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Apna Sapna Money-Money

Money doesn't create man but it is the man who created money. -Warren Buffet


RAHUL JAIN (Striving for excellence) BCOM (H), MBA, FCS


Overview of Indian Financial System and Economic Development

By- Rahul Jain (PGPM (MBA), FCS) rahulkjain16@yahoo.co.in www.learningfinancialmanagement.pbworks.com Ph: 9811228852

Our Strategy for Learning

Concepts, Practice and Class Discussion Punctuality, Participation and Preparation Judgment challenge Learning to communicate ideas Learning from each other Learning through discovery

Overview of financial markets Institutional infrastructure Role and functions of stock


Some Important rules

Switch off your Mobiles Attendance rules will be strictly applied Non completion of Assignment will lead to strict disciplinary measures Students can gather additional bonus points by being a Performer 4 times in the whole course. Students falling in the Improvement category would be penalized.

Website activity
Each one of you write your bio in your course page. For example Foundation students will write in Foundation Batch course page. Bio will be written as per following guidelines:
Include your name, prior education background and institutes name Include your hobbies, 2 strengths and 2 unique talents Include your achievements Include what you want to learn from this course


The Financial System

Financial System set of markets, individuals and institutions which trade in those markets
Channels funds from lenders to borrowers Creates liquidity and money Provides a payments mechanism Provides financial services such as insurance and pensions Offers portfolio adjustment facilities

Financial System



Constituents of Financial System

Regulation of the Financial System

To increase the information available to investors:

To ensure the soundness of financial intermediaries (and the overall financial system):
Restrictions on entry Disclosure Restrictions on Assets and Activities (e.g. Basel II) Deposit Insurance Limits on Competition Restrictions on Interest Rates


Financial Markets
Markets in which funds are transferred from people who have an excess of available funds to people who have a shortage of funds
Example: lenders/savers and borrowers/investors Important effects on economic performance


Structure of Financial Markets

Debt and Equity Markets
U.S. markets (2005): debt $41 trillion, equity $18 trillion Different return profiles

Primary and Secondary Markets

Investment Banks underwrite securities in primary markets Brokers and dealers work in secondary markets

Exchanges and Over-the-Counter (OTC) Markets

Money and Capital Markets
Money markets deal in short-term (< 1 yr) debt instruments Capital markets deal in longer-term (> 1 yr) debt and equity instruments

Growing internationalization of financial markets


Overview of Financial Markets

Types of financial markets Money markets Capital markets Debt Market Hybrid

The Hierarchy of Markets

Asset backed securities & derivatives Corporate bonds & equities Government bond market
Govt T Bills

Money market

Most popular investing instruments
Stocks and shares Bonus issues Rights issues

Corporate Government

Financial Market Primary Mkt Inst Primary market Capital market Insurance cos NIS Second ary market Investors trade securities issued in primary market

Money market Commercial Credit banks unions Short term instruments debt

Firms raise capital

Stock exch ange

Public Private placement

Risk-Return Trade off

India- Young and Restless

Indian Economy and Capital Market at a glance

Second fastest growing economies after China with an average annual growth rate of more than 8 per cent in the last three years Indias growth rate has surpassed some of the developed economies GDP at current market prices is over US $778 billion

Indian Economy A Snapshot

One of the fastest growing in the world Consumption growth fuelling economic growth consumption

expenditure forming 78% of GDP

Services sector contributing over 60% to GDP Emerging as a

hub of manufacturing excellence. new growth

engines of Indian economy include IT, ITes, pharmaceuticals, biotechnology, nano technology, agri. businesses
Where forces of competition are at work Innovation driving enterprises Economic reforms well on course entering second phase

Indian Economy and Capital Market at a Glance

9040 brokers in cash segment and 1064 in derivative segment of the market 122 investment bankers in the market 58 under writers to support primary issues 34 foreign venture capital funds 120 Portfolio managers

Indian Economy and Capital Market at a Glance

Business Week says that of 100 emerging market firms which are rapidly globalising 21 are Indian firms Economists project India to become the third largest economy in the world by 2040 Indian capital market regulator has acquired international credibility in the least possible time

Indian Economy and Capital Market at a Glance

India has a disclosure based regime of regulation Disclosure and Investor Protection guidelines available Indias accounting standards are closer to international standards India has a well laid down legal framework

Indian Economy and Capital Market at a Glance

India has T+2 rolling settlement as opposed to T+3 in NYSE. In India the transactions are totally electronic on a real time basis. India has several protective safeguards for the retail investor such as grading system of public offering, retail quota at 25 per cent etc.

Indian Economy and Capital Market at a Glance

As an integral part of risk management trading and exposure limits, various margins and mark to market margins are in vogue Clearing houses in place Almost 100 per cent risk free electronic settlement through depository system SEBI has a surveillance and enforcement system in place

Indian Economy and Capital Market at a Glance

India - one of 10 fastest-growing population of HNWIs globally There are at least 23 Indian citizens amongst the richest people on the planet Non Resident Indians can invest in all Indian Asset Classes Salary increases in India 13.9% is the highest in the world Increasing Investment avenues Art, Realty Funds, Commodities The number of companies listed on the Bombay Stock Exchange, at more than 6,000, is second only to NYSE. Each year 2,500 tonnes of gold is mined (fifth of the world's gold output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is consumed in India alone.

