Introduction and Overview of

Financial Markets and Institutions

 Welcome and Introduction
• Welcome
• Introduction
– Self
– Students
• Name, Education, Work Exp.,
Purpose ,Career aim
 Syllabus
• Financial Systems • Bonds
and markets • Primary Markets
• Investments • Depositories
• Risk and Return • Secondary Market
• The marketplace • Mutual funds
• Market Participants • Legal Framework
• Equities
 Lectures, Assessments, Books
• 12 Lecures of three hours or 25 lectures of
1 & ½ hours each
• Tests / Assignments / Final exam
• Books
 Test
• What is “ SAT”?
• What is meant by Bid and Offer in context
of capital market?
• What is execution date?
• What is clearing?
• Which is the oldest stock exchange in
India?
• What is a demat account?
• What is capital market?
• What is market capitalisation?
• What is a “security”?
• What is paid up capital?
• Who is chairman of SEBI?
• In which year Companies Act passed?
 Objective
In this session, you will learn about
• Financial Markets
– Primary and Secondary Market
– Money and Capital Market
– Regulation of Financial Markets
• Financial Institutions
– FIs’ Economic Functions and Benefits to Supplier of
Funds
– Risks incurred by Financial Institutions
• Regulation of Financial Institutions
 Discussion- Financial Markets

• What do we understand by financial

markets?
 Understanding Financial Markets
• Financial markets are economic structures
through which funds flow
 Basis of differentiating
• Purpose – Primary or secondary
• Platform – OTC or Exchange
• Tenure of instruments- Money or Capital
Market
• Ownership Claim – Equity and Debt
• Delivery – Cash and Derivative
 Ways to Distinguish Financial
Markets

• Primary and Secondary Market

• Money Market and Capital Market

• Equity Market, Debt Market and

Derivatives Market
 Primary Market- The What
• What are primary markets?

Markets in which users of funds (Eg.

Corporate, Government) raise funds
through new issues of financial
instruments
 Primary Markets- Suppliers
• Who supplies funds in primary market?

Surplus sectors of the economy

like households, Mutual Funds
 Primary Markets
• Merchant Bankers are the intermediaries
in primary market
• They serve as intermediaries between
users of funds i.e. corporates raising funds
and suppliers of funds i.e. investors
 Primary Markets
New issues of financial instruments are offered for sale

Advisers to users
Users of funds and suppliers of funds Initial suppliers
(Corporates issuing (Merchant Bankers, of funds
Underwriters,
Debt/Equity instruments) Brokers) (Investors)

Financial Instruments flow Advise

Funds flow
 Primary Market Trends
Amt ([Link]) Number

40000 2000

30000 1500

20000 1000

10000 500

0 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Particulars 2007-08 2006-07 2005-06 2004-05

Number of issues launched 124 124 139 60
Total funds raised (Rs. Cr.) 87,029 33,508 27,425 28256

Avg. Issue Size (Rs. Cr.) 701 270 197 471

No. of issues > Rs.100 Cr. - 44 49 25
 Primary Markets- Facts
• 411 net new securities are listed in last three
years on National Stock Exchange

Year Number of companies listed

on NSE
2005-06 1069
2006-07 1228
2007-08 1381
 Secondary Markets
• What are secondary markets?

• The market where already issued

securities are bought again and resold
 Secondary Markets
• Financial instruments once issued are
traded

Securities
Investor Brokers Investor

Financial Instruments flow

Funds flow
 Secondary Markets
• What are the other securities bought and
sold in the secondary market?
– Equity shares
– Debt securities
– Derivative securities
 Secondary Markets- Buyers
• Who buys and sells these securities?

• Investors with different perceptions about

market, risks and securities are buyers
and sellers in the secondary market
 Secondary Markets- Facts
• Average daily turnover on BSE
– Cash segment - Rs.6,290 cr
– Derivatives segment – Rs.965 cr
• Average daily turnover on NSE
– Cash segment - Rs.14,148 cr
– Derivatives segment – Rs.52,153 cr

( In 2007-08)
Source: Handbook of Securities on the Indian Securities
Market 2008
 Secondary Markets

• Market capitalization of all NSE stocks is Rs. 48,58,122

crore
• Market capitalization of all BSE stocks is Rs. 51,38,014
crore

• (as on 31st March 2008)

 Secondary Markets

Crore

14,148

7,812
6,253

2005-06 2006-07 2007-08

Average daily turnover on Cash Segment of NSE

 Secondary Markets

Crore 52,153

29,543
19,220

2005-06 2006-07 2007-08

Average Daily Turnover on Derivative segment of

NSE
 Quiz
Identify the type of transaction
• New India Company issues Rs100 mn of new
equity shares
• Old India Company issues preference shares to
its existing members
• People Mutual Fund buys 50,000 shares of
Resurgent India Corporation on NSE
• Trust Insurance company sells 25,000 shares of
New India to an investment company
Money and Capital Market
 Money Markets- The What
• What are Money markets

• Money markets are markets that trade

debt securities with maturities of one year
or less
 Capital Markets- The What
• What are Capital Markets?

