ASSIGNMENT ON

FINANCIAL MARKET AND INSTITUTIONS

SUBMITTED TO
Mrs. HARITIKA CHATWAL

SUBMITTED BY
ASHISH GUPTA
MBA-III
ROLL NO. 27

DELHI INSTITUTE OF ADVANCED STUDIES

(AN AFFILIATED INSTITUTE OF GURU GOBIND SINGH
INDRAPRASTHA UNIVERSITY)

Ques.1: - What steps have been taken to make Indian money market more broad
based and vibrant? What have been the result and what more is to be done in this
direction?
Ans. - Recent money market initiatives
In India the recommendations of chakraborty committee on monetary system (chairman,
professor Sukhamoy chakraborty) and working group on money market (chairman, shri
N. Vaghul), formed the basis for recent reforms in the money market. Important
suggestions by chakraborty committee included: need for enhancing coupon rates on
government securities, rationalizing interest rate structure, popularizing treasury bills as
an instrument for short-term investment and making timely availability of credit to
industry. Vaghul committee made a number of suggestions regarding broadening and
deepening of money market. It also stressed on the necessity for providing an
equilibrating mechanism for evening out short-term surpluses and deficits. It, therefore,
recommended setting up of DFHI as market maker, enlarging the number of money
market participants, developing the bill culture and promoting money market instruments,
such as, commercial papers, certificates of deposit, inter-bank participation certificates,
etc. for increasing the depth and breadth of Indian money market.
Institutional infrastructure has also been further expanded and improved to effectively
serve the growing needs of the financial sector. Discount and Finance House of India Ltd.
(DFHI) has been established to broaden and deepen the money market operations. It acts
as a market maker. Securities and exchange board of India (SEBI) has been set up to
function as an apex regulatory body relating to all aspects of security market activities.
Credit rating information system of India Ltd.(CRISIL) and ICRA, etc. provides credit
ratings for raising funds through bonds, fixed deposits, commercial papers and other
instruments. In addition, it also provides financial analysis of leading companies and
industrial sectors.
Important measures adopted to make Indian money market vibrant are:
1) Issue of 182 days treasury bills with flexible rates through monthly auction was
introduced in November 1986. The periodicity of auction was reduced to fortnight in
June 1988. Of late, auction of this instrument has been discontinued.
2) DFHI was established in April 1988 for participating in call money market both as
lender and borrower. It also deals in all money market instruments as market maker
and offers quotations both for buying and selling. DFHI has already acquired a
pivotal role in money market. Volume of transactions of DFHI has expanded at a
phenomenal rate.
3) An effort has been made to promote bill culture by exempting stamp duty on
rediscounting of derivative usance promissory notes arising out of genuine trade bill
transactions.
4) A new market instrument, i.e., certificate of deposit (CD) was introduced in March
1989.

5) Call money rate, inter-bank short-term deposit rate and the bill discounting rates have
been freed from May 1, 1989.
6) All money market instruments are to be issued at market determined rates.
7) Inter-bank participation certificates on a risk-sharing basis and without risk sharing
basis were introduced in mid-1989.
8) Commercial papers have been introduced since January 1990.
9) Money market mutual fund (MMMF) scheme was introduced in April 1991. The
objective was to expand the money market by facilitating entry of more participants.
It also aims at developing secondary market for money market instruments.
10) Corporate entities with bulk lend able resources of at least Rs 20 crore have been
allowed to participate in call money and bills rediscounting markets. Thus, money
market has been broad based to some extent.
11) Issue of 364 days treasury bills at varying discount rates through monthly auctions
was introduced in April 1992.
12) Successive reduction in cash reserve ratio (CRR) has helped releasing more resources
for money market operations by commercial banks. CRR has been brought down
from 15 % in November 1995 to 12% in July 1996 in phases. A further phased
reduction in CRR to 10% was announced on October 19, 1996.
Through the busy season credit policy announced on October 21, 1997 CRR on net
demand and timely liabilities (NDTL) was expected to be reduced to 8% in eight phases,
i.e., fortnightly reduction of 0.25% starting from October 25, 1997 up to march 28, 1998.
This reduction was expected to release liquidity of Rs. 9,600 crore to help making money
market more buoyant.
However, with a view to stemming the erosion in the value of rupee which has
touched Rs. 40.20 = 1 U.S. $ on Jan. 15, 1998, the RBI announced reversal of policy of
cheap credit and increase in liquidity. On January 16, 1998 the RBI announced a twopoint hike in benchmark bank rate to 11% and CRR was raised to 10.5% from the
prevailing 10%. This increase in CRR resulted in sucking out of about Rs. 2000 crore
from the banking sector. Consequently financial market faced a liquidity crunch. As a
result call rates touched a peak of 120% on January 23, 1998, though they closed at 6070% that day. CRR was reduced to 9% in 1998 and remained at 9% in 1999 also.
On April 1, 2000 the RBI announced a further cut in CRR to 8% in two stages. This cut
released Rs 7,200 crore to banks.
13) Resumption of repo (ready forward) in November 1996. These operations are aimed
at mopping up excess liquidity, reducing volatility in call money markets and consequent
pressure on foreign exchange markets. On Oct 21, 1997, repo facility was extended to
corporate debt and PSU bonds.
Repo rates were initially 4-5%. These were raised to 7% in 1997. On Jan.16, the
Rate for fixed repo was raised to 9% from 7% with immediate effect. On April 1,

