Assignment No :-1

Name :- PAVAN GIRIDHARRAO BASUNDE

Subject :- INDIAN FINANCIAL SYSTEM

Specialization :- Finance (3 Sem)

Q.1. Discuss the importance of Indian capital market in development of Indian

Financial System.
Answer:
There are many persons or organizations that require capital. Similarly, there are
several persons or organizations that have surplus capital. They want to dispose of their
surplus capital. Capital market is a meeting place of these two broad categories of persons
or organizations.
Meaning and definition of Capital Market
Capital market simply refers to a market for long term funds. It’s a market for
buying and selling of equity, debt and other securities. Generally, it deals with long
securities that have a maturity period of above one year.
According to W.H Husband and J.C. Dockerbay, “the capital market is used to
designate activities in long term credit, which is characterized mainly by securities of
investment type”.
Thus, capital market may be defined as an organized mechanism for the effective
and smooth transfer of money capital or financial resources from the investors to the
entrepreneurs.
Characteristics of Capital Market:
● It is a vehicle through which capital flows from the investors to borrowers.
● It generally deals with long term securities.
● All operations in the new issues and existing securities occur in the capital market.
● It deals in many types of financial instruments. These include equity shares,
preference shares, debentures, bonds, etc. These are known as securities. It is for
this reason that capital market is known as ‘Securities Market’.
● It functions through a number of intermediaries such as banks, merchant bankers,
brokers, underwriters, mutual funds etc. They serve as links between investors and
borrowers.
 ● The constituents in the capital market include individuals and institutions. They
include individual investors, investments and trust companies, banks, stock
exchanges, specialized financial institutions etc.

Functions of a Capital Market:

● Mobilize long term savings for financing long term investments.
● Provide risk capital in the form of equity or quasi-equity to entrepreneurs.
● Provide liquidity with a mechanism enabling the investors to sell financial assets.
● Improve the efficiency of capital allocation through a competitive pricing
mechanism.
● Enable quick valuation of instruments- both equity and debt.
● Provide insurance against market risk through derivative trading and default risk
through investment protection fund.
● Provide operational efficiency through; 1. Simplified transaction procedures,
2.Lowering settlements times, and 3. Lowering transaction costs.
● Develop integration among debt and financial sectors, equity and debt instruments,
long term and short term funds.
● Direct the flow of funds into efficient channels through investment and
disinvestment and reinvestment.

Importance of Indian Capital Market:

● Mobilization Of Savings And Acceleration Of Capital Formation:

In developing countries like India, the importance of capital market is self-evident. In this
market, various types of securities help to mobilize savings from various sectors of the
population. The twin features of reasonable return and liquidity in stock exchange are
definite incentives to the people to invest in securities. This accelerates the capital
formation in the country.

● Raising Long-Term Capital

The existence of a stock exchange enables companies to raise permanent capital. The
investors cannot commit their funds for a permanent period but companies require funds
permanently. The stock exchange resolves this dash of interests by offering an opportunity
to investors to buy or sell their securities, while permanent capital with the company
remains unaffected.

● Promotion Of Industrial Growth

The stock exchange is a central market through which resources are transferred to the
industrial sector of the economy. The existence of such an institution encourages people to
invest in productive channels. Thus it stimulates industrial growth and economic
development of the country by mobilizing funds for investment in the corporate securities.
 ● Ready And Continuous Market
The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes an investment in securities more
liquid as compared to other assets.

● Technical Assistance
An important shortage faced by entrepreneurs in developing countries is technical
assistance. By offering advisory services relating to the preparation of feasibility reports,
identifying growth potential and training entrepreneurs in project management, the
financial intermediaries in capital market play an important role.

● Reliable Guide To Performance

The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.

● Proper Channelization Of Funds

The prevailing market price of a security and relative yield are the guiding factors for the
people to channelize their funds in a particular company. This ensures effective utilization
of funds in the public interest.

● Provision Of Variety Of Services:

The financial institutions functioning in the capital market provide a variety of services
such as a grant of long-term and medium-term loans to entrepreneurs, provision of
underwriting facilities, assistance in the promotion of companies, participation in equity
capital, giving expert advice etc.

● Development Of Backward Areas

Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long-term funds are also provided for development
projects in backward and rural areas.

