floating New Issues/Types of Issue)

• Pubic issues
• Offer for sale
• Private placement
• Right issue
• Tender method.
 1. Public Issue of shares

• The selling or marketing of shares for subscription by the public by

issue of prospectus.
• For raising capital from the public by the issue of shares, a public
company has to comply with the provisions of the Companies Act,
the Securities Contracts (Regulation) Act, 1956 including the Rules
made thereunder and the guidelines and instructions issued by the
concerned Government authorities, the Stock Exchanges and SEBI
etc.
• Initial Pubic Offer (IPO)
• An unlisted company makes either a fresh issue of securities or
offers its existing securities for sale or both for the first time to the
public, it is called an IPO.
• Further Public Offer or Follow on Offer (FPO)
• Methods of Determination of Prices of New Shares
• Fixed Price Offer Method
• Book-building Method
Book-building Method
• Book Building is basically a process used in Initial Pubic Offer
(IPO) 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.
2. Offer for Sale Method(OFS)
Under this method, instead of offering shares directly to the
pubic by the company itself, it offers through the intermediary such as
issue houses / merchant banks / investment banks or firms of stock
brokers.
Promoters can sell or dilute their existing shareholdings through an
exchange based bidding platform.
3. Private Placement of Securities
The issue of securities of a company direct to one investor or a
small group of investors. Generally the investors are the financial
institutions or other existing companies or selected private persons
such as friends and relatives of promoters.
A private company cannot issue a prospectus. Hence it usually
raises its capital by private placement.
(Preferential Allotment, Qualified Institutions Placement, Institutional
Placement Programme)
4. Right Issue
A method of raising funds in the market by an
existing company. Under this method, the existing
company issues shares to its existing shareholders in
proportion to the number of shares already held by
them.
(Shareholders existing as on a particular date fixed by
the issuer - Record Date)
5. Other Methods of Issuing Securities
• Tender method
• Issue of bonus shares
• Offer to the employees( ESOP)
• Offer to the creditors
• Offer to the customers
Players or Participants in the Primary
market/Capital Market
• Merchant bankers
• Registrars to the issue
• Bankers
• Brokers
• Underwriters
SECONDARY MARKET
• Secondary Market refers to a market where securities are traded after
being initially offered to the pubic in the Primary Market and/or listed
on the Stock Exchange.
• Majority of the trading is done in the Secondary Market. Secondary
Market comprises of equity markets, the debt markets, commodities
and foreign currency markets.
• The secondary market operates through ‘stock exchanges’.
Secondary Market
• Liquidity
• Sell the securities.
• Invest in new securities.
• There should be a place where securities of different companies can
be bought and sold.
• Secondary market provides such a place.
Meaning of Secondary Market
• Secondary market is a market for old issues. It deals with the buying
and selling existing securities i.e. securities already issued.
• In other words, securities already issued in the primary market are
traded in the secondary market.
• Secondary market is also known as stock market. The secondary
market operates through ‘stock exchanges’.
Primary Vs Secondary Market
• In the primary market, securities are offered to public for subscription
for the purpose of raising capital or fund.
• Secondary market is an equity trading avenue in which already
existing/pre- issued securities are traded amongst investors.
Primary Market Vs Secondary Market
Primary Market(New Issue Market) Secondary Market(Stock Exchange)

New issues of securities by existing Trading of existing shares only

companies to investors
Securities are sold by the company to the Ownership of existing securities is
investor directly or through an exchanged between investors. The
intermediary. company is not involved at all.

Directly promotes capital formation. Indirectly promotes capital formation.

Only buying of securities takes place in Both the buying and the selling of
the primary market. securities can take place on the stock
exchange.

