Regulatory framework
Securities Laws comprises of the following laws:
a) Companies Act, 2013;
b) Securities Contracts (Regulation) Act, 1956;
c) Securities and Exchange Board of India Act, 1992; and
d) Depositories Act, 1996.
Companies Act, 2013
The Companies Act, 2013 is administered by the Ministry of Corporate Affairs
There are 7 Regional Directors, one for each region
• north, east, west, south, north-east, northwest and south-east
• at Noida, Kolkatta, Mumbai, Chennai, Shillong, Ahmedabad & Hyderabad
All the states lying in one particular region come under the jurisdiction of Regional Director of that region.
Hence, all the Registrar of Companies (ROC) of all the states falling under one particular region of India act as sub-ordinate to the Regional Director (RD) of that region.
National Company Law Tribunal (NCLT) is also one quasi-judicial authority with regard to the Companies Act, 2013.
However,
• the provisions of NCLT and the all the aspects of Companies Act, 2013
• such as corporate restructuring, winding up, sick companies, etc.
• Involving the role of NCLT has not come into force till date.
SCRA, SEBI Act and Depositories Act
Following Acts are administered by Ministry of Finance, Government of India
Securities Contracts (Regulation) Act, 1956,
Securities and Exchange Board of India Act, 1992 and
Depositories Act, 1996
Further Securities and Exchange Board of India (SEBI) is the principal executive authority, under the Ministry of Finance, in respect of the aforesaid Acts.
In addition, Securities Appellate Tribunal (SAT) is the quasi-judicial authority with regard to the aforesaid three Acts.
FINANCIAL SYSTEM
A financial system is
• a set of institutional arrangements through which
• financial surpluses are mobilized from the units generating surplus income and
• transferring them to the others, who are in need of them.
It may be noted that
• every modern economy is based on a sound financial system.
• Financial System helps in movement of funds from the surplus hands to tie hands requiring them and
• as a result surplus funds come into the main stream of production & hence develop the economy.
Components of Financial System
Financial System comprises of the following:
Financial Markets;
Financial Institutions and Intermediaries; and
Financial Products.
Financial Markets
Financial Market
• helps in allocation of savings to investment and
• provides a variety of investment options
• To savers as well as various forms of raising finances to Corporate.
Financial Market is further comprised of
• Capital Market and
• Money Market.
Capital Market:
The Capital Market is
• a market for financial investments that are direct or indirect claims to the capital.
• It is wider than the Securities Market and embraces all forms of lending and borrowing.
The Securities market refers to
• The markets for those financial instruments/ claims/ obligations that are
• commonly and readily transferable by sale.
There are two components of securities market, namely,
• Primary market and
• Secondary market.
The primary market provides the channel for sale of new securities by way of public issue, rights issue, bonus issue, etc.,
While the secondary market refers to dealing in previously issued securities through stock exchanges or otherwise
Further, secondary market is of two types:
• spot market and
• Future market.
Spot Market refers to the market where the securities are traded for immediate delivery and payment.
Future Market refers to the market where the securities are traded for future delivery and payment.
Capital Market is regulated by
• Securities and Exchange Board of India and
• Ministry of Finance.
Following are the important functions of Securities Market/ Capital Market:
1. It provides a market place for sale/ purchase of securities.
2. A person, who cannot carry on a particular activity independently, can invest into the securities, through the primary or secondary market, into the securities of a company which is carrying on that particular activity.
3. A person, who wants to start an activity but does not have resources, can attract enough investments, through primary market, from the other like-minded people to make a start.
4. Securities Market comprises of approximately 20,000 listed companies and hence allows an individual to diversify his risk by investing in different ventures, resulting in overall success.
Money Market:
Money Market refers to the market where
• borrowers and lenders exchange short-term funds to solve their liquidity needs.
• the funds exchange hands for up to one year.
