Role of Government in Indian Financial System

SUBMITTED BY UNDER GUIDANCE OF

Debapratim Dutta Prof A Dutta Regd No-09kb042 PGDM -2009-11

Introduction

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 consists of many subsystems like financial services banks financial institutions etc Financial system is the system which induces generation of savings transfer of those savings into an entrepreneurial effort and stimulates an entrepreneur to undertake various business ventures It is a key weapon in monitoring the economic progress of any country because eventually all efforts and resources are measured in financial terms A financial system performs the following functions 1 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 2 It assists in the selection of the projects to be financed and also reviews the performance of such projects periodically 3 It provides payment mechanism for exchange of goods and services 4 It provides a mechanism for the transfer of resources across geographic boundaries 5 It provides a mechanism for managing and controlling the risk involved in mobilizing savings and allocating credit 6 It promotes the process of capital formation by bringing together the supply of saving and the demand for investible funds 7 It helps in lowering the cost of transaction and increase returns Reduce cost motives people to save more 8 It provides you detailed information to the operators players in the market such as individuals business houses Governments etc The Indian financial system comprises a set of financial institutions financial markets and financial infrastructure The financial institutions mainly consist of commercial and co-operative banks regional rural banks (RRBs) all- India financial institutions (AIFIs) and non-banking financial companies (NBFCs) The banking sector which forms the bedrock of the Indian financial system falls under the regulatory ambit of the Reserve Bank of India under the provisions of the Banking Regulation Act 1949 and the Reserve Bank of India Act 1934 The Reserve Bank also regulates select AIFIs Consequent upon amendments to the Reserve Bank of India (Amendment) Act in 1997 a comprehensive regulatory framework in respect of NBFCs was put in place in January 1997

The financial market in India comprises the money market theGovernment securities market the foreign exchange market and the capitalmarket A holistic approach has been adopted in India towards designing anddevelopment of a modern robust efficient secure and integrated payment andsettlement system The Reserve Bank set up the Institute for Development and Research in Banking Technology (IDRBT) in 1996 which is an autonomous centre for technology capacity building for banks and providing core IT services India has a financial system that is regulated by independent regulators in the sectors of banking insurance capital markets competition and various services sectors In a number of sectors Government plays the role of regulator Ministry of Finance Government of India looks after financial sector in India Finance Ministry every year presents annual budget on February 28 in the Parliament The annual budget proposes changes in taxes changes in government policy in almost all the sectors and budgetary and other allocations for all the Ministries of Government of India The annual budget is passed by the Parliament after debate and takes the shape of law

Financial Institutions Financial institutions are the intermediaries who facilitates smooth functioning of the financial system by making investors and borrowers meet Financial institutions act as financial intermediaries because they act as middlemen between savers and borrowers Were these financial institutions may be of Banking or Non-Banking institutions Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India In the initial stages the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower This service was offered by banks FIs brokers and dealers However as the financial system widened along with the developments taking place in the financial markets the scope of its operations also widened Some of the important intermediaries operating ink the financial markets include investment bankers underwriters stock exchanges registrars depositories custodians portfolio managers mutual funds financial advertisers financial consultants primary dealers satellite dealers self regulatory organizations etc Though the markets are different there may be a few intermediaries offering their services in move than one market eg underwriter However the services offered by them vary from one market to another

Intermediary Market Role

Stock Exchange Capital Market Secondary Market to securities

Investment Bankers Capital Market Credit Market Corporate advisory services Issue of securities

Underwriters Capital Market Money Market

Subscribe to unsubscribed portion of securities

Registrars Depositories Custodians Capital Market

Issue securities to the investors on behalf of the company and handle share transfer activity

Primary Dealers Satellite Dealers Money Market Market making in

government securities

Forex Dealers Forex Market Ensure exchange ink currencies

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

Money Market- The money market ifs a wholesale debt market for low-risk highly-liquid short-term instrument Funds are available in this market for periods ranging

from a single day up to a year This market is dominated mostly by government banks and financial institutions

Capital Market - The capital market is designed to finance the long-term investments The transactions taking place in this market will be for periods over a year

Forex Market - The Forex market deals with the multicurrency requirements which are met by the exchange of currencies Depending on the exchange rate that is applicable the transfer of funds takes place in this market This is one of the most developed and integrated market across the globe

Credit Market- Credit market is a place where banks FIs and NBFCs purvey short medium and long-term loans to corporate and individuals FINANCIAL INSTRUMENTS

Money Market Instruments

The money market can be defined as a market for short-term money and financial assets that are near substitutes for money The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost Some of the important money market instruments are briefly discussed below 1 CallNotice Money 2 Treasury Bills 3 Term Money 4 Certificate of Deposit 5 Commercial Papers

1 Call Notice-Money Market CallNotice money is the money borrowed or lent on demand for a very short period When money is borrowed or lent for a day it is known as Call (Overnight) Money Intervening holidays andor Sunday are excluded for this purpose Thus money borrowed on a day and repaid on the next working day (irrespective of the number of intervening holidays) is Call Money When money is borrowed or lent for more than a day and up to 14 days it is Notice Money No collateral security is required to cover these transactions

