Indian Financial System Vth Trim

8/7/2019 Indian Financial System Vth Trim

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Indian FinancialSystem


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Unit-1

Overview of Indian FinancialSystem

AGENDA

} Role of Financial Markets in capital formationand economic development.

} Commercial Banks and industrial finance-evolving role.

} Reserve Bank of India as a regulator ofBanking systems and its other functions.

} Securities & Exchange Board of India as aregulator of Indian capital market


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Financial system andeconomic development The growth of output in any economy depends on the

increase in the proportion of savings/investment to anations output of goods and services.

The financial system and financial institutions help in thediversion of rising current income into savings/investments.

The financial system is possibly the most importantinstitutional and functional vehicle for economictransformation. Finance is a bridge between the presentand the future and whether it be the mobilisation of savingsor their efficient, effective and equitable allocation forinvestment, it is the success with which the financial systemperforms its functions that sets the pace for theachievement of broader national objectives.


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Significance & Definition} The term financial system is a set of inter-related

activities/services working together to achieve

some predetermined purpose or goal. It includesdifferent markets, the institutions, instruments,services and mechanisms which influence thegeneration of savings, investment capitalformation and growth.

} Van Horne defined the financial system as the

purpose of financial markets to allocate savingsefficiently in an economy to ultimate users eitherfor investment in real assets or for consumption.


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}According to Robinson, the primary function of

the system is "to provide a link betweensavings and investment for the creation of newwealth and to permit portfolio adjustment inthe composition of the existing wealth.

} From the above definitions, it may be said that

the primary function of the financial system isthe mobilisation of savings, their distribution forindustrial investment and stimulating capitalformation to accelerate the process of

economic growth.


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Types of Market} Well-developed financial markets are

required for creating a balanced financial

system in which both financial markets andfinancial institutions play important roles.

} The primary function of the financial markets isto facilitate the transfer of funds from surplussectors (lenders) to deficit sectors (borrowers).

} Normally households have excess of funds or

savings which they lend to borrowers in thecorporate and public sectors, whoserequirement of funds exceed their savings.


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}A financial Market consists of investors or

buyers, sellers, dealers and brokers and doesnot refer to a physical location.

} The participants in the market are linked byformal trading rules and communicationnetworks for originating and trading financialsecurities.

} The primary market in which the public issue ofsecurities is made through a prospectus is aretail market and there is no physical location.

} The investors are reached by direct mailing orinvitation to bid within a price band.


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}On the other hand, the secondary market orstock exchange where existing securities aretraded, is an auction market and may have a

physical location such as the rotunda of theBombay Stock Exchange or the trading floor ofDelhi, Ahmadabad and other exchanges

where the exchange members meet to tradesecurities face-to-face.


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Money Market} The money or credit market is the centre for

dealings in monetary assets of short-term nature

generally below one year.} The instruments are call money/notice money,

term money, treasury bills, commercial paper,certificates of deposits, participation certificatesand forward rate agreements/interest rate swaps.

} The money market has organised and

unorganised components.} The organised credit market is dominated by

commercial banks.


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} The other major players are the Reserve bank

of India, Life Insurance corporation, GeneralInsurance corporation, Unit Trust of India,

Securities Trading corporation of India Ltd. AndDiscount and finance house of India.

} Unorganised Market consists of indigenousbankers and money lenders.

} There is no clear demarcation between short-term and long-term finance in as much asthere is nothing on a hundi to indicate

accommodation.

} Hundi is the indigenous bill of exchange.

} Hundis are usually accommodation bills.


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Capital Market} The capital market consists of primary and

secondary markets.

} The primary market deals with the issue of newinstruments by corporate sector such as equityshares, preference shares and debentures.

} The secondary market consists of 24 stockexchanges, (out of which 5 has been de-recognized) including the national stock

exchange, the over the counter exchange ofIndia and interconnected stock exchange of IndiaLtd. Where existing instruments includingnegotiable debts are traded.


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}Capital formation occurs in the primary market

while the secondary market provides acontinuous market for the securities already

issued to be bought and sold in volume withlittle variation in the current market price.