Money market has two components
• formal money market (RBI, commercial banks, co-operative banks, UTI, etc.) and
• informal money market (chit funds, nidhis, etc.).
Money Market is regulated by Reserve Bank of India and Ministry of Finance.
Growth and Development of Financial Markets/ Financial Reforms:
In the initial years of independence, we had a planned economy and as a result much of the emphasis was on the control and restrictions. Subsequently India adopted free economy, where the focus was on growth and development.
There were number of provisions under the various Acts which used to hinder the growth of economy and industry. Over a period of time, all such provisions have been scrapped.
Following are some of the instances which helped in the development of Financial Markets (Financial Reforms):
1. Capital Issues (Control) Act, 1947, a restrictive law, was replaced by Securities and Exchange Board of India Act, 1992, a progressive law.
2. Free pricing of issues was allowed.
3. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 [Erstwhile SEBI (DIP) Guidelines, 2000] were made.
4. FERA has been replaced by FEMA.
5. Twenty-three Stock Exchanges have been set up over a period of time in order to provide liquidity to the large number of investors.
6. A number of Mutual Funds have been set up for better investment options.
7. Depositories Concept was introduced for the fast, inexpensive and hassle-free transaction of securities.
8. Investment norms for Non-Resident Indians have been liberalized.
9. Foreign Institutional Investors were allowed access to Indian Capital Market on registration with SEBI.
10. Indian Companies were permitted to tap foreign markets by issuing ADR, GDR and FCCB.
11. Foreign companies have been allowed to tap Indian markets by issuing IDR.
12. Credit Rating was made compulsory for raising finance through debt instruments.
13. A number of new financial products like zero interest bonds, deep discount bonds, sweat equity shares, etc. have been introduced.
14. Corporate Governance concept has been introduced for the listed companies, which lead to more transparency and better compliances.
15. Introduction of Stock Invest scheme.
16. Introduction of abridged prospectus.
17. Lock-in period for promoter quota shares has been prescribed to protect the small investors.
18. Requirement of finalization of basis of allotment in the presence of Stock Exchange representatives.
19. SEBI has prescribed code of conduct for advertisement of public issue.
20. Companies have been allowed to buy-back their own shares and certain specified securities.
Financial Institutions and Intermediaries
Financial Institutions and Intermediaries are institutional source of finance to industry.
These are of four types:
1. Public Financial Institutions:
They assist the industry by providing debts,
• in the form of loans and
• working capital facilities,
• as well as equity.
PFIs focus mainly on debts and in that too on loans, both rupee and foreign currency.
• Industrial Development Bank of India (IDBI),
• Industrial Finance Corporation of India (IFCI),
• Small Industries Development Bank of India (SIDBI),
• State Financial Corporation’s (SFCs),
are some examples of PFIs.
2. Banks:
They also assist the industry by providing debts,
• in the form of loans and
• working capital facilities,
• as well as equity.
Banks focus mainly on debts and in that too on working capital facilities.
There are three types of banks operating in our country
• Public Sector Banks (SBI, PNB, Bank of India, etc.),
• Private Sector Banks (ICICI Bank, HDFC Bank, Kotak Mahindra Bank, etc.) and
• Foreign Banks (American Express Bank, Standard Chartered Bank, Royal Bank of Scotland, etc.).
3. Non-Banking Financial Companies:
The important activities of NBFCs are equipment
• leasing,
• hire-purchase finance,
• bill discounting,
• venture capital,
• housing finance, etc.
Tata Finance. Escorts Finance, DCM Finance, etc. are some examples of NBFCs.
4. Insurance Organisations:
They assist the industry mainly by participating in their equity.
Life Insurance Corporation of India
General Insurance Corporation of India,
together with its three subsidiaries,
• National Insurance;
• Oriental Insurance;
• New India Assurance
are the government controlled insurance organizations for the life and non-life business respectively.
Private sector insurance organizations
ICICI Prudential, Birla Sunlife, Tata AIG. etc..