2 Inter-Bank Term Money Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market The entry restrictions are the same as those for CallNotice Money except that as per existing regulations the specified entities are not allowed to lend beyond 14 days

3 Treasury Bills Treasury Bills are short term (up to one year) borrowing instruments of the union government It is an IOU of the Government It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (1491182364 days ie less than one year) They are issued

at a discount to the face value and on maturity the face value is paid to the holder The rate of discount and the corresponding issue price are determined at each auction

4 Certificate of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument issued in dematerialised form or as a Usance Promissory Note for funds deposited at a bank or other eligible financial institution for a specified time period Guidelines for issue of CDs are presently governed by various directives issued by the RBI as amended from time to time CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs) and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI Banks have the freedom to issue CDs depending on their requirements An FI may issue CDs within the overall umbrella limit fixed by RBI

5 Commercial Paper CP is a note in evidence of the debt obligation of the issuer On issuing commercial paper the debt obligation is transformed into an instrument CP is freely negotiable by endorsement and delivery A company shall be eligible to issue CP provided - (a) the tangible net worth of the company as per the latest audited balance sheet is not less than Rs 4 crore (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing banks The minimum maturity period of CP is 7 days The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies

Capital Market Instruments The capital market generally consists of the following long term period ie more than one year period financial instruments In the equity segment Equity shares preference shares convertible preference shares non-convertible preference shares etc and in the debt segment debentures zero coupon bonds deep discount bonds etc

Hybrid Instruments Hybrid instruments have both the features of equity and debenture This kind of instruments is called as hybrid instruments Examples are convertible debentures warrants etc

Financial Services Efficiency of emerging financial system largely depends upon the quality and variety of financial services provided by financial intermediaries The term financial services can be defined as activities benefits and satisfaction connected with sale of money that offers to users and customers financial related value

Financial Regulatory Bodies Financial sector in India has experienced a better environment to grow with the presence of higher competition The financial system in India is regulated by independent regulators in the field of banking insurance mortgage and capital market Government of India plays a significant role in controlling the financial market in India

Ministry of Finance Government of India controls the financial sector in India Every year the finance ministry presents the annual budget on 28th February The Reserve Bank of India is an apex institution in controlling banking system in the country Its monetary policy acts as a major weapon in Indias financial market Securities and Exchange Board of India (SEBI) is one of the regulatory authorities for Indias capital market

bull Securities and Exchange Board of India (SEBI) bull National Stock Exchange bull Bombay Stock Exchange (BSE) bull Reserve Bank of India bull Major Financial Institutions in India bull Foreign Investment Promotion Board

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 and more powers were given through an ordinance Since then it regulates the market through its independent powers

Objectives of SEBI

As an important entity in the market it works with following objectives

bull It tries to develop the securities market bull Promotes Investors Interest bull Makes rules and regulations for the securities market

Functions Of SEBI

bull Regulates Capital Market bull Checks Trading of securities bull Checks the malpractices in securities market bull It enhances investors knowledge on market by providing education bull It regulates the stockbrokers and sub-brokers bull To promote Research and Investigation

SEBI In Indias Capital Market SEBI from time to time have adopted many rules and regulations for enhancing the Indian capital market The recent initiatives undertaken are as follows

bull Sole Control on Brokers Under this rule every brokers and sub brokers have to get registration with SEBI and any stock exchange in India

bull For Underwriters For working as an underwriter an asset limit of 20 lakhs has been fixed

bull For Share Prices According to this law all Indian companies are free to determine their respective share prices and premiums on the share prices

bull For Mutual Fund SEBIs introduction of SEBI (Mutual Funds) Regulation in 1993 is to have direct control on all mutual funds of both public and private sector

National Stock Exchange In the year 1991 Pherwani Committee recommended to establish National Stock Exchange (NSE) in India In 1992 the Government of India authorized IDBI for establishing this exchange In National Stock Exchange there is trading of equity shares bonds and government securities Indias Stock Exchanges particularly National Stock Exchange has achieved world standards in the recent years The NSE India ranked its 3rd position since last four years in terms of total number of trading per calendar year Presently there are 24 stock exchanges in India out of which 20 have exchanges National Stock Exchange (NSE) over the Counter Exchange of India Ltd (OTCEI) and Inter-connected Stock Exchange of India limited (ISE) have nationwide trading facilities New NSE Reference Rates Both MIBOR (Mumbai Inter Bank Offer Rate) and MIBID (Mumbai Inter Bank Bid Rate) are the two new references rates of the National Stock Exchanges These two new reference rates were launched on June 15 1998 for the loans of inter bank call money marketBoth MIBOR and MIBID work simultaneously The MIBOR indicates lending rate for loans while MIBID is the rate for receipts Bombay Stock Exchange (BSE) Bombay Stock Exchange is one of the oldest stock exchanges in Asia was established in the year 1875 in the name of The Native Share amp Stock Brokers Association Bombay Stock Exchange is located at Dalal Street Mumbai India It got recognition in 1956 from the Government of India under Securities Contracts (Regulation) Act 1956 Presently BSE SENSEX is recognized over the world Trading volumes growth in the year 2004-05 have drawn the attention over the globe As to the statistics the total turnover from BSE transcation as in June 2006 is calculated at 7201336 crores