• Capital markets are markets that trade

debt and equity instruments with maturities
of one year and more
 Money Market Instruments
• Commercial papers
• Treasury bills
• Certificates of deposits
• Bankers’ acceptances
 Capital Market Instruments
• Corporate stocks
• Corporate bonds
• Government bonds
• PSU bonds
• Home mortgages etc.
 Money and Capital Market
Instruments

Capital Market
Securities
Money
Market Debentures
Securities and Bonds Stocks (Equities) Maturity

One year to 30 years to No specified

maturity maturity maturity
 Quiz
Identify the type of instrument?
• Commercial paper
• Common stock
• Preference stock with 3 year maturity
• Deep discount bond of a bank
• Treasury bills
FINANCIAL MARKET
REGULATION
 Financial Market Regulation
• The financial markets are regulated by
host of regulators like Department of
Economic Affairs, Ministry of Corporate
Affairs, SEBI, RBI, etc.
• A high level committee on capital markets
coordinates among these agencies
Major Acts Governing Securities
Markets
• SCRA, 1956
• Companies Act, 1956
• SEBI Act, 1992
• Depositories Act, 1996
 Acts, Rules and Regulations
• To regulate the market, the Government,
through SEBI, has framed regulations under
SCRA, SEBI Act and Depositories Act
• Companies Act governs issue, allotment
and transfer of securities among other
matters
• The exchanges also have their bye-laws/
business rules.
 Focus of SEBI
• Protection of interests of investors
• Regulation of securities market
• Development of securities market
 Aim of Regulation
• Registration of intermediaries
• Prevention of frauds, insider trading and
unfair trade practices
• Orderly and healthy development of
Securities Market
 Quiz

• Which Act defines what is a security?

• RBI has say in regulation of some mutual
fund schemes-True / False
 Financial Institutions
• In our Financial System consisting of
Regulators, Exchange and a variety of
Intermediaries, Financial Institutions play a
major economic role

• They channel funds from surplus units to

deficit units in the economy
 Types of Financial Institutions
• Commercial banks • Specialized Financial
(Nationalized, Private Institutions
Sector, Foreign, RRB, • NBFCs,RNBFCs
Land Development • Housing finance
Banks) companies
• Development • Insurance Companies
Financial Institutions • Mutual funds
• Cooperative Banks • Pension funds
• Credit societies
• Post offices
 Need for FI’s Intermediation
• As common and small surplus units (saver)
– can not find users (deficit units) of funds
– can not take risk or understand risk
– may find the denomination mismatch
– may find maturity mismatch
– may find the end use or monitoring difficult
Financial Institutions and Markets

Individual Banks
Surplus
Units FIIs

Corporate Mutual
Funds Deficit
Units
Insurance
Policy Holders
Companies

Employees and Pension

Employers Funds
 Flow of Funds in the World of FIs

Users of the Funds FI Suppliers of the funds

(Brokers)

Cash Cash

FI
(Asset
transformers)
Financial
Financial claims
claims
Deposits and
Equity / Debt
Insurance
securities
policies
 Service to Economy
• Transmission of monetary policy
• Credit allocation
• Payment services
• Wealth Transfer
 Role of Banks
• Bank deposits being major source of
money supply, commercial banks help in
percolating monetary policies of the
central bank to the rest of the economy
 Credit Allocation
• FIs play major role as source of finance in
the economy
 Payment Services
• Banks provide check clearing and money
transfer services
 Wealth Transfer
• Pension Funds, PPF, Insurance
Companies help savers transfer wealth
from their youth to old age as well as
across generation
 RECALL
• The role of an insurance company in the
economy
• The role of a credit society in the economy
 ASK
• While performing the role of intermediary
are FIs exposed to any risk?

• If yes? What kind of risk?

 Risks faced by Financial
Institutions
• Interest rate risk • Operational risk
• Market risk • Technology risk
• Credit risk • Insolvency risk
• Liquidity risk • Foreign exchange risk
• Off-Balance sheet risk • Sovereign risk
 Need for Regulation of FI

• As FIs play important role in economy as

well as provide service to borrowers and
lenders, it is important that they function
smoothly.
• Failure of a bank or insurance company
can cause huge loss of money and
damage trust
 Need for Regulations of FIs
• Financial disasters of the world
– Barings
– Enron
– Orange County
Regulation of Financial Institutions
• Regulators of FIs
– Reserve Bank of India
– SEBI
– IRDA
– Pension Fund Regulatory Authority