Apna Sapna Money-MoneyApna Sapna Money-Money

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Money doesn't Money doesn't create man but create man but it is the man it is the man who created who created moneymoney..

-Warren Buffet-Warren Buffet

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WELCOME To ALL OF YOU – IFS CourseWELCOME To ALL OF YOU – IFS Course

RAHUL JAINRAHUL JAIN

(Striving for excellence)(Striving for excellence)

BCOM (H), MBA, FCSBCOM (H), MBA, FCS

Overview of Indian Financial Overview of Indian Financial System and Economic System and Economic

DevelopmentDevelopmentBy- Rahul JainBy- Rahul Jain(PGPM (MBA), FCS)(PGPM (MBA), FCS)rahulkjain16@yahoo.co.inwww.learningfinancialmanagement.pbworks.comwww.learningfinancialmanagement.pbworks.comPh: 9811228852Ph: 9811228852

Our Strategy for LearningOur Strategy for Learning

Concepts, Practice and Class DiscussionConcepts, Practice and Class Discussion

Punctuality, Participation and PreparationPunctuality, Participation and Preparation

Judgment challengeJudgment challenge

Learning to communicate ideas Learning to communicate ideas

Learning from each other Learning from each other

Learning through discoveryLearning through discovery

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OutlineOutline• Overview of financial markets Overview of financial markets • Institutional infrastructure Institutional infrastructure • Role and functions of stock Role and functions of stock

exchangeexchange

Some Important rulesSome Important rules

Switch off your MobilesSwitch off your Mobiles

Attendance rules will be strictly appliedAttendance rules will be strictly applied

Non completion of Assignment will lead to strict Non completion of Assignment will lead to strict disciplinary measuresdisciplinary measures

Students can gather additional bonus points by Students can gather additional bonus points by being a “Performer” 4 times in the whole course.being a “Performer” 4 times in the whole course.

Students falling in the “Improvement category” Students falling in the “Improvement category” would be penalized. would be penalized.

Website activityWebsite activityEach one of you write your bio in your course Each one of you write your bio in your course page. For example Foundation students will page. For example Foundation students will write in Foundation Batch course page.write in Foundation Batch course page.

Bio will be written as per following guidelines:Bio will be written as per following guidelines:– Include your name, prior education background and institute’s nameInclude your name, prior education background and institute’s name– Include your hobbies, 2 strengths and 2 unique talentsInclude your hobbies, 2 strengths and 2 unique talents– Include your achievementsInclude your achievements– Include what you want to learn from this courseInclude what you want to learn from this course

www.learningfinancialmanagement.pbworks.com

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The Financial SystemThe Financial System

Financial System Financial System — set of markets, individuals — set of markets, individuals and institutions which trade in those marketsand institutions which trade in those markets– Channels funds from lenders to borrowersChannels funds from lenders to borrowers– Creates liquidity and moneyCreates liquidity and money– Provides a payments mechanismProvides a payments mechanism– Provides financial services such as insurance and Provides financial services such as insurance and

pensionspensions– Offers portfolio adjustment facilitiesOffers portfolio adjustment facilities

Financial SystemFinancial System

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Constituents of Financial Constituents of Financial SystemSystem

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Regulation of the Financial Regulation of the Financial SystemSystem

To increase the information available to investors:To increase the information available to investors:

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

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Financial MarketsFinancial Markets

Markets in which funds are transferred from Markets in which funds are transferred from people who have an excess of available people who have an excess of available funds to people who have a shortage of funds to people who have a shortage of fundsfunds– Example: lenders/savers and Example: lenders/savers and

borrowers/investorsborrowers/investors– Important effects on economic performanceImportant effects on economic performance

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Structure of Financial Structure of Financial MarketsMarkets

Debt and Equity MarketsDebt and Equity Markets– U.S. markets (2005): debt $41 trillion, equity $18 trillionU.S. markets (2005): debt $41 trillion, equity $18 trillion

– Different return profilesDifferent return profiles

Primary and Secondary MarketsPrimary and Secondary Markets– Investment Banks Investment Banks underwriteunderwrite securities in primary markets securities in primary markets– Brokers and dealers work in secondary marketsBrokers and dealers work in secondary markets