2000 the repo rate was brought down from 6% to 5% and further to 4.5 % on
August 25, 2003.
14) For January 17, 1998, the RBI also made reverse repos facility available to primary
dealers in govt. securities market at the bank rate on a discretionary basis and subject to
some regulations.
15) With a view to obtaining prompt settlement of dues of small scale industrial units
(SSIs), and also for encouraging bill culture, banks were advised to ensure that with
effect from January 1, 1998, of the total inland credit purchases of the borrowers, not less
than 25% should be through bills drawn on them by concerned sellers.
16) Entities with bulk lendable resources have to access the call money markets as
lenders only through primary dealers as per credit policy declared on Oct. 21, 1997. Also
minimum size of transaction in call money market was reduced from Rs 10 crore to Rs 5
crore.
17) Minimum size of issue of certificates of deposits (CDs) to a single investor was
reduced from Rs 10 lakh to Rs 5 lakh on Oct. 21, 1997.
18) Introduction of 14-day treasury bills (TBs) in May 1997.
19) Introduction of 28 day TBs on October 21, 1997.
20) Introduction of money markets mutual funds (MMMFs) for investment in money
market instruments. MMMFs are required to invest in call notice money, certificates of
deposits (CDs), commercial papers, and commercial bills arising out of genuine
trade/commercial transactions, treasury bills and dated government securities having an
unexpired maturity up to 1 year. Indias first MMMF, pioneer money market account, was
launched on Feb 24, 1997, followed by UTI-money market fund launched on April 23,
1997.
With a view to make the scheme of MMMFs more flexible, it was declared on Oct. 21,
1997 that MMMFs can also invest in rated corporate bonds and debentures with a
residual maturity of up to one year, subject to an overall ceiling of 3% of the resources of
the MMMF for CPs issued by individual companies, bonds and debentures taken
together.

Due to above measures Indian money market has transformed from a restricted and
narrow market to a vibrant and broad market with larger number of participants, larger
instruments and much larger volume of transactions. But a lot needs to be done before
Indian money market successfully competes with developed money market, like London
money market. The government has significantly deregulated interest rate structure after
careful evaluation of social implications and the impact on price stability and growth of
trade and industry, though it is short of deregulation. Secondly. The rupee has already
been made convertible on trade account, but not on capital account. Full convertibility of
rupee is essential for ensuring free flow of funds from and to international markets. Only
then Indian money market and the economy in general will get fully integrated with the
world market. However, the gains and the risks involved need to be thoroughly evaluated.
Thirdly, there is further scope for promoting new market instruments and increasing the
number of financially sound participants in the money market. Fourthly, secondary
market for instruments needs to be developed and strengthened. Fifthly, there is need for
promoting more institutions like DFHI and STCI to act as market makers in different
instruments by offering regular two-way quotes. Sixthly, with expansion in the size and
volume of transactions in the money market and greater liberalization, the system of
surveillance on the market is to be made more efficient, effective and responsive to the
changing needs.

Ques.2: - Various activities undertaken by the IFCI including the promotional

scheme.
Ans. - IFCI is not today only a term lending institution, but an active financial
intermediary and a provider of a wide range of services to industry.
Project finance is the main activity of IFCI like other developments banks. Under project
finance, assistance is provided in the following ways:
1.
2.
3.
4.

Long term loans-both in rupees and foreign currencies.

