Indian Financial System

pecuniary focal point ASSIGNMENT ON Indian FINANCIAL SYSTEM & SOURCES OF large TERM AND SHORT TERM FINANCES SUBMITTED BY, PREMJITH. A P10144 PGDM 2010-12 INDIAN FINANCIAL SYSTEM The financial system in india refers to the system of borrowing and change of bullion or the demand for and the confer of funds of in all individuals, institutions, companies and of the politics.Commonly the Indian financial system is classified ad into * Industrial finance funds compulsory for the conduct of industry and trade * Agricultural finance funds infallible and supplied for the conduct of agriculture and allied activity * Development finance funds needed for development actually it admits both industrial finance and hoidenish finance * giving medication finance relates to the demand for a nd supply of funds to meet government activity expenditure The mobilization of savings and the stiff distribution of the savings among all those who demand the funds for enthronisation purposes. The banking system, the policy companies, mutual funds, sit downment funds and former(a) institutions which promote savings among the public, get in their savings and transfer them to the actual investors * The investor in the country composed of individuals investors, industrial investors, industrial and trading companies and the government, these enters in the financial system as borrowers. FUNCTIONS OF INDIAN FINANCIAL SYSTEM The Indian financial system performs a essential role in economic development of india through with(predicate) saving investment process excessively known as capital formation. Sometimes it is as well bids financial foodstuff.The purpose of financial trade is to mobile savings efficiently and allocates the same efficiency among the ultimate users of funds, ie investors * Increase in savings, that is resources that be would hurt been normally use for consumption purposes should be released for other purposes. * mobilisation of savings domestic savings collected by banking and financial institutions and place at disposal of actual investors and * Investment proper, which is the production of capital goods. stem OF THE INDIAN FINANCIAL SYSTEM The Indian notes securities industry is the trade in which short name funds atomic fare 18 borrowed and lent.The capital merc dealise in india on the other hand, is the market for medium- term and long term funds. Reserve bank of india Organized orbit Sub Market unorganized sector Public sector banks Private sector banks NBFC IDFC, GIC, LIC Call bills T- Bills documentation for Deposit Commercial Papers SHORT TERM AND recollective TERM FUNDS SHARES personas comes in the Long term funds. A dower is a unit of capital of the accomp any. It has a definite deliver apprise. It represents self-possession rights of their holders. Buyers of make outs are adverted stockholder and they are effective owners of the firm whose shares they hold.Each shareholder invest their notes in the shares of a company in exception of a return on their investment capital. The return of shareholder consists of dividend and capital gain. Share holder make capital gain or (loss) by sell their share. Each share carries a distinct number. Shares are transferable units. Shareholders are of two type ORDINARY and resource shareholders. Preference share These shares crap preference over the ordinary shares in terms of honorarium of dividend and repayment of capital if company is wound up. They may be issued with or without a maturity period.REDEEMABLE PREFERENCE SHARE are shares with maturity and IRREDEEMABLE PREFERENCE SHARES without any maturity. The holder of preference shares get dividend at a frigid aim. With regards to dividend, preference shares may be issued with or without cumulative features. In the fact of cumulative PREFERENCE SHARES unpaid dividends accumulate and are payable in the future. Dividends in arrears do not accumulate in the character of NON CUMULATIVE PREFERENCE SHARES. Features of Preference share Claim on income and assets preference share is a senior security as com comparabilityed to ordinary share.It has a preli minuteary advance on the companys income in the sense that the company must first pay preference share dividend before compensable(a) the ordinary dividend. Fixed dividend The dividend assess are fixed in the case of preferences share, and preference dividend are not tax deductable. Cumulative dividend that all agone unpaid dividend be paid before the ordinary dividends are paid. run-of-the-mine Shares represents the ownership position in a company. The holders of ordinary shares called shareholders are the legal owners of the company. popular shares are the sources of permanent capital since they do not have a maturity picture.However, the ordinay shareholders are entitled to receive dividends. The amount or rate of dividends are not fixed. An ordinary share is called variable income security. m acrocosm the owner the company, shareholders bear the risk of ownership they are entitled to dividends later on the income claims of others have been satisfied. Similarly, when the company is wound up, they stand exercise their claim on assets later the claims of other suppliers of capital have been met. Features of Ordinary shares Claims on income Ordinary shareholders have a residual ownership claim.They have a claim to the residual income, which is earnings available for ordinary shareholder after paying expenses, interest charges, taxes and preference dividend. Claim on asset Ordinary shareholder have residual claim on company asset in case of liquidation. Voting rights Ordinary shareholder are required to voter turnout on a number of important matters. The most signifi stoolt proposals include election of directors and change in memorandum of association. RIGHTS ISSUE When company distributes all earnings to shareholders, then, it can reacquire new capital from the same sou rces by outcome new shares called rights shares.BONDS A connect is a long term debt shaft or security. binds issued by the government do not have any risk of defaults. The private sector companies alike issue