Exchanges and Over-the-Counter (OTC) MarketsExchanges and Over-the-Counter (OTC) Markets

Money and Capital MarketsMoney and Capital Markets– Money marketsMoney markets deal in short-term (< 1 yr) debt instruments deal in short-term (< 1 yr) debt instruments– Capital marketsCapital markets deal in longer-term (> 1 yr) debt and deal in longer-term (> 1 yr) debt and

equity instrumentsequity instrumentsGrowing internationalization of financial marketsGrowing internationalization of financial markets

OverviewOverview of of Financial Financial Markets Markets

Types of financial markets • Money markets• Capital markets • Debt Market• Hybrid

The Hierarchy of Markets

Money market

Government bond market

Corporate bonds & equities

Asset backed securities & derivatives

Gov’t T Bills

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InstrumentsInstruments

• Equities Equities

• Debt Debt

Most popular investing instruments

Stocks and shares

Bonus issues

Rights issues

Corporate Government

Financial Market

Money market Capital market

Primary market Second

ary market

Commercial banks

Firms raise capital

Investors trade securities issued in primary market

debt

equity

Public Private placement

Short term instruments

Primary Mkt Inst

Stock exchange

Credit unions

Insurance cos

NIS

Supporting

agents

Risk-Return Trade offRisk-Return Trade off

India- Young and RestlessIndia- Young and Restless

Indian Economy and Capital Market Indian Economy and Capital Market at a glanceat a glance

Second fastest growing economies after Second fastest growing economies after China with an average annual growth rate China with an average annual growth rate of more than 8 per cent in the last three of more than 8 per cent in the last three years years

India’s growth rate has surpassed some of India’s growth rate has surpassed some of the developed economiesthe developed economies

GDP at current market prices is over US GDP at current market prices is over US $778 billion $778 billion

Indian Economy – A SnapshotIndian Economy – A Snapshot

One of the fastest growing in the worldOne of the fastest growing in the world

Consumption growth fuelling economic growth – consumption Consumption growth fuelling economic growth – consumption

expenditure forming 78% of GDPexpenditure forming 78% of GDP

Services sector contributing over 60% to GDPServices sector contributing over 60% to GDP

Emerging as a hub of manufacturing excellence. new growth Emerging as a hub of manufacturing excellence. new growth

engines of Indian economy include IT, ITes, pharmaceuticals, bio-engines of Indian economy include IT, ITes, pharmaceuticals, bio-

technology, nano technology, agri. businessestechnology, nano technology, agri. businesses

Where forces of competition are at workWhere forces of competition are at work

Innovation driving enterprisesInnovation driving enterprises

Economic reforms well on course – entering second phase   Economic reforms well on course – entering second phase                

Indian Economy and Capital Market Indian Economy and Capital Market at a Glanceat a Glance

9040 brokers in cash segment and 1064 in 9040 brokers in cash segment and 1064 in derivative segment of the marketderivative segment of the market

122 investment bankers in the market122 investment bankers in the market

58 under writers to support primary issues58 under writers to support primary issues

34 foreign venture capital funds 34 foreign venture capital funds

120 Portfolio managers 120 Portfolio managers

Indian Economy and Capital Market Indian Economy and Capital Market at a Glanceat a Glance

Business Week says that of 100 emerging Business Week says that of 100 emerging market firms which are rapidly globalising market firms which are rapidly globalising 21 are Indian firms21 are Indian firms

Economists project India to become the Economists project India to become the third largest economy in the world by 2040third largest economy in the world by 2040

Indian capital market regulator has Indian capital market regulator has acquired international credibility in the acquired international credibility in the least possible timeleast possible time

Indian Economy and Capital Indian Economy and Capital Market at a GlanceMarket at a Glance

India has a disclosure based regime of India has a disclosure based regime of regulationregulation

Disclosure and Investor Protection Disclosure and Investor Protection guidelines availableguidelines available

India’s accounting standards are closer to India’s accounting standards are closer to international standards international standards

India has a well laid down legal frameworkIndia has a well laid down legal framework

Indian Economy and Capital Market Indian Economy and Capital Market at a Glanceat a Glance

India has T+2 rolling settlement as India has T+2 rolling settlement as opposed to T+3 in NYSE.opposed to T+3 in NYSE.

