1

INDIAN FINANCIAL SYSTEM

A financial system is a complex, well-integrated set if sub-systems of financial institutions, markets, instruments,
and services which facilitates the transfer and allocation of funds, efficiently and effectively.
The financial systems of most developing countries are characterized by co-existence and co-operation between the
formal and informal financial sectors.

According to Christy, the objective of the financial system is to “supply funds to various sectors and activities
of the economy in ways that promote the fullest possible utilization of resources without the destabilizing
consequence of price level changes or unnecessary interference with individual desires.”

According to Robinson, the primary function of the system is “to provide a link between savings and
investment for the creation of new wealth and to permit portfolio adjustment in the composition of the
existing wealth.

FUNCTIONS:

 Mobilize and allocate savings: One of the important functions of a financial system is to link the savers
and investors and thereby help in mobilizing and allocating the savings efficiently and effectively.
 Monitor corporate performance: Financial markets and institutions help to monitor corporate
performance and exert corporate control through the threat of hostile takeovers for underperforming
firms.
 Provide payment and settlement systems: Payment and settlement systems play an important role to
ensure that funds move safely, quickly and in a timely manner. An efficient payment and settlement
system contributes to operating and allocation efficiency of the financial system and thus, overall
economic growth.
 Optimum allocation of risk-bearing and reduction: It limits pools and trades the risks involved in
mobilizing savings and allocating credit. It reduces risk by laying down rules governing the operation of
the system.
 Disseminate price-related information: A financial system also makes available price-related information
which is a valuable assistance to those who need to take economic and financial decisions.
 Offer portfolio adjustment facility: These are provided by financial markets and financial intermediaries
such as banks and mutual funds. Portfolio adjustment facilities include services of providing a quick,
cheap and reliable way of buying and selling a wide variety of financial assets.
 Lower the cost of transactions: This has a beneficial influence on the rate of return to savers. It also
reduces the cost of borrowing.
 Promote the process of financial deepening and broadening: Financial deepening refers to an increase of
financial assets as a percentage of Gross Domestic Product (GDP). It measures the size of the financial
intermediary sector. Financial broadening refers to building an increasing number and variety of
participants and instruments.
 2

Importance of Indian Financial System:

 It accelerates the rate and volume of savings through provision of various financial instruments and
efficient mobilization of savings.
 It aids in increasing the national output of the country by providing funds to co-operate customers to
expand their respective business.
 It protects the interests of investors and ensures smooth financial transactions through regulatory
bodies such as RBI, SEBI etc.
 It helps economic development and raising the standard of living of people.
 It helps to promote the development of weaker section of the society through rural development
banks and co-operative societies.
 It helps corporate customers to make better financial decisions by providing effective financial as well
as advisory services.
 It aids in financial deepening and broadening (Financial deepening refers to the increasing financial
asset as a percentage of GDP, Financial broadening refers to increasing number of participants in the
financial system).
 1

MONEY MARKET

Money market is a market for financial assets that are close substitutes for money. It is a market for overnight
to short-term funds and instruments having a maturity period of one or less than one year. It is not a physical
location, (like stock market), but an activity that is conducted over the telephone.

Characteristics/Features of money market:

 It is not a single market but a collection of markets for several instruments.

 It is wholesale market of short-term debt instruments.
 Its principal features is honour were the creditworthiness of the participant is important.
 The main players are: the Reserve Bank of India (RBI), The Discount and Finance House of India (DFHI),
Mutual Funds, Insurance Companies Banks, Corporate Investors, Non-Banking Finance Companies
(NBFCs), State Governments, Provident Funds, primary dealers, the Securities Trading Corporation of
India (STCI), Public Sector Undertakings (PSUs) and Non-Resident Indians.
 It is a need based market wherein the demand and supply of money shape the market.
 Transactions in the money market can be both secured and unsecured, i.e., without collaterals.

BENEFITS OR NEED OR IMPORTANCE OF MONEY MAARKET:

 Provides a stable source of funds to banks in addition to deposits, allowing alternative financing
structures and competition.
 It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity
structure of their assets and liabilities.
 A developed inter-bank market provides the basis for growth and liquidity in the money market
including the secondary market for commercial papers and treasury bills.
 Encourages the development of non-bank intermediaries thus increasing the competition for funds.
 A liquid money market provides an effective source of long-term finance to borrowers. Large
borrowers can lower the cost of raising funds and manage short-term funding or surplus efficiently.
 A liquid and vibrant money market is necessary for the development of a capital market, foreign
exchange market and market in the derivative instruments. The money market supports the long-term
debt market by increasing the liquidity of securities.
 Trading in forwards, swaps and futures is also supported by a liquid money market of the certainty of
prompt cash settlement is essential for such transactions.
 It facilitates the government market borrowing.
 Makes effective monitory policy actions, monitory control through indirect methods is more effective
if the money market is liquid.
 Helps in pricing different floating interest products.
 2

FUNCTIONS OF MONEY MARKET:

 Provide a balancing mechanism of even out the demand for and supply of short-term funds.
 Provide a focal point for central bank intervention for influencing liquidity and general level of interest
rates in the economy.
 Provide reasonable access to suppliers and users of short-term funds to fulfill their borrowings and
investment requirements at an efficient market clearing price.
 Plays a central role in the monitory policy transmission mechanism as through it the operations of
monitory policy are transmitted to financial markets and ultimately to the real economy.
 A well functioning money market facilitates the development of market for long-term securities.
 The interest rates for extremely short-term use of money serve as which benchmark for longer-term
financial instruments .
 Money market rates reflect market expectations of how the policy rate could evolve in the future
short-term.
 INDIAN FINANCIAL SYSTEM

A financial system is a complex, well-integrated set if sub-systems of financial institutions, markets, instruments,
and services which facilitates the transfer and allocation of funds, efficiently and effectively.
The financial systems of most developing countries are characterized by co-existence and co-operation between the
formal and informal financial sectors.

According to Christy, the objective of the financial system is to “supply funds to various sectors and activities
of the economy in ways that promote the fullest possible utilization of resources without the destabilizing
consequence of price level changes or unnecessary interference with individual desires.”

According to Robinson, the primary function of the system is “to provide a link between savings and
investment for the creation of new wealth and to permit portfolio adjustment in the composition of the
existing wealth.

FUNCTIONS:

 Mobilize and allocate savings: One of the important functions of a financial system is to link the savers
and investors and thereby help in mobilizing and allocating the savings efficiently and effectively.
 Monitor corporate performance: Financial markets and institutions help to monitor corporate
performance and exert corporate control through the threat of hostile takeovers for underperforming
firms.
 Provide payment and settlement systems: Payment and settlement systems play an important role to
ensure that funds move safely, quickly and in a timely manner. An efficient payment and settlement
system contributes to operating and allocation efficiency of the financial system and thus, overall
economic growth.
 Optimum allocation of risk-bearing and reduction: It limits pools and trades the risks involved in
mobilizing savings and allocating credit. It reduces risk by laying down rules governing the operation of
the system.
 Disseminate price-related information: A financial system also makes available price-related information
which is a valuable assistance to those who need to take economic and financial decisions.
 Offer portfolio adjustment facility: These are provided by financial markets and financial intermediaries
such as banks and mutual funds. Portfolio adjustment facilities include services of providing a quick,
cheap and reliable way of buying and selling a wide variety of financial assets.
 Lower the cost of transactions: This has a beneficial influence on the rate of return to savers. It also
reduces the cost of borrowing.
 Promote the process of financial deepening and broadening: Financial deepening refers to an increase of
financial assets as a percentage of Gross Domestic Product (GDP). It measures the size of the financial
intermediary sector. Financial broadening refers to building an increasing number and variety of
participants and instruments.
Importance of Indian Financial System:

 It accelerates the rate and volume of savings through provision of various financial instruments and
efficient mobilization of savings.
 It aids in increasing the national output of the country by providing funds to co-operate customers to
expand their respective business.
 It protects the interests of investors and ensures smooth financial transactions through regulatory
bodies such as RBI, SEBI etc.
 It helps economic development and raising the standard of living of people.
 It helps to promote the development of weaker section of the society through rural development
banks and co-operative societies.
 It helps corporate customers to make better financial decisions by providing effective financial as well
as advisory services.
 It aids in financial deepening and broadening (Financial deepening refers to the increasing financial
asset as a percentage of GDP, Financial broadening refers to increasing number of participants in the
financial system).
STRUCTURE OF INDIAN FINANCIAL SYSTEM:
 FINANCIAL INSTITUTIONS:
These are intermediaries that mobilize savings and facilitate the allocation of funds in an efficient
manner.

