Apna Sapna Money-Money

EEB2 Money doesn't create man but it is the man who created money. -Warren Buffet -Warren Buffet

EEB3 WELCOME To ALL OF YOU – IFS Course RAHUL JAIN (Striving for excellence) BCOM (H), MBA, FCS

Overview of Indian Financial System and Economic Development By- Rahul Jain (PGPM (MBA), FCS) Ph:

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 5

Outline Overview of financial markets Overview of financial markets Institutional infrastructure Institutional infrastructure Role and functions of stock exchange Role and functions of stock exchange

Some Important rules Switch off your Mobiles Attendance rules will be strictly applied Attendance rules will be strictly applied Non completion of Assignment will lead to strict disciplinary measures 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 institute’s name –Include your hobbies, 2 strengths and 2 unique talents –Include your achievements –Include what you want to learn from this course

9 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 EEB10

Constituents of Financial System

12 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

13 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

14 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 Money market Government bond market Corporate bonds & equities Asset backed securities & derivatives Gov’t T Bills

17 Instruments 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 exch ange Credit unions Insurance cos NIS Supporting agents

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 India’s 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, bio- technology, nano technology, agri. businesses  Where forces of competition are at work  Innovation driving enterprises  Economic reforms well on course – entering second phase  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 Indian Economy and Capital Market at a Glance India has a disclosure based regime of regulation Disclosure and Investor Protection guidelines available India’s 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

 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 Growth Growth Gap Over The World Demographics Half the population below 25 yrs Consumerism Retail credit, low interest rates, changing aspirations Infrastructure Development of roads, ports, telecom Reforms FDI, Tax reforms Global competitiveness Exports Outsourcing Indian Equities Long term prospects are intact

30 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

EEB GASCI Seminar 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.

EEB32 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 Stock exchange Clearing and settlement Clearing and settlement Education and training Education and training Investors’ protection Investors’ protection Rating agency Rating agency

Intermediaries Financial intermediaries may stand in between ultimate lenders and ultimate borrowers Merchant BankersMerchant Bankers Stock brokersStock brokers AdvisorsAdvisors BanksBanks Mutual Funds etcMutual Funds etc

35 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

36 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

37 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

38 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 cont’d 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 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 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 a stock exchange cont’d The exchange itself does not buy or sell the securities, nor does it set prices for them

Fair 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

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

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

Transparency cont’d 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 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

Price 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 Visibility Market support Investors confidence Increased demand for products and services Overall increase in profitability

Once traded Aura of reliability Aura of reliability Accuracy in reporting financial data Accuracy in reporting financial 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 Transaction fees paid by members for each order executed Transaction fees paid by members for each order executed Fees paid by firms when their securities are originally listed Fees paid by firms when their securities 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 information 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 GovernanceRegulatory improvement Transparency and Corporate Governance Corporate Governance Protection to minority Shareholders 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 – 11 th 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 ( , Yahooid:rahulkjain16)