bull BSE Indices The well-known BSE SENSEX is a value weighted of 30 scripsOther stock indices of BSE are BSE 500 BSEPSU BSEMIDCAP BSESMLCAP and BSEBANKEX

bull BSE 100 Index The equity share of 100 companies from the list of 5 major stock exchanges such as Mumbai Calcutta Delhi Ahmedabad and Madras are selected for the purpose of compiling the BSE National Index The year 1983-84 is taken as the base year for this index The method of compilation here is same as that of the BSE SENSEX

bull BSE 200 Index The BSE 200 Index was lunched on 27th May 1994 The companies under BSE 200 have been selected on the basis of their market capitalisation volumes of turnover and other findamental factors The financial year 1989-90 has been selected as the base year

bull BSE 500 Index BSE 500 Index consisting of 500 scrips is functioning since 1999 Presently BSE 500 Index represents more than 90 of the total market capitalisation on Bombay Stock Exchange Limited

bull BSE PSU Index BSE PSU Index has been working since 4th June 2001 This index includes major Public Sector Undertakings listed in the Exchange The BSE PSU Index tracks the performance of listed PSU stocks in the exchange

Companies In BSE Companies listed on the Bombay Stock is rising very fast As to statistics companies listed to the end of March 1994 reached at 3200 compared to 992 in 1980

Reserve Bank of India Reserve Bank of India is the apex monetary Institution of India It is also called as the central bank of the country The bank was established on April1 1935 according to the Reserve Bank of India act 1934 It acts as the apex monetary authority of the country The Central Office of the Reserve Bank has been in Mumbai since inception The Central Office is where the Governor sits and is where policies are formulated Though originally privately owned since nationalization in 1949 the Reserve Bank is fully owned by the Government of India The preamble of the reserve bank of India is as follows to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage Central Board The Reserve Banks affairs are governed by a central board of directors The board is appointed by the Government of India in keeping with the Reserve Bank of India Act Appointednominated for a period of four years

bull Constitution bull Official Directors bull Full-time Governor and not more than four Deputy Governors bull Non-Official Directors bull Nominated by Government ten Directors from various fields and one

government Official bull Others four Directors - one each from four local boards bull Functions General superintendence and direction of the Banks affairs

Local Boards

bull One each for the four regions of the country in Mumbai Calcutta Chennai and New Delhi

bull Membership bull Consist of five members each bull Appointed by the Central Government bull For a term of four years

Functions

To advise the Central Board on local matters and to represent territorial and economic interests of local cooperative and indigenous banks to perform such other functions as delegated by Central Board from time to time Foreign Investment Promotion Board

The Foreign Investment Promotion Board is a special agency in India dealing with the matters relating to Foreign Direct Investment This special board was set up with a view to raise the volume of investment to the country The sole aim of the board is to create a base in the country by which a larger volume of investment can be drawn to the country On 18 February 2003 the board was transferred to the Department of Economic Affairs (DEA) Ministry of Finance Important functions of the Board are as follows

bull Formulating proposals for the promotion of investment bull Steps to implement the proposals bull Setting friendly guidelines for facilitating more investors bull Inviting more companies to make investment bull To recommend the Government to have necessary actions for attracting

more investment

With regards to the structure of the Foreign Investment Promotion Board the board comprises the following group of secretaries to the Government

bull Secretary to Government Department of Economic Affairs Ministry of Finance- Chairman

bull Secretary to Government Department of Industrial Policy and Promotion Ministry of commerce and Industry

bull Secretary to Government Department of Commerce Ministry of Commerce and Industry

bull Secretary to Government Economic Relations Ministry of External Affairs bull Secretary to Government Ministry of Overseas Indian Affairs

In the recent years particularly after the implementation of the new economic policy the Government has undertaken many steps to attract more investors for investing in the country The new proposals for the foreign investment are allowed under the automatic route keeping in view the sectoral practices

Major Financial Institutions in India

This is a list on the major financial institutions in India and their respective date of starting operations

Financial Institution Date of Starting Imperial Bank of India 1921 Reserve Bank of India April 1 1935 Industrial Finance corporation of India 1948 State Bank of India July 1 1955 Unit Trust of India Feb 11964 IDBI July 1964 NABARD July 121982 SIDBI 1990 EXIM Bank January 1 1982 National Housing Bank July 1988 Life Insurance Corporation (LIC) September 1956 General Insurance Corporation (GIC) November 1972 Regional Rural Banks Oct 2 1975 Risk Capital and Technology Finance Corporation Ltd March 1975 Technology Development amp Information Co of India Ltd 1989 Infrastructure Leasing amp Financial Services Ltd 1988 Housing Development Finance Corporation Ltd (HDFC) 1977 Planned economic development in India has greatly influenced the course of financial development The liberalization deregulation globalization of the Indian economy since the early nineties has had important implications for the future course of development of the financial system The evoloution of the Indian financial system falls from the viewpoint of exposition into three distinct phases

