1711064724COM15201CR15Unit 1st Introduction to Financial System, Financial Sector Reforms and Role of SEBIfinancial system introduced.ppt

Introduction to Indian financial system and financial sector reforms

1. Unit 1st
•Financial Systems: Significance, Functions and structure of financial
system,
•Indian Financial System, Financial dualism.
•Financial Sector Reforms,
•SEBI: Role & its Functions,
•Financial Instruments, Debentures, Shares, ADR, GDR, and ECBs.
•Derivative trading – Futures & Options Contracts.

2. Financial System:
•An introduction.

3. Our daily routine:
•Bread, butter, milk, fruits and cereals and
vegetables, detergents, soaps and shampoo, tooth
paste, medicine, fragrance, apparels, foot wears,
bags, etc;
•Transport, medical care, education, recreation
legal advice, banks, telephone, internet, insurance,
electricity, water, security, etc;
•House, four wheeler, two wheeler, laptop, cell
phone, refrigerator, CTV, washing machine, lawn
mower, digital camera, etc.

4. Concept of economic system:
•Who offers these things to us and what do we
do in return?
•How does all this flow of goods and services
work?

5. Circular flow of income, payments and
production in an economic system:
•Consuming units provide labour, management
skill and natural resources to producing units
in lieu of income in the form of wages.
•Producing units provide goods and services to
households in lieu of payment in the form of
price.

6. What is an Economic System?
A system meant to allocate scarce resources –
land, labour, management skill and capital – to
their most highly valued use, producing the
goods and services needed by the society.

7. The central core of an economic
system:
•A dynamic market institution.

8. Role of markets in the economic
system:
•Factor markets.
•Product markets.
•Financial markets.

9. Three types of markets in an economic system:
Product Markets
Factor Markets
Consuming UnitsProducing Units
Flow
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Financial Markets
(flow of funds, flow of financial
services, financial claim and
income)

10. Definition of Financial System:-
A collection of markets, institutions, laws,
regulations, and techniques through which bonds,
stocks, and other securities are traded, interest rates
are determined, and financial services are produced
and delivered around the world.

11. Primary task of a financial system:
To mobilise scarce loanable funds from those
who save to those who borrow to buy goods and
services and to make investments in new
equipment and facilities so that global economy
can grow and increase the standard of living
enjoyed by its citizens.

12. Primary objective:
Demanders of Funds
(mainly businesses
and governments
Suppliers of Funds
(mainly households)

13. Inner core of a Financial System:
•A financial market that allocates savings and
sets interest rates and the prices of financial
assets (stocks, bonds, etc.).

14. Financial systems and the economy:
•When funds become more costly and less
available – spending for goods and services falls –
unemployment rises – economy’s growth slows
down.
•In contrast, when cost of funds declines and
loanable funds become more readily available –
spending in the economy increases – more jobs
are created - businesses increase capacities and
their production increases.

15. Financial dualism:
•Formal/Organised Financial System.
•Informal/Un-organised Financial System.

16. Informal Financial System:
•Money lenders.
•Indigenous bankers.
•Landlords.
•Pawn Brokers.
•Chit funds clubs.

17. Features of informal system:
•Prompt and instant credit;
•Transparency of procedures;
•Low default risk;
•However, plagued with high interest rates.

18. Features of a formal system:
•Market determined interest rates;
•Low transaction costs;
However, inaccessible to most far flung areas

19. Formal Financial System:
•Regulators.
•Financial intermediaries.
•Financial Markets.
•Financial instruments.
•Financial Services.

20. Regulators:
•Reserve Bank of India.
•Securities & Exchange Board of India.
•Ministry of Finance.
•Ministry of Corporate Affairs.
•Insurance Regulatory Development Authority of
India.
•Pension Fund Regulatory and Development
Authority of India.

21. Financial Intermediaries:
•Banking Institutions.
•Non-Banking Institutions.
•Mutual Funds.
•Insurance Companies.
•Housing Finance Companies.

22. Other intermediaries:
•Depository Participants;
•Stock brokers and sub-stock brokers;
•Clearing houses of stock exchanges;
•Merchant bankers;
•Registrars;

23. Financial Markets:
•Capital Market.Primary Market.
•Money Market.Secondary Market.

24. Capital Market:
•Equity Market.
•Debt Market.
•Derivative Market.

25. Equity Market:
•Primary Market: Public issues, Private
placement, Merchant Banks, Bankers to the
issue.
•Secondary Market: Trading & Settlement,
NSE, BSE, OTCEI, Regional Stock
Exchanges.

26. Debt Market:
•Government Dated Bills.
•PSU Bonds.
•Corporate Debt.

27. Derivative Market:
•Futures on the stock and index.
•Options on the stock and index.

28. Money Market:
•Treasure Bills.
•Call Money.Primary Segment.
•Commercial Bills.
•Commercial Paper.Secondary Segment.
•CD’s

29. Financial instruments:
•Negotiable equity, debt, preference
instruments etc.
•Mutual funds and ETF’s
•Futures and options on stocks and indices.
•Non-negotiable bank deposits, post office
saving schemes etc.

