Indian Financial System & various

markets and participants under it

Debasish Mukherjee &
Arindam Sarkar
Faculty, T.I.M.E.
 Financial System in general

• In general financial Systems aim at : Regular, smooth,

efficient and cost effective link between saver &
investor to provide essential lubrication of the Real
Sector and other stakeholders
• Financial system also facilitates:
• Expansion of financial market &
• Efficient Allocation Of Financial Resources
• In the era of Globalisation & Liberalisation
importance of financial system has become more
magnified.
 Indian Financial System

• Indian Financial System strove to create an enabling environment to promote deep,

competitive, efficient and vibrant financial institutions and markets with emphasis on stability.
• Constituents of Indian financial system are:
• Financial Institutions & financial services –
• Banks in their various incarnations,
• Non Banking Financial Companies,
• Micro Finance Institutions,
• Insurance Companies in their Life and Non-life segments,
• Pension funds,
• Post Offices for small saving instruments
• These Financial Institutions
• are the participants in financial market .
• are business organisation dealing in financial resources.
• collect resources by accepting deposits from individuals and institution and lends them to
trade, industry and others. They buy & sell financial instruments and may also generate
financial instruments
 Financial Instruments and their Markets
• They refer to financial claims, • Financial Markets
financial assets and securities used
for payment and settlement of • Organised and
transactions and obligations
• Financial instruments : Character
unorganised market
1. Liquidity • Broad, Deep and
2. Security value shallow financial market
3. Marketability
4. Transferability
5. Maturity period
6. Transaction cost
7. Risk and uncertainity
8. Option such as call back or buy back
 Financial Institutions and
their Regulators
• Regulatory Institutions frame rules • Non Banking Statutory Financial
and regulation for operations by Organisation: eg. IFCI, NABARD IDBI,
financial institutions and for SIDBI, etc. These were created by
functioning of financial market. govt. to provide financial assistance
Examples are RBI, IRDA, PFRDA & SEBI for specific purpose and sector
• Intermediary Institution: • Other institutions: DICGC,
Intermediates between Saver & ECGC,NHB,SHCI,CRISIL,DFHI etc.
investor e.g. Commercial banks & • Financial Services: These are financial
Cooperative credit societies. They institutions which provides variety of
directly collect from savers and lends services. Such as, financial and
to investors or borrowers performance guarantees, deposit
• Non- Banking financial insurance, other insurances, hire
intermediaries: eg. LICI, GICI etc. They purchase, installment credit, credit
too intermediate but there resources card, underwriting, factoring, credit
are not directly obtained from savers information etc.
Indian Financial Market and the categories

• Within the category of Organised [Financial]

Markets the major sub-categories are:
• Money Market &
• Capital market
Within the category of Capital market the major
sub-categories are:
• Primary Market and
• Secondary market
 Money Market
Objective of Money Market
Money Market is a specialised
market within the Financial Markets
1. It provides an equilibriating
geared to cater to the short term mechanism for evening out
needs. It is a market for short term
financial assets which are near
short term surpluses and
substitute for money. Money market deficits
instruments are liquid and can be
turned over quickly at low or no
2. It provides focal point for
transaction cost. central bank intervention
General Character of Money Market for influencing liquidity in
1. Over the phone market
the economy
2. With or without help of broker
3. Its market for short term financial 3. Provides reasonable access
assets to users of short term
4. Short term for this purpose is
generally upto one year money to meet their
5. Can be easily converter into requirements at a realistic
money price
6. Has many sub brokers
7. Negotiated Dealing System
 STRUCTURE OF INDIAN MONEY MARKET