In India the transactions are totally In India the transactions are totally electronic on a real time basis.electronic on a real time basis.

India has several protective safeguards for India has several protective safeguards for the retail investor such as grading system the retail investor such as grading system of public offering, retail quota at 25 per of public offering, retail quota at 25 per cent etc. cent etc.

Indian Economy and Capital Market Indian Economy and Capital Market at a Glanceat a Glance

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

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 Economy and Capital Market at a Glance

Sustained GDP Growth

High GDP GrowthGrowth Gap Over The World

DemographicsHalf the population below 25 yrs

ConsumerismRetail credit, low interest rates,

changing aspirations

InfrastructureDevelopment of roads, ports,

telecom

ReformsFDI, Tax reforms

Globalcompetitiveness

Exports

Outsourcing

Indian EquitiesLong term prospects are intact

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Money Market InstrumentsMoney Market Instruments

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

that is at a discount from the par or face value of the that is at a discount from the par or face value of the security.security.

Examples include:Examples include:– Treasury billsTreasury bills– Commercial PaperCommercial Paper

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Short-Term Debt and the Money Short-Term Debt and the Money MarketMarket

Commercial PaperCommercial Paper

Short-term debt instruments, usually unsecured, issued Short-term debt instruments, usually unsecured, issued by corporations.by corporations.Involve credit risk because the financial health of a Involve credit risk because the financial health of a corporation can deteriorate and jeopardize the corporation can deteriorate and jeopardize the repayment of the amount borrowed.repayment of the amount borrowed.– Sold at a discount from their face valueSold at a discount from their face value– Maturities less than a yearMaturities less than a year

Because of the credit risk, usually there is only a market Because of the credit risk, usually there is only a market for commercial paper offered by the most credit worthy for commercial paper offered by the most credit worthy corporate issuers.corporate issuers.

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Bank FinancingBank FinancingShort-Term FinancingShort-Term Financing

Banks are an important source of Banks are an important source of financingfinancing

They provide:They provide:– Lines of Credit in support of working capital Lines of Credit in support of working capital

needsneeds– Term Loans in support of longer term Term Loans in support of longer term

investment in equipmentinvestment in equipment

Market infrastructureMarket infrastructure• Stock exchange Stock exchange • Clearing and settlementClearing and settlement• Education and training Education and training • Investors’ protection Investors’ protection • Rating agencyRating agency

Intermediaries Intermediaries

Financial intermediaries may stand in between Financial intermediaries may stand in between ultimate lenders and ultimate borrowersultimate lenders and ultimate borrowers• Merchant BankersMerchant Bankers• Stock brokers Stock brokers • Advisors Advisors • BanksBanks• Mutual Funds etcMutual Funds etc

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Function of Financial Function of Financial Intermediaries: Indirect FinanceIntermediaries: Indirect Finance

Why is there indirect finance, i.e., what is the Why is there indirect finance, i.e., what is the rationale for financial intermediation?rationale for financial intermediation?

1.1. Lower transaction costsLower transaction costs

2.2. Risk managementRisk management

3.3. Asymmetric informationAsymmetric information

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1. Transaction Costs1. Transaction Costs

Transaction Costs Transaction Costs —— resources (time/money) resources (time/money) used in carrying out the exchange of assets, used in carrying out the exchange of assets, goods or servicesgoods or servicesEconomies of scaleEconomies of scale– Reduction in transaction costs per dollar of Reduction in transaction costs per dollar of

transactiontransaction– Example: legal costs for “blueprint” contractExample: legal costs for “blueprint” contract

Liquidity servicesLiquidity services– Coordination across deposit-taking and lending Coordination across deposit-taking and lending

activitiesactivities

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2. Risk Management2. Risk Management

Risk sharingRisk sharing– Asset transformationAsset transformation

Risk transformation: sell low-risk assets and use Risk transformation: sell low-risk assets and use acquired funds to buy riskier assetsacquired funds to buy riskier assetsMaturity transformation: convert funds lent for a Maturity transformation: convert funds lent for a short-period into loans of longer durationshort-period into loans of longer duration

Diversification — the holding of multiple Diversification — the holding of multiple (not perfectly correlated) assets(not perfectly correlated) assets– Take advantage of portfolio effectsTake advantage of portfolio effects

