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Indian Financial System

INDIAN
INDIAN

FINANCIAL
FINANCIAL

SYSTEM
SYSTEM
Indian Financial System
CONTENTS CONTENTS
Introduction
Features of Financial System
Role of Financial System
Back Drop of Financial System
Indian Financial System from 19! " 19#!
Indian Financial System $ost 199!%s
Indian Financial System
INTROD&CTION INTROD&CTION
T'e financial system or t'e financial sector of any country consists of()
*a+ speciali,ed - non speciali,ed financial institution
*.+ or/ani,ed -unor/ani,ed financial markets and
*c+ Financial instruments - ser0ices 1'ic' facilitate transfer of funds2
$rocedure - practices adopted in t'e markets3 and financial inter
relations'ips are also t'e parts of t'e system2 T'ese parts are not al1ays
mutually e4clusi0e2 For e4ample3 t'e financial institution operate in
financial market and are3 t'erefore a part of suc' market2 T'e 1ord system
in t'e term financial system implies a set of comple4 and closely connected
or inters mi4ed institution3 a/ents practices3 markets3 transactions3 claims3 -
lia.ilities in t'e economy2 T'e financial system is concerned a.out money3
credit3 - finance " t'e terms intimately related yet some 1'at different from
eac' ot'er2 5oney refers to t'e current medium of e4c'an/e or means of
payment2 Credit or 6oan is a sum of money to .e returned normally 1it'
Interest it refers to a de.t of economic unit2 Finance is a monetary resources
comprisin/ de.t - o1ners'ip fund of t'e state3 company or person2
Indian Financial System
FE7T&RES OF FIN7NCI76 S8STE5 )( FE7T&RES OF FIN7NCI76 S8STE5 )(

12 It pro0ides an Ideal linka/e .et1een depositors sa0ers and
In0estors T'erefore it encoura/es sa0in/s and in0estment2
92 Financial system facilitates e4pansion of financial markets
o0er a period of time2
:2 Financial system s'ould promote deficient allocation of
financial resources of socially desira.le and economically
producti0e purpose2
;2 Financial system influence .ot' <uality and t'e pace of
economic de0elopment2
RO6E OF FIN7NCI76 S8STE5( RO6E OF FIN7NCI76 S8STE5(

T'e role of t'e financial system is to promote sa0in/s - in0estments in
t'e economy2 It 'as a 0ital role to play in t'e producti0e process and in
t'e mo.ili,ation of sa0in/s and t'eir distri.ution amon/ t'e 0arious
producti0e acti0ities2 Sa0in/s are t'e e4cess of current e4penditure o0er
income2 T'e domestic sa0in/s 'as .een cate/ori,ed into t'ree sectors3
'ouse'old3 /o0ernment - pri0ate sectors2
T'e sa0in/s from 'ouse'old sector dominates t'e domestic sa0in/s
component2 T'e sa0in/s 1ill .e in t'e form of currency3 .ank deposits3
non .ank deposits3 life insurance funds3 pro0ident funds3 pension funds3
s'ares3 de.entures3 .onds3 units - trade de.ts2 7ll of t'ese currency -
deposits are 0oluntary transactions - precautionary measures2 T'e
Indian Financial System
sa0in/s in t'e 'ouse'old sector are mo.ili,ed directly in t'e form of
units3 premium3 pro0ident fund3 and pension fund2 T'ese are t'e
contractual forms of sa0in/s2 Financial acti0ely deals 1it' t'e
production3 distri.ution - consumption of /oods and ser0ices2 T'e
financial system 1ill pro0ide inputs to producti0e acti0ity2 Financial
sector pro0ides inputs in t'e form of cas' credit - assets in financial
for production acti0ities2
T'e function of a financial system is to esta.lis' a .rid/e .et1een t'e
sa0ers and in0estors2 It 'elps in mo.ili,ation of sa0in/s to materiali,e
in0estment ideas into realities2 It 'elps to increase t'e output to1ards
t'e e4istin/ production frontier2 T'e /ro1t' of t'e .ankin/ 'a.it 'elps
to acti0ate sa0in/ and undertake fres' sa0in/2 T'e financial system
encoura/es in0estment acti0ity .y reducin/ t'e cost of finance risk2 It
'elps to make in0estment decisions re/ardin/ pro=ects .y sponsorin/3
encoura/in/3 e4port pro=ect appraisal3 feasi.ility studies3 monitorin/ -
e4ecution of t'e pro=ects2
Indian Financial System
7n o0er0ie1 of Financial System and Financial 5arkets in India
5INISTR8 OF FIN7NCE
Financial Institutions RBI SEBI IRD7
Insurance company
5utual Fund >enture Capital
Fund
Capital 5arket
6IC -
Ot'er
?IC -
Ot'er
Commercial
Banks
NBFC 5oney 5arket
$rimary
5arket
Secondary
5arket
Stock
E4c'an/e
?o0ernment
Security
5arket
De0elopment
Banks
In0estment
Banks
Sectoral
Banks
State 6e0el
Financial
Institution
Indian Financial System
BACK DROP OF INDIAN FINANCIAL SYSTEM
7t t'e time of independence3 India 'ad a reasona.ly di0ersified financial
system in terms of intermediaries .ut a some1'at narro1 focus on terms of
intermediation3 i2e23 a lack of a lon/ term capital market and t'e relati0e
ne/lect of a/riculture in particular and rural areas in /eneral2
7s India em.arked on a process of industriali,ation and /ro1t'3 RBI set up
De0elopment Financial Institutions *DFI%s+ and State Finance Corporations
*SFC%s+ as pro0iders of lon/ term capital2 7/riculture%s need for credit 1as
met .y cooperati0e .anks2 &TI 1as set up to canali,e resources from retail
in0estors to t'e capital market2
In essence3 t'e understandin/ t'at re<uirement of financial needs for
accelerated /ro1t' and de0elopment 1as .est met .y speciali,ed financial
19;@
19A!s
Industry%s s'are in credit dou.led3
a/riculture3 rural areas3 SSI3 e4ports still
ne/lected
Nationalisation of Banks to
ensure credit allocation as per
plan priorities
19#!s
19@!s
N7B7RD3 EBI53 SIDBI3
NCB setup
RRBs setup
199!s
Credit to Industry D ?o0t
dou.led
Ci/'ly se/mented financial
market3 'i/'ly restricted
Ne/lected( lon/ term3 a/ricultural3 and rural area credit
Need for speciali,ed FIs felt2
DFIs3 SFCs3 &TI3 Co)op Banks setup2
Indian Financial System
intermediaries 1'o performed speciali,ed functions influenced financial
market arc'itecture2
To ensure t'at t'ese speciali,ations 1ere ad'ered to3 financial intermediaries
de0eloped and promoted .y t'e Reser0e Bank of India 'ad si/nificant
restrictions on .ot' t'e asset and lia.ilities side of t'eir .alance s'eets2
In t'e 19!s and 19A!s3 despite an e4pansion of t'e commercial .ankin/
system in terms of .ot' reac' and mo.ili,ation of resources3 a/riculture still
remained under funded and rural areas under .anked2 E'ereas industry%s
s'are in credit dis.ursed almost dou.led .et1een 191 and 19A#3 from :; to
A@2F3 a/riculture /ot .arely 9F of a0aila.le2 Credit to e4ports and small
scale industries 1ere relati0ely ne/lected as 1ell2
In 0ie1 of t'e a.o0e3 it 1as decided to nationali,e t'e .ankin/ sector so t'at
credit allocation could take place in accordance in plan priorities2
Nationali,ation took place in t1o p'ases3 1it' a first round in 19A9 follo1ed
.y anot'er in 19#!2
By t'e mid)se0enties it 1as felt t'at commerciali,ed .anks did not 'a0e
sufficient e4pertise in rural .ankin/ and 'ence in 19@ Re/ional Rural
Banks *RRBs+ 1ere set up to 'elp .rin/ rural India into t'e am.it of t'e
financial net1ork2 T'is effort 1as capped in 19#! 1it' t'e formation of
National Bank for 7/riculture and Rural De0elopment *N7B7RD+3 1'ic'
1as to function as an ape4 .ank for all cooperati0e .anks in t'e country3
'elpin/ control and /uide t'eir acti0ities2 N7B7RD 1as also /i0en t'e
remit of re/ulatin/ rural credit cooperati0es2
Indian Financial System
Follo1in/ 1it' t'e lo/ic of speciali,ation3 t'e 19#!s sa1 ot'er DFIs 1it'
specific remits .ein/ set up " e2/2 T'e EBI5 Bank for e4port financin/3 t'e
Small Industries De0elopment Bank of India *SIDBI+ for small scale
industries and t'e National Cousin/ Bank *NCB+ for 'ousin/ finance2
6on/ term finance for t'e pri0ate sector came from DFIs and institutional
in0estors or t'rou/' t'e capital market2 Co1e0er .ot' price and <uantity of
capital issues 1as re/ulated .y t'e Controller of Capital Issues2
T'erefore t'e deepenin/ of financial intermediation 'ad occurred 1it' an
increase in t'e draft .y .ot' t'e commercial sector and t'e /o0ernment on
financial resources mo.ili,ed2
7t t'e end of t'e 19#!s t'en t'e Indian financial system 1as c'aracteri,ed
.y se/mented financial markets 1it' si/nificant restrictions on .ot' t'e
asset and lia.ility side of t'e .alance s'eet of financial intermediaries as
1ell as t'e price at 1'ic' financial products could .e offered2
In t'e Indian conte4t se/mentation meant t'at competition 1as muted2 In a
scenario 1'ere price 1as determined from outside t'e system and tar/ets
1ere set in terms of <uantities3 t'ere 1as no pressure for non)price
competition as 1ell2 7s a result t'e financial system 'ad relati0ely 'i/'
transaction costs and political economy factors meant t'at asset <uality 1as
not a prime concern2 T'erefore e0en t'ou/' t'e Indian financial system at
t'e end of 19#!s 'ad ac'ie0ed su.stantial e4pansion in terms of access3 t'is
'ad come at t'e cost of asset <uality2 In addition3 1as t'e fact t'at t'e draft
of t'e /o0ernment on resources of t'e financial system 'ad increased
si/nificantly2 T'is in itself need necessarily 1as not a pro.lem .ut o0er t'is
Indian Financial System
period3 i2e23 t'e 19#!s3 t'e composition of /o0ernment e4penditure 1as
c'an/in/ as 1ell3 1it' s'ift to1ards current rat'er t'an capital e4penditure2
In addition3 in t'e a.sence of a reasona.ly li<uid market for /o0ernment
securities3 an increase in net .ank lendin/ to t'e /o0ernment meant t'at t'e
asset side of .anks% .alance s'eets tended to .ecome increasin/ly illi<uid2
T'e impetus for c'an/e came from one e4pected and one une4pected
<uarter ) first3 t'e importance of prudential capital ade<uacy ratios 1as
underlined .y t'e announcement of BaselI norms *see Error( Reference
source not found Error( Reference source not found+ T'at .anks 1ere
e4pected to ad'ere toG second t'e macroeconomic crisis of 199!)912
T'e reform process t'at follo1ed accelerated t'e process of li.erali,ation
already .e/un in t'e 19#!s and .e/an a series of measured and deli.erate
steps to inte/rate India into t'e /lo.al economy3 includin/ t'e /lo.al
financial net1ork2
Briefly 'o1e0er3 /i0en t'e pro.lems facin/ t'e financial system and
keepin/ in mind t'e institutional c'an/es necessary to 'elp India financially
inte/rate into t'e /lo.al economy3 financial reform focused on t'e
follo1in/( impro0in/ t'e asset <uality on .ank .alance s'eets in particular
and operational efficiency in /eneralG increasin/ competition .y remo0in/
re/ulatory .arriers to entryG increasin/ product competition .y remo0in/
restrictions on asset and lia.ility sides of financial intermediariesG allo1in/
financial intermediaries freedom to set t'eir pricesG puttin/ in place a market
for /o0ernment securitiesG and impro0in/ t'e functionin/ of t'e call money
market2
Indian Financial System
T'e /o0ernment security market 1as particularly important not only
.ecause it 1as decided t'e RBI 1ould no lon/er moneti,e t'e fiscal deficit3
1'ic' 1ould no1 .e financed .y directly .orro1in/ from t'e market3 .ut
also monetary policy 1ould .e conducted t'rou/' open market operations
and a lar/e li<uid .ond market 1ould 'elp t'e RBI sterilise3 if necessary3
forei/n e4c'an/e mo0ements2
INDIAN FINANCIAL SYSTEM FROM 19! TO
19"! #
Indian Financial System Durin/ t'is period e0ol0ed in response to t'e
o.=ecti0e of planned economic de0elopment2 Eit' t'e adoption of mi4ed
economy as a pattern of industrial de0elopment3 a complimentary role 1as
concei0ed for pu.lic and pri0ate sector2 T'ere 1as a need to ali/n financial
system 1it' /o0ernment economic policies2 7t t'at time t'ere 1as
/o0ernment control o0er distri.ution of credit and finance2 T'e main
Indian Financial System
elements of financial or/ani,ation in planned economic de0elopment are as
follo1s()
1$ P%&lic '(ne)s*i+ ', ,inancial instit%ti'ns # 1$ P%&lic '(ne)s*i+ ', ,inancial instit%ti'ns #
T'e nationali,ation of RBI 1as in 19;#3 SBI 1as set up in 19A3 6IC came
in to e4istence in 19A .y mer/in/ 9; life insurance companies in 19A93 1;
ma=or pri0ate .anks 1ere .rou/'t under t'e direct control of ?o0ernment of
India2 In 19@93 ?IC 1as set up and in 19#!G si4 more commercial .anks
1ere .rou/'t under pu.lic o1ners'ip2 Some institutions 1ere also set up
durin/ t'is period like de0elopment .anks3 term lendin/ institutions3 &TI
1as set up in pu.lic sector in 19A;3 pro0ident fund3 pension fund 1as set up2
In t'is 1ay pu.lic sector occupied commandin/ position in Indian Financial
System2
-$ F')ti,icati'n O, Instit%ti'nal st)%ct%)e # -$ F')ti,icati'n O, Instit%ti'nal st)%ct%)e #
Financial institutions s'ould stimulate D encoura/e capital formation in t'e
economy2 T'e important feature of 1ell de0eloped financial system is
stren/t'enin/ of institutional structures2 De0elopment .anks 1as set up 1it'
t'is o.=ecti0e like industrial finance corporation of India *IFCI+ 1as set up
in 19;#3 state financial corporation *SFCs+ 1ere set up in 1913 Industrial
credit and In0estment corporation of India 6td *ICICI+1as set up in 192 It
1as pioneer in many respects like under1ritin/ of issue of capital3
c'annelisation of forei/n currency loans from Eorld Bank to pri0ate
industry2 In 19A;3 Industrial De0elopment of India *IDBI+2
.$ P)'tecti'n ', In/est')s # .$ P)'tecti'n ', In/est')s #
Indian Financial System
6ot many acts 1ere passed durin/ t'is period for protection of in0estors in
financial markets2 T'e 0arious acts Companies 7ct3 19A G Capital Issues
Control 7ct3 19;@ G Securities Contract Re/ulation 7ct3 19A G 5onopolies
and Restricti0e Trade $ractices 7ct3 19@! G Forei/n E4c'an/e Re/ulation
7ct3 19@: G Securities - E4c'an/e Board of India3 19##2
0$ Pa)tici+ati'n in C')+')ate Mana1ement # 0$ Pa)tici+ati'n in C')+')ate Mana1ement #
7s participation 1ere made .y lar/e companies and financial instruments it
leads to accumulation of 0otin/ po1er in 'ands of institutional in0estors in
se0eral .i/ companies financial instruments particularly 6IC and &TI 1ere
a.le to put considera.le pressure on mana/ement .y 0irtual of t'eir 0otin/
po1er2 T'e Indian Financial System .et1een 191 and mid#!%s 1as .road
.ased num.er of institutions came up2 T'e system 1as c'aracteri,ed .y
di0ersifyin/ or/ani,ations 1'ic' used to perform num.er of functions2 T'e
Financial structure 1it' considera.le stren/t' and capa.ility of supplyin/
industrial capital to 0arious enterprises 1as /radually .uilt up t'e 1'ole
financial system came under t'e o1ners'ip and control of pu.lic aut'orities
in t'is manner pu.lic sector occupy a commandin/ position in t'e industrial
enterprises2 Suc' control 1as 0ie1ed as inte/ral part of t'e strate/y of
planned economy de0elopment2
INDIAN FINANCIAL SYSTEM POST 199!2S
T'e or/ani,ations of Indian Financial system 1itnessed transformation after
launc'in/ of ne1 economic policy 19912 T'e de0elopment process s'ifted
Indian Financial System
from controlled economy to free market for t'ese c'an/es 1ere made in t'e
economic policy2 T'e role of /o0ernment in .usiness 1as reduced t'e
measure trust of t'e /o0ernment s'ould .e on de0elopment of infrastructure3
pu.lic 1elfare and e<uity2 T'e capital market an important role in allocation
of resources2 T'e ma=or de0elopment durin/ t'is p'ase are()
1$ P)i/atisati'n ', Financial Instit%ti'ns 1$ P)i/atisati'n ', Financial Instit%ti'ns " "
7t t'is time many institutions 1ere con0erted in to pu.lic company and
num.er of pri0ate players 1ere allo1ed to enter in to 0arious sectors(
a+ Industrial Finance Corporation on India *IFCI+( T'e pioneer
de0elopment finance institution 1as con0erted in to a pu.lic
company2
.+ Industrial De0elopment Bank of India - Industrial Finance
Corporation of India *IDBI - IFCI+( IDBI - IFCI ltd offers t'eir
e<uity capital to pri0ate in0estors2
c+ $ri0ate 5utual Funds 'a0e .een set up under t'e /uidelines
prescri.ed .y SEBI2
d+ Num.er of pri0ate .anks and forei/n .anks came up under t'e RBI
/uidelines2 $ri0ate institution companies emer/ed and 1ork under t'e
/uidelines of IRD73 19992
e+ In t'is manner /o0ernment monopoly o0er financial institutions 'as
.een dismantled in p'ased manner2 IT 1as done .y con0ertin/ pu.lic
financial institutions in =oint stock companies and permittin/ to sell
e<uity capital to t'e /o0ernment2
Indian Financial System
-$ Re')1ani3ati'n ', Instit%ti'nal St)%ct%)e # -$ Re')1ani3ati'n ', Instit%ti'nal St)%ct%)e #
T'e importance of de0elopment financial institutions decline 1it' s'ift to
capital market for raisin/ finance commercial .anks 1ere /i0e more funds
to in0estment in capital market for t'is2 S6R and CRR 1ere producedG S6R
earlier H :#2F 1as reduced to 9F and CRR 1'ic' used to .e 9F is at
present F2 $ermission 1as also /i0en to .anks to directly undertake
leasin/3 'ire)purc'ase and factorin/ .usiness2 T'ere 1as trust on
de0elopment of primary market3 secondary market and money market2
.$ In/est')s P)'tecti'n # .$ In/est')s P)'tecti'n #
SEBI is /i0en po1er to re/ulate financial markets and t'e 0arious
intermediaries in t'e financial markets2