Classification of Financial Institutions:

1. Banking and Non-Banking institution: Banking institutions are creators and purveyors of credit while
non-banking financial institutions are purveyors of credit. Non-banking financial institutions, namely, the
Developmental Financial Institutions (DFIs), and Non-Banking Financial Companies (NBFCs) as well as Housing
Finance Companies (HFCs) are major institution of purveyors of credit.

2. Term Finance: Term finance institutions such as Industrial Development Bank of India (IDBI), the
Industrial Credit and Investment Corporation of India (ICICI), the Industrial Financial Corporation of India (IFCI),
the Small Industrial Development Bank of India (SIDBI), and the Industrial Investment Bank of India (IIBI).

3. Specialized: Specialized finance institutions like Export Import Bank of India (EXIM), the Tourism
Finance Corporation of India (TFCI), ICICI venture, the Infrastructure Development Finance Company (IDFC)
and Sectoral Financial Institutions such as National Bank for Agricultural and Rural Development (NABARD)
and the National Housing Bank (NHB).

4. Investment: Investment Institutions in the business of mutual funds Unit Trust of India (UTI), Public
sector and Private sector Mutual Funds and Insurance activity of Life Insurance Corporation (LIC), General
Insurance Corporation (GIC) and its subsidiaries.

5. State Level: State level financial institutions such as State Financial Corporation (SFC) and State
Industrial Development Corporation (SIDCs) which are owned and managed by the state governments.

6. Sectoral: Private sector and public sector.

 FINANCIAL MARKETS:
Financial Markets are a mechanism enabling participants to deal in financial claims. The markets also
provide a facility in which their demands and requirements interact to set a price for such claims.

Types of Financial Markets:

Money Market: Money Market is a market for short term securities.
Capital Market: Capital Market is a market for long term securities, i.e., securities having a maturity period of
one year or more.

Segments:
Primary Market: Primary market deals with new issues;
Secondary market: Secondary market is means for trading in outstanding or existing securities.
Components of secondary market:
1. Over-the counter market
2. Exchange traded market
 FINANCIAL INSTRUMENTS:
A Financial Instrument is a claim against a person or an institution for payment at a future date of a
sum of money and/or a periodic payment in the form of interest or dividend.
Financial Instrument represents paper wealth shares, debentures, like bonds and notes.

Financial securities: Financial securities are Financial Instruments that are Negotiable and tradable.

Types of Financial securities:

Primary securities or Direct securities: Primary securities are directly issued by the ultimate borrowers of
funds to the ultimate savers. It includes equity shares and debentures.
Secondary securities or Indirect securities: They are issued by the financial intermediaries to the ultimate
savers. It includes Bank deposits, Mutual fund units, Insurance policies.

Distinct features:
Marketable
Tradable
Tailor-made

 FINANCIAL SEVICES:
Financial services are those that help with borrowing and funding, lending and investing, buying and
selling securities, making and enabling payments and settlements, and managing risk exposures in Financial
Markets.

Major Categories:
Funds intermediation, payments mechanism, provision of liquidity, risk management and financial
engineering.

Need of Financial Services:

o Borrowing and Funding
o Lending and Investing
o Buying and Selling Security
o Making and anabling
o Payments and Settlement
o Managing risk
 MONEY MARKET
Money market is a market for financial assets that are close substitutes for money. It is a market for
overnight to short-term funds and instruments having a maturity period of one or less than one year. It is not
a physical location, (like stock market), but an activity that is conducted over the telephone.

FEATURES/ CHARACTERISTICS OF MONEY MARKET:

 It is not a single market but a collection of markets for several instruments.
 It is wholesale market of short-term debt instruments.
 Its principal features is honour were the creditworthiness of the participant is important.
 The main players are: the Reserve Bank of India (RBI), The Discount and Finance House of India (DFHI),
Mutual Funds, Insurance Companies Banks, Corporate Investors, Non-Banking Finance Companies
(NBFCs), State Governments, Provident Funds, primary dealers, the Securities Trading Corporation of
India (STCI), Public Sector Undertakings (PSUs) and Non-Resident Indians.
 It is a need based market wherein the demand and supply of money shape the market.
 Transactions in the money market can be both secured and unsecured, i.e., without collaterals.

FUNCTIONS OF MONEY MARKET:

 Provide a balancing mechanism of even out the demand for and supply of short-term funds.
 Provide a focal point for central bank intervention for influencing liquidity and general level of interest
rates in the economy.
 Provide reasonable access to suppliers and users of short-term funds to fulfill their borrowings and
investment requirements at an efficient market clearing price.
 Plays a central role in the monitory policy transmission mechanism as through it the operations of
monitory policy are transmitted to financial markets and ultimately to the real economy.
 A well functioning money market facilitates the development of market for long-term securities.
 The interest rates for extremely short-term use of money serve as which benchmark for longer-term
financial instruments .
 Money market rates reflect market expectations of how the policy rate could evolve in the future
short-term.

IMPORTANCE/ BENEFITS/ NEED OF MONEY MAARKET:

 Provides a stable source of funds to banks in addition to deposits, allowing alternative financing
structures and competition.
 It allows banks to manage risks arising from interest rate fluctuations and to manage the maturity
structure of their assets and liabilities.
 A developed inter-bank market provides the basis for growth and liquidity in the money market
including the secondary market for commercial papers and treasury bills.
 Encourages the development of non-bank intermediaries thus increasing the competition for funds.
 A liquid money market provides an effective source of long-term finance to borrowers. Large
borrowers can lower the cost of raising funds and manage short-term funding or surplus efficiently.
 A liquid and vibrant money market is necessary for the development of a capital market, foreign
exchange market and market in the derivative instruments. The money market supports the long-term
debt market by increasing the liquidity of securities.
 Trading in forwards, swaps and futures is also supported by a liquid money market of the certainty of
prompt cash settlement is essential for such transactions.
  It facilitates the government market borrowing.
 Makes effective monitory policy actions, monitory control through indirect methods is more effective
if the money market is liquid.
 Helps in pricing different floating interest products.

STRUCTURE OF MONEY MARKET:

Money market is a market for short-term securities.