Organised Sector     Unorganised Sector

1. Call and Notice Money
Market                     • Indigenous Bankers
2. Treasury Bill Market • Money Lenders
3. Commercial Bills  Market
4. Certificate of Deposits
5. Commercial Papers
6. Money Market Mutual Funds
7. The REPO Market
8. Collateralised Borrowing and
Lending Obligation [CBLO]
9. Non-Banking Financial Institutions
10. Micro Finance Institutions
 Roles of Indian Securities market
1. Securities market is a component of the wider financial market where securities can be bought and sold
between subjects of the economy, on the basis of demand and supply. Securities markets encompasses 
equity markets, bond markets and derivatives markets where prices can be determined and participants
both professional and non professionals can meet.
2. Securities markets can be split into below two levels. Primary markets, where new securities are issued
and secondary markets where existing securities can be bought and sold. Secondary markets can further
be split into organised exchanges, such stock exchanges and over-the-counter where individual parties
come together and buy or sell securities directly. For securities holders knowing that a secondary market
exists in which their securities may be sold and converted into cash increases the willingness of people to
hold stocks and bonds and thus increases the ability of firms to issue securities.
3. There are a number of professional participants of a securities market and these include; brokerages, 
broker-dealers, market makers, investment managers, speculators as well as those providing the
infrastructure, such as clearing houses and securities depositories.
4. A securities market is used in an economy to attract new capital, transfer real assets in financial assets,
determine price which will balance demand and supply and provide a means to invest money both short
and long term.
 Roles of Indian Securities market..contd.
A securities market is a system of interconnection between all participants (professional and
nonprofessional) that provides effective conditions:
5 to attract new capital by means of issuing new security (securitization of debt)
6 to transfer real asset into financial asset
7 to invest money for short or long term periods with the aim of deriving profitability
8 commercial function (to derive profit from operation on this market)
9 price determination (demand and supply balancing, the continuous process of prices
movements guarantees to state correct price for each security so the market corrects
mispriced securities)
10 informative function (market provides all participants with market information about
participants and traded instruments)
11 regulation function (securities market creates the rules of trade, contention regulation,
priorities determination)
12 Transfer of ownership (securities markets transfer existing stocks and bonds from owners
who no longer desire to maintain their investments to buyers who wish to increase those
specific investments
13 Insurance (hedging) of operations though securities market (options, futures, etc.)
Indian Securities market – Types of Markets
• The Primary Market is that part of the capital markets that deals with the issue of new
securities. Companies, governments or public sector institutions can obtain funding
through the sale of a new stock or bond issue. This is typically done through a syndicate
of securities dealers. The process of selling new issues to investors is called
underwriting. In the case of a new stock issue, this sale is a public offering.
• Dealers earn a commission that is built into the price of the security offering, though it
can be found in the prospectus. Primary markets create long term instruments through
which corporate entities borrow from capital market...
• Features of primary markets are:
• This is the market for new long term equity capital. The primary market is the market
where the securities are sold for the first time. Therefore, it is also called the new issue
market (NIM).
• In a primary issue, the securities are issued by the company directly to investors.
• The company receives the money and issues new security certificates to the investors.
• Primary issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
• The primary market performs the crucial function of facilitating capital formation in the
economy.
• The new issue market does not include certain other sources of new long term external
finance, such as loans from financial institutions. Borrowers in the new issue market may
be raising capital for converting private capital into public capital; this is known as "going
public."
 • The Secondary Market, also known as the Aftermarket, is the financial market where
previously issued securities and financial instruments such as stock, bonds, options, and
futures are bought and sold.
Indian Securities market • The term "secondary market" is also used to refer to the market for any used goods or
assets, or an alternative use for an existing product or asset where the customer base is
– Types of Markets.. the second market (for example, corn has been traditionally used primarily for food
production and feedstock, but a "second" or "third" market has developed for use in
ethanol production). Stock exchange and over the counter markets.
• With primary issuances of securities or financial instruments, or the primary market,
investors purchase these securities directly from issuers such as corporations issuing
shares in an IPO or private placement, or directly from the federal government in the case
of treasuries. After the initial issuance, investors can purchase from other investors in the
secondary market.
• The secondary market for a variety of assets can vary from loans to stocks, from
fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are
the most visible example of liquid secondary markets - in this case, for stocks of publicly
traded companies.
• Exchanges such as the New York Stock Exchange, NASDAQ provide a centralized, liquid
secondary market for the investors who own stocks that trade on those exchanges. Most
bonds and structured products trade “over the counter,” or by phoning the bond desk of
one’s broker-dealer. Loans sometimes trade online using a Loan Exchange.
• In the Indian context, Indian stock exchanges refer to the 28 official stock exchanges
located in India, the largest of which are the NSE and BSE.
• The list of stock exchanges in India is as follows: Bombay Stock Exchange (BSE) - located in
Mumbai, one of the two principal large stock exchanges of India and NSE , Mumbai [1992]
• Bombay Stock Exchange is the fourth oldest stock exchange in the world and was
established in 1875 after its Amsterdam, New York and Hong Kong counterparts
 Over the Counter (OTC) or off-exchange trading
• Over the Counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds,
commodities or derivatives directly between two parties. It is contrasted with exchange trading, which
occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or
stock exchanges. In the over-the-counter trading in stock is carried out by market makers that make
markets in the OTC Bulletin Board (OTCBB).
• OTC stocks are not usually listed nor traded on any stock exchanges, though exchange listed stocks can
be traded OTC on the third market. Although stocks quoted on the OTCBB must comply with Securities
and Exchange Board of India (SEBI) reporting requirements, other OTC stocks have no reporting
requirements.
• An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade
or agreement is to be settled in the future. It is usually from an investment bank to its clients directly.
Forwards and swaps are prime examples of such contracts. It is mostly done via the computer or the
telephone. For derivatives, these agreements are usually governed by an International Swaps and
Derivatives Association agreement.
• This segment of the OTC market is occasionally referred to as the "Fourth Market."
• TheNew York Mercantile Exchange [NYMEX]  has created a clearing mechanism for a slate of commonly
traded OTC energy derivatives which allows counterparties of many bilateral OTC transactions to
mutually agree to transfer the trade to ClearPort, the exchange's clearing house, thus eliminating credit
and performance risk of the initial OTC transaction counterparts like the systems followed in India by
BSE/NSE.
 Main
financial
instruments
Main financial instruments (BOND)
• Bond is a security containing requirement
to make full payment to the bearer of
cheque, Certificate of deposit, Bill of Lading
(a Bill of Lading is a “document evidencing
the receipt of goods for shipment issued by
a person engaged in the business of
transporting or forwarding goods." )
• A Bond is an issued security establishing its
holder's right to receive from the issuer of
the bond, within the time period specified
therein,
• its nominal value
• and the interest fixed therein on this value
or other property equivalent.
• The bond may provide for other property
rights of its holder, where this is not
contrary to legislation.
 Main financial instruments (CHEQUE)
• Cheque is a
bill of
exchange
drawn by a
customer
upon
his/her
bank
Main financial instruments [PN]
• Promissory note
• A Promissory Note, referred to as a
note payable in accounting, or
commonly as just a “Note", is a contract
where one party (the maker or issuer)
• makes an unconditional promise in
writing to pay a sum of money to the
other (the payee), either at a fixed or
determinable future time or on demand
of the payee, under specific terms.
• They differ from IOUs in that they
contain a specific promise to pay, rather
than simply acknowledging that a debt
exists.
 Main financial instruments [CD]
• A Certificate of Deposit [CD] is a Time
Deposit offered to consumers by banks, thrift
institutions, and credit unions to their eligible and
prime customers.
• CDs are similar to savings accounts in that they
are insured and thus virtually risk-free; they are
"money in the bank" (In USA, CDs are insured by
the FDIC for banks or by the NCUA for credit
unions).
• They are different from savings accounts in that
the CD has a specific, fixed term (3/6/12/60
months internationally while in India it is limted
to 12 months), and, usually, a fixed interest rate.
• It is intended that the CD be held until maturity, at
which time the money may be withdrawn
together with the accrued interest.
 • A Commercial paper [CP] is an unsecured,
Main financial short-term debt instrument issued by a
instruments corporation, typically for the financing
of accounts receivable and inventories, and
meeting short-term liabilities to its banks.
• Maturities on commercial paper rarely range
longer than 270 days.
• In India CPs can be issued for a period up to
one year
• Commercial papers are usually issued at a
discount from face value and reflects
prevailing market interest rates.
 Main Capital [Stock] Market instruments..
• Common shares  or Equity Shares represent
ownership in a company and a claim (dividends)
on a portion of profits.
• Investors get one vote per share to elect the
board members, who oversee the major
decisions made by management.
• Over the long term, common stock, by means of
capital growth, yields higher returns than
almost every other investment.
• This higher return comes at a cost since
common stocks entail the most risk. If a
company goes bankrupt and liquidates, the
common shareholders will not receive money
until the creditors, and preferred shareholders
are paid.
• Now they are all dematerialised hence this
image is history
 Main Capital [Stock] Market instruments..
• A Preference Share represents some degree of ownership
in a company but usually doesn't come with the same
voting rights. (This may vary depending on the
company.) With preferred shares investors are usually
guaranteed a fixed dividend forever.
• This is different than common stock, which has variable
dividends that are never guaranteed.
• Another advantage is that in the event of liquidation
preferred shareholders are paid off before the common
shareholder (but still after debt holders).
• Preferred stock may also be callable/redeemable,
meaning that the company has the option to purchase
the shares from shareholders at any time for any reason
(usually for a premium).
• Some people consider preferred stock to be more like
debt than equity.
• Now they are all dematerialised hence this image is
history
 Main Capital [Stock] Market instruments..
• A Debenture is a type of debt instrument that is
not secured by physical assets or collateral.
• Debentures are backed only by the general
creditworthiness and reputation of the issuer.
• Both corporations and governments frequently
issue this type of bond to secure capital.
• Like other types of bonds, debentures are
documented in an indenture i.e.  a legal and
binding agreement, contract or document
between two or more parties.
• Traditionally, these documents featured
indented sides, as indicated by their name.
• Historically, indenture also refers to a contract
binding one person to work for another for a set
period of time, such as an indentured servant. In
finance, the word indenture appears when
discussing bond agreements, certain real estate
deeds and some aspects of bankruptcies.
 Brokers, Dealers and other Professional
Participants in the Indian Securities Market
• Brokerage shall be deemed performance of civil-law
transactions with securities as agent or commission
agent acting under a contract of agency or
commission, and also under a power (letter) of
attorney for the performance of such transactions in
the absence of indication of the powers of agent or
commission agent in the contract.
• Dealer activity shall be deemed performance of
transactions in the purchase and sale of securities in
one's own name and for one's own account through
the public announcement of the prices of purchase
and/or sale of certain securities, with an obligation
of the purchase and/or sale of these securities at
the prices announced by the person pursuing such
activity.
• Professional participants in the securities markets -
legal persons, including credit organizations, and
also citizens registered as business persons including
the brokers and dealers
 Activity of the Participants & their status
• Activity in the management of securities shall be deemed performance by a legal person or individual
business person, in his own name, for a remuneration, during a stated period, of trust management of
the following conveyed into his possession and belonging to another person, in the interests of this
person or of third parties designated by this person:
• securities;
• monies intended for investment in securities;
• monies and securities received in the process of securities management.
• Clearing activity shall be deemed activity in determining mutual obligations (collection, collation and
correction of information on security deals and
• preparation of bookkeeping documents thereon and in offsetting these obligations in deliveries of
securities
• Depositary activity shall be deemed the rendering of services in the safekeeping of certificates of
securities and/or recording and transfer of rights to securities
• Activity in the keeping of a register of owners of securities shall be deemed collection, fixing,
processing, storage and provision of data constituting a system of keeping the register of security
owners
• Provision of services directly promoting conclusion of civil-law transactions with securities between
participants in the securities market shall be deemed activity in the arrangement of trading on the
securities market
 CAPITAL MARKET REFORMS – Secondary market Regulations :

• Capital adequacy and prudential regulation were

introduced for brokers , and other intermediaries
• Dematerialisation of Scrips was initiated with the
creation of legislative framework and the setting
up of the first depository
• Settelment period was reduced to one weak
• Carry forward trading was banned
• Tentative move were made towards a rolling
settlement system.
Categories of Secondary Market Investors
1. Domestic Investors
2. Foreign Direct Investors [FDIs]
3. Foreign Portfolio Investment (FPI) is investment by non-residents in Indian
securities including shares, government bonds, corporate bonds, convertible
securities, infrastructure securities etc.
4. Non-resident Indians [NRIs]
5. Overseas citizens of India (OCI)
• Securities and Exchange Board of India (SEBI) recently came out with a detailed
framework for risk-based Know Your Customer (KYC) ocumentation of foreign
portfolio investors (FPIs).
•  SEBI made it clear that non-resident Indians (NRIs), overseas citizens of India (OCI)
and resident Indians cannot be beneficial owners of Foreign Portfolio investment
(FPIs).
• NRIs and OCIs can only obtain an FPI licence on condition that they limit their roles
to investment advisors and do not invest their money.
 Indian and other notable
Stock Market Indices
• China • India
• Bombay Stock Market Index SENSEX
• SSE Composite Index • National Stock Exchange of India Index NIFTY
• SZSE Component Index • MCX Stock Exchange Index
• CSI 300 Index • Italy
• FTSE MIB Index
• Japan
• FTSE Italia Mid Cap Index
• Nikkei 225 Index • MIBTel Index
• Topic Index • Brazil
• JPX-Nikkei 400 Index • Bovespa Stock Index
• IBrX Stock Index
• Germany • ITEL Stock Index
• DAX 30 Index • Canada
• TecDAX Index • S&P TSX 60 Index
• S&P TSX Composite Index
• MDAX Index • S&P TSX Venture Composite Index
• United Kingdom • South Korea
• FTSE 100 Index • KOSPI Index
• KOSDAQ Index
• FTSE All-Share Index
• USA
• FTSE techMark Index • MSCI World Index
• France • FTSE All-World Index
• CAC 40 Index • S&P Global 100 Index
• S&P Global 1200 Index
• CAC Next 20 Index • Dow Jones Global Titans 50
• CAC Mid 60 Index • Russell Global Index
 Regulators of Indian
Capital/Securities Market
• Indian Capital Markets are regulated and
monitored by
• the Ministry of Finance,
• The Securities and Exchange Board of India
and
• The Reserve Bank of India.
 The Principal Indian Regulators - Detailed
• The Ministry of Finance regulates through the
Department of Economic Affairs - Capital Markets
Division. The division is responsible for formulating
the policies related to the orderly growth and
development of the securities markets (i.e. share,
debt and derivatives) as well as protecting the interest
of the investors. In particular, it is responsible for
I. institutional reforms in the securities markets,
II. building regulatory and market institutions,
III. strengthening investor protection mechanism, and
IV. providing efficient legislative framework for
securities markets
• The Division administers legislations and rules made
under the
• Depositories Act, 1996,
• Securities Contracts (Regulation) Act, 1956 and
• Securities and Exchange Board of India Act, 1992.
 The Principal Indian Regulators - Detailed