FINANCIAL MARKET
Indian Financial System
5oney 5arket
Call 5oney 5arket

Commercial $aper
Certificate of Deposit
Treasury Bill 5arket
5oney 5arket 5utual Fund
Capital 5arket
International Capital 5arket
Indian Financial System

MONEY MARKET AND 4O5T$ SEC6RITIES MARKET
5oney market deal 1it' s'ort term monetary assets and claims3 1'ic' are
/enerally from one day to one year duration2
?o0t2 securities on t'e ot'er 'and are also called dated securities to denote
t'at t'ey are /enerally lon/ term in nature and are issued .y state and central
/o0t2 under t'eir .orro1in/ pro/rammes and duration of more t'an one
year3 /enerally of years and a.o0e2
T'ese securities .ein/ lon/ term in nature are also traded in /o0t2 securities
market .et1een institution and .anks also on t'e stock e4c'an/es) de.t
se/ments2
MONEY MARKET
One of t'e important function of a 1ell de0eloped money market is to
c'anneli,e sa0in/ into s'ort term producti0e in0estments like 1orkin/
capital2 Call money market3 treasury .ills market and markets for
commercial paper and certificate of deposit are some of t'e e4ample of
money market2
CALL MONEY MARKET
T'e call money markets form a part of t'e national money market3 1'ere
day "to) day surplus funds3 mostly of .anks are traded 2 T'e call money
loans are 0ery s'ort term in nature and t'e maturity period of t'is 0ary from
1 to 1 days2 T'e money 1'ic' is lent for one day in t'is market is kno1n as
Indian Financial System
Icall moneyJ3 and if it e4ceeds one day *.ut less t'an 1 days+3 is referred as
Inotice moneyJ in t'is market any amount could .e lent or .orro1ed at a
con0enient interest rate 2 E'ic' is accepta.le to .ot' .orro1er and lender
2t'ese loans are consider as 'i/'ly li<uid as t'ey are repaya.le on demand
at t'e option of et'er t'e lender or .orro1er2
P6RPOSE
Call money is .orro1ed from t'e market to meet 0arious re<uirements of
commercial .ill market and commercial .anks2 Commercial .ill market
.orro1er call money for s'ort period to discount commercial .ills2
Banks .orro1er in call market to(
1() Fill t'e temporary /aps3 or mismatc'es t'at .anks normally face2
9() 5eet t'e cas' Reser0e Ratio re<uirement2
:( ) 5eet sudden demand for fund3 1'ic' may arise due to lar/e payment
and remittance2
Banks usually .orro1 form t'e market to a0oid t'e penal interest rate for not
meetin/ CRR re<uirement and 'i/' cost of refinance from RBI2 Call money
'elps t'e .anks to maintain s'ort term li<uidity position at comforta.le
le0el2
LOCATION
In India call money markets are mainly located in commercial centers and
.i/ industrial centers and industrial center suc' as 5um.ai3 Calcutta3
C'ennai3 Del'i and 7'meda.ad2 7s BSE and NSE and 'ead office of RBI
Indian Financial System
and many ot'er .anks are situated in 5um.aiG t'e 0olume of funds in0ol0ed
in call money market in 5um.ai is far .i//er t'an ot'er cities2
PARTICIPANTS
Initially3 only fe1 lar/e .anks 1ere operatin/ in t'e .ank market2 'o1e0er
t'e market 'ad e4panded and no1 sc'eduled 3 non sc'eduled commercial
.anks forei/n .anks 3state 3 district3 and ur.an cooperati0e .anks 3 financial
institution suc' as 6IC3&TI3?IC3 and its su.sidiaries 3 IDBI3 N7B7RD3
IRBI3 EC?C3 EBI5 Bank3 IFCI3 NCB 3 TFCI3 and SIDBI3 5utual fund
suc' as SBI 5utual fund 2 6IC 5utual funds2 7nd RBI Intermediaries like
DFCI and STCI are participants in local call money markets2 Co1e0er RBI
'as recently introduced restriction on some of t'e participants to p'ase t'em
out of call money market in a time .ound manner2
$articipant in call money market are split into t1o cate/ories
178 BORRO9ER AND LENDER78
T'is comprises entities t'ose 1'o can .ot' .orro1er and lend in t'is
market3 suc' as RBI3 intermediaries like DFCI3 and STCI and commercial
.anks2
-78 ONLY LENDER7 8
T'is cate/ory comprises of entities t'ose 1'o can act only as lender3 like
financial institution and mutual funds2
Indian Financial System
CALL RATES
T'e interest paid on call loan is kno1n as t'e call rates2 &nlike in t'e case of
ot'er s'ort and lon/ rates2 T'e call rate is e4pected to freely reflect t'e day
to day a0aila.ility and lon/ rates2 T'ese rates 0ary 'i/'ly from day to day2
Often from 'our to 'our2 E'ile 'i/' rates indicate a ti/'tness of li<uidity
position in market2 T'e rate is lar/ely su.=ect to .e influenced .y sources of
supply and demand for funds2
T'e call money rate 'ad fluctuated from time to time reflectin/ t'e seasonal
0ariation in fund re<uirements2 Call rates clim.s 'i/' durin/ .usy seasons in
relation to t'ose in slack season2 T'ese seasonal 0ariations 1ere 'i/' due to
a limited num.er of lender and many .orro1ers2 T'e entry of financial
institution and money market mutual funds into t'e call market 'as reduced
t'e demand supply /ap and t'ese fluctuations /radually came do1n in
recent years2
T'ou/' t'e seasonal fluctuations 1ere reduced to considera.le e4tent3 t'ere
are still 0ariations in t'e call rates due to t'e follo1in/ reason(
1() lar/e .orro1er .y .anks to meet t'e CRR re<uirements on certain dates
cause a /ate demand for call money2 T'ese rates usually /o up durin/ t'e
first 1eek to meet CRR re<uirements and decline after1ards2
9() t'e sanction of loans .y .anks3 in e4cess of t'eir o1n resources compel
t'e .ank to rely on t'e call market2 Banks use t'e call market as a source of
funds for meetin/ dis)e<uili.rium of inflo1 and out flo1 of fund s2
Indian Financial System
:() t'e 1it'dra1al of funds to pay ad0ance ta4 .y t'e corporate sector leads
to steep increase in call money rates in t'e market2
COMMERCIAL PAPER
Commercial paper are s'ort term3 unsecured promissory notes issued at a
discount to face 0alue .y 1ell) kno1n companies t'at are financial stron/
and carry a 'i/' credit ratin/ 2 T'ey are sold directly .y t'e issuers to
in0estor3 or else placed .y .orro1ers t'rou/' a/ents like merc'ant .anks
and security 'ouses t'e fle4i.le maturity at 1'ic' t'ey can .e issued are one
of t'e main attraction for .orro1er and in0estor since issues can .e adapted
to t'e needs of .ot'2 T'e C$ market 'as t'e ad0anta/e of /i0in/ 'i/'ly rated
corporate .orro1ers c'eaper fund t'an t'ey could o.tain from t'e .anks
1'ile still pro0idin/ institutional in0estors 1it' 'i/'er interest earnin/ t'an
t'ey could o.tain form t'e .ankin/ system t'e issue of C$ imparts a de/ree
of financial sta.ility to t'e systems as t'e issuin/ company 'as an incenti0e
to remain financially stron/2
T:E FEAT6RES OF CP
12 T'ey are ne/otia.le .y endorsement and deli0ery2
92 T'ey are issued in multiple of Rs lak's2
:2 T'e maturity 0aries .et1een 1 days to a year2
;2 No prior appro0al of RBI is needed for C$ issued2
2 T'e tan/i.le net 1ort' issuin/ company s'ould not .e less t'an ;
lak's
A2 T'e company fund .ased 1orkin/ capital limit s'ould not less t'an Rs
1! crore2
Indian Financial System
@2 T'e issuin/ company s'all 'a0e $9 and 79 ratin/ from CRISI6 and
ICR72
CERTIFICATE OF DEPOSIT
Certificate of Deposits32 Instruments suc' as t'e Certificates of Deposit
*CDs introduced in 19#9+3 Commercial $aper *C$ introduced in 19#9+3
inter).ank participation certificates *1it' and 1it'out risk+ 1ere
introduced to increase t'e ran/e of instruments2 Certificates of Deposit
are .asically ne/otia.le money market instruments issued .y .anks and
financial institutions durin/ ti/'t li<uidity conditions2 Smaller .anks
1it' relati0ely smaller .ranc' net1orks /enerally mo.ilise CDs2 7s CDs
are lar/e si,e deposits3 transaction costs on CDs are lo1er t'an retail
deposits
FEAT6RES OF CD
12 7ll sc'eduled .ank ot'er t'an RRB and sc'eduled cooperati0e
.ank are eli/i.le to issue CDs2
92 CDs can .e issued to indi0iduals3 corporation3 companies3 trust3
funds and associations2 NRI can su.scri.e to CDs .ut only on a
non) repatriation .asis2
:2 T'ey are issued at a discount rate freely determined .y t'e
issuin/ .ank and market2
;2 T'ey issued in t'e multiple of Rs lak' su.=ect to minimum
si,e of eac' issue of Rs is 1! lak'2
Indian Financial System
2 T'e .ank can issue CDs ran/in/ from : mont' t 1 year 3
1'ereas financial institution can issue CDs ran/in/ from 1 year
to : years2
TREAS6RY BILLS MARKET TREAS6RY BILLS MARKET() ()
Treasury .ills are t'e main financial instruments of money market2 T'ese
.ills are issued .y t'e /o0ernment2 T'e .orro1in/s of t'e /o0ernment are
monitored - controlled .y t'e central .ank2 T'e .ills are issued .y t'e RBI
on .e'alf of t'e central /o0ernment2 T'e RBI is t'e a/ent of &nion
?o0ernment2 T'ey are issued .y tender or tap2 T'e .ills 1ere sold to t'e
pu.lic .y tender met'od up to 19A2 T'ese .ills 1ere put at 1eekly
auctions2 7 treasury .ill is a particular kind of finance .ill2 It is a promissory
note issued .y t'e /o0ernment2 &ntil 19! t'ese .ills 1ere also issued .y
t'e state /o0ernment2 7fter 19! on1ards t'e central /o0ernment 'as t'e
aut'ority to issue suc' .ills2 T'ese .ills are /reater li<uidity t'an any ot'er
kind of .ills2 T'ey are of t1o kinds( a+ ad 'oc3 .+ re/ular2
Ad *'c t)eas%)y &ills are issued to t'e state /o0ernments3 semi /o0ernment
departments - forei/n 0entral .anks2 T'ey are not marketa.le2 T'e ad 'oc
.ills are not sold to t'e .anks - pu.lic2 T'e re/ular treasury .ills are sold to
t'e /eneral pu.lic - .anks2 T'ey are freely marketa.le2 T'ese .ills are sold
.y t'e RBI on .e'alf of t'e central /o0ernment2
T'e treasury .ills can .e cate/ori,ed as follo1s()
Indian Financial System
1+ 1; days treasury .ills()
T'e 1; day treasury .ills 'as .een introduced from 199A)9@2 T'ese
.ills are non)transfera.le2 T'ey are issued only in .ook entry system
t'ey 1ould .e redeemed at par2 ?enerally t'e participants in t'is
market are state /o0ernment3 specific .odies - forei/n central .anks2
T'e discount rate on t'is .ill 1ill .e decided at t'e .e/innin/ of t'e
year <uarter2
9+ 9# days treasury .ills()
T'ese .ills 1ere introduced in 199#2 T'e treasury .ills in India issued
on auction .asis2 T'e date of issue of t'ese .ills 1ill .e announced in
ad0ance to t'e market2 T'e information re/ardin/ t'e notified amount
is announced .efore eac' auction2 T'e notified amount in respect of
treasury .ills auction is announced in ad0ance for t'e 1'ole year
separately2 7 uniform calendar of treasury .ills issuance is also
announced2
:+ 91 days treasury .ills()
T'e 91 days treasury .ills 1ere issued from Kuly 19A2 T'ese 1ere
issued tap .asis at a discount rate2 T'e discount rates 0ary .et1een
92 to ;2AF $2a2 from Kuly 19@; t'e discount rate of ;2AF remained
unc'ar/ed t'e return on t'ese .ills 1ere 0ery lo12 Co1e0er t'e RBI
pro0ides rediscountin/ facility freely for t'is .ill2
;+ 1#9 days treasury .ills()
T'e 1#9 days treasury .ills 1as introduced in No0em.er 19#A2 T'e
c'akra0art'y committee made recommendations re/ardin/ 1#9 day
Indian Financial System
treasury .ills instruments2 T'ere 1as a si/nificant de0elopment in t'is
market2 T'ese .ills 1ere sold t'rou/' mont'ly auctions2 T'ese .ills
1ere issued 1it'out any specified amount2 T'ese .ills are tailored to
meet t'e re<uirements of t'e 'olders of s'ort term li<uid funds2 T'ese
.ills 1ere issued at a discount2 T'ese instruments 1ere eli/i.le as
securities for S6R purposes2 T'ese .ills 'a0e rediscountin/ facilities2
+ :A; days treasury .ills()
T'e :A; treasury .ills 1ere introduced .y t'e /o0ernment in 7pril
19992 T'ese instruments are issued to sta.ilise t'e money market2
T'ese .ills 1ere sold on t'e .asis of auction2 T'e auctions for t'ese
instruments 1ill .e conducted for e0ery fortni/'t2 T'ere 1ill .e no
indication 1'en t'ey are puttin/ auction2 T'erefore t'e RBI does not
pro0ide rediscountin/ facility to t'ese .ills2 T'ese instruments 'a0e
.een instrumental in reducin/3 t'e net RBI credit to t'e /o0ernment2
T'ese .ills 'a0e .ecome 0ery popular in India2
M'ney Ma);et M%t%al F%nds <MMMFs=
T'e .enefits of de0elopments in t'e 0arious in t'e money market like
cell money loans2 Treasury .ills3 commercial papers and certificate of
deposits 1ere a0aila.le only to t'e fe1 institutional participants in t'e
market2 T'e main reason for t'is 1as t'at 'u/e amounts 1ere
re<uired to .e in0ested in t'ese instruments3 t'e minimum .ein/ Rs2
1! lack3 1'ic' 1as .eyond t'e means of indi0idual money markets to
small in0estors2
Indian Financial System
555Fs are mutual funds t'at in0est primarily in money market
instruments of 0ery 'i/' <uality and of 0ery s'ort maturities2
555Fs can .e set up .y 0ery 'i/' <uality and of 0ery s'ort
maturities2 555Fs can .e set up .y commercial .ank3 RBI and
pu.lic financial institution eit'er directly or t'rou/' t'eir e4istin/
mutual fund su.sidiaries2 T'e /uidelines 1it' respect to mo.ili,ation
of funds .y 555Fs pro0ide t'at only indi0iduals are allo1ed to
in0est in suc' funds2
Earlier t'ese funds 1ere re/ulated .y t'e RBI2 But RBI 1it'dre1 its
/uidelines3 1it' effect form 5arc' @3 9!!1 and no1 t'ey are
/o0erned .y SEBI2
T'e sc'emes offered .y 555fs can eit'er .y open " ended or close)
ended2 In case of open) ended sc'emer3 t'e units are a0aila.le for
purc'ase on a continuous .asis and t'e 555Fs 1ould .e 1illin/ to
repurc'ase t'e units2 7 close "ended sc'eme is a0aila.le for
su.scription for a limited period and is redeemed at maturity2
T'e /uidelines on t'e on 555fs specify a minimum lock " in period
of 1 days durin/ 1'ic' t'e in0estor cannot redeem 'is in0estment2
T'e /uidelines also stipulate t'e minimum si,e of t'e 555F to .e
Rs2 ! crore and t'is s'ould not e4ceed 9F of t'e a//re/ate deposits
of t'e latest accountin/ year in t'e case of .anks and 9F of t'e lon/)
term domestic .orro1in/s in t'e case of pu.lic financial institutions2
Indian Financial System
Structure of capital market
$ri0ate
$lacement
C7$IT76 57RLET
Secondary 5arket
6istin/ Tradin/ $ractices of Settlements
- Clearin/
$rimary 5arket
Costs of
Issue
5et'od of
Issue
$u.lic
Issue
Muantum
of Issue
Bonus
Issue
Operation
Ri/'t Issue
$layers
Indian Financial System
CAPITAL MARKET CAPITAL MARKET
Capital market is market for lon/ term securities2 It contains financial
instruments of maturity period e4ceedin/ one year2 It in0ol0es in lon/
term nature of transactions2 It is a /ro1in/ element of t'e financial
system in t'e India economy2 It differs from t'e money market in terms
of maturity period - li<uidity2 It is t'e financial pillar of industriali,ed
economy2 T'e de0elopment of a nation depends upon t'e functions -
capa.ilities of t'e capital market2
Capital market is t'e market for lon/ term sources of finance2 It refers to
meet t'e lon/ term re<uirements of t'e industry2 ?enerally t'e .usiness
concerns need t1o kinds of finance()
12 S'ort term funds for 1orkin/ capital re<uirements2
92 6on/ term funds for purc'asin/ fi4ed assets2
T'erefore t'e re<uirements of 1orkin/ capital of t'e industry are met .y t'e
money market2 T'e lon/ term re<uirements of t'e funds to t'e corporate
sector are supplied .y t'e capital market2 It refers to t'e institutional
arran/ements 1'ic' facilitate t'e lendin/ - .orro1in/ of lon/ term funds2
IMPORTANCE OF CAPITAL MARKET IMPORTANCE OF CAPITAL MARKET
Companies *Issuer+
Intermediaries *5erc'ant
Banks FIIs - Broker+
In0estor *$u.lic+
Instruments
Interest Rates
$rocedures
Indian Financial System
Capital market deals 1it' lon/ term funds2 T'ese funds are su.=ect to
uncertainty - risk2 Its supplies lon/ term funds - medium term funds to t'e
corporate sector2 It pro0ides t'e mec'anism for facilitatin/ capital fund
transactions2 It deals I ordinary s'ares3 .ond de.entures - stocks -
securities of t'e /o0ernments2 In t'is market t'e funds flo1 1ill come from
sa0ers2 It con0erts financial assets in to producti0e p'ysical assets2 It
pro0ides incenti0es to sa0ers in t'e form of interest or di0idend to t'e
in0estors2 It leads to t'e capital formation2 T'e follo1in/ factors play an
important role in t'e /ro1t' of t'e capital market()
7 stron/ - po1erful central /o0ernment2
Financial dynamics
Speedy industriali,ation
7ttractin/ forei/n in0estment
In0estments from NRI%s
Speedy implementation of policies
Re/ulatory c'an/es
?lo.ali,ation
T'e le0el of sa0in/s - in0estments pattern of t'e 'ouse'old sectors
De0elopment of financial t'eories
Sop'isticated tec'nolo/ical ad0ances2
PLAYERS IN T:E CAPITAL MARKET PLAYERS IN T:E CAPITAL MARKET
Capital market is a market for lon/ term funds2 It re<uires a 1ell structured
market to en'ance t'e financial capa.ility of t'e country2 T'e market consist
a num.er of players2 T'ey are cate/ori,ed as()
12 Companies
Indian Financial System
92 Financial intermediaries
:2 In0estors2
I$ COMPANIES7
?enerally e0ery company 1'ic' is a pu.lic limited company can access
t'e capital market2 T'e companies 1'ic' are in need of finance for
t'eir pro=ect can approac' t'e market2 T'e capital market pro0ides
funds from t'e sa0ers of t'e community2 T'e companies can mo.ili,e
t'e resources for t'eir lon/ term needs suc' as pro=ect cost3 e4pansion
- di0ersification of pro=ects - ot'er e4penditure of India to raise t'e
capital from t'e market2 T'e SEBI is t'e most po1erful or/ani,ation to
monitor3 control - /uidance t'e capital market2 It classifies t'e
companies for t'e issue of s'are capital as ne1 companies3 e4istin/
unlisted companies- e4istin/ listed companies2 7ccordin/ to its
/uidelines a company is a ne1 company if it satisfies all t'e follo1in/()
a+ T'e company s'all not complete 19 mont's of commercial
operations2
.+ Its audited operati0e results are not a0aila.le2
c+ T'e company may set up .y entrepreneurs 1it' or 1it'out
track record2
7 company 1'ic' can .e treated as e4istin/ listed company3 if its
s'ares are listed in any reco/ni,ed stock e4c'an/e in India2 7 company
is said to .e an e4istin/ unlisted company if it is a closely 'eld or
pri0ate company2
II$ FINANCIAL INTERMEDIARIES7
Indian Financial System
Financial intermediaries are t'ose 1'o assist in t'e process of
con0ertin/ sa0in/s into capital formation in t'e country2 7 stron/
capital formation process is t'e o4y/en to t'e corporate sector2
T'erefore t'e intermediaries occupy a dominant role in t'e capital
formation 1'ic' ultimately leads to t'e /ro1t' of prosperous to t'e
community2 T'eir role in t'is situation cannot .e2 T'e /o0ernment
s'ould encoura/e t'ese intermediaries to .uild a stron/ financial
empire for t'e country2 T'ey are also .ein/ called as financial
arc'itectures of t'e India di/ital economy2 T'eir financial capa.ility
cannot .e measured2 T'ey take acti0e role in t'e capital market2 T'e
ma=or intermediaries in t'e capital market are()
a+ Brokers2
.+ Stock .rokers - su. .rokers
c+ 5erc'ant .ankers
d+ &nder1riters
e+ Re/istrars
f+ 5utual funds
/+ Collectin/ a/ents
'+ Depositories
i+ 7/ents
=+ 7d0ertisin/ a/encies
III$ IN5ESTORS7
T'e capital market consists many num.ers of in0estors2 7ll types
of in0estor%s .asic o.=ecti0e is to /et /ood returns on t'eir
in0estment2 In0estment means3 =ust parkin/ one%s idle fund in a
Indian Financial System
ri/'t parkin/ place for a stipulated period of time2 E0ery parked
0e'icle s'all .e taken a1ay .y its o1ners from parkin/ place after
a specific period2 T'e same process may .e applica.le to t'e
in0estment2 E0ery fund o1ner may desire to take a1ay t'e fund
after a specific period2 T'erefore safety is t'e most important
factor 1'ile considerin/ t'e in0estment proposal2 T'e in0estors
comprise t'e financial in0estment companies - t'e /eneral pu.lic
companies2 &sually t'e indi0idual sa0ers are also treated as
in0estors2 Return is t'e re1ard to t'e in0estors2 Risk is t'e
punis'ment to t'e in0estors for .ein/ 1ron/ selection of t'eir
in0estment decision2 Return is al1ays c'ased .y t'e risk2 7n
intelli/ent in0estor must al1ays try to escape t'e risk - attract t'e
return2 7ll rational in0estors prefer return3 .ut most in0estors are
risk a0era/e2 T'ey attempt to /et ma4imum capital /ain2 T'e
return can .e a0aila.le to t'e in0estors in t1o types t'ey are in t'e
form of re0enue or capital appreciation2 Some in0estors 1ill prefer
for re0enue receipt - ot'ers prefer capital appreciation2 It depends
upon t'eir economic status - t'e effect of ta4 implications2
STR6CT6RE OF T:E CAPITAL MARKET IN INDIA
T'e structure of t'e capital market 'as under/one 0ast c'an/es in recent
years2 T'e Indian capital market 'as transformed into a ne1 appearance o0er
t'e last four - a 'alf decades2 No1 it comprises an impressi0e net1ork of
financial institutions - financial instruments2 T'e market for already issued
securities 'as .ecome more sop'isticated in response to t'e different needs
of t'e in0estors2 T'e speciali,ed financial institutions 1ere in0ol0ed in
Indian Financial System
pro0idin/ lon/ term credit to t'e corporate sector2 T'erefore t'e premier
financial institutions suc' as ICICI3 IDBI3 &TI3 and 6IC - ?IC constitute
t'e lar/est se/ment2 7 num.er of ne1 financial instruments - financial
intermediaries 'a0e emer/ed in t'e capital market2 &sually t'e capital
markets are classified in t1o 1ays()
72 On t'e .asis of issuer
B2 On t'e .asis of instruments
On t'e .asis of issuer t'e capital market can .e classified a/ain t1o types()
a+ Corporate securities market
.+ ?o0ernments securities market
On t'e .asis of financial instruments t'e capital markets are classifieds into
t1o kinds()
a+ E<uity market
.+ De.t market
Recently t'ere 'as .een a su.stantial de0elopment of t'e India capital
market2 It comprises 0arious su.markets2
E<uity market is more popular in India2 It refers to t'e market for e<uity
s'ares of e4istin/ - ne1 companies2 E0ery company s'all approac' t'e
market for raisin/ of funds2 T'e e<uity market can .e di0ided into t1o
cate/ories *a+ primary market *.+ secondary market2 De.t market represents
t'e market for lon/ term financial instruments suc' as de.entures3 .onds3
etc2
PRIMARY MARKET
Indian Financial System
To meet t'e financial re<uirement of t'eir pro=ect company raise t'eir
capital t'rou/' issue of securities in t'e company market2
Capital issue of t'e companies 1ere controlled .y t'e capital issue control
act 19;@2 $ricin/ of issue 1as determined .y t'e controller of capital issue
t'e main purpose of control on capital issue 1as to pre0ent t'e di0ersion of
in0esti.le resources to non) essential pro=ects2 T'rou/' t'e necessity of
retainin/ some sort of control on issue of capital to meet t'e a.o0e purpose
still e4ist 2 T'e CCI 1as a.olis'ed in 1999 as t'e practice of /o0ernment
control o0er t'e capital issue as 1ell as t'e o0erlappin/ of issuin/ 'as lost
its rele0ance in t'e c'an/ed circumstances2
SEC6RITIES > E?C:AN4E BOARD OF INDIA
INTROD6CTION7 INTROD6CTION7
It 1as set up in 19## t'rou/' administrati0e order it .ecame statutory .ody
in 19992 SEBI is under t'e control of 5inistry of Finance2 Cead office is at
5um.ai and re/ional offices are at Del'i3 Calcutta and C'ennai2 T'e
creation of SEBI is 1it' t'e o.=ecti0e to replace multiple re/ulatory
structures2 It is /o0erned .y si4 mem.er .oard of /o0ernors appointed .y
/o0ernment of India and RBI2
OB@ECTI5ES OF SEBI7 OB@ECTI5ES OF SEBI7
12 To protect t'e interest of in0estors in securities2
92 To re/ulate securities market and t'e 0arious intermediaries in t'e
market2
:2 To de0elop securities market o0er a period of time2
Indian Financial System
PO9ERS AND F6NCTIONS OF SEBI7 PO9ERS AND F6NCTIONS OF SEBI7
<1= ISS6E 46IDELINES TO COMPANIES78
SEBI issues /uidelines to t'e companies for disclosin/ information
and to protect t'e interest of in0estor2 T'e /uidelines relates to issue
of ne1 s'ares3 issue of con0erti.le de.entures3 issue .y ne1
companies3 etc2 7fter a.olition of capital issues control act3 SEBI 1as
/i0en po1ers to control and re/ulate ne1 issue market as 1ell as
stock e4c'an/es2
<-= RE46LATION OF PORTFOLIO MANA4EMENT
SER5ICES78
$ortfolio 5ana/ement ser0ices 1ere .rou/'t under SEBI re/ulations
in Kanuary 199:2 SEBI framed re/ulations for portfolio mana/ement
keepin/ securities scams in mind2 SEBI 'as .een entrusted 1it' a =o.
to re/ulate t'e 1orkin/ of portfolio mana/ers in order to /i0e
protections to in0estors2
<.= RE46LATION OF M6T6AL F6NDS78
T'e mutual funds 1ere placed under t'e control of SEBI on Kanuary
199:2 5utual funds 'a0e .een restricted from s'ort sellin/ or carryin/
for1ard transactions in securities2 $ermission 'as .een /ranted to
in0est only in transfera.le securities in money market and capital
market2
<0= CONTROL ON MERC:ANT BANKIN478
Indian Financial System
5erc'ant .ankers are to .e aut'ori,ed .y SEBI3 t'ey 'a0e to follo1
code of conduct 1'ic' makes t'em responsi.le to1ards t'e in0estors
in respect of pricin/3 disclosure ofD in t'e prospectus and issue of
securities3 merc'ant .ankers 'a0e 'i/' de/ree of accounta.ility in
relation to offer documents and issue of s'ares2
<= ACTION FOR DELAY IN TRANSFER AND
REF6NDS78
SEBI 'as prosecuted many companies for delay in transfer of s'ares
and refund of money to t'e applicants to 1'om t'e s'ares are not
allotted2 T'ese also /i0es protection to in0estors and ensures timely
payment in case of refunds2
<A= ISS6E 46IDELINES TO INTERMEDIARIES78
SEBI controls unfair practices of intermediaries operatin/ in capital
market3 suc' control 'elps in 1innin/ in0estors confidence and also
/i0es protection to in0estors2
<B= 46IDELINES FOR TAKEO5ERS AND MER4ERS78
SEBI makes /uidelines for takeo0er and mer/er to ensure
transparency in ac<uisitions of s'ares3 fair disclosure t'rou/' pu.lic
announcement and also to a0oid unfair practices in takeo0er and
mer/ers2
<"= RE46LATION OF STOCK E?C:AN4ES
F6NCTIONIN478
Indian Financial System
SEBI is 1orkin/ for e4pandin/ t'e mem.ers'ip of stock e4c'an/es to
impro0e transparency3 to s'orten settlement period and to promote
professionalism amon/ .rokers2 7ll t'ese steps are for t'e 'ealt'y
/ro1t' of stock e4c'an/es and to impro0e t'eir functionin/2
<9= RE46LATION OF FOREI4N INSTIT6TIONAL
IN5ESTMENT <FIIS=78
SEBI 'as started re/istration of forei/n institutional in0estment2 It is
for effecti0e control on suc' in0estors 1'o in0est on a lar/e scale in
securities2

