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Financial • The economic development of a nation is reflected

by the progress of the various economic units, broadly

System - An
classified into corporate sector, government and
household sector. While performing their activities
these units will be placed in a
surplus/deficit/balanced budgetary situations.

Overview

Financial System Financial System

• There are economic units with surplus funds and
there are those with a deficit.
• A financial system or financial sector functions as an
intermediary and facilitates the flow of funds from
the areas of surplus to the areas of deficit.

Constituents of a
Financial System
• Financial System of any country consists of financial
markets, financial intermediation and financial
instruments or financial products.

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• A Financial Market can be defined as the market in • Money Market- The money market ifs a wholesale debt
which financial assets are created or transferred. market for low-risk, highly-liquid, short-term instrument.
Funds are available in this market for periods ranging
• As against a real transaction that involves
from a single day up to a year. This market is dominated
exchange of money for real goods or services, a mostly by government, banks and financial institutions.
financial transaction involves creation or transfer of
• Capital Market - The capital market is designed to
a financial asset. finance the long-term investments. The transactions
• Financial Assets or Financial Instruments represents a taking place in this market will be for periods over a year.
claim to the payment of a sum of money sometime • Forex Market - The Forex market deals with the
in the future and /or periodic payment in the form multicurrency requirements, which are met by the
of interest or dividend. exchange of currencies. Depending on the exchange
rate that is applicable, the transfer of funds takes place
in this market. This is one of the most developed and
integrated market across the globe.

FINANCIAL
INTERMEDIATION
• Having designed the instrument, the issuer should
then ensure that these financial assets reach the
ultimate investor in order to garner the requisite
amount.

• Capital market deals with medium term and long

term funds. It refers to all facilities and the
institutional arrangements for collection and
distribution of funds (medium term and long term).

Capital Market • Capital market has a crucial significance for capital

formation. For a speedy economic development
adequate capital formation is necessary.

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Primary Market
• A primary market is the market for a security that is
being issued for the first time. In primary market
investors buy securities directly from the issuer, not
from each other. There are two types of primary

Securities Markets markets:

o Public Issue: Securities are made available for sale on the open market to
the public.
o Private placement: The sale of securities to a relatively small number of
select investors as a way of raising capital.

• Initial Public Offering (IPO) is when an unlisted • Rights Issue (RI) is when a listed company which
company makes either a fresh issue of securities or proposes to issue fresh securities to its existing
an offer for sale of its existing securities or both for shareholders as on a record date.
the first time to the public. This paves way for listing • The rights are normally offered in a particular ratio
and trading of the issuer’s securities. to the number of securities held prior to the issue.
• A Further public offering (FPO) is when an already This route is best suited for companies who would
listed company makes either a fresh issue of like to raise capital without diluting stake of its
securities to the public or an offer for sale to the existing shareholders unless they do not intend to
public, through an offer document. An offer for sale subscribe to their entitlements.
in such scenario is allowed only if it is made to satisfy
listing or continuous listing obligations.

Private Placement Secondary Market

• The sale of securities to a relatively small number of • A market where investors purchase securities or
select investors as a way of raising capital. assets from other investors, rather than from issuing
• Investors involved in private placements are usually companies themselves. The stock exchanges such
large banks, mutual funds, insurance companies as the National Stock Exchange (NSE) and the
and pension funds. Mumbai Stock Exchange (BSE) are secondary
• Private placement is the opposite of a public issue, markets.
in which securities are made available for sale on
the open market.

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Functions of Stock
Exchange
• Continuous and ready market for securities
• A newly issued IPO will be considered a primary
o Stock exchange provides a ready and continuous
market trade when the shares are first purchased by market for purchase and sale of securities. It
investors directly from the company. provides ready outlet for buying and selling of
• After that any shares traded will be on the securities. Stock exchange also acts as an
outlet/counter for the sale of listed securities.
secondary market, between investors themselves. • Facilitates evaluation of securities
• In the primary market prices are often set o Stock exchange is useful for the evaluation of
beforehand, whereas in the secondary market industrial securities. This enables investors to know
forces like supply and demand and company the true worth of their holdings at any time.
Comparison of companies in the same industry is
fundamentals and prospects determine the price of possible through stock exchange quotations (i.e
the security. price list).

• Provides safety and security in dealings

o Stock exchange provides safety, security and
equity (justice) in dealings as transactions are
conducted as per well defined rules and
A Depository
regulations. The managing body of the exchange • A depository is an organisation which holds
keeps control on the members. Fraudulent securities (like shares, debentures, bonds,
practices are also checked effectively. Due to government securities, mutual fund units etc.) of
various rules and regulations, stock exchange investors in electronic form at the request of the
functions as the custodian of funds of genuine investors through a registered Depository
investors. Participant.
• At present two Depositories viz. National Securities
Depository Limited (NSDL) and Central Depository
Services (India) Limited (CDSL) are registered with
SEBI.

