“Why do I need to learn about finance..

I am very good in my own area of

specialization”

How would you react to the above statement?

The job content

Management
& Finance
As
Expertise
you
move
up ..

Functional
Expertise
 Finance Management

Management

Human resources Material Finances

Technology Information

HR Finance
Department Department

R&D IT
Department Department

Production
Department
Concerned with
managing financial
resources in the most
optimal manner
Objectives:
1. Overview of Indian financial system, instruments and market.
2. Basic concepts of value of money, returns and risks, corporate finance, working
capital and its management.
3. Knowledge about sources of finance, capital structure, dividend policy.

Outcomes: On completion of the course, learner will be able to:

1. Understand Indian finance system.
2. Apply concepts of time value money and risk returns to product, services and
business.
3. Understand corporate finance; evaluate and compare performance of multiple
firms.
4. Take Investment, finance as well as dividend decisions.
Books Recommended
1. Fundamentals of Financial Management, 13th Edition (2015) by Eugene
F. Brigham and Joel F. Houston; Publisher: Cengage Publications, New
Delhi.
2. Analysis for Financial Management, 10th Edition (2013) by Robert C.
Higgins; Publishers: McGraw Hill Education, New Delhi.
3. Indian Financial System, 9th Edition (2015) by M. Y. Khan; Publisher:
McGraw Hill Education, New Delhi.
4. Financial Management, 11th Edition (2015) by I. M. Pandey; Publisher:
S. Chand (G/L) & Company Limited, New Delhi.
5. Financial Management, Theory & Practice 8th Edition (2011), by
Prasanna Chandra: Tata McGraw Hill Education Private Limited, New
Delhi.
Financial Management
What is financial management?

It’s an area of business management, it is evolving subject, it aims at

judicial use of capital and careful selection of sources of capital.
Finance management

F. M. deals with

Procurement of Utilisation of
fund (cost, risk fund (cost of
and control) procurement)
NATURE OF FINANCIAL MANAGEMENT
• What is the nature of financial management?

• It is an indispensible organ of business finance.

• A business cannot run without financial management.

• It cannot be kept secluded, it has to be a integral organ of the business itself because procuring
finance, utilizing aid, then follow ups, this is a process which cannot go alone, it has to be hand in
hand with the business organization.

• Now it’s a continuous process because it’s not a onetime decision, it’s a regular decision; it’s
evolving day by day. It’s not that at special occasions, I need to call my financial manger and take a
decision.
 NATURE OF FINANCIAL MANAGEMENT
• It is also one of the aspects of financial management that on special occasions, there demand is
higher but during day to day activity also, I need to take my financial decisions, in dividend
payouts, I have to take my financial decisions, so it’s a continuous process, then it’s less
descriptive and more analytical.

• It’s not a descriptive subject; it’s analytical where I have to use my skills, competence to apply
the funds in the most appropriate resources.

• It’s different from accounting function, accounting deals with recording of transaction after it
has taken place, while financial management is a pre hand process, it comes before accounting,
where financial management ends, accounting starts.
NATURE OF FINANCIAL MANAGEMENT

• So it’s a broader concept where we need to make the projects, evaluate them, we
have to take decisions, then comes the final transaction

• It helps the decision of top management.

• Decision making process becomes easy with the help of financial management
where elaborate reports are prepared, analytical reviews have been done, cash
flows, fund flows are prepared, to know the short term positions, this way it’s a
very crucial part of business.
Profit Maximization
What is profit maximization?

Profit maximization is considered as the goal of financial management. Maximizing the profit is an
implied objective and therefore it’s natural to retain it as the goal of financial management.

The profit is regarded as a yardstick for measuring the economic efficiency of any firm. Had all
business of the society work out for maximization of the profit. There would have been efficient,
economic and profitable utilization of resources. There had been minimum wastage.

In this approach, action that increases profit should be undertaken and the actions which reduce the
profit, we need to avoid those actions.
Profit Maximization
• What are the short comings of profit maximizations?

Firstly it ignores risk, there is a direct relationship between risk and profit, higher the risk,
higher the possibility of profit.

If profit maximization is the only goal, risk factor is all together avoided or ignored.
Therefore finance managers will accept the proposals with which risk are highly associated.

That means they enter into risky project in order to earn profit and that is not exactly
certain profit, that’s a possible profit, they may enter into a risky transaction and can face
loses. So the first short coming is ignoring risk factor.
Profit Maximization
Profit maximization’s scope is narrow; profit maximization objective is too narrow.

It fails to consider social consideration; social consideration means various related

groups like consumers, government, interest of workers are all together ignored.

So ethical trade practices are not followed as required under profit maximization
and if these factors are ignored, company cannot survive long.

It will become a short sited policy to go for profit maximization only.

WEALTH MAXIMIZATION

• The objective of the firm is to maximize its wealth. Wealth means its value.

• Value of firm means its market price that is market price of company’s common
stock, common stock means its share, so where the objective of the firm is to
maximize its market price is called wealth maximization objective.