● Foreign Capital
Capital markets make possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities. The government
has liberalized Foreign Direct Investment (FDI) in the country. This not only brings in the
foreign capital but also foreign technology which is important for economic development of
the country.

● Easy Liquidity
With the help of secondary market, investors can sell off their holdings and convert them
into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and
when they are in need of funds.

Q.2. Define Money Market. State the functions of Indian Money Market.
Answers:
Financial markets are classified into two, namely, money market and capital
market.
Meaning of Money Market:
Money market is a segments of financial market. It is a market for short term
funds. Its deal with all transactions in short term securities. These transactions have a
maturity period of one year or less. Examples are bills of exchange, treasury bills etc. These
short term instruments can be converted into money for short term financial securities that
are equal to money.
According to Crowther, “Money market is a collective name given to various firms
and institutions that deal in the various grades of near money”.
Money market is not a place. It is an activity. It includes all organizations and
institutions that deals in short term financial instruments. However, sometimes
geographical names are given to the money market according to the location, e.g. Mumbai
Money Market.

Characteristics of Money Market:

● It is a market for short term financial assets that are close substitutes of money.
● It is basically an over the phone market.
● It is a wholesale market for short term debt instruments.
● It facilitates effective implementation of monetary policy of a central bank of a
country.
● Transactions are made without the help of brokers.
● It established the link between the RBI and banks.
● The players in the money market are RBI, commercial banks and companies.

Functions of Money Market:

● Facilitating adjustments of liquidity positions of commercials banks, business
undertakings and other non-banking financial institutions.
● Enabling the central bank to influence and regulate liquidity in the economy through
its intervention in the market.
● A money market by providing profitable investment opportunities for short-term
surplus funds helps to enhance the profit of financial institutions.
● A money market enhances the amount of liquidity available to the entire country.
● A well-developed money market helps to avoid wide seasonal fluctuations in the
interest rates.
● A well-developed money market, through quick transfer of funds from one place to
another, helps to avoid the regional gluts and stringencies of funds.
 ● By providing various kinds of credit instruments suitable and attractive for
different sections, a money market augments the supply of funds.
● A well-organized money market is essential for the successful operation of the
central banking policies.
● Helping in promoting liquidity and safety of financial assets.
● Serving as a coordinator between borrowers and lenders of short term funds.
● Providing short term funds to government institutions.

Importance of Money Market:

A well-developed money market is essential for the development of a country. It supplies
short term funds adequately and quickly to trade and industry. A developed money market
helps the smooth functioning of the financial system in any economy in the following ways:
● Development of the trade and industry: Money market is an important source of
finance to trade and industries. Money market finances the working capital
requirements of trade and industry through bills, commercial papers etc. it
influences the availability of finance both in the national and international trade.
● Development of capital market: Availability funds in the money market and
interest rates in the money market will influence the resource mobilization and
interest rate in the capital market. Hence, the development of capital market
depends upon the existence of a developed money market. Money market is also
necessary for the development of foreign exchange market and derivatives market.
● Helpful to commercial banks: Money market helps commercial banks for
investing their surplus funds in easily realizable assets. The banks get back the
funds quickly in times of need. This facility is provided by meet the statutory
requirement of CRR and SLR. In short, money market provides a stable source of
funds in addition to deposits.
● Helpful to central bank: Money market helps of a country to effectively
implements its monetary policy. Money market helps the central banks in making
the monetary control effective through indirect methods. In short, a well-developed
money market helps in the effective functioning of a central bank.
● Formulation of suitable monetary policy: Conditions prevailing in a money
market serve as a true indicator of the monetary state of an economy. Hence it
serves as a guide to the government in formulating and revising the monetary
policy. In short, the govt. can formulate the monetary policy after taking into
considerations the conditions in the money market.
● Helpful to government: A developed money market helps the govt. to raise short
term funds through the Treasury bill floated in the market. In the absence of a
developed money market, the govt. would be forced to issue more currency notes or
borrow from the central bank. This will raise the money supply over and above the
needs of the economy. Hence the general price level will go up. In short, money
market is a device to the govt. to balance its inflows and outflows.
Thus, a well-developed money market is essential for economic growth and stability.