Depository Participant The National Stock

(DP) Exchange (NSE)
• A Depository Participant (DP) is an agent of the • The National Stock Exchange (NSE) is India's leading
depository through which it interfaces with the investor stock exchange covering various cities and towns across
and provides depository services. the country.
• Public financial institutions, scheduled commercial • NSE was set up by leading institutions to provide a
banks, foreign banks operating in India with the modern, fully automated screen-based trading system
approval of the Reserve Bank of India, state financial with national reach.
corporations, custodians, stock-brokers, clearing • The Exchange has brought about unparalleled
corporations /clearing houses, NBFCs and Registrar to an transparency, speed & efficiency, safety and market
Issue or Share Transfer Agent complying with the integrity.
requirements prescribed by SEBI can be registered as DP. • It has set up facilities that serve as a model for the
• Banking services can be availed through a branch securities industry in terms of systems, practices and
whereas depository services can be availed through a procedures.
DP.

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History The Trading System of

The NSE
• The National Stock Exchange is India's largest • The trading system of the NSE, known as NEAT
financial market. (National Exchange for Automated Trading), is a
• NSE was promoted by leading Financial Institutions fully automated screen based trading system that
at the behest of the Government of India and was enables members across the country to trade
incorporated in November 1992 as a tax-paying simultaneously with enormous ease and efficiency.
company unlike other stock exchanges in the
country. • In one stroke it has done away with the need for
• The NSE has developed into a sophisticated, people to congregate on the floor of an exchange
electronic market, which ranks third in the world for to trade and has instead taken the exchange floor
transacted volume. to the investor’s doorstep.
• The NSE conducts transactions in the wholesale
debt, equity and derivative markets.

What is Screen Based

Trading (SBT)
• The trading on stock exchanges in India used to take • The NSE trading software was originally developed
place through open outcry without use of information by TCAM Systems Inc., New York for the Vancouver
technology for immediate matching or recording of
trades. Stock Exchange.
• This was time consuming and inefficient. This imposed • Subsequently, the system was enhanced and
limits on trading volumes and efficiency. modified for the use in several stock exchanges
• In order to provide efficiency, liquidity and transparency, around the world.
NSE introduced a nationwide, on-line, fully automated
screen based trading system (SBTS) where a member
can punch into the computer the quantities of a security
and the price at which he would like to transact, and
the transaction is executed as soon as a matching sale
or buy order from a counter party is found.

• The telecommunications network is the backbone of

Mumbai Stock Exchange

any automated trading system and the same is true
for NSE also.
• Each Trading Member trades on the NSE with other • Established in 1875, BSE Ltd. (formerly known as
members through a computer that may be located Bombay Stock Exchange Ltd.), is Asia’s first Stock
at the Trading Member’s office or anywhere in Exchange and one of India’s leading exchange
• India. groups.
• The Trading Members of the exchange trade through • More than 5000 companies are listed on BSE making
VSATs (Very Small Aperture Terminals). Some Trading it world's No. 1 exchange in terms of listed members.
Members are connected through dedicated high
speed 64 kbps telephone lines also.
• The NSE supports more than 3,000 VSAT terminals and
thus the NSE is the largest private wide-area network
in the country.

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Who regulates the

Securities Market in India?
The responsibility for regulating the securities market is • The Securities and Exchange Board of India (SEBI) is
shared by a regulatory authority in India established under
• Department of Economic Affairs (DEA), Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides
• Department of Company Affairs for establishment of Securities and Exchange Board
of India (SEBI) with statutory powers for
• (DCA), o (a) protecting the interests of investors in securities
• Reserve Bank of India (RBI) and o (b) promoting the development of the securities market and
o (c) regulating the securities market.
• Securities and Exchange Board of India (SEBI).
• Its regulatory jurisdiction extends over corporates in
the issuance of capital and transfer of securities, in
addition to all intermediaries and persons
associated with securities market.

Listing of Securities
• Regulating the business in stock exchanges and any • Listing means formal admission of a security to the
other securities markets trading platform of the Exchange.
• Registering and regulating the working of stock • It provides liquidity to investors without compromising the
brokers, sub–brokers etc. need of the issuer for capital and ensures effective
monitoring of conduct of the issuer and trading of the
• Promoting and regulating self-regulatory securities in the interest of investors.
organizations • The issuer wishing to have trading privileges for its
• Prohibiting fraudulent and unfair trade practices securities satisfies listing requirements prescribed in the
• Calling for information from, undertaking inspection, relevant statutes and in the listing regulations of the
conducting inquiries and audits of the stock Exchange.
exchanges, intermediaries, self – regulatory • It also agrees to pay the listing fees and comply with
organizations, mutual funds and other persons listing requirements on a continuous basis.
associated with the securities market. • All the issuers who list their securities have to satisfy the
corporate governance requirement framed by
regulators.

Stock Brokers
• A stock broker is an individual/organization who are • Stock brokers are governed by SEBI Act, 1992,
specially given license to participate in the Securities Contracts (Regulation) Act, 1956,
securities market on behalf of clients. Securities and Exchange Board of India [SEBI (Stock
• The stockbroker has the role of an agent. When the brokers and Sub brokers) Rules and Regulations,
stock broker acts as agent for the buyers and sellers 1992], Rules, Regulations and Bye laws of stock
of securities, a commission is charged for this exchange of which he is a member as well as
service. various directives of SEBI and stock exchange issued
from time to time.
• Every stock broker is required to be a member of a
stock exchange as well as registered with SEBI.