} The major player in the primary market are themerchant banker, mutual funds, financial

institutions, foreign institutional investors andthe anchor of the market, the individualinvestor.

} In the secondary market, the stockbrokers whoare members of the stock exchanges, themutual funds, financial institutions, foreigninstitutional investors and individual investors.


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Foreign Exchange Market The foreign exchange market encompasses all

transactions involving the exchange of differentmonetary units for each other.

Every sovereign nation has its own currency. Themonetary unit of a country can be exchanged withany other currency of any other country in the foreignexchange market.

The foreign exchange market is not a physical place.It is a network of banks dealers and brokers who aredispersed throughout the leading financial sectors ofthe world.

It acts as an intermediary for individual buyers andsellers. The foreign exchange market links financialactivities in different currencies.


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} FEM in India comprises of authorized dealersconsisting mainly of commercial banks,customers and Reserve Bank of India.

} There are seven major centres in Mumbai,Delhi, Calcutta, Chennai, Bangalore, Kochiand Ahmadabad with Mumbai accounting for

the major portion of the transactions.} The Foreign Exchange Dealers Association of

India(FEDAI) plays an important role by layingdown the rules for commission and other

charges.


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Foreign Exchange Rates

} The foreign exchange rates govern therate at which one currency can be

exchanged for another.

}An exchange rate may be defined as theamount of currency that one requires tobuy one unit of another currency or is the

amount of a currency one receives whenselling one unit of another currency.


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Reserve Bank of India

} The Reserve Bank of India as the central bank

of the country, is at the head of this group.

} Commercial banks themselves may be

divided into two groups, the scheduled andthe non scheduled.

} The commercial banking system may be

distinguished into:} A. Public Sector Banks

} B. Private Sector Banks


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A. Public Sector Banks

i) State Bank of India ii) Associate Bank

iii) 14 Nationalized Banks (1969)

iv) 6 Nationalized Banks (1980)

v) Regional Rural BanksB. Private Sector Banks

Other Private Banks;

ii) New sophisticated Private Banks;

iii) Cooperative Banks included in the secondschedule;

iv) Foreign banks in India, representativeoffices, and

v) One non-scheduled banks


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RBI

} The Reserve Bank of India (RBI) is the apexfinancial institution of the countrys

financial system entrusted with the task ofcontrol, supervision, promotion,development and planning.

} RBI is the queen bee of the Indian

financial system which influences thecommercial banks' management in morethan one way.

} RBI performs the four basic functions of

management, viz., planning, organising,directin and controllin in la in a stron


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Functions

} Issuing currency notes, to act as acurrency authority.

} Banker, Agent and Financial Advisor tothe State

} Banker to the Banks

}Custodian of Foreign Exchange Reserves

} Lender of the Last Resort

} Banks of Central Clearance, Settlementand Transfer

}Controller of Credit

} Su ervisor Functions


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Commercial Banks

} In India there are 88 commercial bankswhich account for about 82 %of the total

assets of the financial sector, over 2000cooperative banks accounting for about5% and 133 regional Rural Banks, whichaccount for about 3% of the total assets

of the financial sector.}Commercial banks are business

enterprises which deal in finances,financial instruments and provide variousfinancial services for a price known as

interest, discount, commission, fee etc.


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}According to the Banking Regulation Act,

1949, Banking means, accepting, deposit ofmoney from the public, for the purpose of

lending or investment.

} These deposits may be repayable on demand

or otherwise and may be withdrawn bycheque, draft, order or otherwise.

}Accepting deposits and lending theseresources to business houses and individualsare the main function of commercial banks.

}Commercial banks also involve into various

financial services.


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Functions of commercialbanks

}Accepting deposits

}

Loans and advances}Agency functions

}Dealings in foreign exchange

}Credit creation

} Popularising cheque system} Transfer of funds

}Other functions

} Function under innovative banking

} Insurance business


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}

The Board consists of a chairman, twomembers from the Government of India,ministries of Law and Finance, one memberfrom the RBI and two other members.

} The SEBI prohibits unfair trade practices and

insider trading, regulation of take-overs etc.


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Functions of SEBI

} Regulating the business in stockexchanges and any other securities

market.