• Securities & Exchange Board of India (SEBI)

• The Securities and Exchange Board of India (SEBI –
1992 - Mumbai) is the regulatory authority established
under the SEBI Act 1992 and is the principal regulator
for Stock Exchanges in India.
• SEBI’s primary functions include
• protecting investor interests,
• promoting and regulating the Indian securities
markets.
• All financial intermediaries permitted by their
respective regulators to participate in the Indian
securities markets are governed by SEBI regulations,
whether domestic or foreign.
• Foreign Portfolio Investors are required to register
with SEBI in order to participate in the Indian securities
markets.
• SEBI has codified and notified regulations that cover all
activities and intermediaries in the securities markets.
The Principal Indian Regulators - Detailed
• Reserve Bank of India (RBI)
• The Reserve Bank of India (RBI – 1935 -
Mumbai) is governed by the Reserve Bank
of India Act, 1934. The RBI [established in
1935] is responsible for
• implementing monetary and credit
policies,
• issuing currency notes,
• being banker to the government,
• regulator of the banking system,
• manager of foreign exchange, and
• regulator of payment & settlement systems
while continuously working towards the
development of Indian financial markets.
• The RBI regulates financial markets and
systems through different legislations. It
regulates the foreign exchange markets
through the Foreign Exchange
Management Act, 1999.
 Other Indian Regulators

• Forward Markets Commission (India) (FMC)

since merged with SEBI
• Insurance Regulatory and Development
Authority of India (IRDAI) 1999
• Pension Fund Regulatory and Development
Authority of India (PFRDAI) 2003
• Ministry of Corporate Affairs (MCA)
 Selected other country’s Financial & Securities Regulators
•
Australia Italy:
– Australian Prudential Regulation Authority APRA) • Commissione Nazionale per le
– Australian Securities and Investments
Commission(ASIC)
Società e la Borsa (CONSOB)
– Australian Takeovers Panel • Institute for the Supervision of
– Foreign Investments Review Board (FIRB) Insurance (ISVAP)
– Australian Transaction Reports and Analysis Centre
(AUSTRAC) Japan
– Financial Services Agency,
China, People's Republlic;PRC
– China Securities Regulatory Commission (CSRC) Bank of Japan
– China Banking Regulatory Commission(CBRC) – Securities and Exchange
– China Insurance Regulatory Commission (CIRC) Surveillance
European Union:
•
Commission (SESC)
European Central Bank(ECB)
• European Banking Authority (EBA) Korea, South:
• European Securities and Markets Authority(ESMA) • Financial Services
• European Insurance and Occupational Pensions
Authority (EIOPA) Commission (FSC)
• European Systemic Risk Board(ESRB • Financial Supervisory Service (FSS)
France
• Autorité des marchés financiers (France) (AMF)
Mauritius
• Registre unique des Intermediaires en Assurance, • Bank of Mauritius (BOM)
Banque et Finan (France)(ORIAS)
•
• Financial Services
Autorité de Controle Prudentiel (France) (ACPR)
• French Takeover Panel Commission (FSC)
 Selected other country’s Financial &
Securities Regulators
• Sri Lanka
Malaysia
• Bank Negara Malaysia (BNM) Sri Lanka
• Securities Commission Malaysia (SC)
• Central Bank of Sri Lanka
• Labuan Financial Services Authority
(Labuan FSA) • Securities and Exchange
Nepal Commission of Sri Lanka
• Nepal Rastra Bank (Central Bank of Nepal - Taiwan 
Regulator and Supervisor of Banks and
Financial Institutions) •  Financial Supervisory
• Beema Samiti (Regulator of Insurance Commission
Companies)
Thailand
• Securities Board Nepal
Pakistan 
– Bank of Thailand (BOT)
• State Bank of Pakistan – Office of the Securities and
• Russia - Central Bank of Russia (CBR) Exchange Commission,
 Singapore  Thailand (Thai SEC)
•  Monetary Authority of Singapore (MAS)
 Selected other country’s Financial &
Securities Regulators
United Kingdom • United States:
• Federal Reserve Board
• Bank of • Securities & Exchange Commission (SEC)
England (BoE) • Commodity Futures Trading Commission (CFTC)
• Prudential Regulation • Federal Reserve System ("Fed")
Authority (PRA) • Federal Deposit Insurance Corporation (FDIC)
• Financial Crimes Enforcement Network (FinCEN)
• Financial Conduct • Financial Industry Regulatory Authority (FINRA)
Authority (FCA) • Office of the Comptroller of the Currency (OCC)
• Panel on Takeovers • National Credit Union Administration (NCUA)
and Mergers (PANEL) • Consumer Financial Protection Bureau (CFPB)
• National Association of Insurance
• Financial Policy Commissioners (NAIC)
Committee (FPC) • National Futures Association (NFA]
 National Stock Exchange (NSE) – Rules and Regulations