TYPES OF ISS6E
7 company can raise its capital t'rou/' issue of s'are and de.enture .y
means of ()
P6BLIC ISS6E 78
$u.lic issue is t'e most popular met'od of raisin/ capital and in0ol0es
raisin/ capital and in0ol0e raisin/ of fund direct from t'e pu.lic 2
RI4:T ISS6E 78
Ri/'t issue is t'e met'od of raisin/ additional finance from e4istin/
mem.ers .y offerin/ securities to t'em on pro rata .asis2
7 company proposin/ to issue securities on ri/'t .asis s'ould send a
letter of offer to t'e s'are'olders /i0in/ ade<uate discloser as to 'o1
t'e additional amount recei0ed .y t'e issue is used .y t'e company2
Indian Financial System
BON6S ISS6E78
Some companies distri.ute profits to e4istin/ s'are'olders .y 1ay of
fully paid up .onus s'are in lieu of di0idend2 Bonus s'are are issued in
t'e ratio of e4istin/ s'are 'eld2 T'e s'are'older do not 'a0e to nay
additional payment for t'ese s'are 2
PRI5ATE PLACEMENT 78
pri0ate placement market financin/ is t'e direct sale .y a pu.lic limited
company or pri0ate limited company of pri0ate as 1ell as pu.lic sector
of its securities to a limited num.er of sop'isticated in0estors like &TI 3
6IC 3 ?IC state finance corporation and pension and insurance funds t'e
intermediaries are credit ratin/ a/encies and trustees and financial
ad0isors suc' as merc'ant .ankers2 7nd t'e ma4imum time " frame
re<uired for pri0ate placement market is only 9 to : mont's2 $ri0ate
placement can .e made out of promoter <uota .ut it cannot .e made
1it' unrelated in0estors2
SECONDRY MARKET
T'e secondary market is t'at se/ment of t'e capital market 1'ere t'e
outstandin/ securities are traded from t'e in0estors point of 0ie1 t'e
secondary market imparts li<uidity to t'e lon/ " term securities 'eld .y
t'em .y pro0idin/ an auction market for t'ese securities2
T'e secondary market operates t'rou/' t'e medium of stock e4c'an/e
1'ic' re/ulates t'e tradin/ acti0ity in t'is market and ensures a measure
of safety and fair dealin/ to t'e in0estors2
Indian Financial System
India 'as a lon/ tradition of tradin/ in securities /oin/ .ack to nearly
9!! years2 T'e first India stock e4c'an/e esta.lis'ed at 5um.ai in
1#@ is t'e oldest e4c'an/e in 7sia2 T'e main o.=ecti0e 1as to protect
t'e c'aracter status and interest of t'e nati0e s'are and stock .roker2

