Module 1-Introduction To FMO-new

Module 1
Indian Financial system

SAVINGS AND
INVESTMENTS
MEANING OF
SAVINGS
• According to Fitzsimmons (1950): “It refers to the process of keeping some
amount from the current income for the purpose of taking care of future and
wants”.
• The term savings means “ refraining from spending for consumption needs.”
Savings are the difference between earnings and expenditure
• It can be defines as, “certain proportion of income kept aside for future use”.
OBJECTIVES OF
SAVINGS
• Reduces economic insecurity especially in old age
• Help in period of inability
• Useful during an emergency
• Becomes a source of income
• Savings are useful habit to cultivate as it is a sure means of family security
• Useful for children’s marriage, education or other family expenditure
• It gives feeling of security
INVESTMENT
• An investment is the sum of money that one has paid to an agency for
safekeeping and earning interest
• It may be defined as “ a commitment of funds made in the expectation of

gaining additional income or growth in values. Investments may be made in
financial assets or physical assets
OBJECTIVES OF INVESTMENT
• Security after retirement

• Education children
• Building up an estate
• Improving status and standard of living
TYPES OF
INVESTMENTS
JEWELLER PROPERT SHARE DEBENTURE

Y Y S S
Financial system
• It refers to a set of activities , which facilitate transfer of
resources from savers to borrowers.
• It comprises financial institutions, financial markets,
financial instruments and financial services.
Features of Financial system
• It includes organized and unorganized financial markets
• It regulates transactions between various economic units
• It promotes efficient allocation of financial resources
• It promotes economic development
• It facilitates expansion of financial markets

Components of Financial System
1.Financial markets
2.Financial Institutions
3.Financial Instruments
4.Financial Services
1. Financial markets
• It is an institutional arrangement that facilitates the

exchange of financial assets, including deposits
and loans, stocks and bonds, options and futures.
• It may be organized and unorganized financial
markets.
Financial market
Organised Unorganised
Money
market Capital market
Call money
Commercial bills
Treasury bills Primary Secondary market
Acceptance market
Repo
Discount
2. Financial Institutions
• Organisations that mobilise savings and provide finance
to individuals and organisations.
• Also called Financial intermediaries.
• Financial institutions classified into
1. Monetary or Banking FIs
2. Non-monetary or Non-banking Fis
3. Specialised FIs
Financial Institutions
Monetary/ Non-
Banking Monetary Specialised
RBI NBFCs State level FIs

Commercial Investment IFCI,ICICI,IDBI
Banks insttutions NABARD
RRBs Pension funds IDFC
Co-operatives Lease finance cos. SIDBI
Post office VCFs IDFC
savings banks Housing finance cos.
3. Financial Instruments
• They are documentary evidence of claim against an individual or
firm for payment of principal or interest or dividend on a
specified maturity date.
• Financial instruments are classified into money market

instruments and capital market instruments
4.Financial Services
• Financial services are activities and benefits connected with sale
of money or money’s worth.
• It cover wide range of activities including insurance, banking and
credit services.
Role and functions of Financial system
1.Mobilisation of savings and allocation
2.Reallocation of accumulated old savings
3.Organisation of the payment and settlement system
4.Provision of liquidity
5.Provision of a good corporate governance system
6.Generation of information for decision making
7.Creation of innovative schemes
8.Management of uncertainty and risk
9.Encourage investments
10.Facilitate Judicious allocation
11.Facilitate financial engineering
12.Promoting capital formation
13.Globalisation of the economy
Classification of financial market
Financial
Market
Organised Unorganised
Money Capital
Market Market
Commercial Treasury Primary Secondary

Call money Acceptance Repo Discount
bills bills Market Market
Capital market
• It is market for long term market
• Capital is collected through issue of shares, debentures

and other financial instruments
• Two wings of capital market are primary market (new

issue market) and secondary market ( stock exchange)
Significance or functions of Capital market
• It Promotes capital formation and thereby economic growth