} Registering and regulating the working ofstock brokers, sub-brokers, share transferagents, bankers to an issue, merchant

bankers, underwriters, portfolio managers,investment advisers and such otherintermediaries who may be associatedwith securities markets in any manner.

}

Registering and regulating the working ofcollective investment schemes includin


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} Promoting and regulating self-regulatory

organisation.} Prohibiting fraudulent and unfair trade

practices relating to securities market.

} Promoting investors education and training ofintermediaries of securities market.

} Prohibiting insider trading in securities.

} Levying fees or other charges for carrying outthe above purposes and

}Conducting research for the above purposes.


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Unit- IIFinancial Market

Agenda

}

Money Market: Organisation, Constituentsand Instruments

}Capital Market: New Issue Market & StockExchanges- Differences & Similarities,

Functions, Methods of New Issues,

Regulatory framework.


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Money Market

}Money Market is a very importantsegment of the Indian financial system.

}Money Market is basically over-the-phonemarket. The transactions are conductedthrough oral communications.

} It is the market for dealing in monetary

assets of short-term nature. Short-termfunds up to one year.

}Money market instruments have the

characteristics of liquidity, minimum

transaction cost and no loss in value.


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}Money market provides access to providersand users of short term funds to fulfill their

borrowings and investment requirements.} The Money Market is the major mechanism

through which the Reserve Bank influences

liquidity and the general level of interest rates.

}

There are a large number of participants in themoney market: Commercial Banks, Mutualfunds, investment institutions, financial

institutions and finally the Reserve Bank ofIndia.

} The money market can obtain funds from thecentral bank either by borrowing or through

sale of securities.


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Organisation of MoneyMarket

}Organised

} Reserve Bank of India

} Public Sector Banks

} Private Sector Banks-

}Non-Scheduled Banks

} Scheduled Banks-

} Foreign Banks

} Indian Banks

} Development Banks and other FinancialInstitutions like LIC, UTI, IFC, IDBI etc.

} DFHI Ltd.


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} Unorganised

} Indigenous bankers} Money Lenders

} Traders

} Commission Agents

}

Chit Funds} Nidhis


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Money Market Instruments} Money at call and short notice (Call Loans)

} Treasury Bills

} Bills Rediscounting Scheme (BRS)} Certificates of Deposits (CDs)

} Commercial Papers (CPs)

} Repurchase Options} Inter-Bank Participation Certificates on a risk

sharing basis or without risk sharing basis} Options

} Swaps


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Capital MarketNew Issue MarketNew Issues Market comprises all people,institutions, methods, services and practices

involved in raising fresh capital for both new

and existing companies. This Market is alsocalled Primary Market. PM deals in only newsecurities which acquire form for the first time,i.e. which were not available previously.

On the other hand, secondary market or stockmarket or stock exchange deal in existingsecurities, i.e. securities which have alreadybeen issued by companies and are listed with

the stock exchanges.


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Functions of Nim} Facilitates transfer of resources from savers to

entrepreneurs establishing new companies.

} Helps raising resources for expansion and/ordiversification of activities of existingcompanies

} Helps selling existing enterprises to the publicas going concerns through conversion of

existing proprietorship/partnership/privatelimited concerns into public limitedcompanies.


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Players in the New IssueMarket

} Merchant Bankers

} Registrars

} Collecting and co-ordinating Bankers

} Underwriters

} Brokers, Agents

} Printers

}

Advertising Agencies} Mailing Agencies

} SEBI


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Differences between Nim andStock exchanges

NIM Stock Exchanges

1. Market for new securities 1. Market for existing

securities2. No fixed geographical

location

2. Located at a fixed place

3. Results in raising fresh

resources for the corporatesector

3. Facilitates transfer of

securities from onecorporate investor to

another.

4. All companies enter NIM 4. Securities of only listed

companies can be tradedat stock exchanges

5. No tangible form or

administrative set-up

5. Has a definite

administrative set-up and a


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Similarities between Nim &Stock Exchanges

} Securities traded at stock exchanges are thosewhich have first been issued by the companies.