Prices are determined and decided by the Prices are determined by demand and
management of the company. supply for the security.
There is no fixed geographical located at specified places.
location.
Speculation
• Speculation is an attempt to make capital gain from
the price movement of the scrips in the security
market over a short span of time.
• Those who engaged in such type of transactions are
called speculators.
• They buy and sell securities frequently and are not
interested in keeping them for long term.
• High risks.
• Profit/Loss
Type of Speculators
Bull - A bull or Tejiwala is a speculator who buys shares in
expectation of selling them at higher prices in future.
Bear - A bear or Mandiwala is a speculator who sells
securities with the intention to buy at a alter date at a
lower price. He expects a fall in price in future.
Lame duck - A lame duck is a bear speculator. He finds it
difficult to meet his commitments and struggles like a lame
duck. A trader or investor who makes poor trades and ends
up with heavy losses over time would be considered a
“lame duck."
Stag - neither buys nor sells securities. He applies for shares
in the new issue market. He expects that the price of shares
will soon increase and the shares can be sold for a
premium.
Stock Exchange
• It is an organized market for the purchase and sale of securities of
joint stock companies, government and semi- govt. bodies. It is the
center where shares, debentures and govt. securities are bought and
sold.
• “Stock exchange means any body of individuals, whether
incorporated or not, constituted for the purpose of assisting,
regulating or controlling the business of buying, selling in securities.”
-Securities Contract (regulation) Act, 1956.
Growth of Stock Exchange in India
• The first stock exchange in India was set-up in 1875 as
The Native Share and Stock Brokers Association in
Bombay. Today it is known as the Bombay Stock
Exchange (BSE).
• Development of exchanges in Ahmedabad(1894),
Calcutta(1908) and Madras(1937) Until the early
1990s, the Indian secondary market comprised
regional stock exchanges with BSE heading the list.
• After the reforms of 1991, the Indian secondary
market acquired a three tier form. This consists of:
• Regional Stock Exchanges
• National Stock Exchange (NSE)
• Over the Counter Exchange of India (OTCEI)
BSE(BOMBAY STOCK EXCHANGE TD.)
• BSE td but was established as the Native Share Stock
Brokers Association in 1875.
• BSE td (formerly known as Bombay Stock Exchange
td) was Asia’s first Stock Exchange.
• Granted permanent recognition under the Securities
Contract (Regulation) Act, 1956.
• Contributed to the growth of the corporate sector by
providing a platform for raising capital.
• Even before the actual legislations were enacted, BSE
already had a set of Rules and Regulations to ensure
an orderly growth of the securities market.
Objectives of BSE
(a) To provide an efficient and transparent market for
trading in equity, debt instruments, derivatives, and
mutual funds.
(b) To provide a trading platform for equities of small
and medium enterprises.
(c) To ensure active trading and safeguard market
integrity through an electronically-driven exchange.
(d) To provide other services to capital market
participants, like risk management, clearing,
settlement, market data, and education.
(e) To conform to international standards.
BSE - Some Facts
• More than 5500 companies are listed on BSE making it word's No. 1
exchange in terms of listed members.
• The companies listed on BSE command a total market capitalization of USD
1.68 Trillion as of March 2015.
• BSE also provides a host of other services to capita market participants
including risk management, clearing, settlement, market data services
and education.
• BSE is the first exchange in India and second in the word to obtain an ISO
9001:2000 certification.
• It is also the first Exchange in the country and second in the word to
receive Information Security Management System Standard BS 7799-2-
2002 certification for its On-line trading System (BOLT).
NSE (National Stock Exchange)
• Formation of National Stock Exchange of India limited (NSE) in 1992 is
one important development in the Indian capita market.
• The need was felt by the industry and investing community since
1991. The NSE is slowly becoming the leading stock exchange in terms
of technology, systems and practices in due course of time.
• NSE is the largest and most modern stock exchange in India. In
addition, it is the third largest exchange in the word next to two
exchanges operating in the USA.
Objectives of NSE
• To provide a modern, fully automated screen-based trading system
with national reach.
• Unparalleled transparency, speed & efficiency, safety and market
integrity.
• It has set up facilities that serve as a mode for the securities industry
in terms of systems, practices and procedures.
Stock Index
• Created by selecting a group of stocks that are representative of the
whole market or a specified sector or segment of the market.
• An Index is calculated with reference to a base period and a base
index value.
• An Index is used to give information about the price movements of
products in the financial, commodities or any other markets.
Stock Index
• Calculated by two ways by considering the price of component stock
alone. By considering the market value or size of the company called
market capitalization method.
• Two main stock index of India are Sensex and Nifty.
• Financial indexes are constructed to measure price movements of
stocks, bonds, T-bills and other forms of investments. Stock market
indexes are meant to capture the overall behaviour of equity
markets.
Usefulness of Indexes
• Historical comparison of returns against other forms of investments
such as god or debt.
• They can be used as a standard against which to compare the
performance of an equity fund.
• Indicator of the performance of the overall economy or a sector of
the economy.
• Stock indexes reflect highly up to date information
• Modern financial applications such as Index Funds, Index Futures,
Index Options play an important role in financial investments and risk
management
Stock Broker
• A stockbroker is a regulated professional individual, usually associated
with a brokerage firm or broker-dealer, who buys and sells stocks and
other securities for both retail and institutional clients, through a
stock exchange or over the counter, in return for a fee or commission.
Characteristics of a Stock Exchange
• It is an organized capita market.
• It may be incorporated or non-incorporated body (association or body
of individuals).
• It is an open market for the purchase and sale of securities.
• Only listed securities can be dealt on a stock exchange.
• It works under established rues and regulations.
• The securities are bought and sod either for investment or for
speculative purpose.
Functions of Stock Exchange
• Ensure liquidity of capita
• Marketability to Existing Securities
• Pricing of Securities
• Mobilisation of savings
• Helps in capital formation
• Safety in dealings (Safety of Transaction)
• Evaluation of securities
• Contributes to economic growth
• Barometer of economic conditions
• Providing scope for speculation
• Platform for pubic debt
Over the Counter Exchange of India (OTCEI)
• Incorporated in October, 1990 as a Company under the Companies
Act 1956.
• Became fully operational in 1992 with opening of a counter at
Mumbai.
• Recognized by the Government of India as a recognized stock
exchange under the Securities Control and Regulation Act 1956.
• Promoted jointly by the financial institutions like UTI, ICICI, IDBI, IC,
GIC, SBI, IFCI, etc.
Features of OTCEI
• OTCEI is a floorless exchange where a the activities are fully computerised.