• In the role of the dominant securities market

participant, NSE is required to set out and
implement rules and regulations to govern
the securities market.
• These rules and regulations extend to
• member registration,
• securities listing,
• transaction monitoring,
• compliance by members to SEBI / RBI
regulations,
• investor protection etc.
• NSE has a set of Rules and Regulations
specifically applicable to each of its trading
segments.
• NSE as an entity regulated by SEBI undergoes
regular inspections by them to ensure
compliance.
 Participants in Indian Securities Market –
Merchant Bankers
• Merchant bankers play an important role in public issue process. While acting as a
banker to an issue, a merchant banker has to disclose full details to the Securities
Exchange Board of India (SEBI).
1. Fundamentally, merchant banks are financial institutions. They engage in business
loans as well as underwriting.
2. They mostly cater to large enterprises and individuals of high net worth.
3. They perform a combination of consultancy and banking services.
4. They provide consultancy on matters pertaining the finances, marketing, management,
and law. Such consultancy services assist starting of businesses, raise finance,
modernise, expand or restructure a business, revival of sick units as well as provide
assistance to companies in registering, buying and selling shares.
5. They also performs the functions of Bookbuilding, Initial Public Offering, Bridge
Financing/Loans and Due Diligence.
6. They do not perform the functions of depositories or retail lender institutions. They
are, instead, intermediaries. They also often assist international transactions that
involve multinational corporations.
 Participants in Indian Securities Market –
Investment Bankers
• An investment banker is an individual who often works as part of a
financial institution and is primarily concerned with raising capital for
corporations, governments or other entities.
• Investment bankers often work at investment banks, the largest of which
are Goldman Sachs (GS), Morgan Stanley (MS), JPMorgan Chase (JPM)
Bank of America Merrill Lynch (BAC) and Deutsche Bank (DB).
• They also source cheap funds in the international market through
international banks a, Sovereign Wealth Funds and Private Equity Funds
through LIBOR route.
• Whether or not an investment banker is affiliated with such a firm, he or
she will assist in large, complicated financial transactions. These may
include structuring an acquisition, merger, or sale for a client or group of
clients. A core task also includes the issuing of securities as a means of
raising money. This involves creating detailed documentation for
the Securities and Exchange Board of India (SEBI), necessary for a company
to go public.
 Participants in Indian Securities Market –
Investment Bankers..
• An investment banker can save a client time and money by identifying risks associated with a
particular project before a company moves forward. In theory, the investment banker is an
expert in his or her field, who has a finger on the pulse of the current investing climate.
Businesses and non-profit institutions often turn to investment bankers for advice on how
best to plan their development.
• The investment banker assists with pricing financial instruments and navigating regulatory
requirements. Often, when a company holds its initial public offering (IPO), an investment
bank will buy all or much of that company’s shares directly, acting as an intermediary. In
this case, acting on behalf of the company going public, the investment bank will
subsequently sell the company’s shares into the public market, creating immediate
liquidity.
• An investment bank also stands to make a profit in this scenario, generally pricing its shares
at a markup from what the firm initially paid. Yet, in doing so the investment bank also takes
on a substantial amount of risk. Though experienced analysts at the investment bank use
their expertise to accurately price the stock, an investment banker can lose money on the
deal if they have overvalued the shares.
• They also performs the functions of Underwriting Bookbuilding, Initial Public Offering,
Bridge Financing/Loans and Due Diligence as done by Merchant Bankers.
 Indian Securities Market - Market Size
• The Mutual Fund (MF) industry in India has seen rapid growth in Assets Under Management (AUM).
Total AUM of the industry stood at Rs 23.26 lakh crore (US$ 360.90 billion) as of April 2018. At the
same time the number of Mutual fund (MF) equity portfolios reached a record high of 2.27 billion in
February 2018.
• On account of rise in investments in the Mutual Funds and other financial instruments, the revenues
of the brokerage industry in India are forecasted to grow by 15-20 per cent to reach Rs 18,000-19,000
crore (US$ 2.80-2.96 billion) in FY2017-18, backed by healthy volumes and a rise in the share of the
cash segment.
• Other crucial component of India’s financial industry are the insurance industry and Pension Funds
providing long term funds. The insurance industry has been expanding at a fast pace. The total first
year premium of life insurance companies grew 17.35 per cent year-on-year to reach US$ 25.44 billion
during April 2017-February 2018.
• Along with the secondary market, the market for Initial Public Offers (IPOs) has also witnessed rapid
expansion. The total amount of Initial Public Offerings increased to Rs 84,357 crore (US$ 13,089
million) by the end of FY18.
• Over the past few years India has witnessed a huge increase in Mergers and Acquisition (M&A)
activity. The total value of M&A in India rose 53.3 per cent year-on-year to US$ 77.6 billion in 2017
from US$ 50.6 billion in the preceding year.
 Indian Securities Market - concepts
• ‘Securities’ and ‘Securities Markets’ • Concepts of ‘Risk’ and ‘Return’
• Return refers to the benefit the investor will
• Securities are financial instruments issued to
receive from investing in the security. Risk
raise funds. The primary function of the
refers to the possibility that the expected
securities markets is to enable to flow of
returns may not materialise. For example, a
capital from those that have it to those that
company may seek capital from an investor by
need it.  Securities market help in transfer of
issuing a bond. A bond is a debt security, which
resources from those with idle resources to
means it represents a borrowing of the
others who have a productive need for company. The security will be issued for a
them. Securities markets provide channels specific period, at the end of which the amount
for allocation of savings to investments and borrowed will be repaid to the investor.  The
thereby decouple these two activities. As a return will be in the form of interest, paid
result, the savers and investors are not periodically to the investor, at a rate and
constrained by their individual abilities, but frequency specified in the security.  The risk is
by the economy’s abilities to invest and save that the company may fall into bad times and
respectively, which inevitably enhances default on the payment of interest or return of
savings and investment in the economy. principal.
  Who are the Issuers in Indian Securities
Markets?
•  Issuers are organizations that raise money by issuing securities. They may have short-term and long-term
need for capital, and they issue securities based on their need, their ability to service the securities. Some of
the common issuers in the Indian Securities Markets are:
• Companies issue securities/IPOs/shares/debentures to raise short and long term capital for conducting their
business operations.
• Central and state governments issue debt securities to meet their requirements for short and long term
funds to meet their deficits. Deficit is the extent to which the expense of the government is not met by its
income from taxes and other sources.
• Local governments and municipalities may also issue debt securities to meet their development needs.
Government agencies do not issue equity securities.
• Financial institutions and banks may issue equity or debt securities for their capital needs beyond their
normal sources of funding from deposits and government grants.
• Public sector companies which are owned by the government may issue securities to public investors as part
of the disinvestment program of the government, when the government decides to offer its holding of these
securities to public investors.
• Mutual funds issue units of a scheme to investors to mobilise money and invest them on behalf of investors
in securities.
 Types of Brokers in
Indian Securities Market
• Stock brokers are registered trading • There are also full time or Traditional Brokers or legacy brokers charge
members of stock exchanges. They sell higher commissions or a percentage of assets. They offer the largest
new issuance of securities to investors. assortment of diversified financial services and usually assign a licensed
individual broker to each client. These firms tend to have their own
They put through the buy and sell
investment banking and research departments that provide their own
transactions of investors on stock
analyst recommendations, products and access to initial public
exchanges.  All secondary market
offerings (IPOs). Clients have the option of calling their personal broker
transactions on stock exchanges have to directly to place trades or use various other platforms including online
be conducted through registered brokers. and mobile. Full-service brokers have physical offices and locations.
• Sub-brokers help in reaching the services They also provide customized service.
of brokers to a larger number of • Discount brokers have narrowed the gap with full-service brokers in
investors.  Several brokers provide terms of financial products and services providing independent
research, analysis and recommendations research, mutual fund access and basic banking products. As the name
about securities to buy and sell, to their says, discount brokers have smaller commissions for trades. Many of
the larger discount brokers provide their own direct-access trading
investors.  Brokers may also enable
platforms and physical office locations throughout the country.
screen-based electronic trading of
• There are also Online brokers also known as direct-access brokers cater
securities for their investors, or support
to active day trading clients with the smallest commissions often priced
investor orders over phone. Brokers earn
on a per-share basis, which is needed when scaling in and out of
a commission for their services. positions. 
 Types of Brokers in Indian Securities Market..
• A “stag” specifically refers to a speculator who buys and sells stocks in short to medium
timeframes to make quick profits. A stag investor assumes that the price of a stock will
rapidly increase over the short-term, within the first few hours or days, and adopts
an investment strategy that is the opposite of a long-term buy and hold strategy.
• Bulls, Bears, Stags, Jobbers, • Stag investing generally requires large upfront investments. Traders engaging in stag
Daytraders are various types of strategies include both individual investors and institutions. In order to profit from the
brokers/traders in the Indian small short-term price movements associated with stag investing, traders will generally
Securities Market. buy large blocks of stocks.
• Initial public offerings [IPOs] provide an ideal opportunity for stag investing as large
• In stock market lingo, a "bull" is
gains can often be expected when shares are issued. Large purchases and bullish
an investor who buys stocks, and speculation around an IPO can also help to inflate the near-term price for the benefit of
gambles on selling it at a higher stag investors. Institutional stag buying can also be a factor for IPO issuance. In some
price, allows the price to go instances, institutions may take large initial share positions in a new issuance which can
higher than the acquisition cost positively influence the security’s price in their favor.
and then sale the shares and • Jobbers, also called "stockjobbers," acted as market makers. They held shares on their
own books and created market liquidity by buying and selling securities, and matching
pocketing the margin.
investors' buy and sell orders through their brokers, who were not allowed to make
• A "bear" is an investor who sells markets. They were usually employed by the industrialists to recruit the right people for
his stocks, and gambles on work from villages out of the various job seekers. A jobber often demanded money or
buying it back at a lower gifts for his favour.
price. He watches as the prices • A day trader is a trader who adheres to a trading style called day trading. This involves
go down and then buy them . buying and subsequently selling financial instruments (e.g. stocks, options, futures,
derivatives, currencies) within the same trading day, such that all positions will usually
be closed before the market close of the trading day.
 What is an Asset Management Company?  
What is the role of Portfolio Managers?

• Asset management company and portfolio managers are investment

specialists who offer their services in selecting and managing a
portfolio of securities.
• Asset management companies are permitted to offer securities (called
units) that represent participation in a pool of money, which is used to
create the portfolio. 
• Portfolio managers do not offer any security and are not permitted to
pool the money collected from investors.
• They act on behalf of the investor in creating and managing a portfolio.
• Both asset managers and portfolio managers charge the investor a fee
for their services, and may engage other security market intermediaries
such as brokers, registrars, and custodians in conducting their
functions.
 Special Types of securities
• Treasury bills, or T-bills, are short-term
debt instruments issued by the RBI on
behalf of the government of India.
Treasury bills are sold with maturities of
91, 182 and 364 days.
• Treasury bills are considered the safe
securities as they are backed by the full
faith and credit of the Sovereign
government.
• The Treasury bills rate is a key barometer
of short-term interest rates. They do not
pay interest, but rather are sold at a
discount to their face value.
• The full-face value is paid at maturity, and
the difference between the discounted
purchase price and the full-face value
equates to the interest rate.
• Treasury bills are the original discounted
security
 Special Types of securities
• Zero Coupon Bonds
• A zero coupon bond does not pay
any coupons during the term of
the bond.  The bond is issued at a
discount to the face value, and
redeemed at face value. The
effective interest earned is the
difference between face value and
the discounted issue price. A zero
coupon bond with a long maturity
is issued at a very big discount to
the face value.
• As such these bonds are also
known as deep discount bonds.
Role of Credit Rating Agencies in the
Securities Markets
• The role of Credit Rating Agencies
in the Securities Markets.[CRISIL
pic]
• Credit rating agencies evaluate a
debt security to provide a
professional opinion about the
ability of the issuer to meet the
obligations for payment of
interest and return of principal as
indicated in the security. They use
rating symbols to rank debt
issues, which enable investors to
assess the default risk in a
security.
 Participants in Indian securities market....
• Merchant Bankers also called as issue managers, investment • Investment Bankers source cheap funds in the
bankers, or lead managers help an issuer access the security international market through international
market with an issuance of securities. They evaluate the capital banks a, Sovereign Wealth Funds and Private
needs, structure an appropriate instrument, get involved in
pricing the instrument, and manage the entire issue process until
Equity Funds through LIBOR[London Interbank
the securities are issued and listed on a stock exchange. They Offered Rate] route.
engage other intermediaries such as registrars, brokers, bankers, • Depository is an institution or a kind of
underwriters and credit rating agencies in managing the issue organization which holds securities with it, in
process. which trading is done among shares,
• Underwriters are primary market specialists who promise to pick debentures, mutual funds, derivatives, F&O and
up that portion of an offer of securities which may not be bought
commodities. The intermediaries perform their
by investors.  They serve an important function in the primary
market, providing the issuer the comfort that if the securities actions in variety of securities at Depository on
being offered do not elicit the desired demand, the underwriters behalf of their clients. These intermediaries are
will step in and buy the securities.  known as Depositories Participants.
• The specialist underwriters in the government bond market are Fundamentally, There are two sorts of
called Primary Dealers. depositories in India. One is the National
• Investment Adviser work with investors to help them make a Securities Depository Limited(NSDL) and the
choice of securities that they can buy, based on an assessment of other is the Central Depository Service (India)
their needs, time horizon return expectation and ability Limited(CDSL). Every Depository Participant(DP)
to bear risk. They may also be involved in creating financial plans
needs to be registered under this Depository
for investors, where they define the goals for which investors need
to save money and propose appropriate investment strategies to before it begins its operation or trade in the
meet the defined goals. market. Depositories are regulated by SEBI.
 Commonly used indicators while investing in Equity Markets in India