• The market price of a share of a company serves as a performance index.

Performance index means it’s a report card of the firm, its progress, it indicates
how well the management is doing on behalf of share holders.
WEALTH MAXIMIZATION

• On one hand where profit maximization widens the gap between management and share holders,
wealth maximization works as a coordinator between management and share holders.

• Many other factors also affect market price of share at a given point of time.

• The market price of a share is a function of two factors, firstly earning per share and second is
capitalization rate.

• So market price per share is computed as earning per share divided by capitalization rate.
Therefore finance manager need to insure that earning per share are optimum, keeping in view,
risk and other factors.
WEALTH MAXIMIZATION

• Wealth maximization decision criteria is also known as value maximization or net present
value maximization. Value maximization is widely accepted as appropriate operational
decision criteria for financial management.

• It removes all those technical limitations of profit maximization criteria. The measure of
wealth used in financial management is the economic value or net present value
method. Economic value means net present value; it is calculated by discounting the
future cash flows using appropriate

• rate reflecting risk associated with the project.

WEALTH MAXIMIZATION

• The risk is mitigating by applying discounting rate over the future cash flows to a
certain extent, so we can find out the future values in present term while
eliminating interest elements using that capitalization rate.

• This capitalization rate is cut off rate, is called cost of capital and lastly, it posses
three requirements of suitable operational objective of financial course of action.
 Nature and Scope of Finance Management

 Finance management is concerned with managing

financial resources in the most optimal manner

 Common terms use to describe resources – Capital,

funds, cash flow, money, etc.

 Finance department performs facilitation, reconciliation,

and control functions.

 Finance department maintain a constant control over the

various activities of the organization and makes different
departments accountable for the resources that they
consume.

 ‘The finance manager is on the top and not on the tap’

 Module 1 :Indian Financial System

Course: Corporate Finance Management

Course Code: DJ19ILO8025
Semester: VIII
Financial System
• The financial system enables lenders and borrowers to exchange
funds.
• A financial system can be said to play a significant role in the
economic growth of a country by mobilizing the surplus funds and
utilizing them effectively for productive purposes.
• Indian Financial System is a combination of financial institutions,
financial markets, financial instruments and financial services to
facilitate the transfer of funds.
 Functions of a Financial System
• Mobilization of Savings: The financial system helps channel savings from individuals and
organizations into productive investments, boosting economic activity.
• Allocation of Resources: By directing funds to the most promising investment opportunities,
the financial system helps allocate capital efficiently.
• Facilitating Payments: It provides mechanisms, such as banks and payment systems, for
facilitating day-to-day transactions, including electronic payments, checks, and transfers.
• Risk Management: The system helps individuals and companies manage risks through
financial products like insurance, derivatives, and hedging strategies.
• Price Discovery: The financial system helps establish market prices for financial assets by
reflecting information about supply and demand.
• Liquidity Provision: It ensures that assets can be converted into cash with ease, thus
enhancing the ability of investors and firms to respond to changing economic conditions.
• Capital Formation: Through investments in companies and projects, the financial system
helps in the accumulation of capital, contributing to infrastructure and industrial development.
Characteristics of a Financial System
• Efficiency: A well-functioning financial system ensures efficient allocation
of resources and capital to the most productive uses.
• Liquidity: It provides mechanisms for buying and selling financial assets
quickly without significantly affecting their price.
• Transparency: It ensures clear and open information about financial
instruments, institutions, and markets, enabling informed decision-making.
• Stability: The system must be resilient to shocks, preventing disruptions
that could harm the economy.
• Security: It provides protection to investors and stakeholders, ensuring fair
practices and safeguarding against fraud.
INDIAN FINANCIAL
INSTRUMENTS
Financial Instruments
Financial instruments are contracts or assets that can be traded or used
for investment, hedging, or raising capital.
They represent a form of financial value that can be transferred,
bought, or sold in financial markets.
Financial instruments allow individuals, companies, and governments
to manage risk, make investments, or raise funds.
Characteristics of a Financial Instruments
• Liquidity : The ease with which a financial instrument can be bought or sold in
the market without affecting its price.
• Risk and Return : Each financial instrument carries a different level of risk, and
the potential for return is often linked to that risk.
• Return Type : Some instruments provide regular income (interest, dividends),
while others may generate capital gains.
• Diversification: Financial instruments in India can help investors diversify their
portfolios across different asset classes, sectors, or geographic regions.
• International Exposure: Some financial instruments in India, such as foreign
bonds or international mutual funds, offer exposure to global markets and
currencies.
3 Types of Financial Instruments

• Money market instruments.

• Capital market instruments.

• Hybrid instruments.
 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.
Money market instruments

1. Call/Notice Money

2. Treasury Bills

3. Term Money

4. Certificate of Deposit
5. Commercial Papers
 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". No collateral security is required
to cover these transactions.
 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.
 Treasury Bills
• Treasury Bills are short term (up to one year) borrowing
instruments issued by the Government of India as a promissory
note with guaranteed repayment at a later date.

• It is an IOU of the 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).

