Made by: | Yash V Mehta, SYBBA – A , Roll no.

51

INDIAN FINANCIAL SYSTEM

 Index
Page
Sr. No. Topic no.
1 Indian Financial System 3

2 Financial markets 3

3 Role / Functions of Financial System 4

4 Stock Exchange 5

5 Role of Stock Exchange 5

6 The National Stock Exchange 7

7 Markets of the National Stock Exchange 8

8 Bombay Stock Exchange 9

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INDIAN FINANCIAL SYSTEM
The economic development of a nation is reflected by the progress of the various
economic units, broadly classified into corporate sector, government and
household sector.  While performing their activities these units will be placed in a
surplus/deficit/balanced budgetary situations.

There are areas or people with surplus funds and there are those with a deficit. 
A financial system or financial sector functions as an intermediary and facilitates
the flow of funds from the areas of surplus to the areas of deficit.  A Financial
System is a composition of various institutions, markets, regulations and laws,
practices, money manager, analysts, transactions and claims and liabilities.

Financial System

The word "system", in the term "financial system", implies a set of complex and
closely connected or interlined institutions, agents, practices, markets,
transactions, claims, and liabilities in the economy.  The financial system is
concerned about money, credit and finance-the three terms are intimately related
yet are somewhat different from each other. Indian financial system consists of
financial market, financial instruments and financial intermediation. These are
briefly discussed below

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

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 Intermediary Market Role
Secondary Market to
Stock Exchange Capital Market
securities
Capital Market, Credit  Corporate advisory services,
Investment Bankers
Market Issue of securities
Capital Market, Money Subscribe to unsubscribed
Underwriters
Market portion of securities
Issue securities to the
Registrars, Depositories, investors on behalf of the
Capital Market
Custodians company and handle share
transfer activity
Primary Dealers Satellite Market making in
Money Market
Dealers government securities
Ensure exchange ink
Forex Dealers Forex Market
currencies

Role/ Functions of Financial System:

A financial system performs the following functions:

* It serves as a link between savers and investors. It helps in utilizing the

mobilized savings of scattered savers in more efficient and effective manner. It
channelises flow of saving into productive investment.

* It assists in the selection of the projects to be financed and also reviews the
performance of such projects periodically.

* It provides payment mechanism for exchange of goods and services.

* It provides a mechanism for the transfer of resources across geographic

boundaries.

* It provides a mechanism for managing and controlling the risk involved in

mobilizing savings and allocating credit.

* It promotes the process of capital formation by bringing together the supply of

saving and the demand for investible funds.

* It helps in lowering the cost of transaction and increase returns. Reduce cost
motives people to save more.

* It provides you detailed information to the operators/ players in the market such
as individuals, business houses, Governments etc.

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stock exchange
It is an entity which provides "trading" facilities for stock brokers and traders, to
trade stocks and other securities. Stock exchanges also provide facilities for the
issue and redemption of securities as well as other financial instruments and
capital events including the payment of income and dividends. The securities
traded on a stock exchange include shares issued by companies, unit trusts,
derivatives, pooled investment products and bonds.

To be able to trade a security on a certain stock exchange, it has to be listed

there. Usually there is a central location at least for recordkeeping, but trade is
less and less linked to such a physical place, as modern markets are electronic
networks, which gives them advantages of increased speed and reduced cost of
transactions. Trade on an exchange is by members only.

The initial offering of stocks and bonds to investors is by definition done in the
primary market and subsequent trading is done in the secondary market. A stock
exchange is often the most important component of a stock market. Supply and
demand in stock markets is driven by various factors which, as in all free
markets, affect the price of stocks (see stock valuation).

There is usually no compulsion to issue stock via the stock exchange itself, nor
must stock be subsequently traded on the exchange. Such trading is said to be
off exchange or over-the-counter. This is the usual way that derivatives and
bonds are traded. Increasingly, stock exchanges are part of a global market for
securities.

The role of stock exchanges

Stock exchanges have multiple roles in the economy. This may include the
following:

 Raising capital for businesses

The Stock Exchange provide companies with the facility to raise capital for
expansion through selling shares to the investing public.

 Mobilizing savings for investment

When people draw their savings and invest in shares, it leads to a more rational
allocation of resources because funds, which could have been consumed, or
kept in idle deposits with banks, are mobilized and redirected to promote

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business activity with benefits for several economic sectors such as agriculture,
commerce and industry, resulting in stronger economic growth and higher
productivity levels of firms.

 Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase
distribution channels, hedge against volatility, increase its market share, or
acquire other necessary business assets. A takeover bid or a merger agreement
through the stock market is one of the simplest and most common ways for a
company to grow by acquisition or fusion.

 Profit sharing
Both casual and professional stock investors, through dividends and stock price
increases that may result in capital gains, will share in the wealth of profitable
businesses.

 Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in
shares is open to both the large and small stock investors because a person
buys the number of shares they can afford. Therefore the Stock Exchange
provides the opportunity for small investors to own shares of the same
companies as large investors.

 Government capital-raising for development projects

Governments at various levels may decide to borrow money in order to finance
infrastructure projects such as sewage and water treatment works or housing
estates by selling another category of securities known as bonds. These bonds
can be raised through the Stock Exchange whereby members of the public buy
them, thus loaning money to the government. The issuance of such bonds can
obviate the need to directly tax the citizens in order to finance development,
although by securing such bonds with the full faith and credit of the government
instead of with collateral, the result is that the government must tax the citizens
or otherwise raise additional funds to make any regular coupon payments and
refund the principal when the bonds mature.

 Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on market
forces. Share prices tend to rise or remain stable when companies and the
economy in general show signs of stability and growth. An economic recession,
depression, or financial crisis could eventually lead to a stock market crash.
Therefore the movement of share prices and in general of the stock indexes can
be an indicator of the general trend in the economy.

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The National Stock Exchange (NSE)
It is a stock exchange located at Mumbai, India. It is the largest stock exchange
in India in terms of daily turnover and number of trades, for both equities and
derivative trading.NSE has a market capitalization of around 6,393,418 crore
(US$ 1,451.31 billion) (August 2010) and was expected to become the biggest
stock exchange in India in terms of market capitalization by 2009 end, although
this has not yet occurred. Though a number of other exchanges exist, NSE and
the Bombay Stock Exchange are the two most significant stock exchanges in
India, and between them are responsible for the vast majority of share
transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE
NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by
market capitalization.

NSE is mutually-owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries in India but its ownership and
management operate as separate entities. There are at least 2 foreign investors
NYSE Euronext and Goldman Sachs who have taken a stake in the NSE.As of
2006[update], the NSE VSAT terminals, 2799 in total, cover more than 1500
cities across India.In October 2007, the equity market capitalization of the
companies listed on the NSE was US$ 1.46 trillion, making it the second largest
stock exchange in South Asia. NSE is the third largest Stock Exchange in the
world in terms of the number of trades in equities. It is the second fastest growing
stock exchange in the world with a recorded growth of 16.6%.

History of the National Stock Exchange of India :

Capital market reforms in India and the launch of the Securities and Exchange
Board of India (SEBI) accelerated the incorporation of the second Indian stock
exchange called the National Stock Exchange (NSE) in 1992. After a few years
of operations, the NSE has become the largest stock exchange in India.

Three segments of the NSE trading platform were established one after another.
The Wholesale Debt Market (WDM) commenced operations in June 1994 and
the Capital Market (CM) segment was opened at the end of 1994. Finally, the
Futures and Options segment began operating in 2000. Today the NSE takes the
14th position in the top 40 futures exchanges in the world.

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In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX
Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a
diversified index of 50 stocks from 25 different economy sectors. The Indices are
owned and managed by India Index Services and Products Ltd (IISL) that has a
consulting and licensing agreement with Standard & Poor's.

In 1998, the National Stock Exchange of India launched its web-site and was the
first exchange in India that started trading stock on the Internet in 2000. The NSE
has also proved its leadership in the Indian financial market by gaining many
awards such as 'Best IT Usage Award' by Computer Society in India (in 1996 and
1997) and CHIP Web Award by CHIP magazine (1999).

Markets
Currently, NSE has the following major segments of the capital market:
 Equity
 Futures and Options
 Retail Debt Market
 Wholesale Debt Market
 Currency futures
 MUTUAL FUND
 STOCKS LENDING & BORROWING

August 2008 Currency derivatives were introduced in India with the launch of
Currency Futures in USD INR by NSE. Currently it has also launched currency
futures in EURO, POUND & YEN. Interest Rate Futures was introduced for the
first time in India by NSE on 31 August 2009, exactly after one year of the launch
of Currency Futures.

NSE became the first stock exchange to get approval for Interest rate futures as
recommended by SEBI-RBI committee, on 31 August 2009, a futures contract
based on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly
maturities.

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Bombay Stock Exchange (BSE)
It is the oldest stock exchange in Asia and has the largest number of listed
companies in the world, with 4990 listed as of August 2010. It is located at Dalal
Street, Mumbai, India. On Aug, 2010, the equity market capitalization of the
companies listed on the BSE was US$1.39 trillion, making it the 4th largest stock
exchange in Asia and the 11th largest in the world.

With over 4,990 Indian companies listed & over 7700 scrips on the stock
exchange, it has a significant trading volume. The BSE SENSEX (SENSitive
indEX), also called the "BSE 30", is a widely used market index in India and Asia.
Though many other exchanges exist, BSE and the National Stock Exchange of
India account for most of the trading in shares in India.

History of the Bombay Stock Exchange

The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history
to the 1850s, when 4 Gujarati and 1 Parsi stockbroker would gather under
banyan trees in front of Mumbai's Town Hall. The location of these meetings
changed many times, as the number of brokers constantly increased. The group
eventually moved to Dalal Street in 1874 and in 1875 became an official
organization known as 'The Native Share & Stock Brokers Association'. In 1956,
the BSE became the first stock exchange to be recognized by the Indian
Government under the Securities Contracts Regulation Act. The Bombay Stock
Exchange developed the BSE Sensex in 1986, giving the BSE a means to
measure overall performance of the exchange. In 2000 the BSE used this index
to open its derivatives market, trading Sensex futures contracts. The
development of Sensex options along with equity derivatives followed in 2001
and 2002, expanding the BSE's trading platform. Historically an open outcry floor
trading exchange, the Bombay Stock Exchange switched to an electronic trading
system in 1995. It took the exchange only fifty days to make this transition. This
automated, screen-based trading platform called BSE On-line trading (BOLT)
currently has a capacity of 80 lakh orders per day. The BSE has also introduced
the world's first centralized exchange-based internet trading system,
BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE
platform. The BSE is currently housed in Phiroze Jeejeebhoy Towers at Dalal
Street, Fort area.