• a)      Price Earning Multiple [PE]: The price-earnings ratio or the PE multiple is a valuation measure that
indicates how much the market values per rupee of earning of a company. It is computed as:
• Market price per share/Earnings per share [EPS]
• EPS are the profit after taxes divided by the number of shares. It indicates the amount of profit that company
has earned, for every share it has issued. PE is represented as a multiple. When one refers to a stock was
trading at 12x, it means the stocks is trading at twelve times its earnings.
• b)     Price to Book Value (PBV): The PBV ratio compares the market price of the stock with its book value. It is
computed as market price per share upon book value per share.
• The book value is the accounting value per share, in the books of the company. It represents the net worth
(capital plus reserves) per share. If the market price of the stock were lower than the book value and the PBV is
less than one, the stock may be undervalued. In a bullish market when prices move up rapidly, the PBV would
drop, indicating rich valuation in the market.
• c)      Dividend Yield: Dividend is declared as a percentage of the face value of the shares. A 40% dividend
declared by company will translate into a dividend of Rs.4 per share with a face value of Rs 10 (10*40% =4). If
the share was trading in the stock market for a price of Rs.200 per share, this means a dividend yield of 2%.
• The dividend declared by a company is a percentage of the face value of its shares. When the dividend received
by an investor is compared to the market price of the share, it is called the dividend yield of the share. 
 Commonly used indicators while investing in
Equity Markets in India..
• Alpha - A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price
risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The
excess return of the fund relative to the return of the benchmark index is a fund's alpha.
All of these indicators are intended to help investors determine the risk-reward profile of a
mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio
manager adds to or subtracts from a fund's return.
Beta is the measure of the volatility, or systematic risk, of a security or a portfolio in
comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM),
a model that calculates the expected return of an asset based on its beta and expected
market returns.
DELTA is the change in price of a call option for every one-point move in the price of
the underlying security is also called Hedge Ratio. The manager was happy when he realized
his elasticity delta was one half because that meant that he could continue to raise prices.
 Commonly used indicators while investing in
Equity Markets in India..
• Assets Under Management (AUM) is the market • Net Assets Value (NAV) is a mutual fund's
value of assets that an investment company or price per share or exchange-traded fund's
MF manages on behalf of investors. Assets (ETF) per-share value. In both cases, the
under management (AUM) is looked at as a per-share dollar amount of the fund is
measure of success against the competition and
calculated by dividing the total value of all
consists of growth/decline due to both capital
the securities in its portfolio, less
appreciation/losses and new money
any liabilities, by the number of fund shares
inflow/outflow.
outstanding. In the context of mutual funds,
• There are widely differing views on what "assets
NAV per share is computed once a day
under management" refers to. Some financial
institutions include bank deposits, mutual based on the closing market prices of the
funds and institutional money in their securities in the fund's portfolio. All mutual
calculations; others limit it to funds under funds' buy and sell orders are processed at
discretionary management, where the client the NAV of the trade date. However,
delegates responsibility to the company. investors must wait until the following day
to get the trade price.
 Commonly used indicators while investing in
Equity Markets in India..
• Blue Chip is a very high quality
• Book Building is a process of planned
investment involving a lower-than-
issuance of securities in which an average risk of loss of principal or
underwriter attempts to determine at reduction in income. The term is
what price to offer an IPO based on generally used to refer to securities of
companies having a long history of
demand from institutional investors sustained earnings and dividend
[PRICE DISCOVERY]. payments.
• An underwriter "builds a book" by • Blue chip companies are usually
financially sound and are thought to
accepting orders from fund managers be relatively low-risk investments.
indicating the number of shares they They tend to be less volatile than other
desire and the price they are willing to companies and to provide solid growth
to portfolios. Examples in the United
pay. The procedure is carried out by
States include General Electric and
the Lead Manager of the issue who is Coca-Cola. Indices such as the Dow
called a “book runner”. Jones Industrial Average tracks blue
chip stocks.
 Other special types of Securities
• Approved securities/investments are usually both • Approved securities are securities is
low risk and low return, focusing on stability and
a bond or other type of debt
steady growth for the funds. 
• Securities which qualify for a state approved list obligation that is issued by any
are usually of a high quality and meet standards authority or by a government with a
specified by the state. promise/guarantee of repayment
GoI bonds which can be held by banks
to form part of their reserves [SLR]
upon the security's maturity date
• Approved securities, means-(i) securities in along with payment of periodical
which a trustee may invest money under clause interests.
(a), clause (b), clause (bb), clause (c) or clause (d)
• Government securities are usually
of s. 20 of the Indian Trusts Act, 1882; (ii) such of
the securities authorised by the Central considered low-risk investments and
Government under clause (f) of s. 20 of the approved securities because they are
Indian Trusts Act, 1882, as may be prescribed. backed by the taxing power of a
[Banking Regulation Act, 1949 (10 of 1949), s. 5
(a)]
government i.e. sovereign guarantee.
 • Gilt-edged securities are high-grade bonds issued by
some national governments and private organizations. In
Other special types of the past, it refereed to paper certificates issued by
Securities the Bank of England (BOE) on behalf of the Majesty's
Treasury. The certificates were printed on gilt or gilded
edges – hence, the name gilt-edge securities.
• In India, in earlier days, the edges of the Government
Securities used to be gilted hence the name.
• By nature, a gilt edge denotes a high quality item whose
value remains fairly constant over time. As an investment
vehicle this equates to a high grade security with low
yields compared to risky, below investment-grade
securities.
• For that reason, only blue chip companies and national
governments that have a track record of operating in a
safe and profitable manner issue gilt-edge
securities. Besides conventional gilts, the UK government
issues index-linked gilts that offer semi annual coupon
payments adjusted for inflation. 
 OMOs & Buybacks
• What is meant by repurchase (buyback) of G-Secs?
• What are OMOs ?
• Repurchase (buyback) of G-Secs is a process whereby the
• OMOs are the market Government of India and State Governments buy back their
operations conducted by the existing securities, by redeeming them prematurely, from the
RBI by way of sale/ purchase of holders.
G-Secs to/ from the market • The objectives of buyback can be reduction of cost (by buying back
high coupon securities), reduction in the number of outstanding
with an objective to adjust the securities and improving liquidity in the G-Secs market (by buying
rupee liquidity conditions in the back illiquid securities)and infusion of liquidity in the system.
market on a durable basis. • The repurchase by the Government of India is also undertaken for
When the RBI feels that there is effective cash management by utilising the surplus cash balances.
excess liquidity in the market, it • State Governments generally buy-back their high coupon (high
resorts to sale of securities cost debt) bearing securities to reduce their interest outflows in
the times when interest rates show a falling trend.
thereby sucking out the rupee
• States also retire their high cost debt pre-maturely in order to
liquidity. Similarly, when the fulfill some of the conditions put by international lenders like
liquidity conditions are tight, Asian Development Bank, World Bank etc. to grant them low cost
RBI may buy securities from the loans. Governments make provisions in their budget for buying
market, thereby releasing back of existing securities.
liquidity into the market. • Buyback can be done through an auction process (generally if
amount is large) or through the secondary market route, i.e.
Negotiated Dealing System – online management [NDS-OM] (if
amount is not large).
 Rules
• Rules for Stock, • As advised by SEBI, the stock
Commodity & exchanges (like NSE, BSE, MCX) have
Derivatives been asked to create dedicated debt
Exchanges & segment in their trading platforms. In
CCIL compliance to this, stock exchanges
have launched debt trading (G-Secs as
also corporate bonds) segment which
generally cater to the needs of retail
investors. The process involved in
trading of G-Secs in Demat form in
stock exchanges
 • The Clearing Corporation of India Ltd. [CCIL] is the clearing
agency for G-Secs. It acts as a Central Counter Party (CCP)
The Clearing Corporation for all transactions in G-Secs by interposing itself between
of India Ltd.[CCIL] two counterparties.
• In effect, during settlement, the CCP becomes the seller to
the buyer and buyer to the seller of the actual transaction.
De Novo basis
• All outright trades undertaken in the OTC market and on
the NDS-OM platform are cleared through the CCIL.
• Once CCIL receives the trade information, it works out
participant-wise net obligations on both the securities and
the funds leg. The payable / receivable position of the
constituents (gilt account holders) is reflected against their
respective custodians.
• CCIL forwards the settlement file containing net position of
participants to the RBI where settlement takes place by
simultaneous transfer of funds and securities under the
‘Delivery versus Payment’ system.
• CCIL also guarantees settlement of all trades in G-Secs. That
means, during the settlement process, if any participant
fails to provide funds/ securities, CCIL will make the same
available from its own means. For this purpose, CCIL
collects margins from all participants and maintains
‘Settlement Guarantee Fund’.
 Collateralised Borrowing and Lending
Obligation [CBLO] by CCIL
• CBLO is another money market instrument • Membership to the CBLO segment is extended to entities who are
operated by the Clearing Corporation of India RBI- NDS members, viz., Nationalized Banks, Private Banks, Foreign
Ltd. (CCIL), for the benefit of the entities who Banks, Co-operative Banks, Financial Institutions, Insurance
have either no access to the inter-bank call Companies, Mutual Funds, Primary Dealers, etc. Associate
money market or have restricted access in Membership to CBLO segment is extended to entities who are not
terms of ceiling on call borrowing and lending
members of RBI- CBS E-Kuber, viz., Co-operative Banks, Mutual
transactions.
Funds, Insurance companies, NBFCs, Corporates, Provident/ Pension
• CBLO is a discounted instrument available in
Funds, etc.
electronic book entry form for the maturity
• By participating in the CBLO market, CCIL members can borrow or
period ranging from one day to ninety days (up
to one year as per RBI guidelines) lend funds against the collateral of eligible securities. Eligible
• In order to enable the market participants to
securities are Central G-Secs including Treasury Bills, and such other
borrow and lend funds, CCIL provides the securities as specified by CCIL from time to time. Borrowers in CBLO
Dealing System through Indian Financial have to deposit the required amount of eligible securities with the
Network (INFINET), a closed user group to the CCIL based on which CCIL fixes the borrowing limits. CCIL matches
Members of the RBI CBS E-Kuber, who maintain the borrowing and lending orders submitted by the members and
Current account with RBI and through Internet notifies them. While the securities held as collateral are in custody
for other entities who do not maintain Current of the CCIL, the beneficial interest of the lender on the securities is
account with RBI. recognized through proper documentation.
 Zero Coupon Bonds &
Floating Rate Bonds
• A zero coupon bond does not pay • Floating rate bonds are instruments where
any coupons [interest] during the the interest rate is not fixed, but re-set
term of the bond.  The bond is periodically with reference to a pre-
issued at a discount to the face decided benchmark rate.  For instance, a
company can issue a 5-year floating rate
value, and redeemed at face value.
bond, with the rates being reset semi-
The effective interest earned is the
annually at 50 basis points above the 1-
difference between face value and year yield on central government
the discounted issue price. securities. Every six months, the 1-year
• A Zero Coupon Bond with a long benchmark rate on government securities
maturity is issued at a very big is ascertained from the prevailing market
discount to the face value. prices. The coupon rate the company
• Such bonds are also known as would pay for the next six months is
calculated as this benchmark rate plus
deep discount bonds.
50 basis points.
• Floating rate bonds are also known as
variable rate bonds and adjustable rate
bonds.
 FIMMDA