• They are issued at a discount to the face value, and on maturity the
face value is paid to the holder. The rate of discount and the
corresponding issue price are determined at each auction.
 Certificate of Deposits
• Certificates of Deposit (CDs) is a negotiable money
market instrument and issued in dematerialised form or
as a Usance 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.
 Certificate of Deposits
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.
Banks have the freedom to issue CDs depending on their
requirements. An FI may issue CDs within the overall
umbrella limit fixed by RBI, i.e., issue of CD together with
other instruments viz., term money, term deposits, commercial
papers and intercorporate deposits should not exceed 100 per
cent of its net owned funds, as per the latest audited balance
sheet.
 Commercial Paper
• CP is a note in evidence of the debt obligation of the issuer.
On issuing commercial paper the debt obligation is
transformed into an instrument.

• CP is thus an unsecured promissory note privately placed

with investors at a discount rate to face value determined by
market forces.

• CP is freely negotiable by endorsement and delivery.

 Commercial Paper
A company shall be eligible to issue CP provided –
i. the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore;
ii. the working capital (fund-based) limit of the company from
the banking system is not less than Rs.4 crore and
iii. the borrowal account of the company is classified as a
Standard Asset by the financing bank/s. The minimum
maturity period of CP is 7 days. The minimum credit
rating shall be P-2 of CRISIL or such equivalent rating by
other agencies.
 Merits of Commercial Paper
• Technically, it provides more
funds compared to other
sources. The cost of
commercial paper to the
issuing firm is lower than the
cost of commercial
bank loans.
• It is in freely
transferable nature, therefore
it has high liquidity also a
wide range of maturity
provide more flexibility.
 Merits of Commercial Paper

• A commercial paper is highly secure and does not contain

any restrictive condition.
• Companies can save their extra funds on commercial paper
and also earn some good return on the same.
• Commercial papers produce a continuing source of funds.
This is because their maturity can be tailored to suit the
needs of issuing firm. Again, commercial paper that matures
can be repaid by selling the new commercial paper.
 Limitations of Commercial Paper
• Only financially secure and highly rated organizations can
raise money through commercial papers. New and
moderately rated organizations are not in a position to raise
funds by this method.

• The amount of money that we can raise through commercial

paper is limited to the deductible liquidity available with the
suppliers of funds at a particular time.

• Commercial paper is an odd method of financing. As such if

a firm is not in a position to redeem its paper due to financial
difficulties, extending the duration of commercial paper is
not possible.
 Capital Market Instruments

• The capital market generally consists of the following

long term period i.e., more than one year period,
financial instruments; In the equity segment Equity
shares, preference shares, convertible preference shares,
non-convertible preference shares etc and In the debt
segment debentures, zero coupon bonds, deep discount
bonds etc.
• The capital market is the market for securities
where companies and the government can raise
long term fund.
• It is a place where buyers and sellers of securities
can enter into transactions to purchase and sell
shares, bonds and debentures.
BASIC CAPITAL MARKET INSTRUMENTS
EQUITY SHARES
 MERITS OF EQUITY SHARES

A permanent source of finance to the company

No fixed rate of dividend
Easy liquidity and marketability
 LIMITATIONS OF EQUITY SHARES

No guarantee on returns to shareholders

Loss of managerial control
 PREFERENCE SHARES

Preference shares are known as preferred stock.

Preference share capital has two priorities i.e., in the
repayment of capital and payment of dividend.
Preferred stocks usually carry no voting rigths.
TYPES OF PREFERENCE SHARE
MERITS OF PREFERENCE SHARE CAPITAL

From Company’s point of view

Hybrid security
Absence of voting rights
No dilution of control
Fixed return
LIMITATIONS OF PREFERENCE SHARES

From Investor ’s point of view

Not secured.
Not an attractive investment.
No right to participate in the management.
 DEBENTURES
In corporate finance, a debenture is a medium to long term
debt instrument used by large companies to borrow
money, at a fixed rate of interest.
A debenture is a unit of loan amount
When a corporation is intends to raise the loan amount
from the public it issues debentures.
The debenture holder gets interest which is fixed at the
time of issue.
 Types of DEBENTURES

Redeemable Convertible Secured Bearer

or or non- or or
irredeemable convertible unsecured registered
 MERITS OF DEBENTURES

No loss of managerial control

A Flexible source of finance

Reduces burden of tax of the company

 LIMITATION OF DEBENTURES

• Fixed rate on interest

• Companies may have to mortgage their assets
• Not an attractive investment from company’s point of
view.
 BONDS

• Bonds are issued by public authorities, credit

institutions, companies and super national institutions
in the primary market.
• A bond is a negotiable certificate which entitles the
holder of repayment of the principal sum plus interest.
• The most common process of issuing bonds is through
underwriting.
 TYPES OF BONDS

• Bearer bonds
• Registered bonds
• Callable bonds
• Convertible bonds
• Zero coupon bonds
• Fixed rate bonds
 Bond Debenture
A bond is a financial instrument A debt instrument used to raise
showing the indebtedness of the long term finance is known as
issuing body towards its holders. Debentures.