Q.3. What is Forex Market? Explain the Mechanism of Forex market in India.
Answers:

Forex trading is the means through which one currency is changed into another. When
trading forex, you are always trading a currency pair – selling one currency while
simultaneously buying another.
Each currency in the pair is listed as a three-letter code, which tends to be formed of two
letters that stand for the region, and one standing for the currency itself. For example, USD
stands for the US dollar and JPY for the Japanese yen. In the USD/JPY pair, you are buying
the US dollar by selling the Japanese yen.

How does forex trading work?

● Institutional forex trading takes place directly between two parties in an over-the-
counter (OTC) market. Meaning there are no centralized exchanges (like the stock
market), and the institutional forex market is instead run by a global network of
banks and other organizations.

● Transactions are spread across four major forex trading centers in different time
zones: London, New York, Sydney, and Tokyo. Since there is no centralized location,
you can trade forex 24 hours a day.

● Most traders speculating on forex prices do not take delivery of the currency itself.
Instead, traders will make exchange rate predictions to take advantage of price
movements in the market. The most popular way of doing this is by trading
derivatives, such as a rolling spot forex contract offered by IG.

● Trading derivatives allows you to speculate on an asset’s price movements without

taking ownership of that asset. For instance, when trading forex with IG, you can
predict on the direction in which you think a currency pair’s price will move. The
extent to which your prediction is correct determines your profit or loss.

The three different types of forex market:

There are three different ways to trade on the forex market: spot, forward, and future.

Spot forex market: the physical exchange of a currency pair, which takes place at the exact
point the trade is settled – i.e. ‘on the spot’ – or within a short period of time. Derivatives
based on the spot forex market are offered over-the-counter by dealers like IG.

Forward forex market: a contract is agreeing to buy or sell a set amount of a currency at a
specified price, and to be settled at a set date in the future or within a range of future dates.
Futures forex market: an exchange-traded contract to buy or sell a set amount of a given
currency at a set price and date in the future.

Q.4. Discuss the regulatory role of RBI over Money Market Operations.
Answer:
RBI is the most important constituent of the money market. The money market comes
within the direct purview of the RBI regulations. The RBI influences liquidity and interest
rates through a number of operating instruments such as CRR, Open Market Operations,
repos, change in bank rates etc. The RBI has been taking several measures to develop
money market in India. A committee to review the working of the monetary system under
the chairmanship of Sukhamanoy Chakravorty was set up in 1985. It underlined the need
to develop money market instruments. As follow up, the RBI set up a working group on the
money market under the chairmanship of N.Vaghul. The committee submitted its report in
1987. This committee laid the blueprint for the institutions of a money market. Based on its
recommendations, the RBI initiated the following measures:
● The DFHI was set up as a money market institution jointly by the RBI, public sector
banks, and financial institutions in 1988 to impart liquidity to money market
instruments and help the development of a secondary market for such instruments.
● Money market instruments such as the 182-day T-bill, CD and interbank
participation certificate were introduced in 1988-89. CP was introduced in January
1990.
● To enable price discovery, the interest rate ceiling on call money was freed in sages
from October 1988. As a first step, operations of the DFHI in the call/ notice money
market were freed from the interest rate ceiling in 1988. Interest rate ceiling on
interbank term money, rediscounting of commercial bills and interbank
participation without risk were withdrawn in May 1989. All the money market
interest rates are, by and large, determined by market forces.
In August 1991, the RBI set up a high level committee under the
chairmanship of M.Narasimham (the Narasimham Committee) to examine all
aspects relating to structure, organizations, function and procedures of the financial
system. The committee made several recommendations for the development of the
money market. Based on its recommendations, the RBI initiated the following
measures.
● The securities Trading Corporation of India was set up in June 1994, to provide an
active secondary market in government securities.
● Barriers to enter were gradually eased by (a) setting up the primary dealer system
in 1995 and satellite dealer system in 1999 to inject liquidity in the market,(b)
enabling market evaluation of associated risk by withdrawing regulatory
restrictions such as banks guarantees in respects of CPs, and (c) increasing the
number of participants by allowing the entry of foreign institutional investors.
 ● Several financial innovations in instruments and methods were introduced. T-bills
of varying maturities and RBI repos were introduced. Auctioned T-bills were
introduced leading to market-determined interest rates.
● The development of a market for short term funds at market-determined rates has
been fostered by a gradual switch from a cash credit system to a loan based system.
● Adhoc and on-tap 91-day T-bills were discontinued.
● Liquidity Adjustments Facility (LAF) was introduced in June 2000.
● The minimum lock in the period for money market instruments was brought down
to 7 days.
● The RBI started repos both on auction and fixed interest rate basis for liquidity
management.
● New money market derivatives such as forwards rate agreements and interest rate
swaps were introduced in 1999.
● Money market instruments such as CDs and CPs are freely accessible to non-bank
participants.
● The payments system infrastructure was strengthened with the introduction of the
negotiated dealing system in February 2002, setting up of the clearing corporation
of India ltd. (CCIL) IN April 2002, and the implementation of real time grow
settlement system from April 2004.
● Collateral Borrowing and Lending Obligations was operationalizing as a money
market instruments through the CCIL in June 2003.
A basic objective of money market reforms in the recent years has
been to facilitate the introduction of new instruments and their appropriate pricing.
The RBI has endeavored to develop market segments which exclusively deal in
specific assets and liabilities as well as participations. Accordingly, the call/ notice
money market is now a pure inter- bank market. Standing liquidity support to banks
from the RBI and facilities for exceptional liquidity support has been rationalized.
The various segments of the money markets. Thus, RBI has been attempting to
develop the Indian money market. RBI is playing a key role in the development of
Indian money market.