30. Financial Services:
•Banks.
•Depositories, (NSDL and CSDL).
•Credit Rating Agencies, (CRISIL, ICRA etc).
•Merchant Banking Firms.
•Leasing and Hire-purchase.
•Guaranteeing and Insurance.
•Underwriting.
•Brokerage.

31. Function 1: Transferring resources
across time and space.
•By selling deposits and buying loan products;
•By providing remittance facilties.

32. Function 2: Managing Risk
•By diversification potential;
•By providing insurance products.
•By providing futures contracts.

33. Function 3: Clearing and settling
payments
•Wire transfers, checking accounts, and
credit/cash cards;
•Depositories and stock clearing agencies.

34. Function 4: Pooling resources and
Subdividing shares
•By providing loans;
•By equity participation.

35. Function 5: Providing information
•Information about Interest rates;
•Information about security prices.

36. Function 6: Dealing with incentive
problems
•Moral hazard;
•Adverse selection;

37. •India’s Financial Sector Reforms 1991.

38. Backdrop:
•Industrial licensing and control.
•Administered interest rate regime.
•Public sector dominance.
•Limited competition.
•Import oriented.
•Heavy external debt reliance economy.
•India’s balance of payment crisis during early 1990’s.

39. Measures taken during 1980’s
•Abolition of MRTP Act.
•Relaxing of entry barriers.
•Removing of restriction on enhancement of capacities.
•Reducing import restriction.
•Money market reforms and raising of yield on long-
term government securities.

40. 1991 India’s Economic Crisis.
•Gulf war and its impact on India's oil import bill.
•Decline in exports.
•India’s foreign exchange reserves were at $ 1.2 billion in
January 1991, half of this balance got depleted by June
1991.
•Prolonged fiscal deficit spilled over trade deficit.
•Adverse balance of payment led to external payment crisis.

41. Economic indicators during 90’s
•Inflation – 13.7% against 6 – 7% during 1988-90

•Current Account Deficit – 3.2%
•External debt as a % of GDP – 38.7%
•Rate of Growth of GDP – 0.8%
•Debt Service Ratio – 35.3%

42. 1991 Fire-fighting measures for recovery:
•External borrowing of $ 2.2 billion from IMF.
•Outrage in national sentiments due to pledging of 67 tons of
gold by RBI in lieu of external debt.
•Collapse of Chandra Shekhar’s government and ushering of
P. V. Narasimha Rao led government economic and
financial sector reforms.
•With the introduction of reforms India's Forex reserves
improved to $ 314.61 billion by the end of May 2008 and
today they stand at $ 315,910 million.

43. The Economic Reforms:
•The Journey Continues…

44. Financial Sector Reforms in early 90’s
•Policy Reforms.
•Stock Market Reforms.
•Government Securities Market Reforms.
•Banking Sector Reforms.
•External Sector Reforms.

45. Policy Reforms.
•Abolition of CCI and empowering of SEBI.
•Deregulation.
•Introduction of capital adequacy norms.
•Setting up of special recovery tribunals.
•Imposition of registration of NBFC’s with RBI.
•Establishment of new stock exchanges.
•Introduction of floating interest rate among development banks.
•Disinvestment of financial PSU’s.
•Removal of restriction on setting of banks, mutual funds and insurance companies in the private
sector.
•Phased reduction in Cash Reserve Ratio from a high of 15%.
•Phased reduction of Statutory Liquidity Ratio from a high of 38%.

46. Stock Market Reforms:
•Abolition of fixed price regime.
•Introduction of depositories.
•Modification of the listing requirements.
•Modernisation of stock exchanges.
•Listing of debt securities.
•Collection of daily margin from the brokers.
•Introduction of derivative trading.

47. Government Securities Market Reforms.
•Reduction in maturity period of long dated government securities.
•Introduction of new instrument, like, floating rate bonds, zero coupon bonds, etc.
•Participation of provident funds and state governments into 91 day treasury bill
market.
•Establishment of PD’s
•Setting up of DFHI and STCI as market makers for government securities and
reverse repo.
•Replacement of 182 days TB with 363 day TB and re-introduction of 91 day TB.

48. Banking Sector Reforms.
•Easing of branch licensing and freedom to diversify into merchant banking
and leasing.
•Opening up of banking sector for private sector.
•Introduction of prudential norms.
•Introduction of banking ombudsman scheme.
•Raising of capital by floating public offers.
•Introduction of capital adequacy norms.
•Phased deregulation of interest rates.
•Phased reduction of reserve requirements.

49. External Sector Reforms:
•Abolition of exchange control and introduction of
flexible exchange rate.
•Access of Indian firms to international capital
market.
•Partial rupee convertibility.
•Setting up of Foreign Investment Promotion
Council.
•Replacement of FERA Act by FEMA Act.
•Allowing entry of FII’s.

