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LESSON

16INDIAN FINANCIAL SYSTEM

CONTENTS16.0 Aims and Objectives16.1 Introduction16.2 Organised Capital Market16.3 Un-organized Capital Market16.4 Organized Money Market

16.4.1 Market for Banking Financial Institutions16.4.2 Market for Non Banking Financial Institutions

16.5 Un-organized Money Market16.6 Let us Sum up16.7 Lesson-end Activity16.8 Keywords16.9 Questions for Discussion

16.10 Suggested Readings

16.0 AIMS AND OBJECTIVESThe purpose of this lesson is to discuss the typical structure of the Indian financialsystem. After studying this lesson you will be able to:

describe components of financial markets

understand organised and unorganised capital markets

(iii) explain various segments of money market

16.1 INTRODUCTIONThe Indian financial system coined more particularly immediately after the independence1947. Since 1947, the role of the financial system is more vibrant in meeting the needsand demands of not only the country but also the corporate sectors. It outperformed inthe economy for the development of the nation through the collection of saving from thehouseholds for development of the nation as well as the corporate sectors. The Indianfinancial system could be bifurcated into two different segments viz.

Capital Market and Money marketThese two markets are further classified into organized and unorganized.

Accounting and Finance forManagers

Capital market

Indian financial System

Moneymarket

Organised Un organized Organised Un organized

Primary market

IPOs

Kerb trading

Bills Market

Pawn Brokers

Chit funds

Public Issues

Private Placement

Underwriting

Discount Market

Gilt edgedShort term financial

Short terminstruments market

Institutional offer

Secondary

16.2 ORGANISED CAPITAL MARKETThe capital market which was initially controlled and organized by the Controller ofCapital Issues act and then it was replaced by the Securities Exchange Board of Indiafor the governance of capital market in India. The capital market in India is known asregulated in spheres by SEBI then and there.

The organised capital market is bifurcated into two categories viz Primary market andSecondary market.

Primary market: It is the market for the fresh issuance of securities by the new as wellas existing companies, in order to raise the capital from the investors.

The Primary market is further classified into many segments

Initial Public offering: As a new company registered under the Companies Act 1956 ispermitted to raise the capital from the market through the abridged prospectus.

Public issue: It is another mode of raising the capital from the common public by theexisting companies.

Private placement: During the issue, the larger investment houses are invited for thesubscription of the issue of securities in bulk quantities at a discount price prior to theissue. After the issue, according to the investment policy of the Institutional investors,they sell them at higher price to the individual investors. This facilitates the institutionalinvestors to book profits through the process of private placement.

Underwriting: It is another mode of issuing the securities during the issue, moreparticularly this mode of issue is found to be an avenue to off-load the risk of managingthe issue of securities as well as to secure the issue as fully subscribed.

Secondary market: It is the market for the securities which are already available in themarket, to buy and sell among the players. This is the market further classified into twodifferent categories viz mutualisation and demutualisation of stock exchanges.

Mutualised Stock exchanges: These are the exchanges never have any distinctionamong the members, management and governing body of the stock exchange. Theseare purely administered by the members/brokers of the stock exchange, e.g.,. Traditionalstock exchanges.

Demutualised stock exchanges: These are separate distinct faces among themselves.The roles and responsibilities of the brokers, governing body members and people in themanagement are clearly defined and performed by them without any ambiguity e.g.OTCEI, NSE and so on.

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16.3 UN-ORGANIZED CAPITAL MARKETDue to stringent guidelines of SEBI, unofficial market trading activities are banned onlyin order to safeguard the interest of the investors.

Kerb trading which was taken place among the players of the stock market during thenon working hours of the stock exchange. This trading is known in other words as un-official trading or black trading among the players.

The next segment is nothing but the money market which controlled and monitored bythe Reserve Bank of India.