Financial Products
Following are some of the important financial products:
(i) Equity shares with equal rights;
(ii) Equity shares with differential rights;
(iii) Sweat Equity shares;
(iv) Preference shares;
(v) Debenture;
(vi) Public Deposits;
(vii) Treasury Bills;
(viii) Commercial Bills;
(ix) Commercial Paper;
(x) Certificate of Deposit;
(xi) Global Depository Receipts;
(xii) American Depository Receipts;
(xiii) Foreign Currency Convertible Bonds;
(xiv) Derivatives, etc.
Evolution and Growth of Financial System in India
Initially after independence, Indian Financial system was characterized by the following:
No organized capital market;
Rare cases of public issue;
Loans subject to stringent conditions;
Few Financial institutions and intermediaries, etc.
Capital Market got developed and organized with the replacement of Capital Issues (Control) Act, 1947 by Securities and Exchange Board of India Act, 1992.
As a consequence, Indian capital market had seen as many as approximately 1,000 public issues per year.
In the year 1969, nationalization of banks took place and as a result loans were provided to rural areas on soft terms and hence agriculture and industry got a boost.
A number of Financial Institutions were established in order to provide institutional source of finance in the form of term loans to the industry.
Government of India set up three major financial institutions, namely, ICICI, IDBI and IFCI.
Presently, ICICI is not in existence as it has been merged with the ICICI Bank.
In addition to this, a number of segment specific financial institutions were also set up.
Industrial Reconstruction Bank of India for reconstruction purposes;
EXIM Bank for export-import purposes;
NABARD for agriculture purposes;
SIDBI for small industries;
National Housing Bank for housing sector, etc.
Functions of Financial System
Following are some of the important functions of Financial System:
1. Regulation of currency through RBI.
2. Banking Functions through banks.
3. Management of national reserves of international currency.
4. Credit control by RBI.
5. Supply and deployment of funds for productive use.
6. Maintaining liquidity.
Securities Laws comprises of the following laws:
a) Companies Act, 2013;
b) Securities Contracts (Regulation) Act, 1956;
c) Securities and Exchange Board of India Act, 1992; and
d) Depositories Act, 1996.
Companies Act, 2013
The Companies Act, 2013 is administered by the Ministry of Corporate Affairs
There are 7 Regional Directors, one for each region
• north, east, west, south, north-east, northwest and south-east
• at Noida, Kolkatta, Mumbai, Chennai, Shillong, Ahmedabad & Hyderabad
All the states lying in one particular region come under the jurisdiction of Regional Director of that region.
Hence, all the Registrar of Companies (ROC) of all the states falling under one particular region of India act as sub-ordinate to the Regional Director (RD) of that region.
National Company Law Tribunal (NCLT) is also one quasi-judicial authority with regard to the Companies Act, 2013.
However,
• the provisions of NCLT and the all the aspects of Companies Act, 2013
• such as corporate restructuring, winding up, sick companies, etc.
• Involving the role of NCLT has not come into force till date.
SCRA, SEBI Act and Depositories Act
Following Acts are administered by Ministry of Finance, Government of India
Securities Contracts (Regulation) Act, 1956,
Securities and Exchange Board of India Act, 1992 and
Depositories Act, 1996
Further Securities and Exchange Board of India (SEBI) is the principal executive authority, under the Ministry of Finance, in respect of the aforesaid Acts.
In addition, Securities Appellate Tribunal (SAT) is the quasi-judicial authority with regard to the aforesaid three Acts.
FINANCIAL SYSTEM
A financial system is
• a set of institutional arrangements through which
• financial surpluses are mobilized from the units generating surplus income and
• transferring them to the others, who are in need of them.
It may be noted that
• every modern economy is based on a sound financial system.
• Financial System helps in movement of funds from the surplus hands to tie hands requiring them and
• as a result surplus funds come into the main stream of production & hence develop the economy.