MONEY MARKET
|
Treasury Bill Market,
Call Money Market,
Commercial Bill Market,
Commercial Paper Market,
Certificates of Deposit Market,
Acceptance Market,
Term Money
| .
| |

Primary segment Secondary segment

CALL / NOTICE MONEY MARKET:

Call / Notice money market is by far the most visible market on the day-to-day surplus funds, mostly of
banks, are traded there. The call money market is a market for very short-term funds repayable on demand
and with a maturity period varying between one day to a fortnight. Commercial banks borrow money from
other banks to maintain a minimum cash balance known as cash reserve requirement (CRR).
The interest rate paid on call loans is known as ‘call rate’. it is a highly volatile. In India, the money and
credit situation is subject to seasonal fluctuation every year. The volume of call money transactions and the
amount as well as call rate level characterize seasonal fluctuation. A decrease in the call/notice money
requirement is greater in the slack season than in the buy season.
Under Call money market, funds are transacted on overnight basis and under notice money market,
funds are borrowed/lent for a period between 2 to 14 days. Eligible participants are free to decide on interest
rates, but calculation of interest payable would be based on Fixed Interest Market and Derivative Association
of India (FIMMDA).

COMMERCIAL BILL MARKET:

Commercial Bill is a short-term, negotiable, and self-lequidating instrument with low risk. It enhances the
liability to make payment on a fixed date when goods are bought on credit. (Commercial Bills are negotiable
instruments drawn by the seller on the buyer which are, in turn, accepted and discounted by Commercial
Banks.) In India the Commercial Bill market did not develop due to Cash credit system of credit delivery were
the onus of cash management rests with banks and an absence of an active secondary market.

Types of commercial bills:

 Demand Bill: Demand bill is payable on demand. i.e immediately at sight or on presentation to the
drawee.
  Usance Bill: Usance bill is payable after a specified time. If the seller wishes to give some time for
payment, the bill would be payable at a future date.
 Clean Bill: In a clean bill documents are enclosed and delivered against acceptance by the drawee, after
which it becomes clear.
 Documentary Bill: In case of documentary bill documents are delivered against payment accepted by
the drawee and documents of the file are held by bankers till the bill is paid.
 Inland Bill: Inland bills must (a) be drawn or made in India and must be payable in India; or (b) Drawn
upon any person resident in India.
 Foreign Bill: Financial Bills are (a) Drawn outside India and may be payable in and by a party outside
India, or may be payable in India or drawn on a party in India; or (b) It may be drawn in India and made
payable outside India.
 Hundi: The indegenous variety of bill of exchange for financing the movement of agricultural produce
called a Hundi. It has a long tradition of use in India.
 Derivative usance promissory note: With a view to eliminating movement of papers and facilitating
multiple rediscounting, the RBI introduced an innovative instrument is known as derivative usance
promissory note. The government has exempted stamp duty on derivative usance promissory note.

TREASURY BILL MARKET:

The Treasury bill market is the market that deals in treasury bills. Treasury bills are short-term
instruments issued by the Reserve Bank on behalf the government to tied over short-term liquidity shortfalls.
(to raise short term funds).
There are 3 Categories (types) :
1. On–tap Bills
2. Ad hoc Bills
3. Auctioned T-Bills

The development of T-bills is at the heart of the growth of the money market. The RBI, banks, mutual
funds, financial institutions, primary dealers, provident funds, corporates, foreign banks, and foreign
institutional investors are all participants in the T-bill market. The state government can invest their surplus
funds as no- competitive bidders in T-bills of all maturities. The sale of T-bills is conducted through an auction.
At present, there are two types T-bills.
1. 91 day T-bill
2. 364 days T-bill

There are two types of auctions.

1. Multiple-price action (each winning bidder pays the price it bid.)
2. Uniform-price action (each winning bidder pays the uniform price decided by the Reserve Bank).

Features of T-bill:
1. They are negotiable securities.
2. They are highly liquid as they are of shorter tenure and there is a possibility of inter-bank repos in
them.
3. There is an absence of default risk.
4. They have on assured yield, low transaction cost and are eligible for inclusion in the securities for SLR
purpose.
5. They are not issued in scrip form. The purchases and the sale are effected through the Subsidiary
General Ledger (SGL) account.
 6. At present, there are 91-day, 182-day, and 364-day T-bills in vogue. The 91-day T-bills are auctioned by
the RBI every Friday and the 364-day T-bills every alternate Wednesday, i.e., Wednesday preceding the
reporting Friday.
7. T-bills are available for a minimum amount of Rs.25000 and in multiples thereof.

CERTIFICATES OF DEPOSIT (CD) MARKET:

Certificates of Deposit (CDs) are unsecured negotiable short-term instruments in bearer from, issued
by commercial banks and development financial institutions. Certificates of Deposit are issued by banks during
periods of tight liquidity, at relatively high interest rates. They represent a high cost liability. Compare to other
retail deposits, the transaction costs of certificates of deposit is lower. A large amount of money is mobilised
through these deposits for short periods, reducing the interest burden when the demand for credit is slack.
Certificates of deposit are issued at a discount to face value. Banks and financial institutions can issue
certificates of deposit on floating rate basis provided the methodology of computing the floating rate is
objective, transparent and market-based.
Certificates of Deposit (CDs) are time deposits of specific maturity similar to Fixed Deposits (FDs). The
biggest difference between the two is that Certificates of Deposit (CDs) being in bearer form, are transferable
and tradable while Fixed Deposits (FDs) are not. The deposits attract stamp duty as applicable to negotiable
instruments. They can be issued to individuals, corporations, companies, trusts, funds, associates, and others.

COMMERCIAL PAPER MARKET:

Commercial Paper is an unsecured short-term promissory note issued at a discount by creditworthy
corporates, primary dealers and all India financial institutions. These are negotiable and transferable by
endorsement and delivery with a fixed maturity period.

Investors in Commercial Paper:

o Individuals
o Banks
o Corporates
o Unincorporated bodies
o NRIs
o FIIS (foreign institutional investors)

A commercial paper can be issued to Individuals, Banks, Companies and other registered Indian corporate
bodies, and unincorporated bodies. NRIs can be issued a commercial paper only on a non-transferable and
non-repatriable basis. Banks are allowed to underwrite or co-asset the issue of a commercial paper. Foreign
Institutional Investors are eligible to invest in commercial paper but within the limit set for invest in SEBI.

ACCEPTANCE MARKET:
The acceptance market refers to the market where short-term genuine trade bills are accepted by
financial intermediaries. Investment market based on short-term credit instruments. An acceptance is a time
draft or bill of exchange that is accepted as payment for goods. A banker's acceptance, for example, is a time
draft drawn on and accepted by a bank, which is a common method of financing short-term debts in
international trade including import-export transactions.
The acceptance market is useful to exporters, who are immediately paid for exports; for importers,
who do not need to pay until possession of goods occurs; for the financial institutions, that are able to profit
from the acceptances; and for investors who trade acceptances in the secondary market. Acceptances are sold
in the secondary market at a discount from face value (similar to the Treasury Bill market), at published
acceptance rates. In India, there are no acceptance houses. The commercial banks undertake the acceptance
business to some extent.

COLLATERAL LOAN MARKET:

Commercial loan in which the asset pledged as collateral, and not the borrower's creditworthiness, is
the ultimate source of repayment. Also called collateral lending.

TERM MONEY MARKET:

A term money market is one where funds are traded upto a period of three to six months. The term
money market in India is still not developed.

MONEY MARKET INSTRUMENTS:

CALL /SHORT NOTICE MONEY:

Call / Short Notice money is by far the most visible on the day-to-day surplus funds, mostly of banks,
are traded there. Under Call Money, funds are transacted on overnight basis and under Notice Money, funds
are borrowed/lent for a period between 2 to 14 days. In call money, very short-term funds repayable on
demand and with a maturity period varying between one day to a fortnight. Commercial banks borrow money
from other banks to maintain a minimum cash balance known as cash reserve requirement (CRR).
The interest rate paid on call loans is known as ‘call rate’. it is a highly volatile. In India, the money and
credit situation is subject to seasonal fluctuation every year. The volume of call money transactions and the
amount as well as call rate level characterize seasonal fluctuation. A decrease in the call/notice money
requirement is greater in the slack season than in the buy season.
Eligible participants are free to decide on interest rates, but calculation of interest payable would be
based on Fixed Interest Market and Derivative Association of India (FIMMDA).