Q.5. Discuss Bill Market in India. Explain T-Bills Operations.

Answers:
Bill market:
Bill Market refers to the market for short-term bills generally of three months maturity. A
bill is a promise to pay a specified amount by the borrower (drawer) to the creditor
(drawee). Bills are of three types- (a) bills of exchange or commercial bills used to finance
trade; (b) finance bills or promissory notes; and (c) treasury bills used to meet temporary
financial needs to the government. These bills may be bought and sold in the discount
market which consists of commercial banks, discount houses and other institutions.
The bill market plays an important role in the banking and monetary system of the
country because of the following reasons:
(a) It helps to meet the short-term financial requirements of individuals, companies and the
government.
(b) The commercial banks which have surplus funds can invest them profitably in these
bills,
(c) The commercial bank can dispose of these bills easily or can get them rediscounted by
the Reserve Bank of India whenever they require cash.
Keeping in view the usefulness of the bills as instruments of credit to both business and
banks, their self-liquidating nature and easier regulation of banks’ bill finance by the
central bank, the Reserve Bank of India has been making efforts to develop a bill market in
the country.
The main features of the New Bill Market Scheme are:
(i) All licensed scheduled commercial banks including the public sector banks will be
eligible to offer bills of exchange to the Reserve Bank for rediscounting.
(ii) The bills covered under the scheme must be genuine trade bills relating to the sale or
dispatch of goods.
(iii) The Reserve Bank rediscounts these bills. That is why the scheme is also called ‘Bills
Rediscounting Scheme’. The rediscounting facility should be available at the Reserve Bank’s
offices at Bombay, Calcutta, Madras and New Delhi. To avoid rediscounting of large number
of small bills, such bills should be given in bunches.
(iv) The bill should be drawn on and accepted by the purchaser’s bank. If the purchaser’s
bank is not a licensed scheduled bank, the bill should in addition bear the signatures of a
licensed scheduled bank.
(v) The bills should have maximum usance of 90 days.
(vi) The bills should bear at least two good signatures.
(vii) The scheme does not cover the bills of exchange relating to the sale of goods to the
government departments and quasi-government bodies as well as to statutory
corporations to the sale of such commodities which are indicated by the Reserve Bank from
time to time.
(viii) According to the modification of the scheme in 1971, the bills of exchange relating to
the sale of goods to government departments and quasi government bodies as well as to
statutory corporations have also been covered by the scheme.
(ix) With effect from April 1972, the bills of exchange drawn and accepted by the Industrial
Credit and Investment Corporation of India (ICICI) were also made eligible for discount
under the scheme.
Advantages of Bill Market:
A developed bill market is useful to the borrowers, creditors and to financial and monetary
system as a whole. The bill market scheme will go a long way to develop the bill market in
the country.
The following are various advantages of developed bill markets:
● Bill finance is better than cash credit. Bills are self-liquidating and the date of
repayment of a bank’s loans through discounting or rediscounting is certain.
● Bills provide greater liquidity to their holders because they can be shifted to others
in the market in case of need for cash.
 ● A developed bill market is also useful to the banks is case of emergency. In the
absence of such a market, the banks in need of cash have to depend either on call
money market or on the Reserve Bank’s loan window.
● The commercial bill rate is much higher than the treasury bill rate. Thus, the
commercial banks and other financial institutions with short-term surplus funds
find in bills an attractive source of both liquidity as well as profit.
● A development bill market is also useful for the borrowers. The bills are time-
bound, can be sold in the market and carry the additional security in the form of
acceptor’s signature. Therefore, for the borrowers, the cost of bill finance is lower
than that of cash credit.
● A developed bill market makes the monetary system of the country more elastic.
Whenever the economy requires more cash, the banks can get the bills
rediscounted from the Reserve Bank and thus can increase the money supply.
● Development of the bill market will also make the monetary control measures, as
adopted by the Reserve Bank, more effective. As pointed out by the Narasimhan
Study Group, “the evolution of the bill market will also make the Bank Rate
variation by the Reserve Bank a more effective weapon of monetary control as the
impact of any such changes could be transmitted through this sensitive market to
the rest of the banking system.”
T-Bills Operations:
Treasury bills are money market instruments issued by the Government of India as a
promissory note with guaranteed repayment at a later date. Funds collected through such
tools are typically used to meet short term requirements of the government, hence, to
reduce the overall fiscal deficit of a country.
They are primarily short-term borrowing tools, having a maximum tenure of 364 days,
available at zero coupons (interest) rate. They are issued at a discount to the published
nominal value of government security (G-sec).
Types of Treasury Bill
The distinction between different treasury bill types is made based on their tenure, as
enumerated below:
● 14-day treasury bill
● 91-day treasury bill
● 182-day treasury bill
● 364-day treasury bill
While the holding period remains constant for all types of treasury bills issued (as per the
categories mentioned above), face values and discount rates of such bonds change
periodically, depending upon the funding requirements and monetary policy of the RBI,
along with total bids placed.