Underwriting of equity, preference shares and debenture issues.
Subscribing to equity, preference shares and debenture issues.
Guaranteeing the deferred payments in respect of machinery imported from abroad /
purchased in India.
5. Guaranteeing of loans raised in foreign currency from foreign financial institutions.
Financial assistance may be availed of by any limited company in public, private or
joint sector- or may by a cooperative society incorporated in India, which is engaged or
proposes to be engaged in any of the specified industrial activities. There is no maximum
or minimum ceiling on the amount of assistance to be granted by IFCI.
The financial assistance rendered by IFCI is meant for setting up of new industrial
projects and also for the expansion, diversification, renovation or modernization of
existing ones.
Various activities undertaken by IFCI are as follows:

Advisory services to regulatory agencies

The role of independent regulatory agencies is being increasingly recognized for
development of different infrastructure sectors, namely, electricity, telecom, oil and gas,
education, etc. IFCI facilitates such agencies by providing them consultancy services on
key policy-related technical and financial matters.

Industry research/ information services

IFCI has a dedicated research team looking at both macro-level issues as well as sectorspecific, industry research. The expertise of its professional research team and a large,
diversified database enables them to provide erudite research reports to the corporate
world.

Legal advisory services

A full-fledged legal cell, comprising of experienced professionals with expertise in
handling cases of diverse nature, offers these services. The services rendered by this unit
comprise investigations and preparation of title reports, besides advisory services in
respect of matters under dispute where an independent consultant's view is required.

Corporation finance & investment banking

Offers a range of services to its corporate clients:
1) Placement of debt and equity including design of the structure of instruments,
preparation of Information Memorandum, assistance in identifying potential
investors, placement of instruments with FIs, Banks and other financial institutions.
2) Mergers and amalgamations strategy including advice on strategic mergers,
identification of takeover targets, asset valuation, preparation of scheme of
amalgamation, and assorted post-sanction issues.
3) Arrangement of ECBs including negotiations and obtaining credits from overseas,
arranging foreign lines of credit, providing information on foreign market conditions.
4) PSU disinvestment which includes strategic counseling, restructuring, pricing of
equity, offloading equity, legal assistance and assistance in raising and listing of
securities.

Infrastructure advisory
IFCI offers a range of services to the infrastructure sector, with specific emphasis on
roads, ports, power and urban infrastructure. Total solutions catering to the specific needs
of clients, starting from the stage of investment identification to financial closure are
provided.
The services provided in the infrastructure sector include:

Facilitation of Credit Documentation

Due Diligence

Agreements & Document Review/Advice

Pre-Investment Review

Project Conceptualization And Feasibility Studies

Risk Allocation, Assessment & Reasonableness of Cost

Advise on Financing Options Sources, Cost & Risk

Financial Analysis & Modeling Scenario Analysis

Potential JV/Partner Profiling

Negotiating Support for Equity Buy In

Project Evaluation

Credit Syndication Domestic & Overseas

Arranging Deferred Payment Guarantee, ECB

Placement of debt & equity

Project advisory and finance

In light of increasing need for sophisticated advisory services to the corporate sector at a
time when India is opening its doors to investments in new sectors and projects, IFCI has
set up a Project finance group to focus on traditional project advisory service.
The group offers a range of services to its clients:
1. Project conceptualization and related services, including guidance in relation to
selection of projects, preparation of feasibility studies, DPR, capital structuring,
techno-economic feasibility, financial engineering, project management design etc.
2. Credit syndication including preparation of Information Memorandum, syndication of
domestic/foreign loans, post sanction follow-up, assistance in legal documentation
etc.
3. Documentation of various project documents

Buy/sell advisory
1. Purchase, sale, transfer of assets, operating and technology rights, brands,
business operations, divisions and corporate entities
2. Separation, liquidation, disposal of non-strategic ventures, assets or liabilities

Mergers, joint ventures and alliances

Drafting information memoranda for potential buyers/ sellers

Locating suitable counter-parties

Assessing and advising on augmenting the viability

Determining of share exchange ratio

Structuring and negotiating of terms and conditions for the new entity

Managing and monitoring of the documentation, transaction and transition

process.

Privatization

Conducting the SWOT Analysis and based on the same, to prepare an appropriate
package.
Assessment & Valuation of assets.

Valuation of company as a going concern.

Suggesting measures to enhance sale value.

Financial restructuring, if any.

Preparation of Information Memorandum.

Bid process management, in case required for invitation of private participation.