COMMERCIAL BILL:
Commercial Bill is a short-term, negotiable, and self-lequidating instrument with low risk. It enhances
the liability to make payment on a fixed date when goods are bought on credit. (Commercial Bills are
negotiable instruments drawn by the seller on the buyer which are, in turn, accepted and discounted by
Commercial Banks.) In India the Commercial Bill market did not develop due to Cash credit system of credit
delivery were the onus of cash management rests with banks and an absence of an active secondary market.

Types of commercial bills:

 Demand Bill: Demand bill is payable on demand. i.e immediately at sight or on presentation to the
drawee.
 Usance Bill: Usance bill is payable after a specified time. If the seller wishes to give some time for
payment, the bill would be payable at a future date.
 Clean Bill: In a clean bill documents are enclosed and delivered against acceptance by the drawee, after
which it becomes clear.
 Documentary Bill: In case of documentary bill documents are delivered against payment accepted by
the drawee and documents of the file are held by bankers till the bill is paid.
 Inland Bill: Inland bills must (a) be drawn or made in India and must be payable in India; or (b) Drawn
upon any person resident in India.
  Foreign Bill: Financial Bills are (a) Drawn outside India and may be payable in and by a party outside
India, or may be payable in India or drawn on a party in India; or (b) It may be drawn in India and made
payable outside India.
 Hundi: The indegenous variety of bill of exchange for financing the movement of agricultural produce
called a Hundi. It has a long tradition of use in India.
 Derivative usance promissory note: With a view to eliminating movement of papers and facilitating
multiple rediscounting, the RBI introduced an innovative instrument is known as derivative usance
promissory note. The government has exempted stamp duty on derivative usance promissory note.

TREASURY BILLS:
Treasury bills are short-term instruments issued by the Reserve Bank on behalf the government to tied
over short-term liquidity shortfalls. (to raise short term funds).
There are 3 Categories (types) :
1. On–tap Bills
2. Ad hoc Bills
3. Auctioned T-Bills

The development of T-bills is at the heart of the growth of the money market. The RBI, banks, mutual
funds, financial institutions, primary dealers, provident funds, corporates, foreign banks, and foreign
institutional investors are all participants in the T-bill market. The state government can invest their surplus
funds as no- competitive bidders in T-bills of all maturities. The sale of T-bills is conducted through an auction.
At present, there are two types T-bills.
1. 91 day T-bill
2. 364 days T-bill

There are two types of auctions.

1. Multiple-price action (each winning bidder pays the price it bid.)
2. Uniform-price action (each winning bidder pays the uniform price decided by the Reserve Bank).

Features of T-bill:
8. They are negotiable securities.
9. They are highly liquid as they are of shorter tenure and there is a possibility of inter-bank repos in
them.
10. There is an absence of default risk.
11. They have on assured yield, low transaction cost and are eligible for inclusion in the securities for SLR
purpose.
12. They are not issued in scrip form. The purchases and the sale are effected through the Subsidiary
General Ledger (SGL) account.
13. At present, there are 91-day, 182-day, and 364-day T-bills in vogue. The 91-day T-bills are auctioned by
the RBI every Friday and the 364-day T-bills every alternate Wednesday, i.e., Wednesday preceding the
reporting Friday.
14. T-bills are available for a minimum amount of Rs.25000 and in multiples thereof.

CERTIFICATES OF DEPOSIT (CD):

Certificates of Deposit (CDs) are unsecured negotiable short-term instruments in bearer from, issued
by commercial banks and development financial institutions. Certificates of Deposit are issued by banks during
periods of tight liquidity, at relatively high interest rates. They represent a high cost liability. Compare to other
retail deposits, the transaction costs of certificates of deposit is lower. A large amount of money is mobilised
through these deposits for short periods, reducing the interest burden when the demand for credit is slack.
Certificates of deposit are issued at a discount to face value. Banks and financial institutions can issue
certificates of deposit on floating rate basis provided the methodology of computing the floating rate is
objective, transparent and market-based.
Certificates of Deposit (CDs) are time deposits of specific maturity similar to Fixed Deposits (FDs). The
biggest difference between the two is that Certificates of Deposit (CDs) being in bearer form, are transferable
and tradable while Fixed Deposits (FDs) are not. The deposits attract stamp duty as applicable to negotiable
instruments. They can be issued to individuals, corporations, companies, trusts, funds, associates, and others.

COMMERCIAL PAPER:
Commercial Paper is an unsecured short-term promissory note issued at a discount by creditworthy
corporates, primary dealers and all India financial institutions. These are negotiable and transferable by
endorsement and delivery with a fixed maturity period.

Investors in Commercial Paper:

o Individuals
o Banks
o Corporates
o Unincorporated bodies
o NRIs
o FIIS (foreign institutional investors)

A commercial paper can be issued to Individuals, Banks, Companies and other registered Indian corporate
bodies, and unincorporated bodies. NRIs can be issued a commercial paper only on a non-transferable and
non-repatriable basis. Banks are allowed to underwrite or co-asset the issue of a commercial paper. Foreign
Institutional Investors are eligible to invest in commercial paper but within the limit set for invest in SEBI.

REPURCHASE AGREEMENTS:
CAPITAL MARKET

The capital market is an important constituent of the financial system. It is a market for long-term funds –
both equity and debt – and funds raised within and outside the country,
The capital market aids economic growth by mobilizing the savings of the economic sectors and
directing the same towards channels of productive use.

DEFINITION:
Capital market is a market where buyers and sellers engage in trade of financial securities like bonds, stocks,
etc. The buying/selling is undertaken by participants such as individuals and institutions.

FEATURES
1. Link between Savers and Investment Opportunities:
Capital market is a crucial link between saving and investment process. The capital market transfers money
from savers to entrepreneurial borrowers.
2. Deals in Long Term Investment:
Capital market provides funds for long and medium term. It does not deal with channelising saving for less
than one year.
3. Utilises Intermediaries:
Capital market makes use of different intermediaries such as brokers, underwriters, depositories etc. These
intermediaries act as working organs of capital market and are very important elements of capital market.
4. Determinant of Capital Formation:
The activities of capital market determine the rate of capital formation in an economy. Capital market offers
attractive opportunities to those who have surplus funds so that they invest more and more in capital market
and are encouraged to save more for profitable opportunities.
5. Government Rules and Regulations:
The capital market operates freely but under the guidance of government policies. These markets function
within the framework of government rules and regulations, e.g., stock exchange works under the regulations
of SEBI which is a government body.
An ideal capital market is one:
• Where finance is available at reasonable cost.
• Which facilitates economic growth.
• Where market operations are free, fair, competitive and transparent.
• Must provide sufficient information to investors.
• Must allocate capital productively.

IMPORTANCE OF CAPITAL MARKET

1. It is only with the help of capital market, long-term funds are raised by the business community.
2. It provides opportunity for the public to invest their savings in attractive securities which provide a
higher return.
3. A well developed capital market is capable of attracting funds even from foreign country. Thus, foreign
capital flows into the country through foreign investments.
4. Capital market provides an opportunity for the investing public to know the trend of different
securities and the conditions prevailing in the economy.
5. It enables the country to achieve economic growth as capital formation is promoted through the
capital market.
6. Existing companies, because of their performance will be able to expand their industries and also go in
for diversification of business due to the capital market.
7. Capital market is the barometer of the economy by which we are able to study the economic
conditions of the country and it enables the government to take suitable action.
8. Through the Press and different media, the public are informed about the prices of different securities.
This enables the public to take necessary investment decisions.
9. Capital market provides opportunities for different institutionssuch as commercial banks, mutual
funds, investment trust; etc., to earn a good return on the investing funds. They employ financial experts who
are able to predict the changes in the market and accordingly undertake suitable portfolio investments.