• Its promoters have been designated as sponsor members and they alone are entitled to sponsor a company for listing there.

• Trading on the OTCEI takes pace through a network of computers or OTC dealers located at different paces within the same city
and even across the cities.

• A Company which is listed on any other recognised stock exchange in India is not permitted simultaneously for listing on OTCEI.

• OTCEI deals in equity shares, preference shares, bonds, debentures and warrants. OTC Exchange Of India designed trading in debt
instruments commonly known as PSU bonds and also in the equity shares of unlisted companies.
Defects of Stock Exchanges (or Capital Market) in India

• Speculative activities
• Insider trading
• Poor liquidity
• Less floating securities
• Lack of transparency
• High volatility
• Dominance of financial institutions
• Competition of merchant bankers
• Lack of professionalism
 UNIT-4
Securities and Exchange
Board of India (SEBI)
Need for SEBI
• Sixth Five Year Plan was launched (1985) when some major industrial
policy changes like opening up of the economy to outside word and
greater roe to the Private Sector were initiated.
• The rampant malpractices noticed in the Stock and Capital Market
stood in the way of infusing confidence of investors which is
necessary for mobilisation of larger quantity of funds from the public
and help the growth of the industry.
• Before 1992 the securities market were governed by
• Capita Issues (Control) Act, 1947
• Companies Act, 1956
• Securities Contracts (Regulation) Act, 1956
• The malpractices were noticed in the case of companies, merchants
bankers and brokers who are a operating in the Capital Market.
• Lack of transparency in the trading operations
• Poor services
• Delay in making payments to clients or in giving delivery of shares.
• Persistence of odd lots and refusal of companies to stop this practice of
allotting shares in odd lots.
• Insider trading by agents of companies or brokers rigging and manipulating
prices.
Securities and Exchange Board of India (SEBI)

• Securities and Exchange Board of India (SEBI) was first established in

the year 1988 as a non-statutory body for regulating the securities
market.
• It became an autonomous body in 1992 through an ordinance.
• Twin objective of SEBI - Protecting the interest of investors and to
promote the development of and to regulate the securities market.
ENTITY OF SEBI
• It was registered with the common seal and with the power to
acquire, hold and dispose any property.
• Power to sue or to be sued in its own name.
• The Head office is situated in Mumbai.
• Regional offices - Kolkata, Chennai and Delhi - to monitor and control
the capital market operations across the country.
ORGANISATIONAL GRID OF THE SEBI
• Six members in the committee
• Headed by the chairman
• One member each from the ministries of Law and Finance
• One member from the officials of RBI
• Two nominees from the central government
• It contains 4 different departments viz Primary department, Issue
management and intermediaries department, Secondary department
and Institutional Investment department
POWERS AND FUNCTIONS OF SEBI
Section 11 of the Act Chapter IV highlights the Powers and Functions
of SEBI
• Regulating the business of the stock exchanges
• Regulating the role of the intermediaries
• Registering and regulating of depositories, participants and custodian
of securities, credit rating agencies
• Regulating of mutual funds and venture capital funds
• Prohibiting the unfair trade practices
• Prohibiting of insider trade activities
• Regulating substantial takeovers and acquisitions
• Frequent conduct of research activities
• To conduct any enquiry which warrants the situation to safeguard the
interest of the investors
SEBI - LOGO
Functions of SEBI
• Regulatory Functions
• Development Functions
• Protective Functions