} While issuing prospectus, the companies stipulatein the prospectus that application has been madeor will be made in due course for listing of shareswith the stock exchange.

} Stock exchange exercise control over theorganisation of new issues as a precondition for

listing of shares.} Stock exchanges provide liquidity to the securities

which have passed through NIM.


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Methods of new issues

} Public issue through prospectus

} Through offer for sale

} Through placement of securities- privateplacement and stock exchange placing

} Rights issue

} Issue of Bonus shares

} Book-building} Stock option or Employees Stock Option

Scheme


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Unit-IIIBanking Institutions

Agenda

}Commercial Banks

}Co-operative Banks


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Commercial Banks} Commercial Banks are business enterprises

which deal in finances, financial instrumentsand provide various financial services for aprice known as interest, discount, commission,fee etc.

} According to the Banking Regulation Act,1949, banking means, Accepting deposits ofmoney from the public, for the purpose oflending or investment.

} These deposit may be repayable on demandor otherwise and may be withdrawn bycheques, draft, order or otherwise.


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}Accepting deposits and lending these

resources to business houses and individualsare the main function of commercial banks.


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Functions of CommercialBanks

}Accepting Deposits

}Demand deposits or current accounts

} Savings deposits

} Time deposits or fixed deposits

} Loans and Advances

}Cash Credits

}Overdrafts}Discounting of bills

} Short-term, Medium-term or Long-term loans


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}Agency function

}Dealings in foreign exchange

}Credit Creation

} Popularising Cheque System

}

Transfer of funds}Other functions

} Insurance Business


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Sources & Application of Funds

Sources} Paid-up Capital

} Reserves and Surpluses

}Deposits

Application

} Buildings, furniture, office equipment etc. forconducting business

}Money at call and short notice} Bills discounted and purchased

} Treasury bills etc.


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Asset Structure of CommercialBanks

}Cash Balances

}Money at call and short notice

} Short-term Bills

} Loans and advances

} Investments


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Non-performing Assets

} A non-performing Asset in India represents an

advance that has not been serviced as a

result of past dues accumulating for 90 daysand over.

} NPAs consist of assets under three categories:-

} Sub-standard

} Doubtful and

} Loss


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} A non-performing asset is an advance where:

} Interest and/or installment of principal remainoverdue for a period of more than 90 days in

respect of term loan.

} The account remains our of order for a period ofmore than 90 days in respect of an overdraft/cashcredit.

} The bill remains overdue for a period of more than

90 days in case of the bills purchased anddiscounted.

} Interest and/or installment of principal remainoverdue for two harvest seasons but for a period ofnot exceeding 180 days in the case of an advance

granted for agricultural purposes.}And amount to be received for a period of more

than 90 days in respect of other accounts.


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Bank Rate, Lending Rates andCredit-off take

} Bank rate is the rate of interest at whichReserve Bank of India lends money to banks.

}

Its is the rate at which the central bankrediscounts certain defined bills and othereligible papers.

} Prime Lending rate is the rate of interest atwhich banks lend to the borrowers withhighest credit-worthiness.

} Credit-off take occurs when the demand formoney at lower rate (bank rate and variousinterest rate) is promoted.


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Repo and Reverse Repo rate

} Repo rate is the rate at which banksborrow short-term funds from RBI.

} Reverse repo rate is the rate at whichbanks park their short-term surplus funds inthe RBI.


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Commercial Banks

Scheduled Banks non-scheduledbanks

(i) Public Sector (28) (i) Local Area Banks

(ii) Private Sector (60) SBI Group (8)

(iii) Regional Rural (231) Nationalised Bank(19)

Indian (29)

Foreign (31)


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Organisational structure of Co-operative Credit Institutions

} Urban Co-operative Banks

} Rural Co-operative Credit Institutions

} Short Term Credit} State Co-operative Banks

} District/Central Banks

} Primary Agricultural Credit Societies

} Long Term Credit} State Co-operative Agricultural & Rural

Development Banks} Primary Co-operative Agricultural & Rural

Development Banks


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Co-operative Banks

}

Co-operative Banks undertake the business ofbanking both in urban and rural areas on theprinciple of co-operation.