1 PHASE 1 PRE-1951 ORGANISATION 2 PHASE 2 1951 TO MID-EIGHTIES ORGANISATION 3 PHASE 3 POST-NINETIES ORGANISATION

PHASE 1 PRE-1951 ORGANISATION The principal features of the pre-1951 financial systems were aptly described by LCGupta as ldquoThe principal features of the pre-independence of industrial financing organizations are the closed-circle character of industrial of entrepreneurship a semi-organised amp narrow industrial securities market devoid of issuing institutions amp the virtual absence of participation of by intermediately financial institutions in the long-term financing of the industry

As a result the industry had very restricted access to outside savings The fact that the industry has no easy access to the outside saving is another way of saying that the financial system was not responsive to opportunities for industrial investment Such a financial system was clearly incapable of sustaining a high rate of industrial growth particularly the growth of new amp innovating enterprises PHASE 2 1951 TO MID-EIGHTIES ORGANISATION The organization of the Indian financial system during the post -1951 period evolved in response to the imperatives of planned economic development The scheme of planned economic development was initiated in 1951 The introduction of planning had important implications for the financial systems With the adoption of mixed economy as the pattern of industrial development in which a complementary role was conceived for the public amp private sectors there was need for alignment of the financial mechanism with the priorties laid down by the govt economic policy In other words planning signified the distribution of resources by the financial system to be in conformity with the priorities of the five-year plans The requirement to allocate funds in keeping with the corresponding pattern implied Governmental control over distribution of credit amp finance The main elements of the financial organization in planned economic development could be categorized into four broad groups

1 PublicGovernment ownership of financial institutions 2 Fortificaton of the institutional structure 3 Protection to investors amp 4 Participation of financial institutions in corporate management

1Government ownership of financial institutions One aspect of the financial systems in India during this phase was the progressive transfer of its important constitutes from ownership to public control Important segments of the financial mechanism were assigned to the direct control of public authorities through nationlisation measures as well as through the creation of entirely new institution in public sector

Nationalisation 1 The nationalizations of the Reserve Bank of India(RBI) in 1948 marked the beginning of the transfer of important financial intermediaries to Government control

2 Nationalisation of RBI was followed in 1956 by the setting up of the State Bank of India by taking over the Imperial bank of India

3 In 1956 245 life insurance companies were nationalized amp merged into the state owned monolithic Life Insurance Corporation OF India

4 In 1969 14 major commercial bank were brought under the direct ownership of the Govt bank of India Finally 6 more commercial bank brought under the public ownership in 1980

5 General Insurance Corporation was set up in 1972 New Institutions In the first place a number of powerful special-purpose financial institutions designated as developments banks developments finance institutions term-lending institutions were set up A wide range of such institutions came into being some of which were nationalall Indiawhile others were regionalstate-level institutions amp between them they covered the whole range of industry amp provided finance in diverse formAnother step of considerable significance was the creation of an investment trust organization-the unit trust of India(UTI)Thus the public sector

occupied a commanding position in the industrial financing system of India that is virtually the entire institutional structure was owned amp controlled by the Government

2Fortification of Instituional structure The most significant in the emergence of a fairly well developed financial system in India during the second phase was the strengthening of its institutional structure The fortification of the institutional structure of the Indian financial system was partly the result of the modification in the structure amp policies of the existing financial institutions but mainly due to addition of newer institution as detailed in the discussion below Development bank IFCI- The setting up of the Industrial Finance Corporation of India (IFCI) in1948 The full potentialities of this institution were realized only after some experience in planning which began in 1951The IFCI was established to give medium amp long term credit to industrial enterprise Under the State financial Corporation Act 1951 as counterpart of the IFCI at the state level regional institutions State Financial Corporation (SFC) were organized assist to smallmedium enterprises But it failed to make an impact on the availability of long term finance to industry amp consequently could not fulfill the expectation of solving the problem of chronic shortage of industrial capital NIDC- National Industrial Development Corporation (NIDC) established in 1954 to provide both finance amp entrepreneurship Although ambitious in conception it ultimately degenerated into a financing agency of for the modernization of cotton amp jute textiles Subsequently it was converted into a consultancy organization amp had on concern with the financing of the private industry ICICI ndash The establishment of the Industrial Credit amp Investment Corporation of India (ICICI) Ltd in 1955 represented a landmark in the diversification of development banking in India as it was a pioneer in many respect like underwriting of issue of capital channelisation of foreign currency loans from the World Bank to private industry amp so on IDBI- The Government of India as a follow up set up the Refinance Corporation of Industry (RCI) Ltd In 1958 to provide refinance to the banks against term loans granted by them to mediumsmall enterprises The RCI subsequently merged with the Industrial Development Bank of India (IDBI) in 1964 As par apex Institution it had an important role in the planned economic development Accordingly it not only provided finance but also coordinated the activities of all the financing institutions LIFE INSURANCE CORPORATION OF INDIA Another development in the direction of fortifying the structure of the industrial financing organization in India during this phase was the coming into being of the Life Insurance Corporation (LIC) in 1956as a result of the amalgamation of 245 life insurance companies into a single monolithic state-owned institution requirements of planned development was a notable feature in the evolution of the post-1951 organisation of industrial financial in India Its operation s had a beneficial effect on the functioning of the financial system Finally the presence of such a large institutions shareholder as the LIC had the effect of promoting greater