Bonds are generally secured by Can be Secured or Unsecured.

collateral.
Low Interest Rates High Interest Rates.
Issued by Govt Agencies, Financial Issued by Public Companies
institution, Corporation etc.

Accrued Periodical payments

 DIFFERENCE BETWEEN

EQUITY SECURITY DEBT SECURITY

Owner of the company. Creditor of the company.

Get Dividend only when company

• .
Provides steady income to the
earns sufficient profits. investors.

Have voting rights. No voting rights.

Not secured. Secured in nature.

Share capital of the company. Borrowed capital of the company.

Derivatives
•Futures Contracts:
Agreements to buy or sell an underlying asset at a predetermined price on a specified future date. Futures
are often used for hedging or speculative purposes.
•Options Contracts:
Provide the right (but not the obligation) to buy or sell an asset at a predetermined price before a certain
date. They are used for hedging or speculation.
•Swap Agreements:
Derivative contracts in which two parties exchange financial instruments or cash flows over time, typically
to hedge interest rate risk or currency risk.
Mutual Funds
•Equity Mutual Funds:
Funds that invest primarily in stocks of listed companies. They offer higher returns with higher risk and
are suitable for long-term investors.
•Debt Mutual Funds:
Funds that invest in fixed-income securities like government bonds, corporate bonds, or money market
instruments. These are relatively safer and provide steady returns.
•Hybrid Funds:
Funds that invest in a mix of equities and fixed-income instruments. They offer moderate risk and
return.
 Hybrid Instruments

• Hybrid instruments have both the features of

equity and debenture. This kind of instruments
is called as hybrid instruments. Examples are
convertible debentures, warrants etc.
 Hybrid Instruments
• A hybrid financial insturment is an investment that blends
chearacteristics of both equity and debt markets (stocks and
bonds).

• The most common form of a hybrid instrument is the

convertible bond, warrants.

• This type of security is an issuance of debt that can be

converted to a company's common stock at any given time. So,
it is kind of like a call option.
 Hybrid Instruments
• Obviously, the major advantage of this type of security is that
if the corporations stock price goes down, the option will not
be exercised and you will still receive interest payments on
your bonds.

• However, if the stock price goes up, you can convert the
bonds to stock at a given strike price.

• If the price of the stock is above the strike price, the

convertible is considered in “in the money”.
 Hybrid Instruments

• The major advantage here is security.

• There is opportunity to profit greatly on increases in stock

prices, but at worse case you will still hold the debt
security.

• The only way you can realize "real" losses is if the

corporation defaults on its debt.
 Hybrid Instruments
• One disadvantage of a convertible is a low yield. Convertibles
often yield a lower interest rate than the corporations no
convertible bonds due.

• One important thing to point out when dealing with hybrid

securities is they are very difficult to accurately value, and this
misreresentation is often reflected in its market value.

• This leaves alot of opportunity for an arbitrage situation, where

a securtiy can be purchased then immediatly sold for a profit
simultaniously.
• In India money market is regulated by Reserve bank of India
(www.rbi.org.in) and Securities Exchange Board of India
(SEBI) [www.sebi.gov.in ] regulates capital market. Capital
market consists of primary market and secondary market. All
Initial Public Offerings comes under the primary market and
all secondary market transactions deals in secondary market.
Secondary market refers to a market where securities are
traded after being initially offered to the public in the primary
market and/or listed on the Stock Exchange.

Secondary market comprises of equity markets and the debt

markets. In the secondary market transactions BSE and NSE
plays a great role in exchange of capital market
instruments.(visit www.bseindia.com & www.nseindia.com ).
FINANCIAL MARKET
 FINANCIAL MARKETS
Any marketplace where buyers and sellers participate in the trade of
financial securities, commodities, and other fungible items of
value at low transaction costs and at prices that reflect supply and
demand.

Securities include stocks and bonds, and commodities include

precious metals or agricultural goods.
There are both general markets (where many commodities are traded)
and specialized markets (where only one commodity is traded).
KINDS OF FINANCIAL MARKET
 MONEY MARKET

 As per RBI “ A market for short terms financial assets that

are close substitute for money, facilitates the exchange of
money in primary and secondary market”.

 A mechanism that deals with the lending and borrowing

of short term funds.