bonds, which are called debenture bonds. A company can issue secured and unsecured debenture. In case of bonds and debentures, the rate of interest is generally fixed and known to investors. Features of Bonds * Face nourish is the par value. A bond is generally issued at a par value of Rs100 or Rs1000, and interest in paid on face value. * Interest rate is fixed and known to bondholders.Interest paid on a bond is tax deductable. Interest rate is called coupon rate. * Maturity bond is generally issued for a condition period of time. It is repaid on maturity. * Redemption value The value that a bondholder will get on maturity is called redemption or maturity value. A bond may be ransomed at par or at premium or at discount. * Market value A bond may be traded in a stock e xchange. The worth at which it is currently sold or bought is called the market value of the bond. Market value may be unlike from par value or redemption value.Bonds may be classified into three (1) Bond with maturity (2) utter(a) discount bonds (3) Perpetual bonds Bond with maturity The companies issue bonds that specify the interest rate and the maturity period. Pure discount bonds These bonds do not carry an explicit rate of interest. It provides for the payment lump sum amount at a future date in exchange for the current price of bond. Perpetual bonds These bonds are also consols, has an indefinite life and therefore, it has no maturity value. Types of Debentures * Convertible debenture (CD) * Non cashable debenture (NCD) * Fully convertible debenture (FCD) * Partly convertible debenture (PCD)WARRANTS A warrant entitles the leveragingr to buy a fixed number of ordinary shares at a particular price during a specified time period. Warrants are generally issued along with debe ntures as sweeteners. Warrants are employ in conjunction with ordinary or preference shares. Characteristics of Warrants Exercise price of a warrant is the price at which its holder can purchase the issuing firms ordinary shares. Exercise ratio states the number of ordinary shares that can be purchased at the exercise per warrants. Expiration date is the date when the selection to buy ordinary shares in exchange of warrants expires.Detachability the warrant can all be a detachable or non detachable. Detachable warrants Warrant can be sold separately from debentures to which it is originally attached Non detachable warrants cannot be sold separately from the debenture to which it was originally attached. Some of the other methods used for raising long term capitals, * CUMULATIVE CONVERTIBLE PREFERNCE SHARE * derivative actor SECURITIES * BORROWING FROM FINANCIAL INSTITUTION (BANKS) SHORT TERM FUNDS It is the market for near specie, or it is the market for lending and borrowing of short funds.It is the market for lending and borrowing short term surplus investible funds of banks and other financial institution are demanded by borrowers comprising individual companies and the government. The composition of Indian money market consist of Call money market i important submarket of the Indian money market is the Call money market, which is the market for very short term funds. This market is also known as money at call and short notice. This market has two segments (a) the call market or overnight market and (b) short notice market. The rate at which unds are borrowed and lent in this market is called the call money market. Call money rates are market determined by demand and supply of short term funds. The public sector banks tarradiddle for about 80% for the demand and foreign banks and Indian private sector banks account for the balance of 20% of borrowings. NBFCs like IDBI, GIC, LIC are call money market lenders. Bill market in India The bill market ir t he discount market is the most important part of the money market where short bills normally up to 90days are bought and sold. The bill market is further subdivided into commercialized bill market and treasury bill market.The 91 day treasury bills are the most common ways the government of india raises funds for the short period. Government has also introduced the 182 day T-Bills and 364 day T-bills, In 1997 government introduced 14 day T-Bill. Dated government securities The government of india has also decided to sell dated securities on an auction basis. The purpose of this government decision is * To develop dated securities as a monetary instrument with flexible yields * To provide financial instrument to suit investors expectation, and * To meet Government needs directly from the market.Repo and reverse repos Repos are now a systematic feature of RBIs market operations, If the banking system experience liquidness shortage, then RBI comes to assist banking system by repurcha sing government securities. When the government securities are repurchased from the market, payment is made by RBI to commercial banks and this adds to their liquid and enables them to expand their credit to industry and trade. Reverse repo is to sell dated securities through auction at fixed cut off rate of interest.The mark is to provide short term avenue to banks to park their surplus funds. Certificate of Deposits (CD) The CDs are another important money market instrument. They were issued by banks in multiples of Rs25 lakhs to expand the investor base of CDs, the min value was reduced and is presently Rs 1 lakhs. The maturity is between 3 months and one year. CD s are freely transferable after 45 days after the date of issue. CDs became direct popular with banks for raising resources at competitive rates of interest.Commercial papers (CP) The commercial papers are issued by companies with networth of Rs 10 crores, later reduced to Rs 5 crores. The CP is issued multiples of R s. 25 lakhs subject to minimum issue of Rs 1 crore. The maturity of Cp is between 3 to 6 months. The purpose of introducing CP is to enable high level incorporated borrowers to diversify their source of short term borrowings on the one hand and provide an additional instrument to the banks and financial instrument in the money market.Reference Financial Management by I M Pandey