discipline among corporate management and added a new dimension to public control of private enterprises UNIT TRUST OF INDIA The establishment of the Unit Trust of India (UTI)in 1964 was the culmination of a long overdue need of the capital market in India and reflected the efforts of the Government of India to popularize unit trustmutual funds to encourage indirect holding of securities by the public Developments in the area of mutual funds have had reverberations in the entire financial system In the aftermath of the UTI imbroglio the government provided largesse to all mutual funds by making the income distributed by mutual funds totally tax free in the hands of the recipient Diversification in Forms of Financing Another innovation during this phase was the entry of commercial banks in the fields of underwriter was suggested by the Indian central Banking enquiry committee as early as 1931This was repeated by the shroff committee appointed by the RBI in 1953 It recommened the formation of joint underwriting consortium of banks amp insurance companies Although the idea of joint underwriting consortium was fianally dropped some banks on individual initiative started participating in underwriting activity This interest was presumably stimulated by the tacit support of the central banking authorities Innovative Banking The period after mid-sixties to the early nineties may be aptly described as the phase of innovative banking or revolutionary phase or the beginning of the big change It was argued that large-scale industries large borrowers amp the big amp established business houses had almost monopolized bank credit while the priority sectors such as small scale industries agriculture exports amp small borrowers revolutionary change in the structure operations policies amp practices of commercial bank in India during this phase However it may be noted that the argument for greater bank financing of the priority sector was not entirely ideological Such enterprise had no access to the capital market either amp their need for funds could be met only through bank credit The main features of this phase were ndash 1 Social control 2 Nationalisation 3 Bank credit to priority sectors

3Protection to Investors The extent to which savings can be mobilized for industrial investment depends apart from the development of specific financial facilities on the confidence of the investing public in industrial securities which in turn is dependent on the safeguards amp protection available to them The important of the elaborate legislative code adopted by the government are briefly recapitulated below

Companies Act The enactment of the companies Act 1956 represented an important in the development of corporate enterprises in India It intended to weave an integrated pattern of relationship as between promoters investors amp management The Act also made considerable changes in the matter prospectus allotment of share terms amp conditions on which companies were floated amp the capital structure of companies

Capital Issue (Control) Act The second element in the scheme of providing protection to the investing public the Capital Issue(control) Act 1947 It regulated the capital structure of companies with a view to discouragening undesirable practices amp aimed at protecting the investors of the new enterprise by examination the terms of new issue of capital The act was implemented through the Controller if Capital Issue (CCI) in the Ministry of Finance

Securities Contracts (Regulation) Act The securities (Regulation) Act 1956 provided for reforms in stock exchange trading methods amp practices which were subjects of controversy in the past The scheme of regulation included the provision that only recognized stock exchanges were permitted to function amp that the Government was empowered to withdraw the recorganisation in the interest of trade or public interest It also contained important provisions in respect of listing of securities on the stock exchanges To enforce the Act a Directorate of Stock exchange (DSE) was set up in the Ministry of Finance Monopolies amp Restrictive Trade Practices Act The Monopolies amp Restrictive Trade practice Act came into force from june 1 1970 with the following objective (a) To ensure that the functioning of the economic system did not result in concentration of economic power amp (b) To control such monopolistic amp restrictive trade practices that were injurious to the public welfare The Act certainty contributed to restoring public confidence in the corporate sector Foreign Exchange Regulation Act The Foreign Exchange Regulation Act (FERA) 1973 regulation foreign investment with their aim of diluting the equity holding in foreign companies It was also a step in the direction of engendering confidence among the investing public in Industrial securities

4Participation in Corporate Management A development of considerable significance in the Indian Financial System in this phase of its evolution was the participation of the financial institutions in the management of institutional finance for industry shifted its focus from the problems of supply of finance to the impact of the institutional operations on the institutional operation on the cooperate power structure in India The participation of the institutional investors in the management amp control of private industry had serious implication for the financial system because of accumulation of voting strength in their hands There were numerous cases the institutional equityholding had become so large that managementrsquos tenure in office became dependent on their direct amp indirect support

PHASE 3 POST-NINETIES ORGANISATION The notable development in the organization of the Indian Financial System during this phase are briefly outlined below with reference to 1 Privatisation Of Financial Institutions 2 Reorganisation Of Institutional Structure and 3 Investors protection PRIVATISATION OF FINANCIAL INSTITUTION

An outstanding development in this sphere was the conversion of the Indian Finance Corporation of India - the pioneer development finance institution in the country - into a public company (IFCI ltd) A number of private banks under the RBI guidelines have also come into existence With the establishment of pension fund regulation and development authority (PRDA) private entities are poised to enter pension business Thus the state monopoly over financial institution in India till the early nineties has been dismantled in a phased manner mainly through the the establishment of private financial institution such as banks mutual funds and insurance companies It includes- 1Banks 2 Mutual Fund 3 Insurance Companies COMMERCIAL BANKS

