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 e.g. underwriter.
However, the services offered by them vary from one market to another.

Intermediary Market Role

Secondary Market to
Stock Exchange Capital Market
securities
Corporate advisory services,
Investment Bankers Capital Market, Credit Market
Issue of securities
Capital Market, Money Subscribe to unsubscribed
Underwriters
Market portion of securities
Issue securities to the
Registrars, Depositories, investors on behalf of the
Capital Market
Custodians company and handle share
transfer activity
Primary Dealers Satellite Market making in
Money Market
Dealers government securities
Ensure exchange ink
Forex Dealers Forex Market
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. Call/Notice Money
2. Treasury Bills
3. Term Money
4. Certificate of Deposit
5. Commercial Papers

1. Call /Notice-Money Market: Call/Notice 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 and/or 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 Call/Notice 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 (14/91/182/364 days i.e. 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 Rs.4 crore and
(c) the borrowal account of the company is classified as a Standard Asset by the
financing bank/s. 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 i.e., 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. It's
monetary policy acts as a major weapon in India's financial market.

Securities and Exchange Board of India (SEBI) is one of the regulatory authorities for
India's capital market.

• Securities and Exchange Board of India (SEBI)

• National Stock Exchange
• Bombay Stock Exchange (BSE)
• Reserve Bank of India
• Major Financial Institutions in India
• 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:

• It tries to develop the securities market.

• Promotes Investors Interest.
• Makes rules and regulations for the securities market.

Functions Of SEBI

• Regulates Capital Market

• Checks Trading of securities.
• Checks the malpractices in securities market.
• It enhances investor's knowledge on market by providing education.
• It regulates the stockbrokers and sub-brokers.
• To promote Research and Investigation

SEBI In India's 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:

• Sole Control on Brokers: Under this rule every brokers and sub brokers
have to get registration with SEBI and any stock exchange in India.
• For Underwriters: For working as an underwriter an asset limit of 20 lakhs
has been fixed.
• For Share Prices: According to this law all Indian companies are free to
determine their respective share prices and premiums on the share prices.
• For Mutual Fund: SEBI's 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. India's 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 market.Both 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 & 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 72013.36 crores.

• BSE Indices: The well-known BSE SENSEX is a value weighted of 30

scrips.Other stock indices of BSE are BSE 500, BSEPSU, BSEMIDCAP,
BSESMLCAP, and BSEBANKEX.
• 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.
• 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.
 • 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.
• 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 3,200 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 Bank's 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.
Appointed/nominated for a period of four years.

• Constitution
• Official Directors
• Full-time: Governor and not more than four Deputy Governors
• Non-Official Directors
• Nominated by Government: ten Directors from various fields and one
government Official
• Others: four Directors - one each from four local boards
• Functions: General superintendence and direction of the Bank's affairs

Local Boards

• One each for the four regions of the country in Mumbai, Calcutta, Chennai
and New Delhi
• Membership
• Consist of five members each
• Appointed by the Central Government
• 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:

• Formulating proposals for the promotion of investment.

• Steps to implement the proposals.
• Setting friendly guidelines for facilitating more investors.
• Inviting more companies to make investment.
• 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:

• Secretary to Government Department of Economic Affairs, Ministry of

Finance- Chairman.
• Secretary to Government Department of Industrial Policy and Promotion,
Ministry of commerce and Industry.
• Secretary to Government, Department of Commerce, Ministry of Commerce
and Industry.
• Secretary to Government, Economic Relations, Ministry of External Affairs.
• 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. 1,1964
IDBI July 1964
NABARD July 12,1982
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 & Information Co. of India Ltd. 1989
Infrastructure Leasing & 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 L.C.Gupta as: “The principal features of the pre-independence of
industrial financing organizations are the closed-circle character of industrial of
entrepreneurship; a semi-organised & narrow industrial securities market, devoid of
issuing institutions & 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 & 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 & 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 & finance. The main elements of the financial organization in
planned economic development could be categorized into four broad groups:
1. Public/Government ownership of financial institutions,
2. Fortificaton of the institutional structure
3. Protection to investors &
4. Participation of financial institutions in corporate management.

1.Government 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 & 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 national/all India,while others were regional/state-level
institutions & between them they covered the whole range of industry & provided
finance in diverse form.Another 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 & controlled by the
Government.