} They have served a useful role in spreading thebanking habit throughout the country.

} The co-operative banks have been set upunder the various Co-operative Societies Actsenacted by the State Governments.

} The State Governments regulate/monitor these

banks.}Certain provisions of the Banking Regulation

Act 1949 were made applicable to co-operative banks as well.


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} The State Co-operative Banks and Urban Co-

operative Banks are eligible to be granted thestatus of scheduled banks by the Reserve Bank

of India.

}All Co-operative banks are eligible for beingregistered as insured banks.


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Urban Co-operative Banks} These banks are required to obtain a license from

the Reserve Bank of India under section 22 of theBanking Regulation Act, 1949.

} Recently the Reserve Bank of India has revised thelicensing policy of new banks.

} According the this, a new bank should have sharecapital of Rs. 4 Crore and membership of at least3000 if the population is over 10 lakhs.

} A share capital of Rs. 2 Crore and membership ofat least 2000 are required for population of 5 to 10lakhs.


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} Share capital of Rs. 1 Crore and membershipof at least 1500 are required for population of 1to 5 lakhs.

} Share capital of Rs. 25 lakhs and membershipof at least 500 for population of less than 1lakh.

}

The new bank should have at least 2 directorswith suitable banking experience or relevantprofessional qualifications.

}An urban co-operative bank is allowed tobecome a schedule bank if its net demand

and time liabilities are at least Rs. 100 Croreand its overall functioning in terms of selectparameters is satisfactory.


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}All categories of scheduled banks including

co-operative banks are now subject to thesame cash reserve requirement as applicable

to Scheduled Commercial Banks.


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State Co-operative Banks} These are the important banks in the field of short-

term co-operative credit in rural areas.} The scheduled co-operative banks are eligible for

loans and advances from RBI and have to makecash reserve ratio with the RBI.

} The non-scheduled state co-operative banks haveto comply with the requirement of making depositwith RBI.

} State co-operative banks are also required to seek

licence from RBI for carrying on of Bankingbusiness under section 22 of the BankingRegulation Act, 1949.


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} State Co-operative banks are eligible for

obtaining credit from NABARD on the basis ofshort-term and medium-term credit granted

by them.

} State co-operative banks grant loans andadvances to the central/district co-operative

banks.


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Unit-iv

Non-Banking FinancialIntermediaries

Agenda

} Investment Policy and performanceappraisal of Unit Trust of India and othermutual funds

}Non-Banking Financial Companies

} Insurance Companies


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Non-Banking Financial Companies

} Non-banking Financial Institutions carry out

financing activities but their resources are not

directly obtained from the savers as debt.Instead, these Institutions mobilize the public

savings for rendering other financial services

including investment. All such Institutions arefinancial intermediaries and when they lend,

they are known as Non-Banking FinancialIntermediaries (NBFIs) or Investment

Institutions.


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} The principal business of NBFCs is to accept

deposits under various schemes or arrangements like regulated deposits andexempted deposits and to lend in variousways.

}NBFCs except HFCs are regulated by the RBI.

} HFCs are regulated by NHB.}NBFCs were allowed to enter into credit card

business on their own or in association withanother NBFC or a scheduled commercial

bank.


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} Loan Companies

} Investment Companies}Hire-purchase Finance

}Housing finance

} Lease Finance

}Mutual Benefit Financial Companies

} Residuary Non-Banking Companies

}Merchant Banks

}Venture Capital Funds

} Factors


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}Apart from these NBFIs, another part of Indianfinancial system consists of a large number of

privately owned, decentralised, and relativelysmall-sized financial intermediaries. Most workin different, miniscule niches and make the

market more broad-based and competitive.While some of them restrict themselves to

fund-based business, many others providefinancial services of various types. The entitiesof the former type are termed as "non-bankfinancial companies (NBFCs)". The latter type

are called "non-bank financial servicescompanies (NBFCs)".


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}Non-bank financial intermediaries (NBFIs)comprise a mixed bag of institutions, ranging

from leasing, factoring, and venture capitalcompanies to various types of contractualsavings and institutional investors (pension

funds, insurance companies, and mutualfunds). The common characteristic of these

institutions is that they mobilize savings andfacilitate the financing of different activities,but they do not accept deposits from thepublic. NBFIs play an important dual role in the

financial system.