A commercial bank is a type of financial intermediary and a type of bank Commercial banking is also known as business banking It is a bank that provides checking accounts savings accounts and money market accounts and that accepts time deposits After the great depression the US Congress required that banks engage only in banking activities whereas investment bank were limited to capital Commercial bank is the term used for a normal bank to distinguish it from an investment banks This is what people normally call a bank The term commercial was used to distinguish it from an investment bank Since the two types of banks no longer have to be separate companies some have used the term commercial bank to refer to banks that focus mainly on companies In some English-speaking countries outside North America the term trading bank was and is used to denote a commercial bank It raises funds by collecting deposits from businesses and consumers via checkable deposits savings deposits and time (or term) deposits It makes loans to businesses and consumers It also buys corporate bonds and government bonds Its primary liabilities are deposits and primaryassets are loans and bonds

INTERNAL FACTORS Without a sound and effective banking system in India it cannot have a healthy economy The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factorsFor the past three decades Indias banking system has several outstanding achievements to its credit The most striking is its extensive reach It is no longer confined to only metropolitans or cosmopolitans in India In fact Indian banking system has reached even to the remote corners of the country This is one of the main reason of Indias growth processThe governments regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of IndiaNot long ago an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money Today he has a choice Gone are days when the most efficient bank transferred money from one branch to other in two days Now it is simple as instant messaging or dial a pizza Money have become the order of the dayThe first bank in India though conservative was established in 1786 From 1786 till today the journey of Indian Banking System can be segregated into three distinct phases RBI guidelines stipulated the application of prudential norms in accounting for income assets classification provisioning and capital adequacy on the pattern of commercial banks as envisaged

Narasimha committee I - It is in context of forgoing features of the Indian banking in the post nationalization period that the Narasimham Committee I suggested a comprehensive framework for recognisation reform of the system The are briefly summerised below 1 Direct investment 2 Direct Credit Programme 3 Interest Rate Structure

Oslash Income RecognitionAsset Classification And Provisioning Norms Oslash Transparency Of Financial Statements Oslash Tax Treatment Of Provisions Oslash Debt Recovery Tribunals Oslash Regional Rural Banks Oslash Entry Of Private Sector Banks Oslash Branch Licencing Oslash Foreign Banks Oslash Recruitment And Creation Of Posts Oslash Supervisory Authority Oslash Appoinments Of CMDs Oslash Early phase from 1786 to 1969 of Indian Banks

Oslash Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms

Oslash New phase of Indian Banking System with the advent of Indian Financial amp Banking Sector Reforms after 1991

Oslash CAPITAL ADEQUECY NORMS

Foreign Bank Foreign Banks in India always brought an explanation about the prompt services to customers After the set up foreign banks in India the banking sector in India also become competitive and accurative New rules announced by the Reserve Bank of India for the foreign banks in India in this budget have put up great hopes among foreign banks which allows them to grow unfettered Now foreign banks in India are permitted to set up local subsidiaries The policy conveys that forign banks in India may not acquire Indian ones (except for weak banks identified by the RBI on its terms) and their Indian subsidiaries will not be able to open branches freely Narasimham Committee II- The scheme of reforms outlined by the Narasimham Committee II should be viewed in context of

bull Ongoing form of the Indian Banking System since 1992 as a follow-up to the recommendation of NC I 1991 and

bull Major changes that had taken place in the domestic and

institutional scene coinciding with the movement toward global integration in financial services These developments have reinforced the importance of building a strong and efficient financial system

NON-BANKING FINANCIAL COMPANIES (NBFC) The working and operations of NBFCs are regulated by the(RBI)within the framework of the Reserve Bank of India Act 1934 and the directions issued by it under thfinancial company is defined as- (i) a financial institution which is a company (ii) a non banking institutionprincipal business the receiving of deposits under any scheme or arrangement or in any other manner or lebanking institution or class of such institutions as the bank may with the previous approval of the Non-bankemerging as an important segment of Indian financial system

sect They cannot accept deposits repayable on demand sect They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time sect They cannot offer giftsincentives or any other additional benefit to the depositors sect They should have minimum investment grade credit rating sect Their deposits are not insured sect The repayment of deposits by NBFCs is not guaranteed by RBI sect They are allowed to acceptrenew public deposits for a minimum period of 12 months and maximum sect of 60 month

The types of NBFCs registered with the RBI are-

sect Equipment leasing company- is any financial institution whose principal business is that of leaactivityHire-purchase company- is any financial intermediary whose principal business relates to such transactions

sect Loan company- means any financial institution whose principal business is that of providing finance whether by making loaotherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity)

sect Investment company- is any financial intermediary whose principal business is that of buying and selling of securities

MUTUAL FUND - Mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests it in stocks bonds short-term money marketinstruments andor other securities[1] The mutual fund will have a fund manager that trades the pooled money on a regular basis The net proceeds or losses are then typically distributed to the investors annually Mutual funds can invest in many kinds of securities The most common are cash instruments stock and bonds but there are hundreds of sub-categories Stock funds for instance can invest primarily in the shares of a particular industry such as technology or utilities These are known as sector funds Bond funds can vary according to risk (eg high-yield junk bonds or investment-grade corporate bonds) type of issuers (eg government agencies corporations or municipalities) or maturity of the bonds (short- or long-term) Both stock and bond funds can invest in primarily US securities (domestic funds) both US and foreign securities (global funds) or primarily foreign securities (international funds)Most mutual funds investment portfolios are continually adjusted under the supervision of a professional manager who forecasts cash flows into and out of the fund by investors as well as the future performance of investments appropriate for the fund and chooses those which he or she

believes will most closely match the funds stated investment objective A mutual fund is administered under an advisory contract with a management company which may hire or fire fund managersMutual funds are subject to a special set of regulatory accounting and tax rules