 A segment of the financial market in which financial

instruments with high liquidity and very short maturities
are traded.
 Objectives of Money Market
1.To cater to the requirements of borrowers for short term funds, and
provide liquidity to the lenders of these funds.
2.To provide parking place for temporary employment of surplus fund.
3.To provide facility to overcome short term deficits.
4.To enable the central bank to influence and regulate liquidity in the
economy.
 COMPOSITION OF MONEY MARKET
Money Market consists of a number of sub-markets which
collectively constitute the money market. They are:
 Call Money:
 lending and borrowing transactions are carried out for one day that
may or may not be renewed the next day.
 Demand comes from commercial banks that need to meet
requirements of CRR and SLR,whereas supply comes from
commercial banks with excess funds, and FIs like IDBI, etc.
 The Treasury Bill Market:

 It deals in Treasury Bills of short term duration: 14 days,

182 days ,91 days, and 364 days.
 They are issued by Government and largely held by RBI.
 The treasury bills facilitate the financing of Central
Government temporary deficits.
 The rate of interest for treasury bills is determined by the
market, depending on the demand and supply of funds in
the money market.
 The Commercial Bill Market:
 Deals in bills of exchange, a seller draws a bill of
exchange on the buyer to make payment within a
certain period of time.
 The bills can be domestic bills or foreign bills of
exchange.
 The commercial bills are purchased and
discounted by commercial banks, and
 are rediscounted by FIs like EXIM Bank, SIDBI, IDBI,
etc.
 The Commercial Paper Market:
 The scheme of Commercial Paper (CP) was introduced in 1990
for short term financing issue . They can be issued in multiples of
Rs. 5 lakhs and in multiples thereof
 As per RBI guidelines, CPs can be issued on the following
conditions:
a. The minimum tangible net worth of the company to be at least Rs. 4
crores.
b. The working capital limit should have been sanctioned by a bank or
financial institution.
Certificate of Deposits (CDs) :

 It is an important segment of the Indian money market. The certificate of deposits is

issued by the commercial banks.

 The minimum subscription of CD should be worth Rs. 1 lakh. The maturity period of
CD is as low as 3 months and as high as 1 year.

 These are the transferable investment instrument in a money market. The government
initiated a market of CDs in order to widen the range of instruments in the money
market and to provide a higher flexibility to investors for investing their short term
money.
Banker’s Acceptance :

 This is a financial instrument produced by an individual or a corporation in the name

of the bank, wherein the issuer must pay a specified amount to the instrument holder
on a predetermined date, between 30 and 180 days, starting from the date of issue of
the instrument

 Banker’s Acceptance is issued at a discounted price, and the actual price is paid to the
holder at maturity. The difference between the two is the profit made by the investor

 Banker’s acceptance is a secure financial instrument as the payment is guaranteed by

a commercial bank
Repurchase Agreements (Repo) and Reverse Repo :

 Repo is a short-term borrowing instrument where one party sells a security

(usually government bonds) to another party with an agreement to repurchase
the same security at a later date, typically overnight or within a few days.

 Reverse Repo is the opposite, where the party buys securities with an
agreement to sell them back at a later date.

 These instruments are primarily used by financial institutions and the central
bank (RBI) to manage liquidity.
 STRUCTURE OF MONEY MARKETS

 ORGANISED MONEY STRUCTURE

 UNORGANISED MONEY
STRUCTURE
 ORGANISED MONEY STRUCTURE
PARTICIPANTS:
 Reserve bank of India.
 DFHI (discount and finance house of India)
 Commercial banks:-
Public sector banks
 SBI with 7 subsidiaries
Cooperative banks
 20 nationalized banks
Private banks
 Indian Banks
Foreign banks
 Development bank
IDBI, IFCI, ICICI, NABARD, LIC, GIC, UTI etc.
 UNORGANISED SECTOR

 Indigenous Bankers

 Money lenders

 Unregulated Intermediaries
aries
 INDEGENEOUS BANKS

 Private firms that receive deposits and give loans and thereby
operate as banks
 As activities are not regulated properly ,they are
unorganized segment
 Broadly classified into 4 groups- GUJRATI SHROFFS, MULTANI
SHROFFS, CHETTIARS AND MARWARI KAYAS
 MONEY LENDERS

Broadly classified into 3 categories:

 PROFESSIONAL MONEYLENDERS

 ITINERANT MONEYLENDERS

 NON PROFESSIONAL MONEYLENDERS

UNREGULATED INTERMEDIARIES

 FINANCE COMPANIES- gives loans to the retailers,

artisians and other self-employed persons

 CHIT FUNDS- are saving institutions

 NIDHIS- operate in unregulated credit market and

provide kind of mutual benefit funds
 DISADVANTAGES OF MONEY MARKET

 Absence of integration

 Shortage of funds

 Lower rate of return

 Larger amount of transaction fee

 CAPITAL MARKET

 The market where investment instruments like bonds,

equities and mortgages are traded is known as the capital
market.

 The primal role of this market is to make investment from

investors who have surplus funds to the ones who are running
a deficit.
 CAPITAL MARKET
The capital market offers both long term and overnight funds.

The different types of financial instruments that are traded in the

capital markets are:
 equity instruments
 credit market instruments (loans)
 insurance instruments
 foreign exchange instruments
 hybrid instruments and
 derivative instruments
 STRUCTURE OF THE CAPITAL MARKET

• Capital market is divided into 2 constituents :

– The financial institutions

provide long-term and medium term loan

facilities.

– The securities market

»Gilt-edged market

»The corporate securities market

 Gilt-edged Market
 Market in government securities.

 Risk-free market.

