MODULE – 3 financial environment

Contents of Module 3 Indian money market: meaning, functions and constituents Indian capital market: meaning, functions and constituents Stock exchange: importance and functions SEBI and Capital market reforms and development Industrial financial institutions (IDBI, SIDBI, ICICI, IFCI etc.)

Financial market Financial market is a mechanism that allows people to buy and sell (trade) financial securities (such as stocks and bonds), commodities (such as precious metals or agricultural goods), and other items of value at low transaction costs and at prices that reflect the efficient-market hypothesis.

Financial markets facilitate the raising of capital (in the capital markets), the transfer of risk (in the derivatives markets), international trade (in the currency markets) and are used to match those who want capital to those who have it.

Types of financial markets Capital market which consist of: Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, and enable the subsequent trading thereof. Commodity markets, which facilitate the trading of commodities.

Money markets which provide short term debt financing and investment. Derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date. Insurance markets, which facilitate the redistribution of various risks. Foreign exchange markets, which facilitate the trading of foreign exchange.

The capital markets consist of primary markets and secondary markets The capital markets consist of primary markets and secondary markets. Newly formed (issued) securities are bought or sold in primary markets. Secondary markets allow investors to sell securities that they hold or buy existing securities.

MONEY MARKET The money market can be defined as a market for short-term money and financial assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.

Constituents of money market 1. Call /Notice-Money Market Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money".

2. Inter-Bank Term Money Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days.

3. Treasury Bills. Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year).

4. Certificate of Deposits Certificates of Deposit (CDs) is a negotiable money market instrument issued as a Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI.

Stock Exchange Stock Exchange is an organized marketplace, corporation or mutual organization, where members of the organization gather to trade company stocks and other securities. The members may act either as agents for their customers, or as principals for their own accounts. Stock exchanges also facilitate for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerized.

SEBI The Securities and Exchange Board of India was established on April 12, 1992 in accordance with the provisions of the Securities and Exchange Board of India Act, 1992.

The board of members of SEBI shall consist of a chairman, two members from amongst the officials of the ministries of central government dealing with finance and law, one member from amongst the officials of the Reserve Bank of India, two other members to be appointed by the central government, who shall be professionals and have experience or special knowledge relating to securities market.

The Preamble of the Securities and Exchange Board of India describes the basic functions of the Securities and Exchange Board of India as “…..to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto”

The establishment of Securities and Exchange Board of India (SEBI) was a landmark government measure to monitor and regulate capital market activities and to promote healthy development of the market. SEBI is also empowered to issue such directions as may be appropriate to certain person or class of persons or company, intermediary or other persons referred in the act in the interest of investors etc.

REGULATIONS/Functions of SEBI 1. To protect the interests of investors in securities and to promote the development, and to regulate the securities market.  2. Regulating the business in stock exchanges and any other securities markets.  3. Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, portfolio managers, investment advisers and such other intermediaries who may be associated with securities markets in any manner. 4. Registering and regulating the working of venture capital funds and collective investment schemes including mutual funds.

REGULATIONS/Functions of SEBI 5. Prohibiting fraudulent and unfair trade practices relating to securities markets.  6. Promoting investors' education and training of intermediaries of securities markets. 7. Regulating substantial acquisition of shares and take-over of companies. 8. Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market intermediaries.

Industrial finance Finance is a pre requisite to mobilize resources for organizing production. it is necessary to make finance and other development assistances in a package to take the dormant and developing economies to the take- off stage.

Industrial finance IFIs are institutions set up mainly by the government for providing medium and long-term financial assistance to industry. As these institutions provide developmental finance, that is, finance for investment in fixed assets, they are also known as ‘development banks’ or ‘development financial institutions’. These institutions receive funds for their financing operations primarily from the government or other public institutions. These institutions also raise funds from the capital market.

Role of industrial financial institutions 1. They constitute an important source of long-term finance to industry. 2. They have played an important role in the development of (a) Small scale industry, and (b) Projects in backward areas. 3. They have helped new and small entrepreneurs in setting up industry. 4. Through their operations involving underwriting of and direct subscription to the issue of shares and debentures, they have been important players in the capital market. These operations have a favourable impact on the ability of industrial concerns to raise funds from capital market.

Role of industrial financial institutions 5. These institutions have improved the allocation of funds to industry and thus, have aided in better use of the available resources for the economic development of the country. 6.They have been a source of technical and managerial advice to the industry. They have also helped in identification, evaluation and execution of new investment projects. 7. These institutions have been helpful in the establishment of concerns which required extra-ordinarily large amounts of finance for their projects with a long gestation period.

Industrial Development Bank of India (IDBI) . Industrial development means increasing the scope and reach to the common man and to the industrialists. The bank was established in 1964 by the Indian government under the Industrial Development Bank of India Act,1964. According to the Banks Corporate mission, IDBI strategic objective is to position itself as India’s premier wholesale bank through a full range of wholesale products-lending, capital, market advisory, and risk management.

The strength of IDBI lies on: 1. Diversified portfolio 2 The strength of IDBI lies on: 1.Diversified portfolio 2.Long standing business relationships with major industrial houses. 3.Proven core competency. 4.Large balance sheet and sound financials. 5. capacity to take large single party exposure. 6. capacity to leverage. 7. long term funds. 8. Fairly good retail network with a large investor base. 9.Intellectual capital.

Subsidiary organizations. 1 Subsidiary organizations. 1. SIDBI-Small industrial Development Bank of India. 2. IDBI Capital-A stock broking company started in 1993. 3. INTECH-It is based on the business prospects for the IT sector.

SIDBI The small Industrial Development Bank of India Act, 1989, under which the SIDBI was established on April 2,1990. It is the principal financial institution for the promotion, financing, and development of industry in the small scale sector and to co-ordinate the functions of the institutions engaged in the promotion and financing or developing industry in the small scale sector.

Objectives : Financing, Promotion, Development, Co-ordination Objectives : Financing, Promotion, Development, Co-ordination. Financial Assistance: Equity, Term Loan, Working capital requirement, for raw material through finance against bills receivables. Promotional Orientation: Enterprise Promotion, Human resource Development,Technology upgradation.

Promotion and Development activities of SIDBI. 1 Promotion and Development activities of SIDBI. 1. SIDBI foundation for Micro credit. 2. Mahila Vikas Nidhi. 3. Rural Industries programmes. 4.Entrepreneurship Development programmes.

ICICI: The industrial credit and Investment corporation of India Limited, which was merged with the ICICI bank in 2001, was founded by World Bank, the government of India and representatives of private industry on January 5, 1995 to encourage and assist industrial development and investment in India.

Objectives: 1. Provide assistance in the creation, expansion, and modernization of industrial enterprise. 2.Encouraging and promoting the participation of private capital. 3. Encouraging and promoting industrial investment and the expansion of investment markets. 4. Comprehensive financial services. 5. Provides Brokerage service, advisory services.

IFCI: Industrial Finance Corporation of India IFCI: Industrial Finance Corporation of India. Established in 1948, under the IFCI act, and incorporated in 1993. Principal Activities: Project Finance, Financial services, lending Services.