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3. Asymmetric Information3. Asymmetric Information

Asymmetric distribution of information between agentsAsymmetric distribution of information between agents– Example: borrower has better information about investment Example: borrower has better information about investment

project than the lenderproject than the lender

Economic incentives matterEconomic incentives matter

Adverse SelectionAdverse Selection (before the transaction) (before the transaction)– Example: more likely to select risky borrowerExample: more likely to select risky borrower

Moral HazardMoral Hazard (after the transaction) (after the transaction)– Example: activities making loan repayment by borrower less Example: activities making loan repayment by borrower less

likelylikely

Role and Functions of Role and Functions of a stock exchange a stock exchange

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

Role and Functions of Role and Functions of a stock exchange cont’d a stock exchange cont’d

• Provides a market for the trading of Provides a market for the trading of securities to individuals and securities to individuals and organizations seeking to invest their organizations seeking to invest their saving or excess funds through the saving or excess funds through the purchase of securitiespurchase of securities

Role and Functions of a stock exchange cont’d

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 cont’d

Establishes rules for fair trading practices and regulates the trading activities of its members according to those rules

Role and Functions of Role and Functions of

a stock exchange a stock exchange cont’dcont’d

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

FairFair

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

Efficient marketEfficient market

This means that orders This means that orders are executed and are executed and transactions are settled transactions are settled in the fastest possible in the fastest possible wayway

TransparencyTransparency

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

Transparency cont’d Transparency cont’d

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

Transparency cont’dTransparency cont’d

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

Doing businessDoing business

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

Doing business cont’dDoing business cont’d

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

PricePrice

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

Listing requirementsListing requirements

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

Benefits of listing

• Visibility• Market support• Investors confidence

• Increased demand for products and services

• Overall increase in profitability

Once tradedOnce traded

• Aura of reliabilityAura of reliability• Accuracy in reporting financial Accuracy in reporting financial

data data • Reputation Reputation • Strength Strength

Delisting

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

Liquidity

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

Desirable Characteristics of a stock market cont’d

• Availability of information Market efficiency

• Prices react quickly to new information

• Small price fluctuations • Narrow price spread

Financing the exchange Financing the exchange

• Transaction fees paid by members for Transaction fees paid by members for each order executed each order executed

• Fees paid by firms when their securities Fees paid by firms when their securities are originally listed are originally listed

• Annual fees by firms Annual fees by firms • Entrance fees from new members Entrance fees from new members • sale of historic trading and market sale of historic trading and market

information information

Major challenges for the Major challenges for the ExchangesExchanges

• Cross border trading • Issuers and investors are

expanding their horizons beyond their home markets

• Investors becoming much more demanding

•Regulatory improvementRegulatory improvementTransparency and Corporate Transparency and Corporate

GovernanceGovernance

CorporateGovernance

Protection to minorityShareholders

Disclosure

Enhance market

confidence

Strong industry regulator

Owners

Board of Directors

Managers

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 – 11Assignment – I – 11thth July July

A)A) Individual Assignment- 3minute presentation on Individual Assignment- 3minute presentation on Financial News Analysis (Refer Economic times Financial News Analysis (Refer Economic times and other business news papers/ magazine) –and other business news papers/ magazine) –Compulsory for first 5 roll numbers. Also submit Compulsory for first 5 roll numbers. Also submit a report on A4 size paper (Give intext citations)a report on A4 size paper (Give intext citations)

B)B) Individual Assignment – 2 minute presentation Individual Assignment – 2 minute presentation on Key learnings of the previous class. on Key learnings of the previous class. (Compulsory for all)(Compulsory for all)

C)C) Name of Groups (Maximum 7 students)Name of Groups (Maximum 7 students)

Some important pointsSome important points

Academic Honesty Academic Honesty – Individual Work Only, Allows for Group Individual Work Only, Allows for Group

Discussion of Concepts and ProblemsDiscussion of Concepts and Problems– Do Not Copy WorkDo Not Copy Work– Reference Any Source Reference Any Source – When Confused Ask InstructorWhen Confused Ask Instructor

Contact me: Rahul Jain (9811228852, Contact me: Rahul Jain (9811228852, rahulkjain16@yahoo.co.in, , Yahooid:rahulkjain16)Yahooid:rahulkjain16)