 Government securities market consist of

 The new issue market

 The secondary market

 RBI plays a dominant role

 The investors are predominantly institutions which are
required statutorily to invest in g-sec.
 G-sec are the most liquid debt instruments.

 Transaction in Government securities market are very

large.
 CORPORATE SECURITIES MARKET

 It is a market where securities issued by firms can be bought and sold

freely.

 It consist of – the new issues market (PRIMARY MARKET)

- the stock exchange (SECONDARY MARKET)

 THE NEW ISSUE MARKET
 It Is Related With issue of new securities.
 It Has No Particular Place.

 The public limited companies often raise funds through primary

market for setting up or expanding their business.

 Following are the methods of raising capital in the primary market:

i) Prospectus
ii) Offer For Sale
iii) Private Placement
iv) Right Issue
Primary market
Companies can raise capital at relatively low cost
The primary market is an important source for mobilisation of savings in an
economy.
The chances of price manipulation in the primary market are considerably less
when compared to the secondary market
It enables an investor to allocate his/her investment across different categories
involving multiple financial instruments and industries.
It is not subject to any market fluctuations. The prices of stocks are determined
before an initial public offering, and investors know the actual amount they will
have to invest.
Types of primary market instruments
• Debentures : These are a type of bond that a company issues to raise capital. Debentures pay a fixed interest
rate and have a maturity date upon which the company repays the principal.To rate its debentures, a company
appoints underwriters, as well.
• Bonds : These Bonds are similar to debentures but are issued by governments or corporations. Bonds pay
interest to investors and have a fixed maturity date at which point the principal is repaid.
• IPO : An IPO is the first time a company issues equity shares to the public. Companies typically use an IPO to
raise capital to expand their business.
 Equity Shares :These are the most common type of new issues market security issued in the primary stock
market. Equity shares represent ownership in a company and give shareholders voting rights and a share in
profits.
 Preference Shares : conversely, provide shareholders with a fixed dividend payout and preference in receiving
dividends over common equity shareholders.
• FPO : An FPO is when a company issues additional equity shares to the public after an IPO. Companies use
FPOs to raise additional capital for business expansion or to pay off debt.
 THE STOCK EXCHANGE

 The stock exchange market is a highly organized market

for the purchase and sale of second-hand quoted or listed
securities.

 ‘quoting’ or ‘listing’ of a particular security implies

incorporating the security in the register of the stock exchange
so that it can be bought and sold there.
 Secondary Market

▶ The secondary market is that market in which the buying and selling of the previously
issued securities is done.
▶ The transactions of the secondary market are generally done through the
medium of stock exchange.
▶ The chief purpose of the secondary market is to create liquidity in securities.
▶ If an individual has bought some security and he now wants to sell it, he can do so through the
medium of stock exchange to sell or purchase through . the medium of stock exchange requires
the services of the broker presently, their are 24 stock exchange in India.
Secondary market
• The secondary market helps measure the economic condition of a country. The
rise or fall in share prices indicates a boom or recession cycle in an economy.
• The secondary market provides a good mechanism for a fair valuation of a
company.
• The secondary market helps drive the price of securities towards their genuine, fair
market value through the basic economic forces of supply and demand.
• The secondary market promotes economic efficiency. Each sale of a security
involves a seller who values the security less than the price and a buyer who
values the security more than the price.
• The secondary market allows for high liquidity – stocks can be easily bought and
sold for cash.
Types of secondary market instruments
• Bonds: A loan given to a company or government, where the investor receives
interest payments and the principal amount is repaid at the end of the term.
• Debentures: A type of debt instrument, not secured by collateral. Returns
generated from debentures are thus dependent on the issuer’s credibility.

• Derivatives : A financial contract whose value is tied to the performance of an

underlying asset, such as a stock, bond, or commodity.

• Stocks : A type of equity shares that investors can buy and sell from other
investors in the secondary market.
Primary vs Secondary market
 ROLE OF CAPITAL MARKET IN INDIA’S INDUSTRIAL
GROWTH

 Financing Five Year Plans

 Mobilization of savings and acceleration of capital

formation.

 Promotion of industrial growth.

 Raising long-term capital.

 Ready and continuous market.

 Proper channelization of funds.

 Provision of a variety of services.

FACTORS CONTRIBUTING TO THE GROWTH OF CAPITAL
MARKET IN INDIA
 Establishment of development banks and industrial
financing institutions.

 Legislative measures.

 Growth of underwriting business.

 Growing public confidence.

 Increasing awareness of investment opportunities.

 Setting up of SEBI.

 Mutual funds.

 Credit rating agencies.

PROBLEMS OF THE INDIAN CAPITAL MARKET : THE PRE -
REFORM PHASE

EQUITY MARKET

 as of 1992, BSE was a monopoly, so it had high cost of

intermediation.

 “open outcry” , brokers used to charge the investors a much

higher price.

 No price-time priority.

 Manipulative practices prevailed.

 Retail investors were dependent on sub-brokers.

 Inefficiency of the exchange for the below largest 100
stocks.

 Future-style settlement

 Order execution was unreliable and costly.