DIFFERENCE BETWEEN MONEY MARKET AND CAPITAL MARKET:

Money Market Capital Market

Definition Is a component of the financial markets where short-term borrowing takes place Is a
component of financial markets where long-term borrowing takes place
Maturity Period Lasts anywhere from 1 hour to 90 days. Lasts for more than one year and can also
include life-time of a company.
Credit Instruments Certificate of deposit, Repurchase agreements, Commercial paper, Eurodollar deposit,
Federal funds, Municipal notes, Treasury bills, Money funds, Foreign Exchange Swaps, short-lived mortgage
and asset-backed securities. Stocks, Shares, Debentures, bonds, Securities of the Government.
Nature of Credit Instruments Homogenous. A lot of variety causes problems for investors.
Heterogeneous. A lot of varieties are required.
Purpose of Loan Short-term credit required for small investments. Long-term credit required to
establish business, expand business or purchase fixed assets.
Basic Role Liquidity adjustment Putting capital to work
Institutions Central banks, Commercial banks, Acceptance houses, Nonbank financial institutions, Bill
brokers, etc. Stock exchanges, Commercial banks and Nonbank institutions, such as Insurance Companies,
Mortgage Banks, Building Societies, etc.
Risk Risk is small Risk is greater
Market Regulation Commercial banks are closely regulated to prevent occurrence of a liquidity crisis.
Institutions are regulated to keep them from defrauding customers.
Relation with Central Bank Closely related to the central banks of the country. Indirectly related with
central banks and feels fluctuations depending on the policies of central banks.

COMPONENTS OF CAPITAL MARKET

The main components of capital market are Primary market and Secondary market.

Primary market is a market for new issues. It is also called the new issues market. It is a market for fresh
capital. Funds are mobilized in the Primary market through prospectus, rights issues, and private placement.
Primary market refers to the long term flow of funds from the surplus sector to the government and corporate
sector (through primary issues) and to banks and non-bank financial intermediaries (through secondary
issues). Primary issues to the corporate sector lead to capital formation (creation of net fixed assets and
incremental change in inventories).

Secondary market is a market in which existing securities are resold or traded. This market is also known as
the stock market. In India the Secondary market consists of recognized stock exchanges operating under rules,
by-laws and regulations duly approved by the government. These stock exchanges constitute an organized
market where securities issued by the central and state governments, public bodies, and joint stock companies
are traded.
A stock exchange is defined under section 2(3) of the Securities Contracts (Regulation) Act, 1956, ‘as any body
of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling
the business of buying, selling or dealing in securities’.
Secondary market is a market for outstanding securities. Unlike primary issues in the primary market which
results in capital formation, the secondary market facilitates only liquidity and marketability of outstanding
debt and equity instruments.

DIFFERENCE BETWEEN PRIMARY MARKET AND SECONDARY MARKET

BASIS FOR COMPARISON PRIMARY MARKET SECONDARY MARKET

Meaning The market place for new shares is called primary market. The place where formerly issued
securities are traded is known as Secondary Market.
Another name New Issue Market (NIM) After Market
Type of Purchasing Direct Indirect
Financing It supplies funds to budding enterprises and also to existing companies for expansion and
diversification.It does not provide funding to companies.
How many times a security can be sold? Only once Multiple times
Buying and Selling between Company and Investors Investors
Who will gain the amount on the sale of shares? Company Investors
Intermediary Underwriters Brokers
Price Fixed price Fluctuates, depends on the demand and supply force
Organizational difference Not rooted to any specific spot or geographical location. It has physical
existence.

GOVT. SECURITIES MARKET

INTRODUCTION :
A Government security is a tradable instrument issued by the Central Government or the State Government. It
acknowledges the Government’s debt obligation. Such securities are issued for short term or long term.
Government needs large amount to carry on its welfare activities.

MEANING :
A government security is a bond or other type of debt obligation that is issued by a government with a
promise of repayment upon the security's maturity date. Government securities are usually considered low-
risk investments because they are backed by the taxing power of a government.

OBJECTIVES/FEATURES OF GOVT. SECURITIES :

*Govt. securities are sovereign debt obligations of govt. of India either central or any other authority of govt.
*Govt. securities include central govt.& state govt. securities, Treasury Bill & Govt. guaranteed bonds.
*The terms of govt. securities range from 92 days to 30 years

HOW ARE THE GOVT. SECURITIES ISSUED :

Govt. securities are issued through auctions conducted by the RBI. Auctions are conducted on the electronic
platform called the NDS- Auction platform. Commercial Banks, Scheduled Co-operative Banks, Primary
Dealers, Insurance Companies & Provident Funds, who maintain finds accounts (Current account) &
Securities account (SGL account) with RBI. Are the members of this electronic platform.

TYPES OF GOVERNMENT SECURITIES :

Treasury Bills or T-bills :
• issued on a discount basis.
• maturities up to 52 weeks and lesser than it.
• Treasury bills or T-bills, which are money market instruments, are short term debt instruments issued
by the Government of India and are presently issued in three tenors, namely, 91 day, 182 day and 364 day.
Treasury bills are zero coupon securities and pay no interest. They are issued at a discount and redeemed at
the face value at maturity. For example, a 91 day Treasury bill of Rs.100/- (face value) may be issued at say Rs.
98.20, that is, at a discount of say, Rs.1.80 and would be redeemed at the face value of Rs.100/-

Cash Management Bills (CMBs) :

• Government of India, in consultation with the Reserve Bank of India, has decided to issue a new short-
term instrument, known as Cash Management Bills (CMBs), to meet the temporary mismatches in the cash
flow of the Government. The CMBs have the generic character of T-bills but are issued for maturities less than
91 days. Like T-bills, they are also issued at a discount and redeemed at face value at maturity. The tenure,
notified amount and date of issue of the CMBs depends upon the temporary cash requirement of the
Government.

Treasury Notes :
• longer term than T-bills
• from one to ten years
• semiannual coupon payments
• current owners are registered
• issued in denominations of ₹.1000 or more
• active secondary market.

Treasury Bonds :
• maturities greater than ten years.
• denominations in ₹.1,000 or more
• some have call provisions.

Savings Bonds :
• nonmarketable and offered only to individuals.
• pure discount bonds.
• mature in 20 years with semiannual coupon payments.

Dated Government Securities :

• Dated Government securities are long term securities and carry a fixed or floating coupon (interest
rate) which is paid on the face value, payable at fixed time periods (usually half-yearly). The tenor of dated
securities can be up to 30 years.

Zero Coupon Treasury Security Receipts or Coupon stripping :

• Treasury bonds are purchased and placed in trust with a custodian.
• sets of receipts issued for each coupon date.
• another set of receipts issued for certain maturity dates.
• Zero coupon means no interest.
• Issued at a discount price.

FINANCIAL INSTITUTIONS:
These are intermediaries that mobilize savings and facilitate the allocation of funds in an efficient manner.