BOMBAY STOCK E?C:AN4E
Bom.ay Stock E4c'an/e is t'e oldest stock e4c'an/e in 7sia 1it' a ric'
'erita/e3 no1 spannin/ t'ree centuries in its 1:: years of e4istence2 E'at is
no1 popularly kno1n as BSE 1as esta.lis'ed as NT'e Nati0e S'are - Stock
BrokersO 7ssociationN in 1#@2
BSE is t'e first stock e4c'an/e in t'e country 1'ic' o.tained permanent
reco/nition *in 19A+ from t'e ?o0ernment of India under t'e Securities
Contracts *Re/ulation+ 7ct 19A2 BSEOs pi0otal and pre)eminent role in t'e
de0elopment of t'e Indian capital market is 1idely reco/ni,ed2 It mi/rated
from t'e open outcry system to an online screen).ased order dri0en tradin/
system in 1992 Earlier an 7ssociation of $ersons *7O$+3 BSE is no1 a
corporatised and demutualised entity incorporated under t'e pro0isions of
t'e Companies 7ct3 19A3 pursuant to t'e BSE *Corporatisation and
Demutualisation+ Sc'eme3 9!! notified .y t'e Securities and E4c'an/e
Board of India *SEBI+2 Eit' demutualisation3 BSE 'as t1o of 1orldOs .est
e4c'an/es3 Deutsc'e BPrse and Sin/apore E4c'an/e3 as its strate/ic
partners2
O0er t'e past 1:: years3 BSE 'as facilitated t'e /ro1t' of t'e Indian
Indian Financial System
corporate sector .y pro0idin/ it 1it' an efficient access to resources2 T'ere
is per'aps no ma=or corporate in India 1'ic' 'as not sourced BSEOs ser0ices
in raisin/ resources from t'e capital market2
Today3 BSE is t'e 1orldOs num.er 1 e4c'an/e in terms of t'e num.er of
listed companies and t'e 1orldOs t' in transaction num.ers2 T'e market
capitali,ation as on Decem.er :13 9!!@ stood at &SD 12@9 trillion 2 7n
in0estor can c'oose from more t'an ;3@!! listed companies3 1'ic' for easy
reference3 are classified into 73 B3 S3 T and Q /roups2
T'e BSE Inde43 SENSEB3 is IndiaOs first stock market inde4 t'at en=oys an
iconic stature 3 and is tracked 1orld1ide2 It is an inde4 of :! stocks
representin/ 19 ma=or sectors2 T'e SENSEB is constructed on a Ofree)floatO
met'odolo/y3 and is sensiti0e to market sentiments and market realities2
7part from t'e SENSEB3 BSE offers 91 indices3 includin/ 19 sectoral
indices2 BSE 'as entered into an inde4 cooperation a/reement 1it'
Deutsc'e BPrse2 T'is a/reement 'as made SENSEB and ot'er BSE indices
a0aila.le to in0estors in Europe and 7merica2 5oreo0er3 Barclays ?lo.al
In0estors *B?I+3 t'e /lo.al leader in ETFs t'rou/' its iS'aresR .rand3 'as
created t'e OiS'aresR BSE SENSEB India TrackerO 1'ic' tracks t'e
SENSEB2 T'e ETF ena.les in0estors in Con/ Lon/ to take an e4posure to
t'e Indian e<uity market2
BSE 'as tied up 1it' &2S2 Futures E4c'an/e *&SFE+ for &2S2 dollar)
denominated futures tradin/ of SENSEB in t'e &2S2 T'e tie)up ena.les
Indian Financial System
eli/i.le &2S2 in0estors to directly participate in IndiaOs e<uity markets for t'e
first time3 1it'out re<uirin/ 7merican Depository Receipt *7DR+
aut'ori,ation2 T'e first E4c'an/e Traded Fund *ETF+ on SENSEB3 called
NS$IcEN is listed on BSE2 It .rin/s to t'e in0estors a tradin/ tool t'at can .e
easily used for t'e purposes of in0estment3 tradin/3 'ed/in/ and ar.itra/e2
S$IcE allo1s small in0estors to take a lon/)term 0ie1 of t'e market2
BSE pro0ides an efficient and transparent market for tradin/ in e<uity3 de.t
instruments and deri0ati0es2 It 'as a nation)1ide reac' 1it' a presence in
more t'an ;! cities and to1ns of India2 BSE 'as al1ays .een at par 1it'
t'e international standards2 T'e systems and processes are desi/ned to
safe/uard market inte/rity and en'ance transparency in operations2 BSE is
t'e first e4c'an/e in India and t'e second in t'e 1orld to o.tain an ISO
9!!1(9!!! certification2 It is also t'e first e4c'an/e in t'e country and
second in t'e 1orld to recei0e Information Security 5ana/ement System
Standard BS @@99)9)9!!9 certification for its BSE On)line Tradin/ System
*BO6T+2
BSE continues to inno0ate2 In recent times3 it 'as .ecome t'e first national
le0el stock e4c'an/e to launc' its 1e.site in ?u=arati and Cindi to reac' out
to a lar/er num.er of in0estors2 It 'as successfully launc'ed a reportin/
platform for corporate .onds in India c'ristened t'e ICD5 or Indian
Corporate De.t 5arket and a uni<ue ticker)cum)screen aptly named OBSE
BroadcastO 1'ic' ena.les information dissemination to t'e common man on
t'e street2
Indian Financial System
In 9!!A3 BSE launc'ed t'e Directors Data.ase and ICERS *Indian
Corporate Electronic Reportin/ System+ to facilitate information flo1 and
increase transparency in t'e Indian capital market2 E'ile t'e Directors
Data.ase pro0ides a sin/le)point access to information on t'e .oards of
directors of listed companies3 t'e ICERS facilitates t'e corporates in s'arin/
1it' BSE t'eir corporate announcements2
BSE also 'as a 1ide ran/e of ser0ices to empo1er in0estors and facilitate
smoot' transactions(
In0estor Ser0ices( T'e Department of In0estor Ser0ices redresses /rie0ances
of in0estors2 BSE 1as t'e first e4c'an/e in t'e country to pro0ide an amount
of Rs21 million to1ards t'e in0estor protection fundG it is an amount 'i/'er
t'an t'at of any e4c'an/e in t'e country2 BSE launc'ed a nation1ide
in0estor a1areness pro/ramme) OSafe In0estin/ in t'e Stock 5arketO under
1'ic' 9A; pro/rammes 1ere 'eld in more t'an 9!! cities2
T'e BSE On)line Tradin/ *BO6T+( BSE On)line Tradin/ *BO6T+ facilitates
on)line screen .ased tradin/ in securities2 BO6T is currently operatin/ in
93!!! Trader Eorkstations located across o0er ;! cities in India2
BSEEEBB2com( In Fe.ruary 9!!13 BSE introduced t'e 1orldOs first
centrali,ed e4c'an/e).ased Internet tradin/ system3 BSEEEBB2com2 T'is
Indian Financial System
initiati0e ena.les in0estors any1'ere in t'e 1orld to trade on t'e BSE
platform2
Sur0eillance( BSEOs On)6ine Sur0eillance System *BOSS+ monitors on a
real)time .asis t'e price mo0ements3 0olume positions and mem.ersO
positions and real)time measurement of default risk3 market reconstruction
and /eneration of cross market alerts2
BSE Trainin/ Institute( BTI imparts capital market trainin/ and certification3
in colla.oration 1it' reputed mana/ement institutes and uni0ersities2 It
offers o0er ;! courses on 0arious aspects of t'e capital market and financial
sector2 5ore t'an 9!3!!! people 'a0e attended t'e BTI pro/rammes
71ards
T'e Eorld Council of Corporate ?o0ernance 'as a1arded t'e ?olden
$eacock ?lo.al CSR 71ard for BSEOs initiati0es in Corporate Social
Responsi.ility *CSR+2
T'e 7nnual Reports and 7ccounts of BSE for t'e year ended 5arc'
:13 9!!A and 5arc' :1 9!!@ 'a0e .een a1arded t'e IC7I a1ards for
e4cellence in financial reportin/2
T'e Cuman Resource 5ana/ement at BSE 'as 1on t'e 7sia ) $acific
CR5 a1ards for its efforts in employer .randin/ t'rou/' talent
mana/ement at 1ork3 'ealt' mana/ement at 1ork and e4cellence in
CR t'rou/' tec'nolo/y
Dra1in/ from its ric' past and its e<ually ro.ust performance in t'e recent
times3 BSE 1ill continue to remain an icon in t'e Indian capital market2
Indian Financial System
NATIONAL STOCK E?C:AN4E
T'e National Stock E4c'an/e of India 6imited 'as /enesis in t'e report of
t'e Ci/' $o1ered Study ?roup on Esta.lis'ment of Ne1 Stock E4c'an/es3
1'ic' recommended promotion of a National Stock E4c'an/e .y financial
institutions *FIs+ to pro0ide access to in0estors from all across t'e country
on an e<ual footin/2 Based on t'e recommendations3 NSE 1as promoted .y
leadin/ Financial Institutions at t'e .e'est of t'e ?o0ernment of India and
1as incorporated in No0em.er 1999 as a ta4)payin/ company unlike ot'er
stock e4c'an/es in t'e country2
On its reco/nition as a stock e4c'an/e under t'e Securities Contracts
*Re/ulation+ 7ct3 19A in 7pril 199:3 NSE commenced operations in t'e
E'olesale De.t 5arket *ED5+ se/ment in Kune 199;2 T'e Capital 5arket
*E<uities+ se/ment commenced operations in No0em.er 199; and
operations in Deri0ati0es se/ment commenced in Kune 9!!!2
NSEOs mission is settin/ t'e a/enda for c'an/e in t'e securities markets in
India2 T'e NSE 1as set)up 1it' t'e main o.=ecti0es of(
esta.lis'in/ a nation)1ide tradin/ facility for e<uities3 de.t
instruments and 'y.rids3
Indian Financial System
ensurin/ e<ual access to in0estors all o0er t'e country t'rou/' an
appropriate communication net1ork3
pro0idin/ a fair3 efficient and transparent securities market to
in0estors usin/ electronic tradin/ systems3
ena.lin/ s'orter settlement cycles and .ook entry settlements
systems3 and
5eetin/ t'e current international standards of securities markets2
T'e standards set .y NSE in terms of market practices and tec'nolo/y 'a0e
.ecome industry .enc'marks and are .ein/ emulated .y ot'er market
participants2 NSE is more t'an a mere market facilitator2 ItOs t'at force
1'ic' is /uidin/ t'e industry to1ards ne1 'ori,ons and /reater
opportunities2
T'e lo/o of t'e NSE sym.olises a sin/le nation1ide securities tradin/
facility ensurin/ e<ual and fair access to in0estors3 tradin/ mem.ers and
issuers all o0er t'e country2 T'e initials of t'e E4c'an/e 0i,23 N3 S and E
'a0e .een etc'ed on t'e lo/o and are distinctly 0isi.le2 T'e lo/o sym.olises
use of state of t'e art information tec'nolo/y and satellite connecti0ity to
.rin/ a.out t'e c'an/e 1it'in t'e securities industry2 T'e lo/o sym.olises
Indian Financial System
0i.rancy and unleas'in/ of creati0e ener/y to constantly .rin/ a.out c'an/e
t'rou/' inno0ation2
CORPORATE STR6CT6RE
NSE is one of t'e first de)mutualised stock e4c'an/es in t'e country3 1'ere
t'e o1ners'ip and mana/ement of t'e E4c'an/e is completely di0orced
from t'e ri/'t to trade on it2 T'ou/' t'e impetus for its esta.lis'ment came
from policy makers in t'e country3 it 'as .een set up as a pu.lic limited
company3 o1ned .y t'e leadin/ institutional in0estors in t'e country2
From day one3 NSE 'as adopted t'e form of a demutualised e4c'an/e ) t'e
o1ners'ip3 mana/ement and tradin/ is in t'e 'ands of t'ree different sets of
people2 NSE is o1ned .y a set of leadin/ financial institutions3 .anks3
insurance companies and ot'er financial intermediaries and is mana/ed .y
professionals3 1'o do not directly or indirectly trade on t'e E4c'an/e2 T'is
'as completely eliminated any conflict of interest and 'elped NSE in
a//ressi0ely pursuin/ policies and practices 1it'in a pu.lic interest
frame1ork2
T'e NSE model 'o1e0er3 does not preclude3 .ut in fact accommodates
in0ol0ement3 support and contri.ution of tradin/ mem.ers in a 0ariety of
1ays2 Its Board comprises of senior e4ecuti0es from promoter institutions3
eminent professionals in t'e fields of la13 economics3 accountancy3 finance3
ta4ation3 and etc3 pu.lic representati0es3 nominees of SEBI and one full time
e4ecuti0e of t'e E4c'an/e2
Indian Financial System
E'ile t'e Board deals 1it' .road policy issues3 decisions relatin/ to market
operations are dele/ated .y t'e Board to 0arious committees constituted .y
it2 Suc' committees includes representati0es from tradin/ mem.ers3
professionals3 t'e pu.lic and t'e mana/ement2 T'e day)to)day mana/ement
of t'e E4c'an/e is dele/ated to t'e 5ana/in/ Director 1'o is supported .y
a team of professional staff2
STR6CT6RE OF INTERNATIONAL CAPITAL MARKET

Indian Financial System
INTERNATIONAL CAPITAL MARKETS
ORI4IN
INTERNATIONAL
CAPITAL MARKETS
INTERNATIONAL
BOND MARKET
INTERNATIONAL
EC6ITY MARKET
FOREI4N
BONDS
YANKEE
BONDS
SAM6RAI
BONDS
B6LLDO4
BONDS
FOREI4N
EC6ITY
E6RO
BOND
E6ROD
DOLLAR
E6ROD
YEN
E6ROD
PO6NDS
E6RO
EC6ITY
4LOBAL
DEPOSITORY
RECIEPTS
AMERICAN
DEPOSITORY
RECIEPTS
IDRD
EDR
Indian Financial System
T'e /enesis of t'e present international markets can .e teased to 19A!s3
1'en t'ere 1as a real demand for 'i/' <uality dollar)denominated .onds
form 1ealt'y Europeans *and ot'ers+ 1'o 1is'ed to 'old t'eir assets t'eir
'ome countries or in currencies ot'er t'en t'eir o1n2 T'ese in0estors 1ere
dri0en .y t'e t1in concerns of a0oidin/ ta4es in t'eir 'ome country and
protectin/ t'emsel0es a/ainst t'e fallin/ 0alue of domestic currencies2 T'e
.onds 1'ic' 1ere t'en a0aila.le for in0estment 1ere su.=ected to
1it''oldin/ ta42 Furt'er it is 1as also necessary to re/ister to address t'ese
concerns2 T'ese 1ere issued in .earer forms and so3 t'ere 1as no of
o1ners'ip and ta4 1as 1it''eld2
7lso3 until 19@!3 t'e International Capital 5arket focused on de.t financin/
and t'e e<uity finances 1ere raised .y t'e corporate entities primarily in t'e
domestic markets2 T'is 1as due to t'e restrictions on cross).order e<uity
in0estments pre0ailin/ unit t'en in many countries2 In0estors too preferred
to in0est in domestic e<uity issued due to percei0ed risks implied in forei/n
e<uity issues eit'er related to forei/n currency e4posure or related to
appre'ensions of restrictions on suc' in0estments .y t'e re/ulator2
5a=or c'an/es 'a0e occurred since t'e S@!s 1'ic' 'a0e 1itnessed
e4pandin/ and fluctuatin/ trade 0olumes and patterns 1it' 0arious .locks
e4periencin/ e4tremes in fortunes in t'eir e4portsDimports2 T'is 1as t'e 1as
t'e period 1'ic' sa1 t'e remo0al of e4c'an/e controls .y countries like t'e
&L3 franc and Kapan 1'ic' /a0e a furt'er tec'nolo/y of markets 'a0e
played an important role in c'anneli,in/ t'e funds from surplus unit to
deficit units across t'e /lo.e2 T'e international capital markets also .ecome
a ma=or source of e4ternal finance for nations 1it' lo1 internal sa0in/2 T'e
Indian Financial System
markets 1ere classified into euro markets3 7merican 5arkets and Ot'er
Forei/n 5arkets2
T:E PLAYERS
Borro1ersDIssuers3 6endersD In0estors and Intermediaries are t'e ma=or
players of t'e international market2 T'e role of t'ese players is discussed
.elo12
BORRO9ERSDISS6ERS
T'ese primarily are corporates3 .anks3 financial institutions3 /o0ernment and
<uasi /o0ernment .odies and supranational or/ani,ations3 1'ic' need fore4
funds for 0arious reasons2 T'e important reasons for corporate .orro1in/s
are3 need for forei/n currencies for operation in markets a.road3
dullDsaturated domestic market and e4pansion of operations into ot'er
countries2
?o0ernments .orro1 in t'e /lo.al financial market to ad=ust t'e .alance of
payments mismatc'es3 to /ain net capital in0estments a.road and to keep a
sufficient in0entory of forei/n currency reser0es for contin/encies like
supportin/ t'e domestic currency a/ainst speculati0e pressures2
LENDERSDIN5ESTORS
In case of Euro)loans3 t'e lenders are mainly .anks 1'o possess in'erent
confidence in t'e credi.ility of t'e .orro1in/ corporate or any ot'er entity
mention a.o0e in case of ?DR it is t'e institutional in0estor and 'i/' net
Indian Financial System
1ort' indi0iduals *referred as Bel/ian Dentists+ 1'o su.scri.e to t'e e<uity
of t'e corporates2 For an 7DR it is t'e institutional in0estor or t'e indi0idual
in0estor t'rou/' t'e Mualified Intuitional Buyer 1'o put in t'e money in t'e
instrument dependin/ on t'e statutory status attri.uted to t'e 7DR as per
statutory re<uirements of t'e land2
INTERMEDIARIES
LEAD MAN4ERS
T'ey undertake due dili/ence and preparation of offer circular3 marketin/
t'e issues and arran/er for road s'o1s2
6NDER9RITERS
&nder1riters of t'e issue .ear interest rateDmarket risks mo0in/ a/ainst
t'em .efore t'ey place .onds or Depository Receipts2 &sually3 t'e lend
mana/ers and co)mana/ers act as under1riters for t'e issue2
C6STODIAN
On .e'alf of DRs3 t'e custodian 'olds t'e underlyin/ s'ares3 and collects
rupee di0idends on t'e underlyin/ s'ares and repatriates t'e same to t'e
depository in &S dollarsDforei/n e<uity2
7part from t'e a.o0e3 7/ents and Trustees3 6istin/ 7/ents and Depository
Banks also play a role in issuin/ t'e securities2
T:E INSTR6MENTS
Indian Financial System
T'e early ei/'ties 1itnessed li.erali,ation of many domestic economies and
/lo.ali,ation of t'e same2 Issuers form de0elopin/ countries3 1'ere issue of
dollarDforei/n currency denominated e<uity s'ares 1ere not permitted3 could
access international e<uity markets t'rou/' t'e issue of an intermediate
instrument called SDepository Receipt%2
7 Depository Receipt *DR+ is a ne/otia.le certificate issued .y a depository
.ank 1'ic' represents t'e .eneficial interest in s'ares issued .y a company2
T'ese s'ares are deposited 1it' t'e local Scustodian% appointed .y t'e
depository3 1'ic' issues receipts a/ainst t'e deposit of s'ares2
T'e 0arious instruments used to raise funds a.road include( e<uity3 strai/'t
de.t or 'y.rid instruments2 T'e follo1in/ fi/ure s'o1s t'e classification of
international capital markets .ased on instruments used and market*s+
accessed2
E6RO EC6ITY
4LOBAL DEPOSITORY RECEIPTS <4DR=7
7 ?DR is a ne/otia.le instrument 1'ic' represents pu.licly traded local)
currency e<uity s'are2 ?DR is any instrument in t'e from of a depository
receipt or certificate created .y t'e O0erseas Depository Bank outside India
and issued to non)resident in0estors a/ainst t'e issue of ordinary s'ares or
forei/n currency con0erti.le .onds of t'e issuin/ company2 &sually3 a
typical ?DR is denominated in &S dollars 1'ereas t'e underlyin/ s'ares
1ould .e denominated in t'e local currency of t'e Issuer2 ?DRs may .e " at
Indian Financial System
t'e re<uest of t'e in0estor " con0erted into e<uity s'ares .y cancellation of
?DRs t'rou/' t'e intermediation of t'e depository and t'e sale of
underlyin/ s'ares in t'e domestic market t'rou/' t'e local custodian2
?DRs3 per se3 are considered as common e<uity of t'e issuin/ company and
are entitled to di0idends and 0otin/ ri/'ts since t'e date of its issuance2 T'e
company transactions2 T'e 0otin/ ri/'ts of t'e s'ares are e4ercised .y t'e
Depository as per t'e understandin/ .et1een t'e issuin/ Company and t'e
?DR 'olders2
FOREI4N EC6TIY
AMERICAN DEPOSITORY RECEIPTS <ADR=7
7DR is a dollar denominated ne/otia.le certificate3 it represents a non)&S
company%s pu.licly traded e<uity2 It 1as de0ised in t'e last 199!s to 'elp
7mericans in0est in o0erseas securities and assist non)&S companies
1is'in/ to 'a0e t'eir stock traded in t'e 7merican 5arkets2 7DRs are
di0ided into : le0els .ased on t'e re/ulation and pri0ile/e of eac'
company%s issue2
I$ ADR LE5EL # I7
It is often step of an issuer into t'e &S pu.lic e<uity market2 T'e
issuer can enlar/e t'e market for e4istin/ s'ares and t'us
di0ersify to t'e in0estor .ase2 In t'is instrument only minimum
disclosure is re<uired to t'e sec and issuer need not comply 1it'
Indian Financial System
t'e &S ?77$ *?enerally 7ccepted 7ccountin/ $rinciples+2 T'is
type of instrument is traded in t'e &S OTC 5arket2
T'e issuer is not allo1ed to raise fres' capital or list on any one
of t'e national stock e4c'an/es2
II$ ADR LE5EL # II7
T'rou/' t'is le0el of 7DR3 t'e company can enlar/e t'e in0estor
.ase for e4istin/ s'ares to a /reater e4tent2 Co1e0er3 si/nificant
disclosures 'a0e to .e made to t'e SEC2 T'e company is allo1ed
to 6ist on t'e 7merican Stock E4c'an/e *75EB+ or Ne1 8ork
Stock E4c'an/e *N8SE+ 1'ic' implies t'at company must meet
t'e listin/ re<uirements of t'e particular e4c'an/e2
III$ ADR LE5EL # III7
T'is le0el of 7DR is used for raisin/ fres' capital t'rou/' $u.lic
offerin/ in t'e &S Capital 1it' t'e EC and comply 1it' t'e
listin/ re<uirements of 75EBDN8SE 1'ile follo1in/ t'e &S)
?77$2
DEBT INSTR6MENTS
Indian Financial System
E6ROBONDS
T'e process of lendin/ money .y in0estin/ in .onds ori/inated durin/ t'e
19t' century 1'en t'e merc'ant .ankers .e/an t'eir operations in t'e
international markets2 Issuance of Euro.onds .ecame easier 1it' no
e4c'an/e controls and no /o0ernment restrictions on t'e transfer of funds
in international markets2
T:E INSTR6MENTS
E6ROBONDS
7ll Euro.onds3 t'rou/' t'eir features can appeal to any class of issuer or
in0estor2
T'e c'aracteristics 1'ic' make t'em uni<ue and fle4i.le are(
a+ No 1it''oldin/ of ta4es of any kind on interests payments
.+ T'ey are in .earer form 1it' interest coupon attac'ed
c+ T'ey are listed on one or more stock e4c'an/es .ut issues are
/enerally traded in t'e o0er t'e counter market2
Typically3 a Euro.ond is issued outside t'e country of t'e currency in
1'ic' it is denominated2 It is like any ot'er Euro instrument and t'rou/'
international syndication and under1ritin/3 t'e paper is sold 1it'out any
limit of /eo/rap'ical .oundaries2 Euro.onds are /enerally listed on t'e
1orldOs stock e4c'an/es3 usually on t'e 6u4em.our/ Stock E4c'an/e2
a= FI?ED8RATE BONDSDSTRAI4:T DEBT BONDS7
Indian Financial System
Strai/'t de.t .onds are fi4ed interest .earin/ securities 1'ic' are
redeema.le at face 0alue2 T'e .onds issued in t'e Euro)market
referred to as Euro).onds3 'a0e interest rates fi4ed 1it' reference
to t'e credit1ort'iness of t'e issuer2 T'e interest rates on dollar
denominated .onds are set at a mar/in o0er t'e &S treasury yields2
T'e redemption of strai/'ts is done .y .ullet payment3 1'ere t'e
repayment of de.t 1ill .e in one lump sum at t'e end of t'e
maturity period3 and annual ser0icin/2
b) FLOATIN4 RATE NOTES <FRNs=7
FRNs can .e descri.ed as a .ond issue 1it' a maturity period
0aryin/ from )@ years 'a0in/ 0aryin/ coupon rates ) eit'er
pe//ed to anot'er security or re)fi4ed at periodic inter0als2
Con0entionally3 t'e paper is referred to as notes and not as .onds2
T'e spreads or mar/in on t'ese notes 1ill .e a.o0e A mont's
&SOR for Eurodollar deposits2
FOREI4N BONDS
Indian Financial System
T'ese are relati0ely lesser kno1n .onds issued .y forei/n entities for
raisin/ medium to lon/)term financin/ from domestic money centers in
t'eir domestic currencies2 7 .rief note on t'e 0arious instruments in t'is
cate/ory is /i0en .elo1(
a= YANKEE BONDS7
T'ese are &S dollar denominated issues .y forei/n .orro1ers
*usually forei/n /o0ernments or entities3 supranational and 'i/'ly
rated corporate .orro1ers+ in t'e &S .ond markets2
7 .ond denominated in &2S2 dollars and is pu.licly issued in t'e
&2S2 .y forei/n .anks and corporations2 7ccordin/ to t'e
Securities 7ct of 19::3 t'ese .onds must first .e re/istered 1it'
t'e Securities and E4c'an/e Commission *SEC+ .efore t'ey can
.e sold2 8ankee .onds are often issued in trenc'es and eac'
offerin/ can .e as lar/e as T1 .illion2
Due to t'e 'i/' le0el of strin/ent re/ulations and standards t'at
must .e ad'ered to3 it may take up to 1; 1eeks *or :2 mont's+ for
a 8ankee .ond to .e offered to t'e pu.lic2 $art of t'e process
in0ol0es 'a0in/ de.t)ratin/ a/encies e0aluate t'e credit1ort'iness
of t'e 8ankee .ondOs underlyin/ issuer2
Forei/n issuers tend to prefer issuin/ 8ankee .onds durin/ times
1'en t'e &2S2 interest rates are lo13 .ecause t'is ena.les t'e
forei/n issuer to pay out less money in interest payments2
Indian Financial System
&= SAM6RAI BONDS7
7 yen)denominated .ond issued in Tokyo .y a non)Kapanese
company and su.=ect to Kapanese re/ulations2 Ot'er types of yen)
denominated .onds are EuroDyens issued in countries ot'er t'an
Kapan2
Samurai .onds /i0e issuers t'e a.ility to access in0estment capital
a0aila.le in Kapan2 T'e proceeds from t'e issuance of samurai
.onds can .e used .y non)Kapanese companies to .reak into t'e
Kapanese market3 or it can .e con0erted into t'e issuin/ companyOs
local currency to .e used on e4istin/ operations2 Samurai .onds
can also .e used to 'ed/e forei/n e4c'an/e rate risks2
T'ese are .onds issued .y non)Kapanese .orro1ers in t'e domestic
Kapanese markets2
c= B6LLDO4 BONDS7
T'ese are sterlin/ denominated forei/n .ond 1'ic' are raised in
t'e &L domestic securities market2
7 sterlin/ denominated .ond t'at is issued in 6ondon .y a
company t'at is not Britis'2
T'ese sterlin/ .onds are referred to as .ulldo/ .onds as t'e
.ulldo/ is a national sym.ol of En/land2
d= S:IBOSAI BONDS7
Indian Financial System
T'ese are t'e pri0ately placed .onds issued in t'e Kapanese
markets2
E6RONOTES
Euronotes as a concept is different from syndicated .ank credit and is
different from Euro.onds in terms of its structure and maturity period2
Euronotes command t'e price of a s'ort)term instrument usually a fe1
.asic points o0er 6IBOR and in many instances at su. " 6IBOR le0els2
T'e documentation formalities are minimal *unlike in t'e case of
syndicated credits or .ond issues+ and cost sa0in/s can .e ac'ie0ed on t'at
score too2 T'e fundin/ instruments in t'e form of Euronotes possess
fle4i.ility and can .e tailored to suit t'e specific re<uirements of different
types of .orro1ers2 T'ere are numerous applications of .asic concepts of
Euronotes2 T'ese may .e cate/ori,ed under t'e follo1in/ 'eads(