CAPITAL MARKET A capital market is a market for securities (debt or equity) where business is(companies)and governments can raise long-term funds It is defined as a market in which money is provided for periods longer than a year[1] as the raising of short-term funds takes place on other markets (eg themoney market)The capital market includes the stock market (equity securities) and the bond market (debt) Financial regulators such as the UKs Financial Services Authority (FSA) or the US Securities and Exchange Commission (SEC) oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud among other dutiesCapital markets may be classified as primary markets and secondary markets In primary markets new stock or bond issues are sold to investors via a mechanism known as underwriting In the secondary markets existing securities aresold and bought among investors or traders usually on a securities exchange over-the-counter or elsewhere The structure of both the segment of market ndash primarynew and secondary stock exchange - has witnessed significant changes

Primary Market The primary market is that part of the capital markets that deals with the issuance of new securities Companies governments or public sector institutions can obtain funding through the sale of a new stock or bond issue This is typically done through a syndicate of securities dealers The process of selling new issues to investors is called underwriting In the case of a new stock issue this sale is an initial public offering (IPO) Dealers earn a commission that is built into the price of the security offering though it can be found in the prospectus

Secondary Market The secondary market also known as the aftermarket is the financial market where previously issued securities and financial instruments such asstock bonds options and futures are bought and sold[1] The term secondary market is also used to refer to the market for any used goods or assets or an alternative use for an existing product or asset where the customer base is the second market (for example corn has been traditionally used primarily for food production and feedstock but a second- or third- market has developed for use in ethanol production) Another commonly referred to usage of secondary market term is to refer to loans which are sold by a mortgage bank to investors such as Fannie Mae and Freddie MacWith primary issuances of securities or financial instruments or the primary market investors purchase these securities directly from issuers such ascorporations issuing shares in an IPO or private placement or directly from the federal government in the case of treasuries After the initial issuance investors can purchase from other investors in the secondary market The secondary market for a variety of assets can vary from loans to stocks from fragmented to centralized and from illiquid to very liquid The major stock exchanges are the most visible example of liquid secondary markets - in this case for stocks of publicly traded companies Exchanges such as the New York Stock Exchange Nasdaq and the American Stock Exchange provide a centralized liquid secondary market for the investors who own stocks that trade on those exchanges

Money Market The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend Participants borrow and lend for short periods of time typically up to thirteen months Money market trades in short-term financial instruments commonly called paper This contrasts with thecapital

market for longer-term funding which is supplied by bonds and equityThe core of the money market consists of banks borrowing and lending to each other using commercial paper repurchase agreements and similar instruments These instruments are often benchmarked to (ie priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency

Securities and Exchange Board of India (SEBI) Securities and Exchange Board of India (SEBI) established under the Securities and Exchange aboard of India Act 1992 is the regulatory authority for capital markets in India India has 23 recognized stock exchanges that operate under government approved rules bylaws and regulations It has witnessed a spectacular growthboth in terms of its ability to mobilize resourses and allocate it with some efficiencythe corporate sector has come to rely on the securities market increasinglyto finance its long term requirement of fundsin contrast to a decade earlier when the DFIs were the sole purveyors of long term fundsas a logical corollarythere has also been a growth in the awareness and interest in the investment opportunities available in the securities market among investors To help sustain this growth and crystallize the awareness and interest in to a committed discerning and growing pool of investors the investorsrsquoright must be fully protected trading malpractices must be prevented and structural inadequacies of the market must be removed Although a fairly comprehensive legislative code had been put in place in the pre-1990 phasethe focus was on controlThe framework was fragmentedboth in terms of the lawsacts under which the regulatory function fell and the agencies and government departments that administered themFor example the capital issue(control) act was administered by the controller of capital issues(CCI) in the ministry of financeThe scheme of control under the act required all the companies to obtain prior consent for issues of capital to the publicunder this arrangement the pricing as well as the features of the capital structure such as debt-equity ratioswere controlled by the government likewise the securities contracts (regulation) Acts was administered by the Directors of Stock Exchangesalso in the ministry of financeits aim was to prevent undesirable transactions in the securitiesit empowered the government to recognise derecognize stock exchange stipulate rules and bye-laws for their functioningcompel listing of securities by public companies and so on Such as a system of regulationcontrol was inadequate in the context of the liberalized economic scenario In such a milieu regulation of a different kind was called for The need of the growing securities market in India was a focusedintegrated regulatory framework and its administration by an independentautonomous body The Capital issues (control) Act was repealed in 1992 and the office of the controller of capital issues (CCI) was abolished The securities and Exchange Board of India (SEBI) was set up in April 1988 by an administrative order and acquired a statutory status in 1992 It has emerged as an autonomous and independent statutory body with a definite mandate which requires it to (1) protect the interest of the investors in securities (2) promote the development of the securities market and

