INDIAN FINANCIAL

SYSTEM
Prof. NILIMA DAS

Financial System
Existence of a well organized financial system Promotes the well being and standard of living of the people of a country Mobilize the saving Promotes investment

Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products
Flow of funds (savings)
Seekers of funds (Mainly business firms and government)
Suppliers of funds (Mainly households)

Flow of financial services

Incomes , and financial claims

Evolution of Financial System

Barter Money Lender

Chit Funds

Indigenous Banking

Cooperative Movement

Societies

Banks

Joint-Stock Banks

Consolidation Commercial Banks Nationalization

Investment Banks Development Financial Institutions

Investment/Insurance Companies Stock Exchanges Market Operations Merchant Banking Universal Banking

Indian Financial System

Organized
Regulators Financial Institutions Financial Markets

Non- Organized
Money lenders Indigenous bankers Trader

Financial services

Organized Indian Financial System

Regulators

Financial Instruments

Financial Markets

Financial Intermediaries

Forex Market

Capital Market

Money Market

Credit Market

Primary Market Secondary Market

Money Market Instrument

Capital Market Instrument

What is meant by securities?

The definition of Securities as per the Securities Contracts Regulation Act (SCRA), 1956, includes instruments such as shares, bonds, stocks or other marketable securities of similar nature.

Which are the securities one can invest in?

Shares Government Securities Derivative products Mutual Funds etc.

various options available for investment?

Physical assets

One may invest in

Financial assets

1. Physical assets -real estate, gold/ jewellery, commodities etc. 2. Financial assets - fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

various Short-term financial options available for investment?

Savings Bank Account

Savings Bank Account is often the first banking product people use, which offers low interest (4%-5% p.a.).

Money Market or Liquid Funds

invest in extremely short-term fixed income instruments and thereby provide easy liquidity.

Fixed Deposits with Banks

Referred to as term deposits . minimum investment period is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period.

various Long-term financial options available for investment?

Post Office Savings

Availed through any post office. Monthly Income Scheme is a low risk saving instrument. It provides an interest rate of around 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs. 1,000/ and additional investment in multiples of 1,000/-. Maximum amount is Rs. 3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely.

Public Provident Fund

A long term savings instrument with a maturity of 15 years interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free.

Company Fixed Deposits

These are six months to three or to five years borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semiannually or annually. They can also be cumulative fixed deposits where the entire principal along with the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes.

Bonds
A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity Date. fixed income (debt) instrument. period of more than one year . The central or state government, corporations and sell bonds.

Mutual Funds
A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized are shared by its unit holders in proportion to the number of units owned by them. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities , at a relatively low cost.

Legislations
The five main legislations governing the securities market are: (a) the Securities Contracts (Regulation) Act, 1956, preventing undesirable transactions in securities by regulating the business of dealing in securities. (b) the Companies Act, 1956, which is a uniform law relating to companies throughout India.

 (c) the SEBI Act, 1992 for the protection of interests of investors and for promoting development of and regulating the securities market. (d) the Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of dematerialized securities. (e)the Prevention of Money Laundering Act, 2002 which prevents money laundering and provides for confiscation of property derived from or involved in money laundering.

Regulators
The regulators ensure that the market participants behave in a desired manner so that the securities market continue to be a major source of finance for corporate and government and the interest of investors are protected. The responsibility for regulating the securities market is shared by 1. Department of Economic Affairs (DEA), 2. Department of Company Affairs (DCA), 3. Reserve Bank of India (RBI), 4. Securities and Exchange Board of India (SEBI) and 5. Securities Appellate Tribunal (SAT).

What is SEBI and what is its role?

The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. It provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c)regulating the securities market.

functions
(a) Regulating the business in security market. (b) Registering and regulating the working of all intermediaries who may be associated with securities markets in any manner. (c) Registering and regulating the working of venture capital funds . (d) Promoting and regulating self-regulatory organizations. (e) Prohibiting fraudulent and unfair trade practices relating to securities markets. (f) promoting investors' education and training of intermediaries of securities markets;

(g) prohibiting insider trading in securities

(h) regulating substantial acquisition of shares and takeover of companies. (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and selfregulatory organisations in the securities market. (j) levying fees or other charges for carrying out the purpose of this section. (k) conducting research for the above purposes.