50. Tail piece:
•Reforms – A never ending agenda.

51. Securities & Exchange Board of India (SEBI)
– Role and Functions.

52. Domain of Securites Market:
•Long term Equity, Debt and Derivative
securities.

53. Components of Securities Market:
•Corporates, mutual funds, registrars, merchant
bankers, bankers to the issue, underwriters,
depositories, DP’s, retail investors,
institutional investors, etc.
•Stock exchanges, brokers, sub brokers,
depositories, clearing corporation, bankers,
investment advisors etc.

54. Stock Exchanges operating in India
•BSE - 1875.
•NSE – 1992.
•OTCEI – 1990.
•ICSE – 1998.
•14 Regional Stock Exchanges.

55. Regulation of the Indian’s Capital Market:
•Securities and Exchange Board of India;
•The Department of Economic Affairs;
•The Department of Company Affairs;
•Reserve Bank of India.

56. Main legislations governing Capital Market:
•The Companies Act, 1956, (Amended 2013)
•The Securities Contracts (Regulation) Act,
1956.
•The SEBI Act, 1992.
•Depositories Act, 1996.

57. SEBI Act, 1992
•Protection of investor interest;
•Development of the securities market;
•Regulation of the securities market;
•Other matters connected or incidental to
Securities market.

58. The Companies Act, 1956
•Issue, allotment and transfer of securities;
•Disclosures;
•Matters concerning underwriting, rights, bonus
and payment of interest and dividend.

59. The Securities Contracts (Regulation) Act, 1956
•Regulation of Securites trading;
•Management of stock exchanges.

60. The Depositories Act, 1996
•Establishment of Depositories;
•Regulation of electronic maintenance and
transfer of ownership in Demat securities.

61. Prior to 1990 security scam:
•Capital Issues (Control) Act, (CCI) 1947 –
repealed in 1992 with the introduction of SEBI
Act.

62. SEBI:
•Established in year 1988.
•Ordinance passed on 30 January 1992 giving
wide ranging powers to SEBI.
•SEBI Act 1992 gets approval on 4 April 1992.

63. Purpose of SEBI:
•1. Issuers: For issuers it provides a market
place in which they can raise finance fairly and
easily.
•2. Investors: For investors it provides
protection and supply of accurate and correct
information.
•3. Intermediaries: For intermediaries it
provides a competitive professional market.

64. Objectives of SEBI:
1. To regulate the activities of stock exchange.
2. To protect the rights of investors and ensure safety to their
investment.
3. To prevent fraudulent and malpractices by having balance
between self regulation of business and its statutory
regulations.
4. To regulate and develop a code of conduct for
intermediaries such as brokers, merchant bankers,
underwriters, etc.

65. Role of Regulators in the Securities Market:
•Regulatory Role.
•Developmental Role.
•Investor Protection Role.

66. Role of SEBI in Capital Market:
•Protecting the interests of investors in
securities.
•Promoting the development of the securities
market.
•Regulating securities market.

67. Functions of SEBI:
•i. Protective functions.
•ii. Developmental functions.
•iii. Regulatory functions.

68.  Protective Functions:
•It Checks Price Rigging.
•It Prohibits Insider trading.
•SEBI prohibits other fraudulent and Unfair Trade
Practices.
•Provides a grievance redressal window for
investors.

69. SEBI’s Investor Awareness Platform:
http://investor.sebi.gov.in/

70. Developmental Functions:
•(i) SEBI promotes training of intermediaries of the securities (i) SEBI promotes training of intermediaries of the securities
market.market.
•(ii) SEBI tries to promote activities of stock exchange by adopting (ii) SEBI tries to promote activities of stock exchange by adopting
flexible and adaptable approach in following way:flexible and adaptable approach in following way:
•(a) SEBI has permitted internet trading through registered stock
brokers.
•(b) SEBI has made underwriting optional to reduce the cost of issue.
•(c) Even initial public offer of primary market is permitted through
stock exchange.

71. Regulatory Functions:
•SEBI has framed rules and regulations and a code of conduct to
regulate the intermediaries such as merchant bankers, brokers,
underwriters, etc.
•These intermediaries have been brought under the regulatory purview
and private placement has been made more restrictive.
•SEBI registers and regulates the working of mutual funds etc.
•SEBI regulates takeover of the companies.
•SEBI conducts inquiries and audit of stock exchanges and its
constitutents.

72. Powers of SEBI:
•Ask any intermediary or market participant for information.
•Inspect books of depository participants, issuers or beneficiary owners.
•Suspend or cancel a certificate of registration granted to a depository participant or
issuer.
•Suspend or cancel the registration of a banker to the issue or request RBI to inspect the
books of such intermediary.
•Suspend or cancel the registration of custodians, FII’s, merchant banker, portfolio
manager, registrar, share transfer agent or a broker.
•Investigate affairs of mutual funds, their trustees and asset management companies.
•Investigate an acquirer, a seller, or a merchant banker for violating takeover rules.