Classification of Financial Institutions:

1. Banking and Non-Banking institution: Banking institutions are creators and purveyors of credit while non-
banking financial institutions are purveyors of credit. Non-banking financial institutions, namely, the
Developmental Financial Institutions (DFIs), and Non-Banking Financial Companies (NBFCs) as well as Housing
Finance Companies (HFCs) are major institution of purveyors of credit.
2. Term Finance: Term finance institutions such as Industrial Development Bank of India (IDBI), the Industrial
Credit and Investment Corporation of India (ICICI), the Industrial Financial Corporation of India (IFCI), the Small
Industrial Development Bank of India (SIDBI), and the Industrial Investment Bank of India (IIBI).
3. Specialized: Specialized finance institutions like Export Import Bank of India (EXIM), the Tourism Finance
Corporation of India (TFCI), ICICI venture, the Infrastructure Development Finance Company (IDFC) and
Sectoral Financial Institutions such as National Bank for Agricultural and Rural Development (NABARD) and the
National Housing Bank (NHB).
4. Investment: Investment Institutions in the business of mutual funds Unit Trust of India (UTI), Public sector
and Private sector Mutual Funds and Insurance activity of Life Insurance Corporation (LIC), General Insurance
Corporation (GIC) and its subsidiaries.
5. State Level: State level financial institutions such as State Financial Corporation (SFC) and State Industrial
Development Corporation (SIDCs) which are owned and managed by the state governments.
6. Sectoral: Private sector and public sector.

STOCK EXCHANGE:
A stock exchange is an exchange (or bourse)[note 1] where stock brokers and traders can buy and sell shares
of stock, bonds, and other securities. Stock exchanges may also provide facilities for issue and redemption of
securities and other financial instruments and capital events including the payment of income and dividends.
Securities traded on a stock exchange include stock issued by listed companies, unit trusts, derivatives, pooled
investment products and bonds. Stock exchanges often function as "continuous auction" markets with buyers
and sellers consummating transactions at a central location such as the floor of the exchange.

Benefits of Stock Exchange:

1. Long Term Finance: Banks may not be willing to provide long-term finance, so, the companies needing
such financing turn to the public, inviting people to lend them money or take a share in the business in
exchange for future profits. This they do by issuing stocks and shares in the business through stock exchanges.
By doing so, they can mobilize the savings of individuals and institutions. Thus, the Stock Exchange exists to
provide a channel through which these savings can reach those who need finance.
2. Unlimited Opportunity of investment: Everyone wants to save or invest in one form or another. The
Stock Exchange provides a way in which money can be put to work. When the saver in shares needs his money
back, he does not have to go to the company with whom he originally placed it. Instead, he sells his shares to
some other who is seeking to invest his money through the Stock Exchange. Stock exchanges have, thus, found
different solutions to the problem of providing contiguous and free market insecurities, with varying degrees
of success.
3. Economic Stability: The economic stability of a country is essential for the growth of healthy industrial
atmosphere and participations of people in productive economic investments. Capital is the lifeblood for
industries. The Government is providing the major equity for further expansion or to survive in a different
economic condition. The stock Exchange provides assistance to the enterprises by creating avenues for selling
shares and stocks to the public to generate fund. Thus, the Stock exchange is a unique yardstick to assess the
industrial activity and investment opportunities of a country.
4. Investment opportunities to small savers: The Stock Exchange is a system of arrangement which, in
combination with other institutions, patterns the capital market of an economy. In a free economy, the stock
exchange is the pivot of the money market. It thus provides investment opportunities to small savers.
5. Raising of new capital: Companies, however, do not get their shares listed on the stock exchange
automatically and, though the actual listing fees payable to the stock exchange are not big, the cost to the
company of meeting the exchanges may be considerable. A company willingly accepts these responsibilities
because access to the Stock exchange brings benefits in the form of better marketability for their shares and,
thereby, assists in the raising of new capital.
6. Easy to participate: The Stock Exchange has no statutory authority, or monopoly, over anybody and no
legal powers other than those which individual companies freely contract to give. Members of the Stock
Exchange agree to abide by its rules as a condition of membership and companies do so by signing the listing
agreement or general undertaking.

FUNCTIONS OF CAPITAL MARKET:

CLASSIFICATION OF NON-BANKING FINANCIAL INSTITUTIONS:

Non-banking financial Institutions

____ _________________ | _____________________.
| |

Non-banking Finance Companies Development Finance Institutions

|
| | |
All-India Financial State level Other
Institutions: IFCI, Institutions: Institutions:
IDBI, SIDBI, IDFC, SFCs, SIDCs ECGC, DICGC
NABARD, EXIM Bank,
NHB

 Non-banking Finance Companies: Non-banking Finance Companies supplement the role of the banking
sector in meeting the increasing financial needs of the corporate sector, delivering credit to the
unorganized sector and to small, local borrowers. Non-banking Finance Companies have a more flexible
structure than banks. They can be classified into;
1. Asset Finance Company (AFC) [Equipment Leasing Company and Hire Purchase Finance Company]
2. Investment Company (IC)
3. Loan Company (LC)
4. Residuary Non-banking Company (RNBC)
 Development Finance Institutions: Development banks are financial agencies that provide medium and
long-term financial assistance and act as a catalytic agents in promoting development of the country and
thereby aid in the economic growth of the country. They are engaged in promotion and development of
industry, agriculture, and other key sectors. They also provide development services that can aid in the
accelerated growth of an economy.
 Industrial Finance Corporation of India (IFCI): The Industrial Finance Corporation of India (IFCI) was
established on July 1, 1948. It was the first development financial institution in India with the main object
of making medium and long term credit to industrial needs. It was established with a mission to serve the
industrial sector of the country, which was in need of long-term finance.

The functions of the IFCI are as follows:

(i) The corporation grants loans and advances to industrial concerns.
(ii) Granting of loans both in rupees and foreign currencies.
(iii) The corporation underwrites the issue of stocks, bonds, shares etc.
(iv) The corporation can grant loans only to public limited companies and co-operatives but not to private
limited companies or partnership firms.
Organisation and Management:
The Head Office of the IFCI is in New Delhi. It has also established its Regional offices in Bombay, Chennai,
Kolkata, Chandigarh, Hyderabad, Kanpur and Guwahati. The branch office of IFCI is located in Bhopal, Pune,
Jaipur, Cochin, Bhubaneswar, Patna, Ahmedabad and Bangalore.
The IFCI is managed by a Board of Directors, headed by a Chairman, who is appointed by the Government of
India, in consultation with RBI. The chairman holds his position for a period of 3 years, subject to extension.
Of the 12 directors, 4 are nominated by the IDBI, three of whom are experts in the fields of industry, labour
and economics and the fourth is the General Manager of the IDBI. The remaining 8 directors are nominated.
 Two directors are nominated for a term of 4 years by each of the following-scheduled banks, co-operative
banks, insurance companies and investment companies making up eight directors.
Activities of the IFCI:
The promotional activities of IFCI are explained below:

1. Soft Loan Assistance:

This scheme provides soft loan assistance to existing industries in small and medium sector for developing
technology through in-house research and development.
2. Entrepreneur Development:
IFCI provides financial support to EDPs (Entrepreneur Development Programmes) conducted by
several agencies all-over India. In co-operation with Entrepreneurship Development Institute of
India.
3. Industrial Development in Backward Areas:
IFCI also take measures to promote industrial development in backward areas through a scheme of
concessional finance.
4. Subsidised Consultancy:
The IFCI gives subsidised consultancy for,
(i) Small Entrepreneurs for Meeting the Cost of Project.
(ii) Promoting Ancillary Industries
(iii) To do the Market Research.
(iv) Reviving Sick Units.
(v) Implementing Modernisation.
(vi) Controlling Pollution in Factories.
5. Management Development:
To improve the professional management the IFCI sponsored the Management Development
Institute in 1973. It established the Development Banking Centre to develop managerial,
manpower in industrial concern, commercial and development banks.
Working of the IFCI:
The working of the IFCI came in for a large measure of criticism. In the first place, the rate of interest which
the corporation charged was extremely high.
Secondly, there was a great delay in sanctioning loans and in making the amount of the loans available.
Thirdly, the ‘corporation’s insistence on the personal guarantee of managing directors in addition to the
mortgage of property was considered wrong In the last two decades the corporation had entered into new lines
of activity, viz, underwriting debentures and shares and guaranteeing of deferred payment in respect of imports
from abroad of plant an equipment by industrial concerns and subscribing to stocks and shares of industrial
concerns directly Besides, the performance of IFCI together with the work of other public sector financial
institutions has been extremely credit worthy in the last two decades.