a= COMMERCIAL PAPER7
T'ese are s'ort)term unsecured promissory notes 1'ic' repay a
fi4ed amount on a certain future date2 T'ese are normally issued at a
discount to face 0alue2
&= NOTE ISS6ANCE FACILITIES <NIFs=7
T'e currency in0ol0ed is mostly &S dollars2 7 NIF is a medium)
term le/ally .indin/ commitment under 1'ic' a .orro1er can issue
s'ort)term paper3 of up to one year2 T'e underlyin/ currency is
mostly &S dollar2 &nder1ritin/ .anks are committed eit'er to
Indian Financial System
purc'ase any notes 1'ic' t'e .orro1er . una.le to sell or to pro0ide
standin/ credit2 T'ese can .e re)issued periodically2
c= MEDI6M8TERM NOTES <MTNs=7
5TNs are defined as se<uentially issued fi4ed interest securities
1'ic' 'a0e a maturity of o0er one year2 7 typical 5TN pro/ram
ena.les an issuer to issue Euronotes for different maturities2 From
o0er one year up to t'e desired le0el of maturity2 T'ese are
essentially fi4ed rate fundin/ arran/ements as t'e price of eac'
preferred maturity is determined and fi4ed up front at t'e time of
launc'in/2 T'ese are concei0ed as non)under1ritten facilities3 e0en
t'ou/' international markets 'a0e started offerin/ under1ritin/
support in specific instances2
7 ?lo.al 5TN *?)5TN+ is issued 1orld1ide .y tappin/ Euro as
1ell as t'e) &S markets under t'e same pro/ram2
&nder ?)5TN pro/rams3 issuers of different credit ratin/s are a.le
to raise finance .y accessin/ retail as 1ell as institutional in0estors2
In 0ie1 of fle4i.le access3 speed and efficiency3 and en'anced
in0estor .ase ?)5TN pro/rams afford numerous .enefits to t'e
issuers2
Spreads paid on 5TNs depend on credit ratin/s3 treasury yield
cur0e and t'e familiarity of t'e issuers amon/ in0estors2 In0estors
include $ri0ate Banks3 $ension Funds3 5utual Funds and Insurance
Companies2
Indian Financial System
FOREI4N E?C:AN4E AND FOREI4N E?C:AN4E
MARKETS #
O5ER5IE9
In today%s 1orld no country is self sufficient3 so t'ere is a need for e4c'an/e
of /oods and ser0ices amon/st t'e different countries2 Co1e0er3 unlike in
t'e primiti0e a/e t'e e4c'an/e of /oods and ser0ices is no lon/er carried out
on .arter .asis2 E0ery so0erei/n country in t'e 1orld 'as a currency 1'ic'
is a le/al tender in its territory and t'is currency does not act as money
outside its .oundaries2 So 1'ene0er a country .uys or sells /oods and
ser0ices from or to anot'er country3 t'e residents of t1o countries 'a0e to
e4c'an/e currencies2 So 1e can ima/ine t'at if all countries 'a0e t'e same
currency t'en t'ere is no need for forei/n e4c'an/e2
FOREI4N E?C:AN4E IN INDIA
In India3 forei/n e4c'an/e 'as .een /i0en a statutory definition2 Section 9
*.+ of Forei/n E4c'an/e Re/ulation 7ct3 19@: states(
SForei/n e4c'an/e% means forei/n currency and includes(
7ll deposits3 credits and .alances paya.le in any forei/n currency and
any drafts3 tra0eler%s c'e<ues3 letters of credit and .ills of e4c'an/e 3
e4pressed or dra1n in Indian currency .ut paya.le in any forei/n
currency3
7ny instrument paya.le3 at t'e option of dra1ee or 'older t'ereof or
any ot'er party t'ereto3 eit'er in Indian currency or in forei/n
currency or partly in one and partly in t'e ot'er2
Indian Financial System
For India 1e can conclude t'at forei/n e4c'an/e refers to forei/n money3
1'ic' includes notes3 c'e<ues3 .ills of e4c'an/e3 .ank .alances and
deposits in forei/n currencies2
ABO6T FOREI4N E?C:AN4E MARKET
$articularly for forei/n e4c'an/e market t'ere is no market place called t'e
forei/n e4c'an/e market2 It is mec'anism t'rou/' 1'ic' one country%s
currency can .e e4c'an/e i2e2 .ou/'t or sold for t'e currency of anot'er
country2 T'e forei/n e4c'an/e market does not 'a0e any /eo/rap'ic
location2 T'e market comprises of all forei/n e4c'an/e traders 1'o are
connected to eac' ot'er t'rou/' out t'e 1orld2 T'ey deal 1it' eac' ot'er
t'rou/' telep'ones3 tele4es and electronic systems2 Eit' t'e 'elp of Reuters
5oney 9!!!)93 it is possi.le to access any trader in any corner of t'e 1orld
1it'in a fe1 seconds2
9:O ARE T:E PARTICIPANTS IN FOREI4N
E?C:AN4E MARKETSE
T'e main players in forei/n e4c'an/e markets are as follo1s(
12 C6STOMERS
T'e customers 1'o are en/a/ed in forei/n trade participate in forei/n
e4c'an/e markets .y a0ailin/ of t'e ser0ices of .anks2 E4porters
re<uire con0ertin/ t'e dollars in to rupee and importers re<uire
con0ertin/ rupee in to t'e dollars as t'ey 'a0e to pay in dollars for t'e
/oodsDser0ices t'ey 'a0e imported2
Indian Financial System
92 COMMERCIAL BANKS
T'ey are most acti0e players in t'e fore4 market2 Commercial .anks
dealin/ 1it' international transactions offer ser0ices for con0ersion of
one currency in to anot'er2 T'ey 'a0e 1ide net1ork of .ranc'es2
Typically .anks .uy forei/n e4c'an/e from e4porters and sells
forei/n e4c'an/e to t'e importers of t'e /oods2 7s e0ery time t'e
forei/n e4c'an/e .ou/'t and sold may not .e e<ual .anks are left
1it' t'e o0er.ou/'t or o0ersold position2 T'e .alance amount is sold
or .ou/'t from t'e market2
No1adays3 in international forei/n e4c'an/e markets3 t'e
international trade turno0er accounts for a fraction of 'u/e amounts
dealt3 i2e2 .ou/'t and sold2 T'e .alance amount is accounted for eit'er
.y financial transactions or speculation2 Banks 'a0e enou/' financial
stren/t' and 1ide e4perience to speculate t'e market and .anks does
so2 E'ic' is popularly kno1n as t'e tradin/ in t'e fore4 market2
Commercial .anks 'a0e follo1in/ o.=ecti0es for .ein/ acti0e in t'e
forei/n e4c'an/e markets2
T'ey render .etter ser0ice .y offerin/ competiti0e rates to t'eir
customers en/a/ed in international tradeG
T'ey are in a .etter position to mana/e risks arisin/ out of e4c'an/e
rate fluctuationsG
Forei/n e4c'an/e .usiness is a profita.le acti0ity and t'us suc' .anks
are in a position to /enerate more profits for t'emsel0esG
Indian Financial System
T'ey can mana/e t'eir inte/rated treasury in a more efficient manner2
In India Reser0e Bank of India 'as /i0en license to t'e commercial
.anks to deal in forei/n e4c'an/e under section A Forei/n E4c'an/e
Re/ulation 7ct3 19@:3 1'ic' are called t'e 7ut'ori,ed Dealers *7Ds+2
:2 CENTRAL BANK
In all countries central .anks 'a0e .een c'ar/ed 1it' t'e
responsi.ility of maintainin/ t'e e4ternal 0alue of t'e domestic
currency2 ?enerally t'is is ac'ie0ed .y t'e inter0ention of t'e .ank2
7part from t'is central .anks deal in t'e forei/n e4c'an/e market for
t'e follo1in/ purposes(
1+ E4c'an/e rate mana/ement( It is ac'ie0ed .y t'e inter0ention
t'ou/' sometimes .anks 'a0e to maintain e4ternal rate of t'e
domestic currency at a le0el or in a .and so fi4ed2
9+ Reser0e mana/ement( Central .ank of t'e country is mainly
concerned 1it' t'e in0estment of countries forei/n e4c'an/e reser0e
in a sta.le proportions in ran/e of currencies and in a ran/e of assets
in eac' currency2 For t'is .ank 'as to in0ol0e certain amount of
s1itc'in/ .et1een currencies2
;2 E?C:AN4E BROKERS
Fore4 .rokers play a 0ery important role in t'e forei/n e4c'an/e
markets2 Co1e0er t'e e4tent to 1'ic' ser0ices of fore4 .rokers are
utili,ed depends on t'e tradition and practice pre0ailin/ at a particular
fore4 market center2 In India as per FED7I /uidelines t'e 7 Ds are
free to deal directly amon/ t'emsel0es 1it'out /oin/ t'rou/' .rokers2
Indian Financial System
T'e fore4 .rokers are not allo1ed to deal on t'eir o1n account all
o0er t'e 1orld and also in India2
2
2 O>ERSE7S FOREB 57RLETS
Today t'e daily /lo.al turno0er is /uestimated to .e more t'an &S T
12 trillion a day2 T'e international trade 'o1e0er constitutes 'ardly
to @ F of t'is total turno0er2 T'e rest of tradin/ in 1orld fore4
markets is constituted of financial transactions and speculation2 7s 1e
kno1 t'at t'e fore4 market is 9;)'our market3 t'e day .e/ins 1it'
Tokyo and t'ereafter Sin/apore opens3 t'ereafter India3 follo1ed .y
Ba'rain3 Frankfurt3 $aris3 6ondon3 Ne1 8ork3 Sydney3 and .ack to
Tokyo2
FOR9ARD E?C:AN4E CONTRACT
9:AT IS T:E NEED FOR FOR9ARD E?C:AN4E
CONTRACTE
T'e risk on account of e4c'an/e rate fluctuations3 in international trade
transactions increases if t'e time period needed for completion of
transaction is lon/er2 It is not uncommon in international tradeF on account
of lo/istics3 t'e time frame can not .e foretold 1it' clock precision2
E4porters and importers alike3 can not .e precise as to t'e time 1'en t'e
Indian Financial System
s'ipment 1ill .e made as sometimes space on t'e s'ip is not a0aila.le3
1'ile at t'e ot'er3 t'ere are delays on account of con/estion of port etc2
In international trade t'ere is considera.le time la/ .et1een enterin/ in to a
salesDpurc'ase contract3 s'ipment of /oods3 and payment2 In t'e meantime3
if e4c'an/e rate mo0es a/ainst t'e party 1'o 'as to e4c'an/e 'is 'ome
currency in to forei/n currency3 'e may end up in loss2 Conse<uently3
.uyers and sellers 1ant to protect t'em a/ainst e4c'an/e rate risk2 One of
t'e met'ods .y 1'ic' t'ey can protect t'emsel0es is enterin/ in to a forei/n
e4c'an/e for1ard contract2
Ee can see from t'e daily report of t'e >adilal Industries 6imited *Fore4
di0ision+ t'at t'e rupee fell do1n nearly 9 paise in a day2
T'e date of t'is fluctuation is 9
t'
5ay 9!!!2 No1 let suppose t'at t'e
e4porter 'as dealt
FOR9ARD E?C:AN4E FOR9ARD CONTRACT
For1ard e4c'an/e for1ard contract is a contract 1'erein t1o parties a/ree
to deli0er certain amount of forei/n e4c'an/e at an a/reed rate eit'er at a
fi4ed future date or durin/ a fi4ed future period2 If t'e merc'ants are sure
a.out t'e remittance or t'e payment of t'e forei/n e4c'an/e t'en t'ey can
c'oose t'e fi4 date for1ard e4c'an/e contract3 in 1'ic' t'ey are .ound .y
t'e date on 1'ic' t'ey 'a0e to meet t'eir part of lia.ility in t'e a/reement2
If t'e customers are not sure a.out t'e date of remittance or t'e payment of
t'e forei/n e4c'an/e t'ey can enter in to t'e option period for1ard
e4c'an/e contract2 Bot' t'e types are e4plained .elo12
Indian Financial System
1$ FI?ED DATE FOREI4N E?C:AN4E FOR9ARD
CONTRACT
If under t'e forei/n e4c'an/e for1ard contract3 forei/n e4c'an/e is to
.e deli0ered at fi4ed date3 t'e contract is kno1n as fi4ed date forei/n
e4c'an/e for1ard contract2
-$ OPTION FOREI4N E?C:AN4E FOR9ARD
CONTRACT
If under t'e forei/n e4c'an/e for1ard contract3 forei/n e4c'an/e is to
.e deli0ered in future3 durin/ a specified period3 t'e contract is kno1n
as option forei/n e4c'an/e for1ard contract2 In t'is type of contract
t'ere is no option for takin/D deli0ery of forei/n e4c'an/e2 Suc'
contracts pro0ide for option as far as date of deli0ery of forei/n
e4c'an/e is concerned2 E'ile enterin/ in to a option for1ard contract
first date and t'e last date for e4ercisin/ option for /i0in/ Dtakin/
deli0ery of forei/n e4c'an/e is al1ays fi4ed2
In India3 like de0eloped countries3 t'ere are not many instruments
a0aila.le for 'ed/in/ forei/n e4c'an/e risk2 7s a result t'e merc'ants
'a0e to 'ed/e t'eir forei/n e4c'an/e e4posures t'rou/' for1ard
contracts only2
For merc'ants t'is is t'e only tool a0aila.le to minimi,e t'e risk due
to ad0erse forei/n e4c'an/e fluctuation
2
Indian Financial System
DERI>7TI>ES DERI>7TI>ES
INTROD6CTION7 INTROD6CTION7
T'e emer/ence of t'e market for deri0ati0e products3 most nota.ly
for1ards3 futures and options3 can .e traced .ack to t'e 1illin/ness of risk)
a0erse economic a/ents to /uard t'emsel0es a/ainst uncertainties arisin/ out
of fluctuations in asset prices2 By t'eir 0ery nature3 t'e financial markets are
marked .y a 0ery 'i/' de/ree of 0olatility2 T'rou/' t'e use of deri0ati0e
products3 it is possi.le to partially or fully transfer price risks .y lockin/)in
asset prices2
Introduction of deri0ati0es in t'e Indian Capital market is t'e .e/innin/ of a
ne1 era3 1'ic' is truly e4citin/2 Inde4 futures 1ere introduced as t'e first
e4c'an/e traded deri0ati0es product in t'e Indian Capital 5arket in Kune
9!!!2 Eit' introduction of inde4 options3 indi0idual stock futures and
options3 Indian deri0ati0es market 'as turned multi)product deri0ati0es
market3 at par 1it' t'e /lo.al standards2
Deri0ati0es3 1orld1ide are reco/ni,ed as Risk 5ana/ement products2 T'ese
products 'a0e a lon/ 'istory in India in t'e unor/ani,ed sector3 especially in
currency and commodity markets2 T'e a0aila.ility of t'ese products on
or/ani,ed e4c'an/es 'as pro0ided t'e market 1it' .road).ased risk
mana/ement tools2
Deri0ati0es also facilitate t'e creation of ne1 financial products in an
economy2 Today3 financial markets around t'e 1orld are under/oin/ a
profound c'an/e in terms of t'e financial inno0ation2 Ne1 financial
Indian Financial System
products are .ein/ arc'itected3 on a day)to)day .asis3 to cater to t'e specific
needs of .ot' t'e issuers and in0estors2 To keep pace 1it' t'e /lo.al
markets3 Indian Securities 5arket also needs to de0elop ne1 financial
products in all t'e dimensions of t'e economy includin/ commodities3
securities3 currency etc2
In recent years3 t'e market for financial deri0ati0es 'as /ro1n tremendously
.ot' in terms of 0ariety of instruments a0aila.le3 t'eir comple4ity and also
turno0er2 In t'e class of e<uity deri0ati0es3 futures and options on stock
indices 'a0e /ained more popularity t'an on indi0idual stocks3 especially
amon/ indi0idual in0estors3 1'o are ma=or users of inde4)linked deri0ati0es2
E0en small in0estors find t'is useful due to 'i/' correlation of t'e popular
indices 1it' 0arious portfolios and ease of use2 T'e lo1er costs associated
1it' inde4 deri0ati0es 0is)U)0is deri0ati0e products .ased on indi0idual
securities is anot'er reason for t'eir /ro1in/ use2
DEFINITION OF DERI5ATI5ES7
Deri0ati0e is a product 1'ose 0alue is deri0ed from t'e 0alue of one or more
.asic 0aria.les called .ases *underlin/ asset3 inde43 or reference rate+3 in a
contractual manner2 T'e underlyin/ asset can .e e<uity3 fore43 commodity
or any ot'er asset2 For e4ample 1'eat farmers may 1is' to sell t'eir 'ar0est
at a future date to eliminate t'e risk of a c'an/e in prices .y t'at date2 Suc'
a transaction is an e4ample of a deri0ati0e2 T'e price of t'is deri0ati0e is
dri0en .y t'e spot price of 1'eat 1'ic' is t'e Iunderlyin/J2
Indian Financial System
TYPES OF DERI5ATI5ES
T'e most commonly used deri0ati0es contracts are for1ards3 futures and
options and since t'is pro=ect re0ol0es around futures and options3 it 1ill .e
discussed in /reater detail later on2 For no1 1e take a .rief look at t'e
0arious deri0ati0es contracts t'at 'a0e come to .e used2
FOR9ARDS7
7 for1ard contract is a customi,ed contract .et1een t1o entities3 1'ere
settlement takes place on a specific date in t'e future at today%s pre)
a/reed price2
F6T6RES7
7 futures contract is an a/reement .et1een t1o parties to .uy or sell an
asset at a certain time in t'e future at a certain price2 In simpler 1ords3
futures are for1ard contracts <uoted in an e4c'an/e2
OPTIONS7
Options are of t1o types( ) Calls and $uts2 Calls /i0e t'e .uyer t'e ri/'t
.ut not t'e o.li/ation to .uy a /i0en <uantity of t'e underlyin/ asset at a
/i0en price on or .efore a /i0en future date2 $uts /i0e t'e .uyer t'e ri/'t3
.ut not t'e o.li/ation to sell a /i0en <uantity of t'e underlyin/ asset at a
/i0en price on or .efore a /i0en date2
Indian Financial System
9ARRANTS7
Options /enerally 'a0e li0es of up to one year3 t'e ma=ority of options
traded on options e4c'an/es 'a0in/ a ma4imum maturity of nine mont's2
6on/er dated 1arrants are called 1arrants and are /enerally traded o0er
t'e counter2
LEAPS7
T'e acronym 6E7$S mean 6on/)Term E<uity 7nticipation Securities2
T'ese are options 'a0in/ a maturity of up to t'ree years2
BASKETS7
Basket options are options on portfolios of underlyin/ assets2 T'e
underlyin/ asset is usually a mo0in/ a0era/e or a .asket of assets2 E<uity
inde4 options are a form of .asket options2
S9APS7
S1aps are pri0ate a/reements .et1een t1o parties to e4c'an/e cas'
flo1s in t'e future accordin/ to prearran/ed formula2 T'ey can .e
re/arded as portfolios of for1ard contracts2 T'e t1o commonly used
s1aps are(
<A= INTEREST RATE S9APS7
T'ese entail s1appin/ only t'e interest related cas' flo1s
.et1een t'e parties in t'e same currency2
<B= C6RRENCY S9APS7
Indian Financial System
T'ese entail s1appin/ .ot' principal and interest .et1een t'e
parties3 1it' t'e cas' flo1s in one direction .ein/ in a different
currency t'an t'ose in t'e opposite direction2
S9APTIONS7
S1aptions are options to .uy or sell a s1ap t'at 1ill .ecome operati0e at
t'e e4piry of t'e options2 T'us a s1aption is an option on a for1ard
s1ap2 Rat'er t'an 'a0e calls and puts3 t'e s1aptions market 'as recei0er
s1aptions and payer s1aptions2 7 recei0er s1aption is an option to
recei0e fi4ed and pay floatin/2 7 payer s1aption is to pay fi4ed and
recei0e floatin/2
FOR9ARD CONTRACT
INTROD6CTION7
7 for1ard contract3 as it occurs in .ot' for1ard and futures markets3 al1ays
in0ol0es a contract initiated at one timeG performance in accordance 1it' t'e
terms of t'e contract occurs at a su.se<uent time2 It is a simple deri0ati0e
t'at in0ol0es an a/reement to .uyD sell an asset on a certain future date at an
a/reed price2 T'is is a contract .et1een t1o parties3 one of 1'ic' takes a
long position and a/rees to .uy t'e underlyin/ asset on a specified future
date for a certain specified price2 T'e ot'er party takes a short position3
a/reein/ to sell t'e asset at t'e same date for t'e same price2
Indian Financial System
For e4ample3 1'en one orders a car3 1'ic' is not in stock3 from a dealer3 'e
is .uyin/ a for1ard contract for t'e deli0ery of a car2 T'e price and
description of t'e car are specified2
T'e mutually a/reed price in a for1ard contract is kno1n as t'e deli0ery
price2 T'e deli0ery price is c'osen in suc' a 1ay t'at t'e 0alue of t'e
for1ard contract to .ot' t'e parties is ,ero3 so t'at it costs not'in/ to take
eit'er a lon/ or a s'ort position2 On maturity3 t'e contract is settled so t'at
t'e 'older of t'e s'ort position deli0ers t'e asset to t'e 'older of t'e lon/
position3 1'o in turn pays a cas' amount e<ual to t'e deli0ery price2 T'e
0alue of a for1ard contract is determined3 c'iefly .y t'e market price of t'e
underlyin/ asset2
For1ard contracts are .ein/ used in India on a lar/e scale in t'e forei/n
e4c'an/e market to 'ed/e t'e currency risk2 For1ard contracts3 .ein/
ne/otiated .y t'e parties on one to one .asis3 offer t'em tremendous
fle4i.ility to articulate t'e contract in terms of price3 <uantity3 <uality *in
case of commodities+3 deli0ery time and place2
From t'e simplicity of t'e contract and its o.0ious usefulness in resol0in/
uncertainty a.out t'e future3 it is not surprisin/ t'at for1ard contracts 'a0e
'ad a 0ery lon/ 'istory2
T:E FOR9ARD PRICE
T'e for1ard price of a contract is t'e deli0ery price3 1'ic' 1ould render a
,ero 0alue to t'e contract2 Since upon initiation of t'e contract3 t'e deli0ery
Indian Financial System
price is so c'osen t'at t'e 0alue of t'e contract is nil3 it is o.0ious t'at 1'en
a for1ard contract is entered into3 t'e deli0ery price and for1ard price are
identical2 7s time passes t'e for1ard price could c'an/e .ut t'e deli0ery
price 1ould remain unc'an/ed2 ?enerally3 t'e for1ard price at any /i0en
time 0aries 1it' t'e maturity of t'e contract so t'at t'e for1ard price of a
contract to .uy or sell in one mont' 1ould .e typically different from t'at of
a contract 1it' time of t'ree mont's or si4 mont's to maturity2
F6T6RES CONTRACT
INTROD6CTION
7 futures contract is a type of for1ard contract 1it' 'i/'ly standardi,ed and
closely specified contract terms2 7s in all for1ard contracts3 a futures
contract calls for t'e e4c'an/e of some /ood at a future date for cas'3 1it'
t'e payment for t'e /ood to occur at a future date2 T'e purc'aser of a futures
contract undertakes to recei0e deli0ery of t'e /ood and pay for it3 1'ile t'e
seller of a future promises to deli0er t'e /ood and recei0e payment2 T'e
price of t'e /ood is determined at t'e initial time of contractin/2
In a crude sense3 futures markets are an e4tension of for1ard markets2 T'ese In a crude sense3 futures markets are an e4tension of for1ard markets2 T'ese
markets3 .ein/ or/ani,edD standardi,ed3 are 0ery li<uid .y t'eir o1n nature2 markets3 .ein/ or/ani,edD standardi,ed3 are 0ery li<uid .y t'eir o1n nature2
T'erefore3 li<uidity pro.lem3 1'ic' persists in t'e for1ard market3 does not T'erefore3 li<uidity pro.lem3 1'ic' persists in t'e for1ard market3 does not
e4ist in t'e futures market2 In futures market3 clearin/ corporationD 'ouse e4ist in t'e futures market2 In futures market3 clearin/ corporationD 'ouse
.ecomes t'e counter)party to all t'e trades or pro0ides t'e unconditional .ecomes t'e counter)party to all t'e trades or pro0ides t'e unconditional
/uarantee for t'eir settlement i2e2 assumes t'e financial inte/rity of t'e entire /uarantee for t'eir settlement i2e2 assumes t'e financial inte/rity of t'e entire
system2 In ot'er 1ords3 1e may say t'at in futures market3 t'e credit risk of system2 In ot'er 1ords3 1e may say t'at in futures market3 t'e credit risk of
Indian Financial System
t'e transactions is eliminated .y t'e e4c'an/e t'rou/' t'e clearin/ t'e transactions is eliminated .y t'e e4c'an/e t'rou/' t'e clearin/
corporationD 'ouse corporationD 'ouse$ $
OPTIONS OPTIONS
INTROD6CTION TO OPTIONS
Ee no1 come to t'e ne4t deri0ati0e product t'at is traded3 namely Options2
Options are fundamentally different from for1ard and future contracts2 7n
option /i0es t'e 'older of t'e option t'e ri/'t to do somet'in/2 T'e 'older
need not e4ercise t'is ri/'t2 In contrast3 in a for1ard or futures contract3 t'e
t1o parties are committed and 'a0e to fulfill t'is commitment2 7lso it costs
not'in/ *e4cept mar/in re<uirement+ to enter into a futures contract 1'ereas
t'e purc'ase of t'e option re<uires an upfront payment called t'e option
premium2
TYPES OF OPTION CONTRACTS7
1$ CALL OPTION7
7 call option /i0es t'e .uyer t'e ri/'t to purc'ase a specified
num.er of s'ares of a particular company from t'e option 1riter
*seller+ at a specified price *called t'e e4ercise price+ up to t'e
e4piry of t'e option2 In ot'er 1ords t'e option .uyer /ets a ri/'t to
call upon t'e option seller to deli0er t'e contracted s'ares anytime
up to t'e e4piry of t'e option2 T'e contract t'us is only a one)1ay
$remium
Indian Financial System
o.li/ation3 i2e2 t'e seller is o.li/ed to deli0er t'e contracted s'ares
1'ile t'e .uyer 'as t'e c'oice to e4ercise t'e option or let t'e
contract lapse2 T'e .uyer is not o.li/ed to perform2
POSITION 4RAP:7