• Mobilises savings of the people for investment
• Channelises the funds to the most productive sector
• Increases production and productivity and enhances economic
welfare of the society
• Makes possible the technological upgradations in the industrial
sector with the channelised funds
• Helps the corporate sector expand grow and diversity leading to the
growth of the economy
• The borrowers with deficit have funds from lenders with surplus in
the capital market
Capital market instruments
Financial instruments can be divided into ownership instruments/securities
(capital stocks) and
creditorship instruments/securities(debt capital)

Major financial instruments
1. Equity shares
2. Preference shares
3. Debentures
4. Bonds
1.Equity shares
• Equity holders are the legal owners of a company.
• Guarantees a residual interest in the assets of an enterprise after
deducting all its liabilities

Types of equity shares
1. Equity shares with detachable warrants –It enable the warrant holder to apply for
specified number of equity shares at predetermined price within a given time
2. Shares with differential voting right (SWDVR)- The differential rights are in respect
of voting power and dividend. shares with higher voting rights are generally given to
promoters, key managerial persons, Managing directors etc.
3. Non-voting shares (NVS)- Do not carry voting right but eligible for higher dividend
4. SWEAT Equity shares- these shares issued by company to its employees or

directors at a discount or for consideration other than cash as recognition for providing
knowhow , intellectual property rights or other value additions to the company. -ESOP
2.Preference shares
• These shares are those which :

1. carry a preferential right to payment of dividend during life time of
the company
2. Carry a preferential right for repayment of capital in the event of

winding up
Types of Preference shares
1. Redeemable preference -These shares are redeemed after a given period
2. Irredeemable Preference shares –These shares not redeemable except on the

liquidation of the company
3. Convertible Preference shares- can be converted to equity shares at the option of

the holder. Also known as quasi equity shares
4. Participating preference share – These shares are entitled to get regular dividend
and also right for surplus of the company beyond a certain limit
Types of Preference shares
5. Cumulative Preference share –Dividend not paid in a particular year can be

cumulated for the next year.-
6. Preference share with warrants- The holder of such warrants can apply for equity
shares at premium.
7. Fully convertible cumulative preference shares.- Shares are automatically

converted into equity shares.
3. Debentures
It is a debt instrument issued by a company with a promise to

pay interest and repay the principle on maturity.
Denture holders are creditors of the company

Types of Debentures
1. Secured debentures- Debentures which create a charge on the property
of the company . The charge may be floating or fixed
2. Unsecured Debentures (Naked) - These are not protected through any

charges by any property or assets of the company
3. Bearer Debenture- These are payable to bearer and are transferable by

mere delivery.
4. Registered debentures – in this the name and address and date of

registration entered in the company books. The holder is eligible for
interest only . Which will automatically send to him on every payment date,
Types of Debentures
5. Redeemable debentures- On this Debentures company has right to call
them before maturity
6. Convertible dentures – it has an option given to convert dentures in to

equity shares after a specific period.
7. Non convertible debenture with detachable equity warrants -

The debenture holders can buy a specified number of shares from the
company at predetermined period , only after a specified period
4. Bonds
It is a debt instrument that are issued by companies

/Governments to raise funds for financing their capital
requirement.
By purchasing a bond, an investor lends money for a period

of time at a predetermined interest rate
It has fixed face value

Types of Bonds
1. Government bonds- are fixed income debt instruments issued by the
government to financé their capital requirements.
2. Corporate bonds- are debt securities issued by public or private