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Mutual Funds

}Mutual Funds are financial intermediarieswhich collect the savings of investors andinvest them in a large and well diversifiedportfolio of securities such as money marketinstruments, corporate and Governmentbonds and equity shares of joint stockcompanies.

}A Mutual Fund is a pool of mix funds investedby different investors, who have no contact

with each other.}Mutual funds helps the investors who generally

dont have adequate time, knowledge,experience and resources for directlyaccessing the capital market.


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} The first mutual fund was the Unit Trust of India

in 1964 under an act of Parliament.

}During the years 1987-1992, seven new mutualfunds were established in the public sector.

} In 1993, the Government changed its policy toallow the entry of private corporate and

foreign institutional investor into the mutualfund segment.

} There are two types of Mutual Funds :

} Open-ended funds

} Closed-ended funds


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Organization

} The Sponsor

} The Board of Trustee or Trust Company

} The Asset Management Company

} The Custodian

} The Unit-holders


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Investment Policy & Performanceappraisal of UTI

} The MFs invest their resources in different typeof financial assets subject to the guidelinesform the government and the SEBI.

} The government directs that investment bythe UTI in anyone company should notexceed five percent of its total investible fund,or 10 percent of the value of the outstandingsecurities of that company, whichever islower.

} It is further laid down that UTI should not investmore than 5 percent of its funds in the initialissues of any new industrial concern.


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} The objective of government regulations are

to minimize risk and avoid concentration ofinvestments in a few large companies.

} In view of the requirement of safe provision ofa stable, regular and growing income to its

unit-holders, the portfolio of its assets has to becomposed of fixed-income securities andordinary shares.

} The SEBI requires other mutual funds to invest

not more than 5 percent of the outstanding

equity capital of any company.


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Determinants of Mutual FundPerformance

} Factors affecting expected returns include assetallocation and systematic risk, while transactioncosts include explicit and implicit ones, which canbe measured by expense ratios, age of the funds,fund fees, management structure, managementtenure, macro economics variables like inflation,growth rate of GDP, development of capitalmarket, and size of funds respectively.

} In order to judge the performance of MF schemesin an objective manner and offer investors an easyway to identify funds that have performed betterin relation to their peer, a number of.


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} Entities are evaluating and ranking theirperformance.

} The most popular of them arerankings/evaluations by CRISIL, Value

Research India and Credence Analytics.


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Insurance Companies

} The Insurance companies are financialintermediaries as they collect and invest largeamounts of premiums.

} They offer protection to the investors, providemeans for accumulating savings and channelisefunds to the government and other sectors.

} The insurance industry has both economic andsocial purpose. It provides social security andpromotes individual welfare.

} The actual premium of insurance companiescomprises the pure premium and administrative aswell as marketing cost.


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} The pure premium is the present value of the

expected cost of an insurance claim.

} Since there is a lag between payment ofpremiums and payment of claims, there isgeneration of investible funds known as

insurance reserves.

}

Insurance companies may be organised aseither corporations or mutual associations.

} There are various parts of insurance industry:life insurance, health insurance, generalinsurance, etc.


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Insurance Industry in India

} Public Sector

} Life LIC, Post Office Insurance

} General GIC and its four subsidiaries

} Private Sector

} Life

} General


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Investment Pattern and Policy

} The pattern of investment of LIC funds has beengoverned by the provisions of the Insurance Act1938.

} Till very recently, it had to invest at least 50 percentof its controlled funds in government and otherapproved securities, 15 percent in otherinvestments which included loans to stategovernment for housing and water supplyschemes, municipal securities not included incategory one, government guaranteed loans tomunicipal committees and co-operative sugarfactories, and upto 35 percent in approved ..


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investments which included shares and

debentures of public and private limitedcompanies, of co-operative societies,

immovable property, loans to its policy-holdersand fixed deposits with scheduled banks andco-operative societies.