V $remium
.
.
Stock $rice
W W
Intrinsic 0alue 6ines

*a+ Buy 7 Call *.+ Erite a Call
7n option .uyer starts 1it' a loss e<ui0alent to t'e premium paid2 Ce 'as to
carry on 1it' t'e loss till t'e stock market price e<uals t'e e4ercise price as
s'o1n in *a+2 T'e intrinsic 0alue of t'e option up to t'is price remains ,ero3
and t'us runs alon/ t'e B)a4is2 7s t'e stock price increases furt'er3 t'e loss
starts reducin/ and /ets 1iped out as soon as t'e increase e<uals t'e
V
Intrinsic value
Lines
Stock
Price
Indian Financial System
premium3 represented on t'e /rap' .y point S.%3 also called t'e .reak e0en
point2 T'e profita.ility line starts clim.in/ up at an inclination of ; de/rees
after crossin/ t'e B)a4is at . and from t'ereon mo0es into t'e positi0e side
of t'e /rap'2 T'e inclined line .eyond t'e point S .% indicates t'at t'e option
ac<uires intrinsic 0alue and is3 t'us referred to as t'e intrinsic 0alue line2
T'e position /rap' *.+ represents t'e profita.ility status of t'e 1riter 1'o
does not o1n t'e stock i2e2 naked or an unco0ered 1riter2 T'e /rap' is
lo/ically t'e in0erse of t'at for t'e option .uyer2
1$ P6T OPTION
7 put option /i0es a .uyer t'e ri/'t to sell a specified num.er of
s'ares of a particular stock to t'e option of t'e 1riter at a specific
price *called e4ercise price+ any time durin/ t'e currency of t'e
option2 T'e seller of a put option 'as t'e o.li/ation to take
deli0ery of underlyin/ asset2 E'en put position is opened3 t'e
.uyer pays premium to t'e put seller2 If t'e price of underlyin/
asset rises a.o0e t'e strike price and stays t'ere3 t'e put 1ill e4pire
1ort'less2 T'e seller of put 1ill keep t'e premium as 'is profit and
t'e put .uyer 1ill 'a0e a cost to purc'ase ri/'t2
$ut .uyers are .earis'3 t'ey .elie0e t'at t'e price of t'e underlyin/ asset
1ill fall and t'ey may not .e a.le to sell t'e asset at a 'i/'er price2 $ut
sellers are .ullis'3 as t'ey .elie0e t'at t'e price of t'e underlyin/ asset 1ill
rise2
$osition ?rap'(
Indian Financial System

Intrinsic >alue 6ine
V
Stock $rice

W $remium
S9APS
S1ap can .e defined as a financial transaction in 1'ic' t1o counter parties
a/ree to e4c'an/e streams of payments3 or cas' flo1s3 o0er time2 T1o types
of s1aps are /enerally seen i2e2 interest rate s1aps and currency s1aps2
T1o more s1aps .ein/ introduced are commodity s1aps and t'e ta4 rate
s1aps3 1'ic' are seen to .e an e4tension of t'e con0entional s1aps2 7 s1ap
results in reducin/ t'e .orro1in/ cost of .ot' parties2
Indian Financial System
FINANCIAL INSTIT6TION