 Industrial Development Bank Of India (IDBI): Industrial Development Bank of India (IDBI) established
under Industrial Development Bank of India Act, 1964, is the principal financial institution for providing
credit and other facilities for developing industries and assisting development institutions.
Till 1976, IDBI was a subsidiary bank of RBI. In 1976 it was separated from RBI and the ownership was
transferred to Government of India. IDBI is the tenth largest bank in the world in terms of development.
The National Stock Exchange (NSE), the National Securities Depository Services Ltd. (NSDL), Stock Holding
Corporation of India (SHCIL) are some of the Institutions which has been built by IDBI.
Organisation and Management:
IDBI consist of a Board of Directors, consisting of a chairman and Managing Director appointed
by the Government of India, a Deputy Governor of the RBI nominated by that bank and 20 other
Directors are nominated by the Central Government.
 The board had constituted an Executive Committee consisting of 10 Directors, including the
Chairman and Managing Director. The executive committee is empowered to sanction financial
assistance.
The Head office of IDBI is located in Mumbai. The bank has five regional offices, one each in
Kolkata, Guwahati, New Delhi, Chennai and Mumbai. Besides the bank have 21 branch offices.
Functions of IDBI:
The main functions of IDBI are discussed below:
(i) To provide financial assistance to industrial enterprises.
(ii) To promote institutions engaged in industrial development.
(iii) To provide technical and administrative assistance for promotion management or
expansion of industry.
(iv) To undertake market and investment research and surveys in connection with development
of industry.

IDBI Assistance:
The IDBI provides financial assistance either directly or through some specified financial
institutions:
(i) Direct Assistance: The IDBI grants loans and advances to industrial concerns. There is no
restriction on the upper or lower limits for assistance to any concern itself. The bank guarantees loans
raised by industrial concerns in the open market from the State Co-operative Banks, the Scheduled
Banks, the Industrial Finance Corporation of India (IFCI) and other ‘notified’ financial institutions.
(ii) Indirect Assistance: The IDBI can refinance term loans to industrial concerns repayable within 3
to 25 years given by the IFCI, the State Financial Corporation and some other financial institutions and
to SIDCs (State Industrial Development Corporations), Commercial banks and Cooperative banks which
extend term loans not exceeding 10 years to industrial concerns. IDBI subscribes to the shares and
bonds of the financial institutions and thereby provide supplementary resources.

Developmental Activities of IDBI:

(1) Promotional Activities:
In fulfillment of its developmental role, the bank continues to perform a wide range of
promotional activities relating to developmental programmes for new entrepreneurs,
consultancy services for small and medium enterprises and programmes designed for
accredited voluntary agencies for the economic upliftment of the underprivileged.
These include entrepreneurship development, self-employment and wage employment in
the industrial sector for the weaker sections of society through voluntary agencies, support to
Science and Technology Entrepreneurs’ Parks, Energy Conservation, Common Quality Testing
Centers for small industries.
(2) Technical Consultancy Organisations:
With a view to making available at a reasonable cost, consultancy and advisory services to
entrepreneurs, particularly to new and small entrepreneurs, IDBI, in collaboration with other
All-India Financial Institutions, has set up a network of Technical Consultancy Organisations
(TCOs) covering the entire country. TCOs offer diversified services to small and medium
enterprises in the selection, formulation and appraisal of projects, their implementation and
review.
(3) Entrepreneurship Development Institute:
Realising that entrepreneurship development is the key to industrial development; IDBI
played a prime role in setting up of the Entrepreneurship Development Institute of India for
fostering entrepreneurship in the country. It has also established similar institutes in Bihar,
 Orissa, Madhya Pradesh and Uttar Pradesh. IDBI also extends financial support to various
organisations in conducting studies or surveys of relevance to industrial development.

 Small Industrial Development Bank of India (SIDBI): With a view to ensuring larger flow of financial
and non-financial assistance to the small-scale sector, the Government of India set up the Small
Industries Development Bank of India (SIDBI) under a special Act of the Parliament in October 1989 as
wholly-owned subsidiary of the IDBI. The bank commenced its operations from April 2, 1990 with its
head office in Lucknow. The SIDBI has taken over the outstanding portfolio of the IDBI relating to the
small-scale sector.
The SIDBI’s financial assistance to small-scale industries is channelised through the existing
credit delivery system comprising State Financial Corporation, State Industrial Development
Corporations, Commercial Banks, and Regional Rural Banks.
The important functions of SIDBI are:
1. To initiate steps for technological up-gradation and modernisation of existing units.
2. To expand the channels for marketing the products of SSI sector in domestic and
international markets.
3. To promote employment oriented industries especially in semi-urban areas to create more
employment opportunities and thereby checking migration of people to urban areas.

 infrastructure development finance company limited (IDFC):

 REGULATORY INSTITUTIONS
THE RESERVE BSNK OF INDIA (RBI):
The Reserve Bank of India was established by legislation in 1934 through the Reserve Bank of India Act,
1934. It started functioning from April 1, 1935. Its central office is at Mumbai since 1937. Though originally
privately owned, since nationalization in 1949, it is fully owned by the Government of India. The Reserve Bank
of India is the central bank of our country.

OBJECTIVES OF THE RESERVE BANK:

1. To secure monetary stability within the country.
2. To operate the currency and credit system to the advantage of the country.
In other words, the objectives of the RBI are price stability and ensuring adequate credit availability to
finance economic activities for the benefit of the country.

The Monetary Policy of Reserve Bank of India has four major objectives. They are
 Exchange rate stability
 Price stability
 Encouraging employment growth
 Assisting for rapid economic growth.

 Exchange rate stability:

For the purpose of exchange rate stability, RBI has not only resorted to exchange control but has helped the
exporters to earn more foreign exchange. It has provided export finance through commercial banks and has
helped both the government and the exporters to earn foreign exchange. By maintaining adequate foreign
exchange reserve, it has prevented the domestic currency value from declining.
 Price stability:
The price fluctuation in India is not only due to the interaction of supply and demand but also due to the
activity of traders. Hoarding and black marketing are responsible for the price increase. Through selective
credit control and by direct action, RBI has prevented the price rise to some extent. However, the presence
of a large number of money lenders and indigenous bankers has prevented RBI from taking effective price
control.
 Full employment:
To promote more employment, both in rural and urban areas, RBI adopted the policy of Lead Bank Scheme.
But when the system failed, in 1988, Service Area Approach was adopted. Accordingly, each bank branch
was ear-market certain area in which the bank will be sole authority to extend credit. This has helped in
generating employment in rural, semi-urban and urban areas. RBI has directed commercial banks to extend
credit facilities to priority sector which is aimed at increasing employment generation.
 Assisting for rapid economic growth:
Economic growth can be achieved only when the country experiences a substantial increase in production in
agriculture, industry and service sectors. In our country, RBI has helped the government by mobilizing
savings of the people for investment. The balance of payment position should also be under control for
achieving economic growth. Though the five year plans have an object of 5.5% of economic growth only
three percent could be realized which is due to an increase in population growth. Hence RBI is helpless. If
the government co-operates by controlling the populating then the monetary policy of RBI will not only
improve the economic growth by also help in the economic development of the country. That is increased
production bringing an impact in the people in the form of higher standard of living.
FUNCTIONS OF RBI:
1. To formulate, implement and monitor the monetary policy.
2. To prescribe broad parameters of banking operations within the country’s banking and financial system
functions.
3. To facilitate external trade and payment and promote orderly development and maintenance of foreign
exchange market in India.
4. To issue and exchange or destroy currency and coins not fit for circulation.
5. To perform a wide range of promotional functions to support national objectives.
6. To perform merchant banking function for the central and the state governments.
7. To maintain banking accounts of all scheduled banks.