Unit V


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Unit-VDevelopment, Merchant &

Investment BankingAgenda

}Development Banking}Merchant Banking

} Investment Banking


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Development Banking

}Development Banking is the financing ofprojects assessed on the basis of their

viability to generate cash flows to meetthe interest and repayment obligation.

} They have an in-built promotional aspectbecause projects have to fall within the

overall national industrial priorities,located preferably in backward areasand promoted by entrepreneurs.


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Development banking is different: Loans aremade not to those who have accumulatedwealth in the past but to those who show

promise to become wealthy in the future.Normal banking looks for safety in assetsaccumulated from the past; in developmentbanking, possible accumulation of assets in thefuture is the true collateral. Thus, while in

normal banking, the collateral is real andtangible, in development banking, thecollateral is a dream; it is intangible. In normalbanking, an interest default of more than 90days becomes a non-performing asset. In the

case of development, growth is rarely smooth;development happens in fits and starts; cashflows are subject to wild fluctuations andbecome negative at times.


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development banks need to have a longerperspective than three months; they shouldshow patience for years. Normal banks can

afford to be myopic; development banksshould take the long view. For developmentbanks, it is the trend line and not the current

surplus that is important. As one developmentbanker blithely explained: "When I see any risk,

I take my money and run away." But that is notdevelopment banking; development bankstake risks that ordinary banks will not.


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Merchant Banking} Merchant banking activity was formally initiated

into the Indian Capital markets when Grindlaysbank in 1967 received the license from Reserve

Bank of India in 1967.} Apart from meeting specially, the needs of small

scale units, it provided management consultancyservices to large and medium sized companies.

} Following Grindlays Bank, Citibank set up itsmerchant banking division in 1970. The divisiontook up the task of assisting new entrepreneursand existing units in the evaluation of new projectsand raising funds through borrowing and equityissues.


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} Merchant Bankers are permitted to carry onactivities of primary dealers in governmentsecurities.

} On the recommendations of Banking Commissionin 1972, Indian banks should offer merchantbanking services as part of the multiple servicesthey could provide their clients.

} State Bank of India started the merchant Banking

division in 1972. In the initial years the SBIs objectivewas to render corporate advice and assistance tosmall and medium entrepreneurs.

} The commercial banks that followed SBI wereCentral Bank of India, Bank of India and syndicateBank in 1977; Bank of Baroda, Standard Chartered

Bank and Mercantile Bank in 1978 andU

nited Bankof India, United Commercial Bank, PNB, CanaraBank and IOB in late 1970s and early 1980s.


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} Among the development banks ICICI started

merchant banking activities in 1973, followed by

IFCI(1986) and IDBI (1991).} The notification of the Ministry of Finance defines a

merchant banker as, any person who is engaged

in the business of issue management either bymaking arrangements regarding selling, buying or

subscribing to securities as manager, consultant,advisor or rendering corporate advisory service in

relation to such issue management.

} Merchant bankers have to be organized as body

corporates. They are governed by the merchant

bankers rules issued by the Ministry of Finance andmerchant bankers regulations issued by SEBI.


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Services rendered by

Merchant Banks

} Organizing and extending finance forinvestment in projects,

} Assistance in financial management,

} Acceptance of house business,

} Raising Eurodollar loans and issue of foreigncurrency bonds,

} Financing local authorities

} Financing export of capital goods, ships,

hydropower installation, railways.} Financing of hire-purchase transactions,

equipment leasing, mergers and take-overs


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}Valuation of Assets,

} Investment management and promotion of

investment trusts.}All merchant banks dont offer all these

services.

}Different merchant bankers specialize indifferent services.

}Merchant banking is a skill based activity andinvolves servicing of any financial need of theclient.

}Merchant banking activities are regulated by

(1) Guidelines of SEBI and Ministry of Finance,(2) Companies act 1956 (3) Listing guidelines ofStock Exchanges and (4) Securities Contracts(Regulation) Act 1956.


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Unit-VI

FDI and Issues related therein

Agenda

} Foreign Investment and its regulation

}Accessing International Capital Market

Indian Financial System Vth Trim

Documents

Transcript of Indian Financial System Vth Trim