766 INDI7 DE>E6O$5ENT B7NL
Industrial De0elopment Bank
Industrial Finance Corporation of India
Industrial In0estment Bank of India
E4port Import Bank of India
State Financial Corporation
State Industrial De0elopment Corporation
IN>EST5ENT INSTIT&TIONS
6ife insurance Corporation
?eneral Insurance Corporation
&nit trust of India
5utual Funds
B7NLS
Reser0e Bank of India
Commercial Banks
Sc'eduled Banks
Indian Financial System
Re/ional Rural Banks
NON B7NLIN? FIN7NCI76 COR$OR7TION
In0estment Trust
NIDCIS
5erc'ant Banks
Cire $urc'ases Finance Company
6ease Finance Company
Cousin/ Finance Companies
National Cousin/ Bank
>enture Capital Fundin/ Companies
ALL INDIA DE5ELOPMEN T BANKS
IND6STRIAL DE5ELOPMENT BANK OF INDIA
IDBI 1as esta.lis'ed in 19A; as a su.sidiary of t'e RBI .y an act of t'e
parliament and 1as made a 1'olly o1ned /o0t2 of India undertakin/ in
19@2 It 1as esta.lis'ed 1it' t'e main o.=ecti0e of ser0in/ as an ape4
financial institution to coordinate t'e functionin/ of all ot'er financial
institution2 $lannin/ 3promotin/ and de0elopin/ functionin/ of all ot'er
financial institution 2industries to fill t'e /aps in t'e industrial structure of
t'e country pro0idin/ tec'nical administrati0e assistance for promotin/ or
e4pansion of industry 2 undertakin/ market and in0estment researc' sur0ey
n connection 1it' t'e de0elopment of industry and to pro0ide finance
keepin/ in 0ie1 national priorities irrespecti0e of t'e financial attracti0eness
of pro=ect are its ot'er o.=ecti0e IDBI finance industries directly - also
support state financial corporation and state industrial de0elopment
corporations .y pro0idin/ refinance and t'rou/' t'e .ill rediscountin/ scale
IDBI 1as transformed from finance institution to commercial .ank in t'e
year 9!!;2
Indian Financial System
IND6STRIAL FINANCE CORPORATION OF INDIA
IFCI is t'e first financial institution to .e esta.lis'ed in India in 19;# .y an
act of parliament 1it' o.=ecti0e of pro0idin/ medium and lon/ term finance
to industrial concerns eli/i.le for financin/ under t'e act2 T'e sector for
1'ic' t'e IFCI pro0ides finance e4tend t'rou/' t'e industrial spectrum of
t'e country2
IND6STRIAL IN5ESTMENT BANK OF INDIA
T'e IIBI first came into e4istence as a central /o0ernment corporation 1it'
t'e name Industrial Reconstruction Corporation of India in 19@12 Its .asic
o.=ecti0e 1as to finance t'e reconstruction and re'a.ilitation of sick and
closed industrial unit2 Its name 1as c'an/ed to Industrial reconstruction
.ank of India and it 1as made t'e principal credit and reconstruction a/ency
in t'e country in 19# t'rou/' t'e RBI act 19#;2 T'e .ank started co)
ordinary similar 1ork of t'e institutions and .anks preparin/ sc'emes for
reconstructions .y reconstructin/ t'e lia.ilities appraisin/ sc'emes of
mer/er - amal/amation of sick company and pro0idin/ financial assistance
for moderni,ation e4pansion3 di0ersification and tec'nolo/ical up /radation
of sick units2
In 5arc' 19#@3 in line 1it' t'e on/oin/ policies of financial and economic
reforms3 IRBI 1as con0erted into a full)fled/ed de0elopment financial
institution2 It 1as renamed as Industrial In0estment Bank of India ltd2 7nd
1as incorporated as company under t'e companies act 19A2 Its entire
Indian Financial System
e<uity is finance for t'e esta.lis'ment of ne1 industrial pro=ect as 1ell as
for e4pansion di0ersification and moderni,ation of e4istin/ industrial
enterprises2 It pro0ides financial assistance in t'e form of term loans3
su.scription to de.enture e<uity s'ares and deferred payment /uarantees2
IIBI is no1 also acti0e ion merc'ant .ankin/ and its ser0ices includes inte)
aliaF structurin/ suita.le instrument for pu.lic ri/'ts issues preparation of
prospecti0e offer documents and 1orkin/ as a lead mana/er it also offers its
ser0ices for de.t syndication and packa/e of ser0ices for mer/er and
ac<uisition2
T:E E?PORT IMPORT BANK OF INDIA $
T'e EBI5 Bank 1as set up in 19#9 to coordinate t'e acti0ity of t'e 0arious
institutional en/a/ed in trade finance it 'elps Indian e4porter in e4tendin/
credit to t'eir o0erseas customer .y pro0idin/ lon/ term finance to t'em it
also pro0ides financial assistance to .ank in e4tendin/ credit for e4port and
e4port linked imports it also pro0ides ad0isory ser0ices and information to
e4ports2
STATE FINANCIAL CORPORATION $
7t t'e .e/innin/ of t'e fifties t'e /o0t2 found t'at of ac'ie0in/ rapid
industriali,ation separate institution s'ould .e set up t'at cater e4clusi0ely
to t'e needs of t'e small medium sector t'erefore t'e SFC 1as act passed .y
t'e parliament in 191 to ena.le t'e state /o0t2 esta.lis' SFC t'e .asic
o.=ecti0e for 1'ic' t'e SFC 1as set up 1as to pro0ide financial assistance
to small and medium scale industries estates2 T'e SFC pro0ides finance in
t'e form of lo/ term loan3 .y under1ritin/ issue of s'are and de.entures
Indian Financial System
and standin/ /uarantee for loans raised from ot'er institution and form t'e
/eneral pu.lic2
STATE IND6STRIAL DE5ELOPMENT CORPORATIONS$
T'e SIDCS 'a0e .een set up to facilitate rapid industrial /ro1t' in t'e
respecti0e state2 In addition to pro0idin/ finance 3 t'e SIDC identify and
sponsor pro=ect in t'e participation of pri0ate entrepreneurs2
IN5ESTEMENT INSTIT6ITONS
LIFE INS6RANCE CORPORATION OF INDIA $
T'e 6IC 1as esta.lis'ed in 19A .y amal/amation and nationali,ation of
9; pri0ate insurance companies .y an enactment of parliament 2 t'e main
.usiness of 6IC is to pro0ide life insurance and it 'as almost a monopoly in
t'is .usiness2 T'e 6IC act permits it in0est up to 1! percent of t'e
in0esta.le funds in t'e pri0ate sector 2 it pro0ides finance .y participatin/ in
a consortium 1it' ot'er institution and does not undertake independent
appraisal of pro=ects2
4ENERAL INS6RANCE CORPORATION OF INDIA
T'e ?IC 1as esta.lis' in 19@; 1it' t'e nationali,ation of /eneral insurance
.usiness in country it can in0est up to :! F of t'e fres' accrual of funds in
t'e pri0ate sector 2 like t'e 6IC t'e ?IC also pro0ides finance .y
Indian Financial System
participatin/ in consortium .ased on t'e appraisal made .y ot'er financial
institutions .ut does not independently pro0ide t'e finance2
6NIT TR6ST OF INDIA
T'e &TI 1as founded in 19A; under t'e &TI act 19A:2 Initially !F of t'e
capital of t'e trust 1as contri.uted .y t'e RBI 1'ile t'e rest 1as .rou/'t in
.y t'e SBI and its associates3 6IC 3?IC3 and ot'er financial institutions2 In
19@; t'e 'oldin/ of RBI 1as transferred to t'e IDBI makin/ t'e &TI an
associate of IDBI 2 t'e primary o.=ecti0e of &TI is to mo.ili,e t'e sa0in/s in
t'e countries and c'anneli,e t'em in to producti0e corporate in0estments2
&TI pro0ides assistance .y under1ritin/ de.enture and s'are 3 su.scription
to pu.lic and ri/'t issue of s'are and de.enture su.scription to pro0ide
pri0ate placement and .rid/e finance2 In Kanuary 2 9!!: &TI split in to t1o
part &TI " 1 and &TI)9 2 &TI)1 'as /i0en all t'e assured return sc'eme and
unit sc'eme A; and it is .ein/ administrated .y central /o0t2 &TI)9
entrusted 1it' t'e task of mana/in/ N7>).ased sc'emes2 &TI )9 is .ein/
mana/ed .y SBI3 $NB3BOB and 6IC2
M6T6AL F6NDS
5utual funds ser0es t'e purpose of mo.ili,in/ of funds from 0arious
cate/ories of in0estors and c'anneli,in/ t'em into producti0e in0estment2
7part form &TI2 5utual fund sponsored .y 0arious .ank su.sidiaries3
insurance or/ani,ations pri0ate sector financial institutions DFI and FII 'a0e
come up 2 t'ese mutual fund 1ork 1it'in t'e frame1ork of SEBI re/ulation
1'ic' prescri.e t'e mec'anism for settin/ up of a mutual fund 3 procedure
of re/istration its constitution and t'e duties3 functions and responsi.ility of
t'e 0arious parties in0ol0ed2
Indian Financial System

Indian Financial System
BANK
T:E RESER5E BANK OF INDIA
T'e Reser0e Bank of India is t'e central .ank of t'e country entrusted 1it'
monetary sta.ility3 t'e mana/ement of currency and t'e super0ision of t'e
financial as 1ell as t'e payments system2
Esta.lis'ed in 19:3 its functions and focus 'a0e e0ol0ed in response to t'e
c'an/in/ economic en0ironment2 Its 'istory is not only intrinsically
inter1o0en 1it' t'e economic and financial 'istory of t'e country3 .ut also
/i0es insi/'ts into t'e t'ou/'t processes t'at 'a0e 'elped s'ape t'e
countryOs economic policies2
T'e Reser0e Bank of India is t'e central .ank of t'e country2 Central .anks
are a relati0ely recent inno0ation and most central .anks3 as 1e kno1 t'em
today3 1ere esta.lis'ed around t'e early t1entiet' century2
T'e Reser0e Bank of India 1as set up on t'e .asis of t'e recommendations
of t'e Cilton 8oun/ Commission2 T'e Reser0e Bank of India 7ct3 19:; *II
of 19:;+ pro0ides t'e statutory .asis of t'e functionin/ of t'e Bank3 1'ic'
commenced operations on 7pril 13 19:2
T'e RBI 'as 99 re/ional offices3 most of t'em in state capitals like B'opal3
Cydera.ad3 Kaipur3 Na/pur3 Lolkata etc2
Indian Financial System
:ISTORY OF T:E RBI
T'e Bank .e/an its operations .y takin/ o0er from t'e ?o0ernment t'e
functions so far .ein/ performed .y t'e Controller of Currency and from t'e
Imperial Bank of India3 t'e mana/ement of ?o0ernment accounts and pu.lic
de.t2 T'e e4istin/ currency offices at Calcutta3 Bom.ay3 5adras3 Ran/oon3
Larac'i3 6a'ore and Ca1npore *Lanpur+ .ecame .ranc'es of t'e Issue
Department2 Offices of t'e Bankin/ Department 1ere esta.lis'ed in
Calcutta3 Bom.ay3 5adras3 Del'i and Ran/oon2
Burma *5yanmar+ seceded from t'e Indian &nion in 19:@ .ut t'e Reser0e
Bank continued to act as t'e Central Bank for Burma till Kapanese
Occupation of Burma and later up to 7pril3 19;@2 7fter t'e partition of
India3 t'e Reser0e Bank ser0ed as t'e central .ank of $akistan up to Kune
19;# 1'en t'e State Bank of $akistan commenced operations2 T'e Bank3
1'ic' 1as ori/inally set up as a s'are'olderOs .ank3 1as nationali,ed in
19;92
T'e RBI 1as esta.lis'ed .y le/islation in 19:;3 t'rou/' t'e RBI 7ct of
19:;2 T'e RBI started functionin/ from 7pril 1
st
19:2 T'is represented t'e
culmination of a lon/ series of efforts to set up an institution of t'is kind in
t'e country2 T'e RBI 1as ori/inally constituted as a S'are'olders% Bank
1it' a s'are capital of Rs2 Crore2 In 0ie1 of t'e need of close inte/ration
.et1een its policies and t'ose of t'e /o0ernment3 it 1as nationali,ed in
19;92
Indian Financial System
Eit' li.erali,ation3 t'e BankOs focus 'as s'ifted .ack to core central .ankin/
functions like 5onetary $olicy3 Bank Super0ision and Re/ulation3 and
O0erseein/ t'e $ayments System and onto de0elopin/ t'e financial markets2
T'e se<uences of e0ents leadin/ to t'e formation of t'e RBI are summari,ed
in t'e fi/ure(
ESTABLIS:MENT OF T:E RESER5E BANK OF INDIA
In India3 t'e ur/ent need for a central .ankin/ institution 1as reco/ni,ed
1'en t'e : presidency .anks " Bank of 5adras3 Bank of Bom.ay - Bank
of Ben/al 1ere amal/amated in 1991 to form t'e Imperial Bank2
$residency Bank
Imperial Bank of India
Central Bankin/ En<uiry Committee3 19:1
Reser0e Bank of India 7ct3 19:;
Constitution of RBI3 7pril 1
st
19:
Nationali,ation of t'e RBI2 19;9
Indian Financial System
In 199A3 t'e Cilton)8oun/ Commission recommended t'e esta.lis'ment of
a central .ank2 7 .ill 1as passed in t'e Central 6e/islature in Kanuary 199@
.ut 1as dropped2 7 fres' .ill 1as introduced on Septem.er #
t'
3 199: and
1as recei0ed2
T'us t'e Reser0e Bank of India 1as esta.lis'ed .y le/islation in 19:;
t'rou/' t'e Reser0e Bank of India 7ct 19:;2 T'e 7ct pro0ides t'e statutory
.asis of functionin/ of t'e .ank 1'ic' commenced operations on 7pril 1
st
3
19:2
CENTRAL BOARD
T'e Reser0e BankOs affairs are /o0erned .y a central .oard of directors2 T'e
Board is appointed .y t'e ?o0ernment of India in keepin/ 1it' t'e Reser0e
Bank of India 7ct2 T'e Board of Directors is comprised of(
12 7 /o0ernor and not more t'at ; deputy /o0ernors appointed .y t'e
Central ?o0ernment2
92 Four Directors nominated .y t'e Central ?o0ernment3 one from eac'
of t'e ; 6ocal Boards2
:2 Ten Directors nominated .y t'e Central ?o0ernment
;2 One /o0ernment official nominated .y t'e Central ?o0ernment2
T'e ?o0ernor - Deputy ?o0ernor 'old office for suc' periods not
e4ceedin/ ; years as may .e fi4ed .y t'e Central ?o0ernment at t'e time of
t'eir appointment and are eli/i.le for reappointment2 T'e ?o0ernment
official 'olds office durin/ t'e pleasure of t'e Central ?o0ernment2 T'e
?o0ernor3 in 'is a.sence3 appoints a deputy ?o0ernor to .e t'e c'airman on
Indian Financial System
t'e Central Board2 5eetin/s of t'e Central Board are re<uired to .e 'eld not
less t'an A times in eac' year - at least once in a <uarter2
LOCAL BOARDS
For eac' of t'e ; re/ional areas of t'e country3 t'ere is a 6ocal Board 1it'
'ead<uarters in Lolkata3 C'ennai3 and 5um.ai - Ne1 Del'i2 6ocal Boards
consist of mem.ers eac'3 appointer .y t'e Central ?o0ernment for a term
of ; years2 T'e 6ocal Board mem.ers elect from amon/st t'emsel0es t'e
c'airman of t'e Board2 T'e Re/ional Directors of t'e .ank offices in
Lolkata3 C'ennai3 and 5um.ai - Ne1 Del'i are t'e e4)officio secretaries
of t'e 6ocal Boards at t'e Centers2 T'e functions of 6ocal Boards are
re0ie1ed .y t'e Central Board from time to time2
Cent)al B'a)d ', RBI
0 L'cal B'a)ds at C'ennai3 Lolkata3
5um.ai - Ne1 Del'i
1# .ranc'es in ma=or cities of t'e
country2
Internal Or/ani,ation - 5ana/ement(
T'is consists of a.out 9 departments
trainin/ esta.lis'ments - researc'
institutions2
Indian Financial System
Its functions include ad0isin/ t'e Central Board on local matters and
representin/ territorial and economic interests of local cooperati0e and
indi/enous .anks - to perform suc' ot'er functions as dele/ated .y Central
Board from time to time2
INTERNAL OR4ANIGATION > MANA4EMENT
T'e ?o0ernor is t'e C'ief E4ecuti0e 7rc'itect of t'e RBI2 T'e ?o0ernor
'as t'e po1ers of /eneral superintendence and direction of affairs and
.usiness of t'e Bank2 T'e E4ecuti0e ?eneral 5ana/ers are in .et1een t'e
Deputy ?o0ernors and C'ief ?eneral 5ana/ers of central office
departments2
Formulatin/ of policies concernin/ monetary mana/ement3 re/ulation and
super0ision of .anks3 non .ankin/ institutions3 financial institutions3 and co)
operati0e .anks3 e4tension of e4c'an/e resources and renderin/ of ad0ice to
t'e ?o0ernment on economic and financial matters are also done .y t'e
RBI2
MAIN F6NCTIONS
T'e Reser0e Bank of India 1as constituted to(
Re/ulate t'e issue of .anknotes
5aintain reser0es 1it' a 0ie1 to securin/ monetary sta.ility
Operate t'e credit and currency system of t'e country to its ad0anta/e
Indian Financial System
$romote financial and economic de0elopment =eopardi,in/ monetary
sta.ility
Set up many financial institutes pro0ide de0elopment of finance and
foster financial markets2
CORE F6NCTIONS7
Follo1in/ are t'e core functions of t'e Reser0e Bank of India(
Operatin/ monetary policy for maintainin/ price sta.ility and
ensurin/ ade<uate financial resources for de0elopment process2
$romotion of an efficient financial system2
5eetin/ currency re<uirement of t'e pu.lic