Features of Treasury Bills

● Minimum investment
As per the regulations put forward by the RBI, a minimum of Rs. 25,000 has to be invested
by individuals willing to procure a short term treasury bill. Furthermore, any higher
investment has to be made in multiples of Rs. 25,000.
● Zero-coupon securities
G-Sec treasury bills don’t yield any interest on total deposits. Instead, investors stand to
realize capital gains from such investments, as such securities are sold at a discounted rate
in the market. Upon redemption, the entire par value of this bond is paid to investors,
thereby allowing them to realize substantial profits on total investment.
● Trading
The method of investment forms an integral part of essential Treasury bill details. The RBI,
on behalf of the central government, auctions such securities every week (on Wednesday)
in the market, depending upon the total bids placed on major stock exchanges. Investors
can choose to procure such government assets through depository participant commercial
banks, or other registered primary dealers (PDs), wherein the security transfer follows a
T+1 settlement process.

Alternatively, many open-ended mutual fund schemes also include treasury bills in their
corpus for individuals willing to invest through such funds.
● Yield Rate on Treasury Bills
The percentage of yield generated from a treasury bill can be calculated through the
following formula –

Y = (100-P)/P x 365/D x 100

Where Y = Return per cent

P = Discounted price at which a security is purchased, and

D = Tenure of a bill
Let us consider a treasury bills example for better understanding. If the RBI issues a 91-day
treasury bill at a discounted value of Rs. 98 while the face value of the bill is Rs. 100, the
yield on such G-Secs can be determined as follows –