16.4 ORGANIZED MONEY MARKETThe organised money market can be further segmented into two categories:

16.4.1 Market for Banking Financial InstitutionsUnder this the entire banking network is administered by RBI, which has the followingmany more classification viz Public sector banks, Scheduled banks, Private sector bank,Co-operative banks, Regional Rural banks and Land development banks

16.4.2 Market for Non Banking Financial InstitutionsThe non banking financial institutions are nothing but development banks, state financialinstitutions

The money market is further divided into various segments viz

Bills market

Discounting market

Acceptance market

Marketable securities market

Gilt edged securities market and so on

Bill market: In this market only, the bills are bought and sold among the players. It is themarket for both commerce bill and finance bill. The commerce bill is nothing but the billof exchange defined in accordance with the Sec. 5 of the Negotiable Instruments Act. Itarises only due to credit sales among the parties, only in order to safeguard the interestof the suppliers who supplied the goods and articles on credit.

Discounting market: It is another most important market for discounting of the bills ofthe trade. These are normally carried out by the banking and financial institutions inaddition to Discounting Housing Finance of India which is the apex body for rediscountingin India next to Reserve Bank of India. The bills are discounted by the banking and nonbanking financial institutions only on the basis of the credibility of the parties involved inthe bill who has accepted to make the payment on the maturity of the bill.

Acceptance market: In India, there is no separate acceptance market for accepting thebills before discounting, but in U.K., there is greater scope for accepting the bill beforethe process of discounting. Normally, the discounting is carried out only on the basis ofthe extent of acceptance given by the acceptance houses on the bills produced.

Govt Securities market: The govt securities are also tradable in the secondary marketimmediately after the issuance. According to the Public debt act, the central and stategovt are empowered to issue the securities to raise financial resources from the publicfor developmental aspects of the state or region.

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The treasury bills are mainly traded in the market immediately after the issuance

The following are the major type of treasury bills traded in the market are 91 daystreasury bills, 182 days treasury bill and 364 days treasury bill

Bonds market: It is a separate market available to raise the financial resources throughlong term debt instrument. The bonds are normally issued by the corporate sectors andgovt organizations. They are many in categories viz

Secured and unsecured bonds

Pay in kind bonds

Redeemable bonds and irredeemable bonds and so on.

16.5 UN-ORGANIZED MONEY MARKETThis particular market is dominated by the pawn brokers, chit funds, nidhis, and so on.There is no stringent guidelines prevailing to control and monitor the role of the abovementioned players.

In addition to the above classifications, one more classification is that of insurancecompanies which are separately governed by the IRDA

Which has got its own segments as following:

Life insurance sector

Non life insurance sector

Pension funds

Health insurance and so on.

Check Your Progress

What are the main components of Indian financial system?

16.6 LET US SUM UPThe Indian financial system could be bifurcated into two different segments viz. CapitalMarket and Money Market.

The money market is further divided into various segments viz

Bills market

Discounting market

Acceptance market

Marketable securities market

Gilt edged securities market and so on.

16.7 LESSON-END ACTIVITYExamine critically the role of Financial markets in industrial development of India.

16.8 KEYWORDSOrganised Capital MarketPrimary market

1.

2.

3.

4.

5.

Initial Public offering Indian Financial System

Public issue

Secondary market

Mutualised Stock exchanges

Demutualised Stock exchanges

Unorganized Capital market

Bill market

Discounting market

Acceptance market

Govt Securities market

Bonds market

Un-organized money market

16.9 QUESTIONS FOR DISCUSSIONWrite elaborate note on the organized capital market. Explain the role of SEBI incontrolling the capital market.

Draw the role of RBI in controlling and monitoring the various entities in the regulatedmoney market environment.

Explain the various steps involved in the bills market.

Illustrate the role of acceptance market.

Explain the various type of bonds and treasury bills under the organized moneymarket.

16.10 SUGGESTED READINGSR.L. Gupta and Radhaswamy, “Advanced Accountancy”.V.K. Goyal, “Financial Accounting”, Excel Books, New Delhi.

Khan and Jain, “Management Accounting”.S.N. Maheswari, “Management Accounting”.S. Bhat, “Financial Management”, Excel Books, New Delhi.

Prasanna Chandra, “Financial Management – Theory and Practice”, Tata McGrawHill, New Delhi (1994).

I.M. Pandey, “Financial Management”, Vikas Publishing, New Delhi.

Nitin Balwani, “Accounting & Finance for Managers”, Excel Books, New Delhi.

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