• The Fixed Income Money Market and Derivatives Association of India (FIMMDA), an association of
Scheduled Commercial Banks, Public Financial Institutions, Primary Dealers and Insurance Companies
was incorporated as a Company under section 25 of the Companies Act,1956 on June 3, 1998.
• FIMMDA is a voluntary market body for the bond, money and derivatives markets with HQ at Mumbai
[1998].
• FIMMDA represents market participants and aids the development of the bond, money and
derivatives markets. It acts as an interface with the regulators on various issues that impact the
functioning of these markets. It also undertakes developmental activities, such as, introduction of
benchmark rates and new derivatives instruments, etc. FIMMDA releases rates of various G-Secs that
are used by market participants for valuation purposes. FIMMDA also plays a constructive role in the
evolution of best market practices by its members so that the market as a whole operates
transparently as well as efficiently.
• FIMMDA has members representing all major institutional segments of the market. The membership
includes Nationalized Banks such as State Bank of India and other nationalized banks;
• Private sector banks such as ICICI Bank, HDFC Bank; Foreign Banks such as Bank of America, Citibank,
Financial institutions such as IDFC, EXIM Bank, NABARD, Insurance Companies like Life Insurance
Corporation of India (LIC), ICICI Prudential Life Insurance Company, Birla Sun Life Insurance Company
and all Primary Dealers.
 What is the ‘When Issued’ market and “Short Sale”?

• 'When Issued', a short term of "when, as and if issued",

indicates a conditional transaction in a security notified for
issuance but not yet actually issued.
• All "WI " transactions are on an "if" basis, to be settled if and
when the security is actually issued.
• 'WI transactions in the Central G-Secs have been permitted
to all Negotiated Dealing System – Online Matching [NDS-
OM] members and have to be undertaken only on the NDS-
OM platform of RBI.
• WI market helps in price discovery of the securities being
auctioned as well as better distribution of the auction stock
 • Primary dealers are registered entities with the RBI who
Special type of participants have the license to purchase and sell government
in gilts/securities market securities.  They are entities who buys government
-Primary Dealers securities directly from the RBI (the RBI issues
government securities on behalf of the government),
aiming to resell them to other buyers. In this way, the
Primary Dealers create a market for government
securities.
•  The Primary Dealers system in the government
securities market was introduced by the RBI in 1995.
• The Primary Dealers are thus created to promote
transactions in government securities market. A
facilitating arrangement is essential for selling of
government securities as government is the single
largest borrower in the market who borrows through
the issue of its securities – treasury bills and bonds.
• The RBI instructs Primary Dealers to have a minimum
turnover ratio, bidding ratio, underwriting ratio,
secondary market participation etc to ensure that they
are active in supporting the trade in government
securities. PDs are active in the stock market also for
enhancing the trading of government securities
 Callable bonds & Puttable bonds
• Callable bonds allow the issuer to • A Puttable bond gives the
redeem the bonds prior to their investor the right to seek
original maturity date. Such bonds
have a call option in the bond redemption from the issuer
contract, which lets the issuer alter before the original maturity
the tenor of the security. For date. For example, a 7-year
example, a 10-year bond may be bond may have a put option
issued with call options at the end of
the 5th year such as in the SBI bond
at the end of the 5th year. If
illustration below. Such options give interest rates have risen,
issuers more flexibility in managing Puttable bonds give investors
their debt capital. If interest rates the ability to exit from low-
decline, an issuer can redeem a
callable bond and re-issue fresh
coupon bonds and re-invest
bonds at a lower interest rate. in higher coupon bonds.
 Repos/Reverse repos & CBLOs
•  A repo is a transaction in which    Collateralized Borrowing
one participant borrows money and Lending Obligation (CBLO): A
at a pre-determined rate against Collateralized Borrowing and
the collateral of eligible security Lending Obligation (CBLO) is an
for a specified period of time. instrument used to lend and
borrow for short periods, typically
• A reverse repo is a lending
one to three days. The debt is
transaction; a repo in the books
fully secured against the collateral
of the borrower is a reverse of government securities. CBLO is
repo in the books of the lender. a standardized and traded repo.
• Eligible collateral for repos and  CBLO is done for non-bank
reverse repos are central and participants in the money market
state government securities and by Clearing Corporation of India
select corporate bonds.
 Further concepts
• Time Value of Money. • How are Bond Yields and prices related?
• A rupee in hand today is more • The bond price is the present value of cash inflows from the
valuable than a rupee obtained in bond, discounted by the market yield. So bond price, coupon
future. For example, let us compare rate and yield are all connected. Given any two, the third can
receiving Rs.1000 today, and be easily calculated.
receiving it after 2 years. If today’s • In the bond markets, it is the price of a bond that is known
Rs.1000 is placed in a 2 year bank and quoted. Information on coupon rate and redemption are
deposit earning simple interest of also available. Given the bond price and its coupon, the yield
8%, then it will be worth Rs.1080 can be computed.
(principal 1000 + interest 80) at the • If the investor purchases the bond at a price lower than the
end of 2 years. This makes today’s face value, then he has acquired it at a price cheaper than the
Rs.1000 more valuable than the originally issued price. As a result yield will be higher than the
future Rs.1000. The value of coupon rate. If the investor purchases the bond at a price
currently available funds over funds higher than the face value, then he has acquired it at a higher
received in the future is due to the price than the original face value, so his yield will be lower
return that can be earned by than the coupon rate.
investing current funds. If cash • There is an inverse relationship between yield and price of a
flows that are receivable at bond.  As bond price falls, the yield to the investor goes up.
different points in time have to be This is because as the discounting rate (or yield) is increased,
compared, the time value of money the final present value (price) reduces.
has to be taken into account.
 Yield to Maturity
• The rate which equates the present value of future cash
flows from a bond with the current price of the bond is
called the Yield to Maturity (YTM) of the bond.
• As bond price changes, so does the YTM.
• Thus, YTM is the discount rate implied in the bond value
at a point in time.
• YTM is a popular and widely used method for computing
the return on a bond investment.
• Yield quotations in the debt market usually refer to YTM.
They are also charted in excel sheet known as YTM charts.
Initial Public Offer/Offering (IPO)
• The first public offer of shares made by a company is called an Initial Public Offer (IPO).
When a company makes an IPO the shares of the company becomes widely held and there
is a change in the shareholding pattern. The shares which were privately held by
promoters are now held by retail investors, institutions, promoters etc. An IPO can either
be a fresh issue of shares by the company or it can be an offer for sale to the public by any
of the existing shareholders, such as the promoters or financial institutions.
• Fresh Issue of Shares - New shares are issued by the company to public investors.  The
issued share capital of the company increases. The percentage holding of existing
shareholders will come down due to the issuance of new shares.
• Offer for Sale - Existing shareholders such as promoters or financial institutions offer a part
of their holding to the public investors. The share capital of the company does not change
since the company is not making a new issue of shares. The proceeds from the IPO go to
the existing shareholders who are selling the shares and not to the company. The holding
of the existing shareholders in the share capital of the company will reduce.
• Follow-on public offer is made by an issuer that has already made an IPO in the past and
now makes a further issue of securities to the public. A company can make a further issue
of shares if the aggregate of the proposed issue and all the other issues made in a financial
year does not exceed 5 times the pre-issue net worth.
• When a company wants additional capital for growth or to redo its capital structure by
retiring debt, it raises equity capital through a fresh issue of capital in a follow-on public
offer.
 Rights Issue of Shares