corporations that need to raise funds for working capital.
Other types of Bonds
a) Zero coupon Bonds: are issued at a discount to their face value and at the
time of maturity , face value is repaid to the holders. No coupon is paid to
the holders. Also known as Deep discount bonds.
b) Mortgage Bonds: are secured by physical assets of the corporation.
c) Convertible Bonds: Allows the bond holder to convert into shares
d) Step-up Bonds: pays a lower coupon rate for an initial period , then
increases to a higher coupon rate.
Other types of Bonds
e) Callable and Non-callable Bonds: If a bond can be called
(redeemed) prior to maturity is callable bonds. Otherwise Non-
callable.
f) Option Bonds: The investors have the option to choose
between cumulative or Non-cumulative bonds.
g) Bonds with warrants: Allows the holder to buy a number of
equity shares at a pre-specified price in future.
h) Floating rate Bonds: Bonds wherein the interest rate is not
fixed and is linked to a benchmark rate.
Money Market
• It is a market for borrowing and lending short term funds.
• To meet the short term requirements from few days to less
than 1 year.
• Money market instruments can be readily converted into cash
without loss.
Definition of money market
• RBI defines money market as” a market for short term financial
assets that are close substitute for money, and facilitates the
exchange of money in primary and secondary market”
Features of Money market
1. No geographical constraints as that of stock exchange
2. Wholesale market of short term debt instruments
3. Relates to all dealings in money or monetary assets

4. Market purely for short term funds
5. Not a single homogeneous market. There are various sub-

markets
Features of Money market
6. Establishes a link between RBI and Banks and provides for

monetary policy and liquidity management.
7. No fixed place for conduct of operations , transactions can be
conducted over phone
8. Transactions can be conducted with or without brokers
9. Variety of short term debt instruments are traded.

Objectives of Money market
I. Providing parking place for temporary employment of surplus
fund
II. Providing facility to overcome short term deficits
III. Enabling the central bank to influence and regulate liquidity
and interest rates in the economy
Money Market Instruments
1. Commercial papers(CPs)
2. Certificate of Deposits(CDs)
3. Treasury Bills (T-Bills)
4. Commercial Bills(CBs)
5. Call money
6. Repurchase Agreements(REPOs)
1. Commercial papers(CPs)
• Unsecured promissory note issued by a
co. with a fixed maturity and approved
by RBI.
• Introduced in India in 1990
• Period of maturity range from 7 days to
1 year
• Negotiable by endorsement and delivery
• Issued at a discount on face value
• Manufacturing cos., leasing and finance
cos.,mutual funds and Fis.are major
issuers.

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Module 1

Indian Financial system

• It may be defined as “ a commitment of funds made in the expectation of

• Security after retirement

JEWELLER PROPERT SHARE DEBENTURE

• It facilitates expansion of financial markets

• It is an institutional arrangement that facilitates the

RBI NBFCs State level FIs

• Financial instruments are classified into money market

Commercial Treasury Primary Secondary

• Capital is collected through issue of shares, debentures

• Two wings of capital market are primary market (new

• It Promotes capital formation and thereby economic growth

Financial instruments can be divided into ownership instruments/securities

(capital stocks) and

creditorship instruments/securities(debt capital)

• Equity holders are the legal owners of a company.

• Guarantees a residual interest in the assets of an enterprise after

deducting all its liabilities

4. SWEAT Equity shares- these shares issued by company to its employees or

• These shares are those which :

2. Carry a preferential right for repayment of capital in the event of

2. Irredeemable Preference shares –These shares not redeemable except on the

3. Convertible Preference shares- can be converted to equity shares at the option of

5. Cumulative Preference share –Dividend not paid in a particular year can be

7. Fully convertible cumulative preference shares.- Shares are automatically

It is a debt instrument issued by a company with a promise to

Denture holders are creditors of the company

2. Unsecured Debentures (Naked) - These are not protected through any

3. Bearer Debenture- These are payable to bearer and are transferable by

4. Registered debentures – in this the name and address and date of

6. Convertible dentures – it has an option given to convert dentures in to

7. Non convertible debenture with detachable equity warrants -

It is a debt instrument that are issued by companies

By purchasing a bond, an investor lends money for a period

It has fixed face value

2. Corporate bonds- are debt securities issued by public or private

b) Mortgage Bonds: are secured by physical assets of the corporation.

c) Convertible Bonds: Allows the bond holder to convert into shares

3. Relates to all dealings in money or monetary assets

5. Not a single homogeneous market. There are various sub-

6. Establishes a link between RBI and Banks and provides for

8. Transactions can be conducted with or without brokers

9. Variety of short term debt instruments are traded.

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