 Share certificates were printed on paper.

 DEBT MARKET
 in 1992, debt trading took place without an exchange.

 Credit risk narrowed the market.

 Enforcement of Cartels.

 Trading took place by telephone in Mumbai.

 Trade prices were not centrally reported.

 RBI tracks ownership of G-sec in a database called

SGL(subsidiary general ledger). It was maintained manually.
 STRENGTHENING THE CAPITAL MARKET: THE POST-
REFORM PHASE

GOVERNMENT SECURITIES MARKET

 The auction system for the sale of government of india
medium and long-term securities was introduced from june
3, 1992.

 the government of india set up the Securities trading corporation

of india.

 Scheme of 14-day intermediate treasury bills was introduced.

 A system of primary dealers was established in 1995.

 Market orientation to issues of government securities paved the
way for the RBI to activate the open market operation as a tool of
market intervention.
 Improvement were brought in transparency of operations
and data dissemination.
 A practise of pre-announcing a calendar of treasury bills was
introduced.
 Foreign institutional investors were allowed to set up 100per cent
debt funds to invest in government securities.
 Retail trading in government securities commenced in 2003.
 SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SEBI set up in 1988 was given statutory recognition in 1992 on

recommendations of the Narasimham Committee.
The Aims of SEBI are :

 regulating the business in stock market and other security

market.

 Registering and regulating the working of stock brokers.

 Registering and regulating the working of investment

schemes.
 Promoting and regulating the self-regulatory
organizations.
 Prohibiting fraudulent and unfair trade practices.
 Prohibiting insider trading.
 Regulating substantial acquisition of shares and takeover
of companies.
 NATIONAL STOCK EXCHANGE OF INDIA

 NSE is a securities exchange set up in 1992.

 It is a limited liability company.

 The physical floor was replaced by

 anonymous, computerized order-matching with strict price-
time priority.

 Satellite communication removed the limitation of physical

place.

 Transparency.
 FINANCIAL
INSTITUTIONS
 Financial Institutions
 A financial institution (FI) is a company engaged in the business of dealing
with financial and monetary transactions such as deposits, loans,
investments, and currency exchange.

 The major categories of financial institutions include central banks, retail

and commercial banks, internet banks, credit unions, savings and loans
associations, investment banks, investment companies, brokerage firms,
insurance companies, and mortgage companies
Characteristics of Financial Institutions
Intermediation Role: Financial institutions act as intermediaries between savers and borrowers. They collect
deposits from individuals and businesses and lend this money to those who need it, such as borrowers or
investors.

Risk Management: They help manage and mitigate financial risks. For instance, insurance companies help
individuals and businesses manage risks by providing policies that protect against uncertain events (e.g., health,
property, life risks). Investment institutions also manage investment risks by diversifying portfolios.

Liquidity: Financial institutions provide liquidity by offering instruments that can be easily converted into cash.
For example, commercial banks allow depositors to withdraw funds at any time, while mutual funds can be sold
or redeemed relatively quickly.

Capital Formation: Financial institutions facilitate the formation of capital by mobilizing savings and
channeling them into productive investments. This aids in the development of businesses, infrastructure, and the
overall economy.
Characteristics of Financial Institutions
Regulation and Supervision: Financial institutions are usually heavily regulated by government bodies to ensure stability,
transparency, and fairness. In many countries, central banks or financial regulatory authorities establish guidelines and
monitor the activities of financial institutions.

Financial Products and Services: Financial institutions offer a wide range of products and services tailored to the needs of
different customers, including:

 Loans (e.g., home loans, personal loans, business loans)

 Insurance (e.g., life, health, property insurance)

 Investments (e.g., mutual funds, stocks, bonds)

 Banking Services (e.g., savings accounts, checking accounts, credit cards)

Trust and Reliability: Financial institutions are expected to operate with a high degree of trust and reliability. Customers rely
on these institutions to safeguard their funds, provide accurate information, and act ethically in managing financial
transactions.

Diversification: Financial institutions often provide various types of financial products, which allows them to diversify their
activities and reduce risk. For example, commercial banks may offer loans, savings accounts, credit cards, and investment
services all within the same institution.
Characteristics of Financial Institutions
Profit Motive: Most financial institutions, especially private banks and investment firms, operate with a profit
motive. They generate revenue through interest on loans, fees for services, and returns on investments.

Economies of Scale: Larger financial institutions can benefit from economies of scale, where they can offer
services at lower costs due to their size and reach. This makes them more competitive and enables them to
provide better services and products.

Innovation: Financial institutions often innovate to provide new financial products and services. For example,
with the rise of digital banking, many institutions now offer online banking, mobile banking apps, and digital
wallets, making it more convenient for customers to access their accounts and manage their money.