Rese)/e Ban; ', India


Issue of
Currency
Notes
Banker to
?o0ernment
Banker to
Banks
5onetary -
Credit $olicy
Forei/n
E4c'an/e
5ana/ement
Clearin/
Cose 7/ent
$ayment
System
5ana/ement
Indian Financial System
MONETARY A6T:ORITY7
T'e Reser0e Bank of India constantly 1orks to1ards keepin/ inflation
under c'eck and ensurin/ ade<uate supply of li<uidity for t'e producti0e
sector as also to1ards financial sta.ility2 It also formulates3 implements and
monitors t'e monetary policy2
RE46LATOR AND S6PER5ISOR OF T:E FINANCIAL
SYSTEM7
$rescri.es .road parameters of .ankin/ operations 1it'in 1'ic' t'e
countryOs .ankin/ and financial system functions2
O.=ecti0e( maintain pu.lic confidence in t'e system3 protect
depositorsO interest and pro0ide cost)effecti0e .ankin/ ser0ices to t'e
pu.lic2
$ermittin/ .anks to fi4 t'eir o1n position limits as per international
terms - a//re/atin/ /ap limits2
DE5ELOPMENTAL ROLE
$erforms a 1ide ran/e of promotional functions to support national
o.=ecti0es2
$ro0ides rural credit2
Settin/ up of institutional frame1ork2
Ser0ice area approac'2
Financin/ t'e industries2
$ro0ision of finance to information tec'nolo/y and soft1are industry2
Infrastructure financin/
Indian Financial System
ISS6ER OF C6RRENCY
T'e Reser0e Bank of India ensures /ood <uality coins and currency notes in
ade<uate <uantity .y(
Issuin/ and e4c'an/es or destroys currency and coins not fit for
circulation2
5oppin/ up notes and coins unfit for circulation
7d0isin/ t'e ?o0ernment on desi/nin/ of currency notes 1it' t'e
latest security features2
MANA4ER OF FOREI4N E?C:AN4E
T'e Reser0e Bank of India is mainly empo1ered 1it' aut'ority under t'e
Forei/n E4c'an/e 5ana/ement 7ct *FE57+ 1999 to re/ulate forei/n
e4c'an/e operation2 7s suc'3 rules and re/ulations relatin/ to non)resident
accounts are issued .y t'e RBI2 T'e RBI also formulates policies to
facilitate e4ternal trade and payments3 facilitates forei/n in0estments in
India and Indian in0estments a.road and promotes orderly de0elopment of
forei/n e4c'an/e markets
BANKER TO T:E 4O5ERNMENT
T'e RBI acts as a Banker to t'e ?o0ernment under section 9! of t'e RBI
7ct of 19:;2 Section 91 pro0ides t'at t'e ?o0ernment s'ould entrust its
money remittance3 e4c'an/e and .ankin/ transactions in India to t'e RBI2
Indian Financial System
T'e RBI maintains accounts of central and state /o0ernments2 It performs
merc'ant .ankin/ function for t'e central and t'e state /o0ernments2 It also(
Encoura/es de0elopment and orderly functionin/ of ?o0ernment
securities market
7d0ises central and state /o0ernments in .etter cas' mana/ement2
PAYMENT SYSTEMS
Ne/otiated dealin/ system for security dealin/2
Esta.lis'ment of clearin/ corporation of India 6td2 *CCI6+ for
settlement of security deals2
Introduction of Real Time ?ross Settlement *RT?S+
Electronic payment facilities like Electronic Clearin/ System *ECS+3
Electronic Funds Transfer *EFT+3 and National Electronic Funds
Transfer *NEFT+ and C'e<ue truncation2
$ro0idin/ messa/in/ net1ork and encryption facilities for secured
messa/in/ t'rou/' t'e Institute for De0elopment and Researc' in
Bankin/ Tec'nolo/y *IDRBT+2
BANKERSH BANK
T'e Reser0e Bank of India acts as a .anker to all sc'eduled .anks2
Commercial .anks includin/ forei/n .anks3 co)operati0e .anks - re/ional
rural .anks are eli/i.le to .e included in t'e second sc'edule of t'e Reser0e
Bank of India 7ct su.=ect to fulfillin/ conditions laid do1n under Section ;9
*A+ of t'e Reser0e Bank of India 7ct 19:;22
Indian Financial System
S6PER5ISOR OF T:E FINANCIAL SYSTEM
$rescri.es re/ulations for sound functionin/ of .anks and financial
institutions3 includin/ non).ankin/ finance companies
$romotes .est practices in risk mana/ement and corporate /o0ernance
to protect depositorsO interest and to en'ance pu.lic confidence in t'e
financial system of t'e country
Encoura/es use of tec'nolo/y in .anks to pro0ide cost)effecti0e
ser0ice to consumers2
BOARD FOR FINANCIAL S6PER5ISION
T'e Reser0e Bank of India performs t'is function under t'e /uidance of t'e
Board for Financial Super0ision *BFS+2 T'e Board 1as constituted in
No0em.er 199; as a committee of t'e Central Board of Directors of t'e
Reser0e Bank of India2
OB@ECTI5E
$rimary o.=ecti0e of BFS is to undertake consolidated super0ision of t'e
financial sector comprisin/ commercial .anks3 financial institutions and
non).ankin/ finance companies2
CONSTIT6TION OF T:E BOARD
T'e Board is constituted .y co)optin/ four Directors from t'e Central Board
as mem.ers for a term of t1o years and is c'aired .y t'e ?o0ernor2 T'e
Indian Financial System
Deputy ?o0ernors of t'e Reser0e Bank are e4)officio mem.ers2 One Deputy
?o0ernor3 usually3 t'e Deputy ?o0ernor in c'ar/e of .ankin/ re/ulation and
super0ision3 is nominated as t'e >ice)C'airman of t'e Board2
BFS MEETIN4S
T'e Board is re<uired to meet normally once e0ery mont'2 It considers
inspection reports and ot'er super0isory issues placed .efore it .y t'e
super0isory departments2
BFS t'rou/' t'e 7udit Su.)Committee also aims at up/radin/ t'e <uality of
t'e statutory audit and internal audit functions in .anks and financial
institutions2 T'e audit su.)committee includes Deputy ?o0ernor as t'e
c'airman and t1o Directors of t'e Central Board as mem.ers2
T'e BFS o0ersees t'e functionin/ of Department of Bankin/ Super0ision
*DBS+3 Department of Non)Bankin/ Super0ision *DNBS+ and Financial
Institutions Di0ision *FID+ and /i0es directions on t'e re/ulatory and
super0isory issues2
F6NCTIONS OF T:E BFS
Some of t'e initiati0es taken .y BFS include(
i2 restructurin/ of t'e system of .ank inspections
ii2 introduction of off)site sur0eillance3
iii2 stren/t'enin/ of t'e role of statutory auditors and
i02 Stren/t'enin/ of t'e internal defenses of super0ised institutions2
Indian Financial System
T'e 7udit Su.)committee of BFS 'as re0ie1ed t'e current system of
concurrent audit3 norms of empanelment and appointment of statutory
auditors3 t'e <uality and co0era/e of statutory audit reports3 and t'e
important issue of /reater transparency and disclosure in t'e pu.lis'ed
accounts of super0ised institutions2
COMMERCIAL BANK
Commercial .anks ordinarily are simple .usiness or commercial concern
1'ic' pro0ides 0arious types of financial ser0ices to consumers in return for
payments in one form or anot'er suc' as interest discount3 fees3 commission3
and so on 2 t'eir o.=ecti0e is to make profits2 Co1e0er3 1'at distin/uis'
t'em from ot'er .usiness concerns * financial as 1ell as manufacturin/ + is
t'e de/ree to 1'ic' t'ey 'a0e to .alance t'e principal of profit
ma4imi,ation 1it' certain ot'er principal 2 in India especially 2 .anks are
re<uired to modify t'e performance in profit makin/ if t'at clas'es 1it'
t'eir o.li/ations in suc' areas as social 1elfare 3 social =ustice 3 and
promotion of re/ional .alances in de0elopment 2 .ank in /eneral 'a0e to pay
muc' more attention to .alancin/ profita.ility 1it' li<uidity2
SC:ED6LED BANKS
Sc'eduled .anks are 1'ic' are included in t'e second sc'edule of T'e
Bankin/ Re/ulation 7ct 19;93 ot'er are non sc'edule .ank
*a+ must 'a0e paid up capital and reser0e not less t'an Rs lak'2
*.+ it must also satisfy t'e RBI t'at its affairs are not conducted in a manner
detrimental t t'e interests of its depositors2 Sc'eduled .anks are re<uired to
maintain a certain amount of reser0es 1it' t'e RBI t'ey in return 3 en=oy t'e
Indian Financial System
facility of financial accommodation and remittance at concessional rates
from t'e RBI2
RE4IONAL R6RAL BANKS$
7 .e/innin/ to set up t'e RRB 1as made in later 'alf of 19@ in accordance
1it' t'e recommendations of .ankin/ commission it 1as intended t'at t'e
RRB 1ould operate e4clusi0ely in rural areas and 1ould pro0ide credit and
ot'er facility to small and mar/inal farmers 3 a/ricultural la.orer 3 artisans 3
and small entrepreneurs2 T'ey no1 carry all types of .ankin/ .usiness
/enerally 1it'in one to fi0e districts2 T'e RRB can .e set up pro0ided .y
pu.lic sector .ank sponsor t'em 2 t'e o1ners'ip capital of t'ese .anks is
'eld .y t'e central /o0t2 *! F+ 3concerned state /o0t2 *1 F+3 and t'e
sponsor .ank *:F+ 2 t'ey are in effect o1ned .y t'e /o0t2 and t'ere is a
little local participation in o1ners'ip and administration of t'ese .ank also 2
furt'er t'ey 'a0e a lar/e num.er of .ranc'es2
Indian Financial System
CLASSIFICTION OF NBFC7
T'e 0arious NBFC can .e classified as follo1s(
Cousin/ Finance Institution *companies+
>enture Capital Funds
Factors or Factorin/ companies
IN5ESTMENT TR6ST OR IN5ESTMENT COMPANIES
In0estment trust are close ended or/ani,ation3 unlike &TI and t'ey 'a0e
a fi4ed amount of aut'ori,ed capital and a stated amount of issued
capital2 In0estment trust pro0ides useful ser0ice t'rou/' conser0in/ and
mana/in/ property for t'ose 1'o3 for some reasons or ot'er cannot
mana/e t'eir o1n affairs2 In0estor of moderate means are pro0ide
facilities for di0ersification of in0estment3 e4pert ad0ice on lucrati0e
in0estment c'annels3 and super0ision of t'eir in0estment2 From t'e point
of 0ie1 of t'e economy3 t'ey 'elp to mo.ili,e small sa0in/s and direct
tem to fruitful c'annels2 T'y also 'a0e a sta.ili,in/ effect on stock
market2 &nlike in ot'er countries3 t'ey render manifold function suc' as
financin/3 under1ritin/3 promotin/ and .ankin/2
Indian Financial System
5ost of t'ese companies are not independent3 t'ey are in0estment
'oldin/ companies3 formed .y t'e former mana/in/ a/ents3 or .usiness
'ouses2 7s suc'3 t'ey pro0ide finance mainly to suc' companies as are
associated 1it' t'ese .usiness 'ouses2
NID:IS7
5utual .enefit funds or nid'is3 as t'ey are called in India3 are =oint stock
companies operatin/ mainly in sout' India3 particularly in Tamil Nadu2
T'e source of t'eir funds are s'are capital3 deposits from t'eir mem.ers3
and t'e pu.lic2 T'e deposit are fi4ed and recurrin/2 &nlike ot'er
NBFC%S nid'is also accepts demand deposit to some e4tent2 T'e loans
/i0en .y t'is institution are mainly for consumption purposes2 T'ese
loans are usually secured loans3 /i0en a/ainst t'e security of tan/i.le
asset suc' as 'ouse property 3 /old =e1elry3 or a/ainst s'are of
companies3 6IC policies3 and so on2 T'e terms on 1'ic' loans are /i0en
are <uite moderate2 T'e nota.le points a.out t'ese institutions are (
a+ T'ey offer sa0in/ sc'emes 1'ic' are linked 1it' t'e
assurance to make credit a0aila.le 1'en re<uired .y sa0er%s
.+ T'ey make t'e credit a0aila.le to t'ose to 1'om t'e
commercial .anks may 'esitate to /i0e credit or 1'om
commercial .anks 'a0e not .een a.le to reac'3
c+ T'ey possess c'aracteristics suc' as t'eir local c'aracter3
easy approac'a.ility3 and t'e a.sence of cum.ersome
procedures3 1'ic' make t'em suita.le for small areas and3
Indian Financial System
d+ Interest rates on t'eir deposit and t'e loans are compara.le to
t'ose of commercial .anks3 and t'ey 1ork on t'e sound
principal of t'e .ankin/2 T'eir operations are similar to t'ose
of unit .anks2 T'ey are incorporate .odies and are /o0erned
.y t'e directi0es of t'e RBI2
MERC:ANT BANKS7
It 1ould 'elp in understandin/ t'e nature of merc'ant .ankin/ if 1e
compare it 1it' commercial .ankin/2 T'e 5Bs offer mainly financial
ad0ice and ser0ice for a fee3 1'ile commercial .anks accepts deposit and
lend money2 E'en 5Bs do functions essentially as 1'olesale .ankers rat'er
t'an retail .ankers2 It means t'at t'ey deals 1it' selecti0e lar/e industrial
clients and not 1it' t'e /eneral pu.lic in t'eir fund .ased acti0ities2 T'e
merc'ant .anks are different from security dealers3 trades and .rokers also2
T'ey deal mainly in ne1 issues3 1'ile t'e latter deal mainly in e4istin/
securities2
T'e ran/e of acti0ities undertaken .y merc'ant .anks can .e understood
from recent ad0ertisement of one of t'e merc'ant .ankers in India 1'ic'
mentioned t'e follo1in/ ser0ice offered .y it(
1+ 5ana/ement3 marketin/ and under1ritin/ of ne1 issues3
9+ $ro=ect promotion ser0ices and pro=ect finance3
:+ Syndication of credit and ot'er facilities3
;+ 6easin/3 includin/ pro=ect leasin/3
Indian Financial System
+ Corporate ad0isory ser0ices3
A+ In0estment ad0isory ser0ices3
@+ Bou/'t)out deals3
#+ >enture capital3
9+ 5utual fund and offs'ore funds3
1!+ In0estment mana/ement includin/ dictionary
mana/ement3
11+ In0estment ser0ice for non) resident Indians3
19+ 5ana/ement of and dealin/ in commercial papers3
In India t'e merc'ant .ankin/ ser0ice are pro0ided .y t'e commercial .anks3
7ll Indian Financial Institutions3 pri0ate consultancy firms - tec'nical
consultation or/ani,ations2

In 5arc' 19913 SEBI /ranted permission to >5C pro=ect tec'nolo/ies to act
as t'e merc'ant .anker and to undertake pu.lic issue mana/ement3 portfolio
mana/ement3 lead mana/ement3 and so on2 It may .e noted t'at in India3 t'e
permission of t'e SEBI is re<uired to do merc'ant .ankin/ .usiness2
:IRE P6RC:ASE FINANCE COMPANIES
Cire purc'ase in0ol0es a system under 1'ic' term loan for purc'ases of
/oods and ser0ices are ad0anced to .e li<uidated in sta/es t'rou/' a
Indian Financial System
contractual o.li/ation2 T'e /oods 1'ose purc'ases are t'us financed may .e a
consumer /oods or producer /oods or may .e simply ser0ices suc' as air
tra0el2
Cire)purc'ase credit may .e pro0ided .y t'e seller 'imself or .y any financial
institution2
Cire)purc'ase credit is a0aila.le in India for a 1ide ran/e of ser0ices2 $roduct
like automo.ile3 se1in/ mac'ines3 radios3 refri/erators3 T> sets3 .icycles3
mac'inery and e<uipment3 ot'er capital /oods3 industrial s'ades3 ser0ices like
educational fees3 medical fees3 and so on are no1 financed 1it' 'elp of suc'
credit2 Co1e0er unlike in ot'er countries t'e emp'asis in India is on t'e
pro0ision of installment credit for producti0e /oods - ser0ices rat'er t'an for
purely consumer /oods2
Ot'er suppliers of 'ire)purc'ase finance are retail and 1'olesale traders3
commercial .anks3 IDBI3 ICICI3NSIC3NSIDC3 SFCS3SIDCS3 7r/o)industries
corporations *7ICs+3 and so on2
In t'e recent past3 .anks also 'a0e increased t'eir .usiness in 'is field of
installment credit and loans2
IDBI indirectly participate in financin/ 'ire purc'ase .usiness .y 1ay of
rediscountin/ usance .illsDpromissory notes arisin/ out of indi/enous
mac'inery on deferred payment .asis2
Indian Financial System
LEASE FINANCE COMPANIE7
7 lease is a form of financin/ employed to ac<uire t'e use of asset3 t'rou/'
1'ic' firm can ac<uire t'e use of asset for a stated period 1it'out o1in/
t'em2 E0ery lease in0ol0es t1o parties ( user of asset is kno1n as lessee3 and
t'e o1ner of t'e asset is kno1n as t'e lessor2 E'ile t'ese companies may
undertake ot'er acti0ities like consumer credit3 car finance3 etc2 t'eir
predominant acti0ity is leasin/2
6ease financin/ or/ani,ations in India include many pri0ate sector
manufacturin/ companies3 infrastructure leasin/ and financial ser0ice
limited2*I6-FS+3 ICICI3 IRCI3 capital market su.sidiaries of leadin/
nationali,ed .anks3 IFC36IC3 ?IC3 Cousin/ De0elopment Finance
Corporation *CDFC+3 certain SIDCs and SIICs3 and ot'er or/ani,ations2 T'e
lessee companies include many leadin/ corporation in .ot' pu.lic and pri0ate
sectors3 and small manufacturin/ companies2
:O6SIN4 FINANCE COMPANIES7
Cousin/ finance is pro0ide in t'e form of mort/a/e loan i2e2 it is pro0ided
a/ainst t'e security of immo0a.le property of land and .uildin/s2 .asically
'ousin/ finance loan are /i0en .y Cosin/ and &r.an De0elopment
Corporation3 t'e ape4 Co)operati0e Cousin/ Financin/ Societies and 'ousin/
.rand in different states3 central and state /o0ernment3 6IC3 Commercial
.anks3 ?IC3 and a fe1 pri0ate 'ousin/ companies and nid'is2t'e /o0ernment
pro0ide direct loan mainly to t'eir employees2 T'e participation of
Indian Financial System
commercial and ur.an co)operati0e .anks in direct in mort/a/e loans 'as
.een mar/inal till recently2 6IC 'as .een a ma=or supplier of mort/a/e loan in
indirect and direct forms2 It 'as .een /i0in/ loans to t'e state /o0ernment3
ape4 cooperati0e 'ousin/ societies3 C&DCO and so on2 In addition it 'as
.een pro0idin/ mort/a/e loan directly to indi0iduals under its 0arious
mort/a/e sc'emes2
NATIONAL :O6SIN4 BANK7
It 1as set up in Kuly3 19## as an ape4 le0el 'ousin/ finance institution as
1'olly o1ned su.sidiary of t'e RBI2 It .e/an its operation 1it' t'e total
capital of Rs21@! crore *Rs 1!! crore as s'are capital3 Rs ! crore as lon/
term loan from RBI and Rs 9! crore t'rou/' sale of .ounds+2 In Septem.er3
19#9 it s'are capital 1as raised to Rs1! crore2 Durin/ 19#9)9!3 it issued its
second series of .onds 1'ose total su.scription amounted to RsA! crore2
T'ese .onds are /uaranteed .y t'e central /o0ernment3 and carry an interest
rate of 112F per annum2 T'e RBI sanctioned it a lon/)term loan of Rs9
crore in 19#9)9!2 Furt'er3 it can .orro1 in t'e &S7 capital market &ST!
million under t'e &S7ID /o0ernment /uarantee pro/ram2 T'us t'e resources
.ase of NCB 'as .een made <uite stron/2 T'e e4plicit and t'e primary aim of
NCB is to promote 'ousin/ finance institution at local and re/ional le0els in
t'e pri0ate - =oint sector .y pro0idin/ financial and ot'er support2
Indian Financial System

5ENT6RE CAPITAL F6NDIN4 COMPANIES7
T'e term I0enture capitalJ su//est takin/ risk in supplyin/ capital2 Co1e0er
supply of risk capital may not .e a prime function in certain cases t'e
emp'asis may .e on supportin/ tec'nocrats in settin/ up pro=ects or on
portfolio mana/ement2 T'e term 0enture capital fund is usually used to denote
mutual fund or institutional in0estors t'at pro0ide e<uity finance or risk little
kno1n3 unre/istered 'i/'ly risky3 small pri0ate .usinesses3 especially in
tec'nolo/y)oriented and kno1led/e intensi0e .usiness or industries 1'ic'
'a0e lon/ de0elopment cycles and 1'ic' usually do not 'a0e access to
con0entional source of capital .ecause of t'e a.sence of suita.le collateral
and t'e presence of 'i/' risk2 >CFs play an important role in supplyin/
mana/ement and marketin/ e4pertise to suc' units2