Components of Financial System
Financial System comprises of the following:
Financial Markets;
Financial Institutions and Intermediaries; and
Financial Products.
Financial Markets
Financial Market
• helps in allocation of savings to investment and
• provides a variety of investment options
• To savers as well as various forms of raising finances to Corporate.
Financial Market is further comprised of
• Capital Market and
• Money Market.
Capital Market:
The Capital Market is
• a market for financial investments that are direct or indirect claims to the capital.
• It is wider than the Securities Market and embraces all forms of lending and borrowing.
The Securities market refers to
• The markets for those financial instruments/ claims/ obligations that are
• commonly and readily transferable by sale.
There are two components of securities market, namely,
• Primary market and
• Secondary market.
The primary market provides the channel for sale of new securities by way of public issue, rights issue, bonus issue, etc.,
While the secondary market refers to dealing in previously issued securities through stock exchanges or otherwise
Further, secondary market is of two types:
• spot market and
• Future market.
Spot Market refers to the market where the securities are traded for immediate delivery and payment.
Future Market refers to the market where the securities are traded for future delivery and payment.
Capital Market is regulated by
• Securities and Exchange Board of India and
• Ministry of Finance.
Following are the important functions of Securities Market/ Capital Market:
1. It provides a market place for sale/ purchase of securities.
2. A person, who cannot carry on a particular activity independently, can invest into the securities, through the primary or secondary market, into the securities of a company which is carrying on that particular activity.
3. A person, who wants to start an activity but does not have resources, can attract enough investments, through primary market, from the other like-minded people to make a start.
4. Securities Market comprises of approximately 20,000 listed companies and hence allows an individual to diversify his risk by investing in different ventures, resulting in overall success.
Money Market:
Money Market refers to the market where
• borrowers and lenders exchange short-term funds to solve their liquidity needs.
• the funds exchange hands for up to one year.
Money market has two components
• formal money market (RBI, commercial banks, co-operative banks, UTI, etc.) and
• informal money market (chit funds, nidhis, etc.).
Money Market is regulated by Reserve Bank of India and Ministry of Finance.
Growth and Development of Financial Markets/ Financial Reforms:
In the initial years of independence, we had a planned economy and as a result much of the emphasis was on the control and restrictions. Subsequently India adopted free economy, where the focus was on growth and development.
There were number of provisions under the various Acts which used to hinder the growth of economy and industry. Over a period of time, all such provisions have been scrapped.
Following are some of the instances which helped in the development of Financial Markets (Financial Reforms):
1. Capital Issues (Control) Act, 1947, a restrictive law, was replaced by Securities and Exchange Board of India Act, 1992, a progressive law.
2. Free pricing of issues was allowed.
3. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 [Erstwhile SEBI (DIP) Guidelines, 2000] were made.
4. FERA has been replaced by FEMA.
5. Twenty-three Stock Exchanges have been set up over a period of time in order to provide liquidity to the large number of investors.
6. A number of Mutual Funds have been set up for better investment options.
7. Depositories Concept was introduced for the fast, inexpensive and hassle-free transaction of securities.
8. Investment norms for Non-Resident Indians have been liberalized.
9. Foreign Institutional Investors were allowed access to Indian Capital Market on registration with SEBI.
10. Indian Companies were permitted to tap foreign markets by issuing ADR, GDR and FCCB.
11. Foreign companies have been allowed to tap Indian markets by issuing IDR.
12. Credit Rating was made compulsory for raising finance through debt instruments.
13. A number of new financial products like zero interest bonds, deep discount bonds, sweat equity shares, etc. have been introduced.
14. Corporate Governance concept has been introduced for the listed companies, which lead to more transparency and better compliances.