2.Fortification 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 & 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 1951.The IFCI was established to give medium & 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 small/medium enterprises. But it failed
to make an impact on the availability of long term finance to industry &
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 & entrepreneurship. Although ambitious in conception, it
ultimately degenerated into a financing agency of for the modernization of cotton &
jute textiles. Subsequently, it was converted into a consultancy organization & had
on concern with the financing of the private industry.

ICICI – The establishment of the Industrial Credit & 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 & 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 medium/small 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 1956,as
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 trust/mutual 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 1931.This was repeated by the shroff
committee appointed by the RBI in 1953. It recommened the formation of joint
underwriting consortium of banks & 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 & the
big & established business houses had almost monopolized bank credit, while the
priority sectors such as small scale industries, agriculture, exports & small borrowers
revolutionary change in the structure, operations, policies, & 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 & their need for funds could be
met only through bank credit. The main features of this phase were – 1. Social
control 2. Nationalisation 3. Bank credit to priority sectors.

3.Protection 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 & 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, &
management. The Act also made considerable changes in the matter prospectus
,allotment of share, terms, & conditions on which companies were floated, & 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; & 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 & 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 & 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 & Restrictive Trade Practices Act. The Monopolies & 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 & (b) To control such monopolistic & 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.

4.Participation 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 & 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
management’s tenure in office became dependent on their direct & 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- 1.Banks 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 U.S. 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
factors.For the past three decades India's 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 India's growth process.The government's regular
policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major
private banks of India.Not 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 day.The 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.

Ø Income Recognition,Asset Classification And Provisioning Norms

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

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

Ø New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991

Ø 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 :

• Ongoing form of the Indian Banking System since 1992 as a follow-

up to the recommendation of NC I, 1991; and

• 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
(RBI)within the framework of the Reserve Bank of India Act, 1934 and the directions issued by it under
financial company' is defined as:- (i) a financial institution which is a company; (ii) a non banking institutio
principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or l
banking institution or class of such institutions, as the bank may, with the previous approval of the Non-ban
emerging as an important segment of Indian financial system.

§ They cannot accept deposits repayable on demand.

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

.The types of NBFCs registered with the RBI are:-

§ Equipment leasing company:- is any financial institution whose principal business is that of le
activity.Hire-purchase company:- is any financial intermediary whose principal business relates to
such transactions.
§ Loan company:- means any financial institution whose principal business is that of providing financ
otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finan
§ Investment company:- is any financial intermediary whose principal business is that of buying and s

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, and/or 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 (e.g., high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g.,
government agencies, corporations, or municipalities), or maturity of the bonds (short- or long-
term). Both stock and bond funds can invest in primarily U.S. securities (domestic funds), both
U.S. 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 fund's stated investment objective. A mutual fund is
administered under an advisory contract with a management company, which may hire or fire
fund managers.Mutual 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 (e.g., themoney market).The capital market includes the stock
market (equity securities) and the bond market (debt). Financial regulators, such as the UK's
Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC),
oversee the capital markets in their designated jurisdictions to ensure that investors are protected
against fraud, among other duties.Capital 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 – primary/new 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 Mac.With 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 equity.The 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 (i.e. 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 growth,both in terms of its
ability to mobilize resourses and allocate it with some efficiency.the
corporate sector has come to rely on the securities market increasingly,to
finance its long term requirement of funds,in contrast to a decade earlier
when the DFIs were the sole purveyors of long term funds.as a logical
corollary,there 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
investors’right 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 phase,the focus was on control.The framework was
fragmented,both in terms of the laws/acts under which the regulatory
function fell and the agencies and government departments that
administered them.For example the capital issue(control) act was
administered by the controller of capital issues(CCI) in the ministry of
finance.The scheme of control under the act required all the companies to
obtain prior consent for issues of capital to the public.under this
arrangement, the pricing as well as the features of the capital structure,
such as debt-equity ratios,were controlled by the government. likewise, the
securities contracts (regulation) Acts was administered by the Directors of
Stock Exchanges,also in the ministry of finance.its aim was to prevent
undesirable transactions in the securities.it empowered the government to
recognise /derecognize stock exchange, stipulate rules and bye-laws for
their functioning,compel listing of securities by public companies, and so on.
Such as a system of regulation/control 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
focused/integrated regulatory framework and its administration by an
independent/autonomous 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 & 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 fund/customer 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 organized/formal
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.