• Whenever a company makes a fresh issue of shares, it has an

impact on the existing shareholders since their proportionate
holding in the share capital of the company gets diluted.
• For example, a company may have 10 lakhs shares of Rs.10 each,
amounting to an issued and paid-up capital of Rs. 1 crore. If it issues
another 10 lakhs shares, to increase its capital, the proportion held
by existing shareholders will come down by half, as the issued and
paid up capital has doubled.
• This is called as dilution of holdings.
• To prevent this, section 81 of the Company’s Act requires that a
company which wants to raise more capital through an issue of
shares must first offer them to the existing shareholders.
• Such an offer of shares is called a rights issue.
 • The Green Shoe Option (GSO) in a public
offer is used by companies to provide
Green Shoe Option
stability to price of the share in the
secondary market immediately on listing.
• A company, which opts for Green Shoe
option can allot additional shares not
exceeding 15% of the issue size, to the
general public who have subscribed in the
issue.
• The proceeds from this additional allotment
will be kept in a separate bank account and
used to buy shares in the secondary markets
once the shares are listed, in case the price
falls below the issue price.
• This is expected to provide support to the
price of the shares. This price stabilization
activity will be done by an entity appointed
for this purpose.
 • Mutual fund is a vehicle to
Mutual Fund mobilize moneys from investors,
to invest in different markets
and securities, in line with the
investment objectives agreed
upon, between the mutual fund
and the investors. In other
words, through investment in a
mutual fund, a small investor
can avail of professional fund
management services offered by
an asset management company.
It has got various types
 Various types of Mutual Funds
• Equity Mutual funds invest in a • Debt Mutual funds invest in
portfolio of equity shares and equity
debt securities issued by the
related instruments. The return and
risk of the fund will be similar to government, public sector
investing in equity. Investors in units, banks and private
equity funds seek growth and capital limited companies.
appreciation as the primary
objective and should ideally have a • Debt securities may have
long investment horizon that will different features. They may
allow time for the investment to have credit risk or risk of
appreciate in value and not be
default, short-term or long-
affected by short-term fluctuations.
• They include Large-cap, Mid-cap
term duration. Debt funds
and small cap funds are offered in various
categories.
 Various types of Mutual Funds..
• Short term funds :These funds focus • Long term funds:These funds focus on MTM
primarily on accrual income and shorter gains and longer maturity, and have a higher risk
maturity, and have a lower risk and stable and higher return.
– Gilt funds invest in a portfolio of long-term
return.
government securities. The coupon income earned is
– Liquid funds can only invest in securities with lower than corporate bonds of comparable tenor
not more than 91 days to maturity. This is a since there is no credit risk in the securities. The
regulatory requirement. These funds primarily MTM gains and losses can be high since these
earn coupon income in line with current securities have long tenors.
market rates – Income funds invest in a combination of corporate
– Ultra-short term funds hold a portfolio similar bonds and government securities. They earn a
to liquid funds but with a slightly higher higher coupon income from the credit risk in
corporate bonds held. The gains or losses from MTM
maturity to benefit from higher coupon
will depend upon the tenor of the securities held.
income.
• Dynamic funds: These funds shift their focus
– Short-term Gilt funds invest in short-term
government securities such as treasury bills of
between short and long term debt instruments,
the government. depending on the expectation for interest rate,
and provide moderately higher return than
– Short-Term Plan invest in a portfolio of short-
term debt securities primarily to earn coupon
short term funds, at a moderately lower risk
income but may also hold some longer term than long term debt funds
securities to benefit from appreciation in price.
 Various types of Mutual Funds..
• Fixed Maturity Plans (FMP) are closed-end funds • Asset Allocation Funds
that invest in securities whose maturity matches • These funds invest in both equity and
the term of the scheme.  The scheme and the
securities that it holds mature together at the end debt but without a pre-specified
of the stated tenor. The fund pays out the allocation as in the case of other hybrid
maturity proceeds of the portfolio on the closing funds. The fund manager takes a view
date. Investors who are able to hold the scheme on which type of investment is
to maturity will be able to benefit from the expected to do well and will tilt the
returns of the FMP that are locked in when the
portfolio is created. There is no risk of the value of allocation towards either asset class.
the securities being lower at the time the fund Such funds may also hold 100% in
matures (unless there is a default) since the equity or debt. Examples of asset
instruments will also be redeemed at their face allocation fund include life stage funds
value on maturity. that invest across asset classes suitable
• The time for which the investor is willing to invest
to the age of the investor. Such funds
must match the term of the fund
• The primary risk in FMPs is credit risk from a
will have a higher allocation to equity
possible default by the issuer. in the initial years and reduce equity
• As closed-end funds these schemes are listed on exposure and increase debt exposure
stock exchanges where they may be traded at as the age advances.
prices related to the NAV.
 Various types of Mutual Funds..
• Hybrid funds hold a portfolio • Equity-oriented hybrid funds have a greater
of equity and debt securities. exposure to equity in their portfolio as compared
The investment objective of to debt. Balanced funds are an example of equity-
oriented funds. The coupon income from the debt
the fund will determine the portion will stabilize the risky returns from the
allocation of the portfolio equity component. However the higher equity
between the two asset component in the portfolio means the fund’s
classes. A hybrid fund is a debt overall returns will depend on the performance of
and an equity fund, rolled into the equity markets and will also fluctuate more.
one. The risk in a hybrid fund • Debt-Oriented Hybrid Funds
will primarily depend upon the • Debt-oriented hybrid funds have a higher
allocation between equity and proportion of their portfolio allotted to debt.
debt, and the relative Monthly Income Plans are such funds. The returns
are primarily from the debt portion and will
performance of these asset depend upon the type debt securities held: short
classes. The higher the equity or long term, low or high credit risk. The equity
component in the portfolio, portion augments the return from debt so that the
the greater will be the overall fund is able to generate better returns than a pure
risk. debt fund.
 Various types of Mutual Funds..
• Equity Linked Savings Schemes • Exchange traded funds (ETF) are a type of
mutual fund that combines features of an open-
(ELSS) are equity funds that
ended fund and a stock. Following are its
provide tax benefits in the features:
form of deductions under • Units are issued directly to investors when the
section 80 (c) for the amount scheme is launched.
invested. • Post this period, units are listed on a stock
exchange like a stock and traded.
• The limit for claiming
• Units purchased at the time of launch or bought
deduction is Rs. One lakh. from the stock markets are credited to the
• ELSS have to hold at least 80% demat account of the investor.
of the investment portfolio in • Transactions are done through brokers of the
equity securities exchange. Investors need a broking account and
a demat account to invest in ETFs.
• Investments are subject to a • The prices of the ETF units on the stock exchange
three-year lock-in on the will be linked to the NAV of the fund, but prices
investments made to get the are available on a real-time basis depending on
trading volume on stock exchanges.
tax benefit.
 Various types of Mutual Funds..
• Gold Exchange Traded Funds • International funds invest in securities listed on
(ETFs) are ETFs with gold as markets outside India. The type of securities that
the underlying asset. The the fund can invest in is specified by the
following are the features: regulator SEBI and includes equity shares and
debt -listed abroad, units of mutual funds and
• It provides a way to hold gold ETFs issued abroad and ADRs and GDRs of Indian
in electronic rather than in companies listed abroad. The funds can also
physical form invest part of the portfolio in the Indian markets.
• Typically each unit of ETF • Fund of Funds (FoFs)
represents one gram of gold • FoFs invests in other funds. The FoF selects funds
• The fund holds physical gold that meets its investment objectives and invests
and gold receipts in them. Its portfolio is not made up of securities,
representing the units issued but is a portfolio of other funds. Most FoFs invest
in schemes of the same mutual fund. Some FoFs
• Price of the units will move in
consider schemes across fund houses which
line with the price of gold meets the FoFs investment objective for
inclusion in the portfolio
Derivatives Market
 Derivatives in brief
• A Derivative is a financial • The Derivative itself is a
security with a value that is contract between two or
reliant upon, or derived from, more parties based upon the
an underlying asset or group asset or assets. ... The most
of assets. ... The most common common underlying assets
underlying assets include include stocks, bonds,
stocks, bonds, commodities, commodities, currencies,
currencies, interest rates interest rates and market
and market indexes.
indexes.
• Derivatives can either be
•  Derivatives can either
traded over-the-counter (OTC)
be traded over-the-counter
or on an exchange.
(OTC) or on an exchange.
 Types of Derivative Instruments
• Derivative contracts are of • The most common type
several types. of Derivatives that you
• The most common types can trade in India is future
are forwards, futures, and options or f&o in
options and swap. short.
• A forward contract is an • Further, the important
agreement between two underlying markets for
parties – a buyer and a stocks, commodities,
seller to purchase or sell treasury bills, foreign
something at a later date at exchange and real
a price agreed upon today. estate.     
 Types of Derivatives – Futures & Options
• Futures: A futures contract is an • Options
agreement between two parties to Call Options
buy or sell an asset at a certain time A call option gives the buyer, the right
to buy a specified quantity of the
in the future at a certain price. underlying asset at a strike price on
Options: An Option is a contract or before expiry date. The seller
which gives the right, but not an however, has the obligation to sell
obligation, to buy or sell the the underlying asset if the buyer
underlying at a stated date and at a decides to exercise his option to buy.
stated price. While a buyer of an Put Options
option pays the premium and buys A Put Option gives the buyer, the
right to sell a specified quantity of
the right to exercise his option, the
the underlying asset at a strike price
writer of an option is the one who on or before expiry date. The seller
receives the option premium and however, has the obligation to buy
therefore obliged to sell/buy the the underlying asset if the buyer
asset if the buyer exercises it on him. decides to exercise his option to sell.
 Volume of Derivative Trading in India
• The world’s largest derivatives exchanges • As per the forum, March
(by number of transactions) are the
Korea Exchange (which lists KOSPI Index
data shows that NSE cash
Futures & Options), Eurex (which lists a market volume stands at
wide range of European products such as USD 90,968.9 million and
interest rate & index products), and CME derivatives volume at USD
Group.
2,689,055 million dollars.
• However India has raced ahead of
Korea Exchange, in terms of the ratio Cash volumes for the Korea
of equity derivatives turnover to the cash exchange were USD 240,760
market turnover, according to data million while derivative
by World Federation of Exchanges Forum.
volume was at USD
• The derivatives to cash market ratio for
India has increased to 29.6 from around
4,529,445.1 million.
15.0 two years ago, and is way ahead of
Korea, which had a ratio of 18.8 at the
end of March 2018.
 Hamstring injury