Yield = (100 – 98)/98 x 365/91 x 100

= 8.19%

Advantages of Government Treasury Bills

● Risk-free
Treasury bills are one of the most popular short-term government schemes issued by the
RBI and are backed by the central government. Such tools act as a liability to the Indian
government as they need to be repaid within the stipulated date.
Hence, individuals enjoy comprehensive security on the total funds invested as they are
backed by the highest authority in the country, and have to be paid even during an
economic crisis.
● Liquidity
As stated above, a government treasury bill is issued as a short-term fundraising tool for
the government and has the highest maturity period of 364 days. Individuals looking to
generate short term gains through secure investments can choose to park their funds in
such securities. Also, such G-secs can be resold in the secondary market, thereby allowing
individuals to convert their holding into cash during emergencies.
● Non-competitive bidding
Treasury bills are auctioned by the RBI every week through non-competitive bidding,
thereby allowing retail and small-scale investors to partake in such bids without having to
quote the yield rate or price. It increases the exposure of amateur investors to the
government securities market, thereby creating higher cash flows to the capital market.

Q.6. Supriya’s grandmother, who was unwell, called her and gave her a gift packet.
Supriya opened the packet and saw many crumpled Share Certificate inside. As no
trading is now done in physical form, Supriya wants to know the process by adopting
which she is in a position to deal with these certificates.
Answers:

Q.7. “Every listing company has certain obligations and is required to comply with
the various documents for listing”. List documents require for listing.
Answers:
The Listing regulations would consolidate and streamline the provisions of existing listing
agreements for different segments of the capital market viz. Equity (including convertibles)
issued by entities listed on the Main Board of the Stock Exchanges, Small and Medium
Enterprises listed on SME Exchange and Institutional Trading Platform, Non-Convertible
Debt Securities, Non-Convertible Redeemable Preference Shares, Indian Depository
Receipts, Securitized Debt Instruments and Units issued by Mutual Fund Schemes. The
Regulations have thus been structured to provide ease of reference by consolidating into
one single document across various types of securities listed on the Stock exchanges.
 
The Listing Regulations have been sub-divided into two parts viz.,(a) substantive
provisions incorporated in the main body of Regulations; (b) procedural requirements in
the form of Schedules to the Regulations.
 
The main features of these regulations are as follows:
 
1. Guiding Principles (Chapter II): The regulations start by providing broad
principles (in line with IOSCO Principles) for periodic disclosures by listed entities
and also have incorporated the principles for corporate governance (in line with
OECD principles). These principles underlie specific requirements prescribed in
different chapters of the Regulations. In the event of the absence of specific
requirements or ambiguity, these principles would serve to guide the listed entities.
 
2. Common obligations applicable to all listed entities (Chapter III): Obligations
which are common to all listed entities have been enumerated.  These include
general obligation of compliance of listed entity, appointment of common
compliance officer, filings on electronic platform, mandatory registration on
SCORES, etc.
 
3. Obligations which are applicable to specific types of securities (Chapter III to
IX): Obligations which are applicable to specific types of securities have been
incorporated in separate chapters
 
4. Obligations of stock exchanges and provisions in case of default (Chapter X &
XI): Stock Exchanges have been given responsibility to monitor compliance or
adequacy / accuracy of compliance with provisions of these regulations and to take
action for non-compliance.
 
5. Ease of Reference:: The related provisions have been aligned and provided at a
common place for ease of reference. For  example, all clauses dealing with disclosure
of events or information which may be material or price sensitive spread across the
Listing Agreement have been provided as a schedule to the regulations. All
disclosures required to be made on the website of the listed entity have been
enumerated at a single place for ease of reference and all requirements pertaining to
disclosures in annual report have been combined.
 
6. Streamlining and segregation of initial issuance/listing obligations: In order to
ensure that there is no overlapping or confusion on the applicability of these
regulations, pre-listing requirements have been incorporated in respective
regulations viz. ICDR Regulations, ILDS Regulations, etc  These provisions pertain to
allotment of securities, refund and payment of interest, 1% Security Deposit (in case
of public issuance), etc. Post-listing requirements have been incorporated in Listing
Regulations.
 
7. Alignment with provisions of Companies Act, 2013:  Wherever necessary, the
provisions in Listing Regulations have been aligned with those of the Companies
Act, 2013.
 
8. Listing Agreement- A shortened version of the Listing Agreement (2 page
approximately) will be prescribed which will be required to be signed by a company
getting its securities listed on Stock Exchanges.  Existing listed entities will be
required to sign the shortened version within six months of the notification of the
regulations