regulate the securities market in order to achieve these objectives

Regulation 1 SEBI (stock brokers and sub-brokers regulation 2 SEBI (prohibition of insider trading) regulation 3 SEBI (merchant bankers)regulation 4 SEBI (portfolio managers)regulation 5 SEBI (registars to an issue and share transfer agents)regulation 6 SEBI (underwriters)regulation 7 SEBI (debenture trustees) regulation 8 SEBI (bankers to an issue) regulation 9 SEBI (foreign institutional investors) regulation 10 SEBI (custodian of securities) regulation 11 SEBI (depositories and participants) regulation 12 SEBI (venture capital funds)regulation 13 SEBI (mutual funds)regulation 14 SEBI (substantial acquisition of shares and takeovers)regulation 15 SEBI (buy-back of securities)regulation 16 SEBI (credit rating agencies)regulation 17 SEBI (collective investment scheme)regulation 18 SEBI (foreign venture capital investors)regulation 19 SEBI (procedure for board meeting)regulation 20 SEBI (issue of sweet equity)regulation 21 SEBI (procedure for holding enquiry by enquiry officer and imposing penalty)regulation 22 SEBI (prohibition of fraudulent and unfair trade practices relating to securities markets)regulation 23 SEBI (central listing authority)regulation 24 SEBI (ombudsman)regulation 25 SEBI (central database of market participants)regulation 26 SEBI (self-regulatory organization)regulation 27 SEBI intermediaries regulation 2008 28 SEBI securitized debt instrument regulation 2008 29 SEBI issue and listing of debt instruments regulation 2008

Guidelines 1 SEBI (employee stock option scheme and employee stock purchase scheme) guidelines 2 Guidelines for opening of trading terminals abroad 3 SEBI (disclosure amp investor protection)guidelines 4 SEBI (delisting of securities) Guidelines 5 SEBI (STP centralized hub and STP service providers)guidelines 6 comprehensive guidelines for investors protection fundcustomer protection fund at stock exchange

Schemes 1 securities lending scheme 2 SEBI (informal guidance) scheme

Conclusion The Indian financial system that is indispensable for economic development of the nation is undergoing numerous evolutions especially since 1990s that are rendering as lubricants to the fast economic development Banking sector a major component of the financial system liberalized in early 1990s but presently also public sector banks together accounting for 78 deposits and 74 of advances of banking business in India Hence these banks have to play very crucial role in extending the banking services to so far not reached segment especially states like Jharkhand and North Eastern region where only 12 total population have access to bank service Despite 72 of population live in rural area they are accounting for about 14 of total bank deposits and credit transactions This uneven distribution of banking can be addressed by way of evolving strategic alliance with post offices which network nook and corner of the country to offer more banking services The contribution of unorganized sector to NDP (2000-01) was 59 the organizedformal financial system is mainly concentrated on organized sector but it is equally important to cover unorganized sector for balanced economic growth All most 50 of the house holding savings are committed in investing in physical assets hence the financial system need to be more effective efficient and conducive to attract the household savings towards deployment in financial instruments The real sign of maturity of the financial system and economic development of the nation Efforts should also be augmented to extend the sphere of formal financial system accessibility poorest of the poor though semi-organized 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 consists of many subsystems like financial services banks financial institutions etc Financial system is the system which induces generation of savings transfer of those savings into an entrepreneurial effort and stimulates an entrepreneur to undertake various business ventures It is a key weapon in monitoring the economic progress of any country because eventually all efforts and resources are measured in financial terms A financial system performs the following functions 1 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 2 It assists in the selection of the projects to be financed and also reviews the performance of such projects periodically 3 It provides payment mechanism for exchange of goods and services 4 It provides a mechanism for the transfer of resources across geographic boundaries 5 It provides a mechanism for managing and controlling the risk involved in mobilizing savings and allocating credit 6 It promotes the process of capital formation by bringing together the supply of saving and the demand for investible funds 7 It helps in lowering the cost of transaction and increase returns Reduce cost motives people to save more 8 It provides you detailed information to the operators players in the market such as individuals business houses Governments etc The Indian financial system comprises a set of financial institutions financial markets and financial infrastructure The financial institutions mainly consist of commercial and co-operative banks regional rural banks (RRBs) all- India financial institutions (AIFIs) and non-banking financial companies (NBFCs) The banking sector which forms the bedrock of the Indian financial system falls under the regulatory ambit of the Reserve Bank of India under the provisions of the Banking Regulation Act 1949 and the Reserve Bank of India Act 1934 The Reserve Bank also regulates select AIFIs Consequent upon amendments to the Reserve Bank of India (Amendment) Act in 1997 a comprehensive regulatory framework in respect of NBFCs was put in place in January 1997













FINANCIAL MARKETS






















Objectives of SEBI



Functions Of SEBI

















Local Boards



Functions




more investment








































































FINANCIAL MARKETS






















Objectives of SEBI



Functions Of SEBI

















Local Boards



Functions




more investment















































































Objectives of SEBI



Functions Of SEBI

















Local Boards



Functions




more investment







































































Local Boards



Functions




more investment




























































Functions




more investment




























































Role of Government in Indian Financial System

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Transcript of Role of Government in Indian Financial System