A recent hamstring injury creating lots of

problems for Indian financial and banking
sector has been none other than the
TWIN BALANCE SHEET PROBLEM.
Since questions may be asked on the topic
let’s have some brief ideas of it…
 Twin Balance Sheet Problem
• A balance sheet is a financial • Thus, TBS is two two-fold problem for
Indian economy which deals with:
statement that summarises a • Overleveraged companies – Debt
company/institution’s assets, accumulation on companies is very high
and thus they are unable to pay interest
liabilities and shareholder’s payments on loans.
equity at a specific point of a • Note: 40% of corporate debt is owed by
time. companies who are not earning enough to
pay back their interest payments. In
• Twin Balance Sheet Problem technical terms, this means that they have
(TBS) deals with two balance an interest coverage ratio less than 1.
•  Bad-loan-encumbered-banks – Non
sheet problems. One with
Performing Assets (NPA) of the banks is 9%
Indian companies and the for the total banking system of India. It is as
other with Indian Banks. high as 12.1% for Public Sector Banks. As
companies fail to pay back principal or
interest, banks are also in trouble.
 Twin Balance Sheet Problem..
• Origin of TBS problem can be traced to the • The reason for this is that major NPAs are
2000s when the economy was on an concentrated in Public Sector Banks which
upward trajectory. have the full backing of the government.
• However, unlike in India, in other
Solution to the Twin Balance Sheet Problem?
countries, corporates over expand during
the boom and accumulate obligations • India has till now pursued a decentralised
which they find difficult to repay. It leads approach where individual banks have taken
to default and the situation is reached decisions on its own to resolve NPAs.
where high NPA levels have triggered • As such mechanisms of resolving this problem
banking crises.
in the form of decentralised approach have
• In India, there have been no bank runs, no
failed. and time have now come to create a
stress in the interbank market, no need for
any liquidity support and GDP growing at centralised agency called Public Sector Asset
a good pace since the TBS problem first Rehabilitation Agency (PARA).
emerged in 2010. Yet the problem has • The centralised agency in the form of PARA
reached to this scale where it threatens would allow debt problems to be worked out
the stability of the entire banking system.
quickly. The time has come for India to
consider the same approach.
 A TALE OF
TWO POLICIES
Latest Developments in the Financial Sector –
Interim Budget – Key areas
1. Finance Minister in the Interim Budget announced a 2 per cent interest subvention for
MSMEs that have taken a loan of Rs 1 crore. The government will make it mandatory to
source 25 per cent from the SME sector. If this is combined with the interest subventions
schemes announced for both – farmers who pay on time as well as SMEs – the progress
made is quite substantial. In a way, these announcements are more universal and obviate
the need to have provisions for loan waivers or any other form of transfer of income, as
the present benefits are tied to a purpose.
2. Launching of Pradhan Mantri Shram Yogi Mandhan (PMSYM) scheme to provide
unorganised workers an assured monthly pension of Rs 3,000 after 60 years of age.
3. Hiking of tax free gratuity to Rs 30 lakh from existing Rs 20 lakh for employees having
service of more than five years.
4. Pradhan Mantri Shram Yogi Mandhan scheme will provide assured monthly pension of Rs
3,000, with contribution of 100 rupees per month, for workers in unorganised sector
after 60 years of age.
5. Individuals having annual taxable income of up to Rs 5 lakh will not have to pay any
income tax. Contd.
Latest Developments in the Financial Sector
– Interim Budget – Key areas contd.

6. Further, standard deduction has been raised from Rs 40,000 to Rs 50,000,

which will benefit 30 million salaried individuals.
7. If an individual invests in the specified tax saving schemes of the
government, the effective tax-free income limit will be Rs 6.5 lakh a year,
while it may go further up with additional avenues like NPS, medical
insurance and home loan interest payment.
8. Increase in tax deducted at source (TDS) limit on rent income to Rs 2.4
lakh from the current Rs 1.80 lakh.
9. Increase in the TDS threshold on interest from bank and post office
deposits to be raised from Rs 10,000 to Rs 40,000.
10.Exemption of tax on notional rent for unsold housing units for two years.
 1. Reduction in the policy repo rate by 25 basis points from 6.5 per
Latest Developments in the
cent to 6.25 per cent. As a result, the reverse repo rate stands
Financial Sector –
adjusted to 6.0 per cent, and the marginal standing facility (MSF)
RBI Monetary Policy– Key rate and the Bank Rate to 6.5 per cent
measures
2. A softer stance would bode well for the Government, which wants
CURRENT POLICY RATES to boost lending and lift growth as it faces elections by May. 
3. Also, the Reserve Bank of India (RBI) on Thursday relaxed the
REPO RATE 6.25% provision that Foreign Portfolio Investors (FPI) can't have an
exposure of more than 20% of its corporate bond portfolio to a
REVERSE REPO RATE 6.00% single corporate.
MSF 6.50% 4. Further, in its bi-monthly monetary policy review, RBI said
BANK RATE 6.50% companies under the insolvency process can borrow abroad to
repay the existing lenders. However, such companies can't use this
CRR 4.00% relaxation to borrow from overseas branches/subsidiaries of
SLR 19.25% Indian banks. Under the present External Commercial Borrowing
(ECB) framework, proceeds of ECB denominated in either foreign
currency or Indian Rupee (INR), are not permitted to be utilised for
repayment or for on-lending for repayment of domestic Rupee
loans.
5. RBI also raised the limit of collateral-free agricultural loan to Rs 1.6
lakh from the current Rs 1 lakh with a view to help small and
marginal farmers. The central bank also decided to set up an
internal working group (IWG) to review agricultural credit and
arrive at a workable policy solution.
 RBI Monetary Policy – The basis
• Taking into consideration key factors such as
• lower food inflation,
• moderation in the fuel group,
• recent unusual pick-up in the prices of health and education,
• Benign crude oil prices outlook and
• moderation in inflation expectations of households,
• the CPI inflation has been since revised downwards to 2.8 per cent in fourth quarter of
2018-19 and 3.2-3.4 per cent in first half 2019-20 and 3.9 per cent in third quarter of
2019-20, with risks broadly balanced around the central trajectory.
• Giving the rationale behind the dovish stance, the MPC said that the output gap has
opened up modestly as actual output has inched lower than potential. "Investment
activity is recovering but supported mainly by public spending on infrastructure. The need
is to strengthen private investment activity and buttress private consumption."
 RBI Monetary Policy – An Evaluation
• However, some economists felt that the decision to lower rates
is surprising because the main factor which determines policy
decision, i.e. CPI inflation potential remains unchanged.
• The risks of monsoon,
• higher food prices,
• oil prices,
• demand led inflation pressures etc
are factors that had led to a status quo decision by the RBI earlier.
 But this time the stance has changed and the expectation is
that inflation will be 2.8 per cent in the fourth quarter (Q4),
which justifies this move.
That was the last slide
 Thanks for being with me.
Best Wiahes & Au Revoir.
Debasish Mukherjee Ex MoF RBI
&
Arindam Sarkar
Faculty T.I.M.E.