Global Reach: Many financial institutions operate globally, providing services across countries and continents.
International banks, investment firms, and insurance companies enable global trade, investment, and finance
 Types of Financial Institutions
Depository institution:-
 Commercial bank
 Credit union
 Saving and loan association
 Mutual saving
Non-depository institution:-
(They are not a bank in real sense. They make a contractual arrangement and invest in securities to
satisfy the need and preferences of the investor)
 Insurance companies
 Pension and provident fund
 Finance companies
 Mutual funds
 IFCI, Industrial Finance Corporation of India The Industrial Investment Bank of India (IIBI)
Industrial Development Bank of India (IDBI) National Bank for Agriculture and Rural Development (NABARD)
National Housing Bank (NHB) as the Common Nodal Agency for both Schedule
Commercial Banks (SCBs) and Housing Finance Companies (HFCs)
Small industrial Development Bank of India (SIDBI) Tourism Finance Corporation of India Ltd. (TFCI)
Housing and Urban Development Corporation Ltd. (HUDCO)
 State Land
State Finance Corp Development
orations (SFCs) Bank (India)
Primary Land
SIDC states industrial Development
development corporation Bank

National Small State Industrial

Industries Investment
Corporation Corporation
(NSIC) Bank (SIIC)
Non-Banking Financial Company (NBFC)
 Ministry Of Corporate Affairs

As depicted above, RBI classifies NBFCs into ten categories namely Asset Finance Companies(AFCs), Loan Companies(LCs), Investment
Companies (ICs), Infrastructure Finance Companies(IFCs), Core Investment Companies(CICs), Infrastructure Debt Funds (IDF-NBFCs), NBFC-
Microfinance Institutions (NBFC-MFIs), Factoring companies(FCs), Mortgage Guarantee Companies (MGCs) and Residuary Non- Banking
Companies(RNBCs).
 Commercial bank

The primary functions of a commercial bank are accepting deposits and also lending
funds. Deposits are savings, current, or time deposits. Also, a commercial bank lends
funds to its customers in the form of loans and advances, cash credit, overdraft and
discounting of bills, etc.
 Functions of Commercial bank
 Commercial banks provide retail banking services to household and business
customers
 They are licensed deposit-takers – providing a range of savings accounts
 They are licensed to lend money (and thereby “create” money e.g. in the form of bank
loans, overdrafts and mortgages
 Commercial banks are profit-seeking
 A commercial bank’s business model relies on receiving a higher interest rate on the
loans (or other assets) than the rate it pays out on its deposits (or other liabilities)
 This “spread” on their assets and liabilities is used to pay the operating expenses of a
bank and also to make a profit.
 Merchant Banks

A merchant banker usually refers to a firm or organization involved in all

aspects of issue management. Their services include providing consultancy
or advisory services to corporates for issue management, making
arrangements for buying, selling or subscribing to shares in an issue or any
other consultancy or services such as underwriting, analysis and advice
related to mergers and acquisitions, arranging offshore funding or venture
capital, credit syndication and portfolio management.
Functions of Merchant Banks
 Leading merchant bankers in India

 Public sector: SBI Capital Markets, Punjab National bank, IFCI Financial Services
 Private sector: ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital Markets, Yes
Bank, Kotak Mahindra Capital Company, Reliance Securities
 Foreign merchant bankers: Goldman Sachs (India) Securities, Morgan Stanley India,
Barclays Securities (India), Bank of America, Citigroup Global Markets India
 NBFC
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956
and is engaged in the business of Loans, Advances, Acquisition of
shares/stock/bonds/debentures/securities issued by Government or local authority or other
securities of like marketable nature, Leasing, Hire-purchase, Insurance business, Chit business.

Unlike banks, NBFCs cannot accept demand deposits (like savings or checking accounts) or offer
checking account services.
Some of the services provided by NBFCs include:
•Loans and advances (personal loans, business loans, etc.)
•Insurance
•Leasing and hire purchase
•Investment and asset management services

Example : Muthoot Finance, Shriram Transport Finance, LIC Housing Finance

 IMPORTANCE OF NBFCs
▶ In the present economic environment it is very difficult to cater need of society by Banks alone so
role of Non Banking Finance Companies and Micro Finance Companies become indispensable.
▶ The role of NBFCs as effective financial intermediaries has been well recognized as they have
inherent ability to take quicker decisions, assume greater risks, and customize their services and
charges more according to the needs of the clients.
▶ At present, NBFCs in India have become prominent in a wide range of activities like hire-
purchase finance, equipment lease finance, loans, investments, etc.
▶ To help in developing the large number of industries as well as entrepreneur in different sectors of
different areas.
▶ To cover all the areas which is being untouched or uncovered by RBI or other FCIs.
Unorganised Sector (NBFI)
• Hire purchase is a financial arrangement where the buyer agrees to pay for an
asset in installments over time while using the asset. Typically, once the final
installment is paid, the buyer becomes the owner of the asset.
• Leasing is a financial contract in which one party (the lessor) gives another party
(the lessee) the right to use an asset (such as machinery, vehicles, or property) for
a fixed period in return for periodic payments.
• Factoring involves a financial service where a business sells its receivables
(invoices) to a third party (called a factor) at a discount, in exchange for
immediate cash. This allows businesses to improve their liquidity without waiting
for customers to pay.
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