Indian Equities Long term prospects are intact

Half the population below 25 yrs

Retail credit, low interest rates, changing aspirations

Development of roads, ports, telecom

FDI, Tax reforms

Sustained GDP Growth

Global competitiveness

Exports Outsourcing

High GDP Growth Growth Gap Over The World

Money Market Instruments

Short-term debt is traded in the money markets. Short-term is any debt instrument sold with a life that is 365 days or shorter. Typically, money market securities have the following features:
No stated rate of interest instead, sold at a price that is at a discount from the par or face value of the security.

Examples include:
Treasury bills Commercial Paper

Short-Term Debt and the Money Market

Commercial Paper
Short-term debt instruments, usually unsecured, issued by corporations. Involve credit risk because the financial health of a corporation can deteriorate and jeopardize the repayment of the amount borrowed. Sold at a discount from their face value Maturities less than a year Because of the credit risk, usually there is only a market for commercial paper offered by the most credit worthy corporate issuers.

GASCI Seminar 2005


Bank Financing
Short-Term Financing
Banks are an important source of financing They provide:
Lines of Credit in support of working capital needs Term Loans in support of longer term investment in equipment



Market infrastructure
Stock exchange Clearing and settlement Education and training Investors protection Rating agency

Financial intermediaries may stand in between ultimate lenders and ultimate borrowers Merchant Bankers Stock brokers Advisors Banks Mutual Funds etc

Function of Financial Intermediaries: Indirect Finance

Why is there indirect finance, i.e., what is the rationale for financial intermediation?
1. Lower transaction costs 2. Risk management 3. Asymmetric information


1. Transaction Costs
Transaction Costs resources (time/money) used in carrying out the exchange of assets, goods or services Economies of scale
Reduction in transaction costs per dollar of transaction Example: legal costs for blueprint contract

Liquidity services
Coordination across deposit-taking and lending activities


2. Risk Management
Risk sharing
Asset transformation
Risk transformation: sell low-risk assets and use acquired funds to buy riskier assets Maturity transformation: convert funds lent for a short-period into loans of longer duration

Diversification the holding of multiple (not perfectly correlated) assets

Take advantage of portfolio effects


3. Asymmetric Information
Asymmetric distribution of information between agents
Example: borrower has better information about investment project than the lender

Economic incentives matter Adverse Selection (before the transaction)

Example: more likely to select risky borrower

Moral Hazard (after the transaction)

Example: activities making loan repayment by borrower less likely


Role and Functions of a stock exchange

Established for the purpose of assisting, regulating and controlling business of buying, selling and dealing in securities

Role and Functions of a stock exchange contd

Provides a market for the trading of

securities to individuals and organizations seeking to invest their saving or excess funds through the purchase of securities

Role and Functions of a stock exchange contd

Provides a physical location for buying and selling securities that have been listed for trading on that exchange

Role and Functions of a stock exchange contd Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules

Role and Functions of a stock exchange contd

The exchange itself does not buy or sell the securities, nor does it set prices for them

The exchange assures that no investor will have an undue advantage over other market participants

Efficient market This means that orders are executed and transactions are settled in the fastest possible way

Investor make informed and intelligent decision about the particular stock based on information

Transparency contd

Listed companies must disclose information in timely, complete and accurate manner to the Exchange and the public on a regular basis

Transparency contd
Required information include stock price, corporate conditions and developments dividend, mergers and joint ventures, and management changes etc

Doing business

People who buy or sell stock on an exchange do so through a broker

Doing business contd

The broker takes your order to the floor of the exchange looks for a broker representing someone wanting to buy/sell If a mutually agreeable price is found the trade is made

At any point in time, the price of previously issued stock is determined by the ebb and flow of supply and demand

Listing requirements There are specific requirements for allowing a public company to list its securities on the Stock Exchange these are set out in the legislation

Benefits of listing

Market support
Investors confidence

Increased demand for products and

services Overall increase in profitability

Once traded
Aura of reliability Accuracy in reporting financial

data Reputation Strength

Stock exchange can delist companies for a number of reasons including : Merger with another company Solvency problems Name change company asked to be removed Failure to comply with exchange rules

Desirable Characteristics of a stock market

Ability to sell an asset quickly at a fairly known price Low transactions costs

Desirable Characteristics of a stock market contd

Availability of information

Market efficiency Prices react quickly to new information

Small price fluctuations Narrow price spread

Financing the exchange

Transaction fees paid by members for

each order executed Fees paid by firms when their securities are originally listed Annual fees by firms Entrance fees from new members sale of historic trading and market information

Major challenges for the Exchanges

Cross border trading Issuers and investors are

expanding their horizons beyond their home markets Investors becoming much more demanding

Regulatory improvement Transparency and Corporate Governance

Protection to minority Shareholders Corporate Governance Disclosure

Enhance market confidence

Strong industry regulator


Ownership of the company is by the public in the form of shares one share, one vote Board is elected by shareholders to represent the best interests of the owners


Board hires and fires the management of the company

Assignment I 11th July

A) Individual Assignment- 3minute

presentation on Financial News Analysis (Refer Economic times and other business news papers/ magazine) Compulsory for first 5 roll numbers. Also submit a report on A4 size paper (Give intext citations) B) Individual Assignment 2 minute presentation on Key learnings of the previous class. (Compulsory for all) C) Name of Groups (Maximum 7 students)

Some important points

Academic Honesty
Individual Work Only, Allows for Group Discussion of Concepts and Problems Do Not Copy Work Reference Any Source When Confused Ask Instructor Contact me: Rahul Jain (9811228852, rahulkjain16@yahoo.co.in, Yahooid:rahulkjain16)