15. Introduction of Stock Invest scheme.
16. Introduction of abridged prospectus.
17. Lock-in period for promoter quota shares has been prescribed to protect the small investors.
18. Requirement of finalization of basis of allotment in the presence of Stock Exchange representatives.
19. SEBI has prescribed code of conduct for advertisement of public issue.
20. Companies have been allowed to buy-back their own shares and certain specified securities.
Financial Institutions and Intermediaries
Financial Institutions and Intermediaries are institutional source of finance to industry.
These are of four types:
1. Public Financial Institutions:
They assist the industry by providing debts,
• in the form of loans and
• working capital facilities,
• as well as equity.
PFIs focus mainly on debts and in that too on loans, both rupee and foreign currency.
• Industrial Development Bank of India (IDBI),
• Industrial Finance Corporation of India (IFCI),
• Small Industries Development Bank of India (SIDBI),
• State Financial Corporation’s (SFCs),
are some examples of PFIs.
2. Banks:
They also assist the industry by providing debts,
• in the form of loans and
• working capital facilities,
• as well as equity.
Banks focus mainly on debts and in that too on working capital facilities.
There are three types of banks operating in our country
• Public Sector Banks (SBI, PNB, Bank of India, etc.),
• Private Sector Banks (ICICI Bank, HDFC Bank, Kotak Mahindra Bank, etc.) and
• Foreign Banks (American Express Bank, Standard Chartered Bank, Royal Bank of Scotland, etc.).
3. Non-Banking Financial Companies:
The important activities of NBFCs are equipment
• leasing,
• hire-purchase finance,
• bill discounting,
• venture capital,
• housing finance, etc.
Tata Finance. Escorts Finance, DCM Finance, etc. are some examples of NBFCs.
4. Insurance Organisations:
They assist the industry mainly by participating in their equity.
Life Insurance Corporation of India
General Insurance Corporation of India,
together with its three subsidiaries,
• National Insurance;
• Oriental Insurance;
• New India Assurance
are the government controlled insurance organizations for the life and non-life business respectively.
Private sector insurance organizations
ICICI Prudential, Birla Sunlife, Tata AIG. etc..
Financial Products
Following are some of the important financial products:
(i) Equity shares with equal rights;
(ii) Equity shares with differential rights;
(iii) Sweat Equity shares;
(iv) Preference shares;
(v) Debenture;
(vi) Public Deposits;
(vii) Treasury Bills;
(viii) Commercial Bills;
(ix) Commercial Paper;
(x) Certificate of Deposit;
(xi) Global Depository Receipts;
(xii) American Depository Receipts;
(xiii) Foreign Currency Convertible Bonds;
(xiv) Derivatives, etc.
Evolution and Growth of Financial System in India
Initially after independence, Indian Financial system was characterized by the following:
No organized capital market;
Rare cases of public issue;
Loans subject to stringent conditions;
Few Financial institutions and intermediaries, etc.
Capital Market got developed and organized with the replacement of Capital Issues (Control) Act, 1947 by Securities and Exchange Board of India Act, 1992.
As a consequence, Indian capital market had seen as many as approximately 1,000 public issues per year.
In the year 1969, nationalization of banks took place and as a result loans were provided to rural areas on soft terms and hence agriculture and industry got a boost.
A number of Financial Institutions were established in order to provide institutional source of finance in the form of term loans to the industry.
Government of India set up three major financial institutions, namely, ICICI, IDBI and IFCI.
Presently, ICICI is not in existence as it has been merged with the ICICI Bank.
In addition to this, a number of segment specific financial institutions were also set up.
Industrial Reconstruction Bank of India for reconstruction purposes;
EXIM Bank for export-import purposes;
NABARD for agriculture purposes;
SIDBI for small industries;
National Housing Bank for housing sector, etc.
Functions of Financial System
Following are some of the important functions of Financial System:
1. Regulation of currency through RBI.
2. Banking Functions through banks.
3. Management of national reserves of international currency.
4. Credit control by RBI.
5. Supply and deployment of funds for productive use.
6. Maintaining liquidity.
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