ROLE OF RBI:
1. Monetary Authority of the Country: Monetary policy-making is the central functions of the Reserve
Bank. The broad objectives of monetary policy in India are (a) maintaining price stability and (b) ensuring
adequate flow of credit to productive sectors to assist growth. Monetary policy creates conditions for
growth by influencing the cost and availability of money and credit. Monetary policy represents policies,
objectives and instruments directed towards regulating money supply and the cost and availability of
credit in the economy. The RBI conducts the monetary policy with the help of an intermediate target, the
operating instruments, and procedures.
2. Regulator and Supervisor of the Financial System: lays out parameters of banking operations within
which the country”s banking and financial system functions for- A) maintaining public confidence in the
system, B) protecting depositors’ interest ; C) providing cost-effective banking services to the general
public.
3. Regulator and supervisor of the payment systems: A) Authorises setting up of payment systems; B) Lays
down standards for working of the payment system; C)lays down policies for encouraging the movement
from paper-based payment systems to electronic modes of payments. D) Setting up of the regulatory
framework of newer payment methods. E) Enhancement of customer convenience in payment systems.
F) Improving security and efficiency in modes of payment.
4. Manager of Foreign Exchange: RBI manages forex under the FEMA- Foreign Exchange Management Act,
1999. in order to A) facilitate external trade and payment B) promote the development of foreign
exchange market in India.
5. Issuer of currency: RBI issues and exchanges currency as well as destroys currency & coins not fit for
circulation to ensure that the public has an adequate quantity of supplies of currency notes and in good
quality.
6. Developmental role: RBI performs a wide range of promotional functions to support national objectives.
Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.
7. Banker to the Government: performs merchant banking function for the central and the state
governments; also acts as their banker.
8. Banker to banks: An important role and function of RBI is to maintain the banking accounts of all
scheduled banks and acts as the banker of last resort.
9. An agent of Government of India in the IMF.
Securities and Exchange Board of India (SEBI) :
Securities and Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities
market. SEBI promotes orderly and healthy development in the stock market but initially SEBI was not able to
exercise complete control over the stock market transactions.
Securities and Exchange Board of India (SEBI) was set up with statutory powers on February 21, 1992.
The objectives defined by the ordinance for the board were (i) investor protection and (ii) promotion and
development of the capital market while simultaneously regulating the functioning of the securities market.

Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development of stock
exchange and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.
2. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
3. To protect the rights of investors and ensuring safety to their investment. (Protect the interest of the
investor in securities).
4. Promote the development of securities market.
5. Regulating the securities market.
6. To prevent fraudulent and malpractices by having balance between self regulation of business and its
statutory regulations.

Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important functions. These
are:
 Protective functions
 Developmental functions
 Regulatory functions.
 Protective functions of SEBI:
As clear from the name, SEBI’s protective function is to protect investors’ interest and provide them security by
taking following actions:
 Manipulation of security prices to inflate or depress the market prices (price rigging) and thereby cheating
investors is prohibited by SEBI. Price rigging refers to manipulating the prices of securities with the main
objective of inflating or depressing the market price of securities. SEBI prohibits such practice because this can
defraud and cheat the investors.
 SEBI keeps check on insiders who buy securities of the company and then takes strict action on insider trading
i.e. trading by insiders by using such information that is not available to general public.
 SEBI also prohibits fraudulent unfair Trade Practices by not letting the companies make misleading statements
which might induce the investors.
 SEBI also undertakes steps in educating investors so that they can evaluate and make correct decisions
 SEBI promotes code of conduct and fair practices in the security market

 Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the
business in stock exchange. Under developmental categories following functions are performed by SEBI:
 SEBI promotes training of intermediaries of the securities market.
 SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in following way:
o SEBI has permitted internet trading through registered stock brokers.
o SEBI has made underwriting optional to reduce the cost of issue.
o Even initial public offer of primary market is permitted through stock exchange.
 Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To regulate the activities of
stock exchange following functions are performed:
 SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as merchant
bankers, brokers, underwriters, etc.
 These intermediaries have been brought under the regulatory purview and private placement has been made
more restrictive.
 SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents, trustees, merchant
bankers and all those who are associated with stock exchange in any manner.
 SEBI registers and regulates the working of mutual funds etc.
 SEBI regulates takeover of the companies.
 SEBI conducts inquiries and audit of stock exchanges.

 Other function or powers given to SEBI:

 SEBI has been empowered to seek records and information from any board or statutory authority or corporation
established by central government, state or local government.
 If there are reasonable grounds of believing that a particular company might be indulging in unfair trade
practices then SEBI may conduct inspection of registers, books or of documents and records of listed company
or any public company that intends to get the securities listed.
 It shall have similar powers as given to a civil court in certain matters like summoning, oath examination , issuing
of commissions and also in matters of inspection or production of books of account , records or documents of a
company or of any person specified in section 12 of the SEBI act 1992.
 Has been empowered to levy fees for carrying out various functions.
 SEBI may take any of these measure during the investigation or inquiry or on completion of such an investigation
or inquiry.
 Suspending any security’s trading in a recognized stock exchange.
 Prohibiting a person to deal in securities or restraining the person from gaining access to the securities market.
 Suspending office bearers of stock exchanges or of self-regulatory organizations from holding of such positions.
 Retaining the proceeds of securities of a transaction under investigation.
 Attach after passing of the order.
 Directing intermediary or person associated with securities market not to alienate or dispose of an asset that
forms part of transaction under investigation.
 Regulating or prohibiting the issue of prospectus, advertisements or offer document or advertisement for issue
of securities.
 SEBI may make enquiries to protect interest of investors, to prevent activities from being conducted in an unfair
manner and to ensure proper management of the intermediaries.
 SEBI is empowered to conduct search and seizure can be made use of if there exist reasonable grounds in
believing that operations are being carried on in a way that affects badly the interests of those associated with
securities market.
 SEBI is empowered to issue desist and cease order if after the inquiry Board finds that the person has violated or
may violate provisions of the SEBI Act or rules made there under.
 Under Securities Contracts Regulations Act of 1956, following powers have been given to SEBI:
 Granting of recognition to stock exchange.
 Withdrawing such recognition in the interest of the trade.
 Requiring stock exchange to provide periodical returns
 Approving stock exchange for making bye – laws.
 Suspending for a limited period the business of recognized stock exchange
 Compelling listing of securities by the public companies.

SEBI has laid down strict comprehensive guidelines that control issue of financial instruments, and detailed norms
for merchant bankers, stock-brokers, sub-brokers, portfolio managers and mutual funds, thus providing issuers with a
place to deal fairly, providing accurate information and protection to investors and a good fair market to the
intermediaries.