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Well organized financial system supports economic development of the

country. Financial system is the system which supplies financial inputs for the
production of goods and services to promote the well being and standard of
living of the people of a country.

Financial system is the broader term which includes Financial Market and
Financial Institutions which support the system of providing financial inputs for
production and productivity. The major assets traded in the Financial market
are Money and monetary Assets. The responsibility of financial market is to
mobilize the savings in the forms of money and monetary assets and invest
them in to the productive venture for overall economic development of the

The study of the above reveals that the financial system acts as mediator
between saver and investors to promote faster economic development.
Functions of Indian Financial
• Provision of Liquidity
• Mobilization of Savings
Concepts used in Indian Financial
• Financial Assets.
• Financial Intermediaries
• Financial Markets
• Financial Rate of Return
• Financial Instruments.
Financial Assets:
Financial assets are those which are used for Production or
consumption or for further creation of assets. Financial assets are
different from physical assets as physical assets are not useful for
further production of goods or for earning income.

Classification of Financial Assets:

• A: Marketable Assets B: Non-Marketable Assets

a. Shares a. Bank Deposits
b. Government Securities b. Provident Fund
c. Bonds c. LIC Schemes
d. MFs d. PO Certificates
Financial Intermediaries;
These are the organizations which intermediate and
facilitate financial transaction for both individuals and
companies. Therefore, financial intermediaries are
financial institutions and investing institutions to
facilitate financial transactions in financial markets
which may be organized or un-organized.

Classification of financial Intermediaries:

Capital Market intermediaries : Financial corporation/LIC

Money Market Intermediaries. : Commercial banks/Co-

operative banks
Financial Markets:
The Places where financial transactions take place. Therefore, financial market may be
centre or arrangement which facilitates buying and selling of financial assets.

Classification of Financial Markets:

a. Unorganized Market
b. Organized Market

Organized Market:

In this market, standardized rules and regulation exists to govern the financial dealings of
participants. These markets are under direct control of RBI and other regulatory

Classification of Organized market:

a. Capital Market
b. Money Market
This is the market for financial assets which
have a long and indefinite maturity.
Hence, this market deals with long term
securities. Capital market is again divided
in to three types, viz,

a. Industrial Securities Market

b. Government Securities Market
c. Long Term Loan Market
Long Term Loan market:
• Term Loan market
• Market for Mortgage
• Market For Financial guarantees
Industrial Securities Market:
• Primary Market
• Secondary Market
Primary Market:
It is new issue market which deals with those securities
which are issued to the public for the first time and
borrower issues new securities for long term funds. This
market facilitate capital formation.

Company raises capital in primary Market in three ways;

a. Public Issue (IPO)

b. Right Issue
c. Private Placement.
Instruments in Primary Market:
• SPN (Secured Premium Note)
• Equity Share
• Preference Share
• Debentures
• Zero Interest Bond
• Deep Discount Bond
• Option Bond
• Bonds with Warrants.
Players in the Primary Markets:
• Merchant Bankers
• Registrars
• Collecting and co-coordinating Bankers
• Underwriters and Brokers
• Advertising Agency.
Functions of New Issue Market:
– Origination
– Underwriting
– Distribution.
Regulations of New Issue Market:
• Company must have been registered under the Companies act;1956

• Company must have obtained the permission from the comptroller of Capital Issue.

• Company must have appointed Bankers and Underwriter for the issue

• Company must have been listed in the recognized Stock Exchange in India

• Company must have raised the minimum issue within the prescribed period.

• Company will have to attach the Prospectus with every application for Share Subscription.

• Company shall have to return the share money deposited by the public in the collection centre if share are not
allotted within the prescribed period.

• Allotment shall have to be made as per the direction of the SEBI.

• Issue of shares will be only at par if the Company is completely new one.

• Issue of shares by new company established by existing company (with 5 year Track record) can freely issue
shares at premium

• Private and closely held company shall be permitted to price their issue freely.

• Existing listed company will be allowed to raise fresh capital by freely pricing issue provided promoter’s
contribution is 50% on 1st 100 Corers, 30% on next 100 corers and 15% on the balance issue.

The market where existing securities are traded is referred

to Secondary Market or Stock Market. In this market,
purchases and sale of securities of Government, semi-
government, public bodies and Shares and Debentures
of Joint stock Companies are effected. The securities of
Government are traded in the stock market as a
separate component called Guilt Edged market. Another
component of stock market deals with stock and share of
joint stock companies called market for stock and shares
Definition of Stock Exchange:
As per SCR Act,1956 “ A Stock Exchange is an
association, organization or body of individuals whether
incorporated or not, established for the purpose of
assisting, regulating and controlling business in buying,
selling and dealing in securities”

From the above definition, it is clear that the stock

exchange is not involved in buying and selling of
securities. It establishes set of rules which must be
followed by all the participants in buying and selling of
securities to systematize and control the trading process.
Functions of Stock Exchange:
• It provides liquidity and Marketability of securities
• It provides safety of funds
• It helps to supply long term funds
• It helps to provide flow of capital to profitable venture.
• It motivates to improve performance
• It promotes investment
• It reflects the Economic conditions of the country
• It provides information of continuous price movement
of stock in the market.
• It helps investors to take suitable decision for
investment or withdrawal.
Listing of Securities:
Meaning of Listing:

It means securities are admitted to be traded on a

recognized stock exchange. It is compulsory for those
companies which offer shares and debentures to the
public for subscriptions by means of issuing a
prospectus. Without listing, the company cant go for
public issue as per the restriction imposed by SEBI and
the underwriting is not possible. It also grants to the
company to list their securities in more than one stock
exchange in India. However, they must submit
themselves to the various regulatory measures of the
stock exchange concerned as well as SEBI.
Advantages of Listing:
• Buying and Selling Securities
• Ensure Liquidity
• Wide publicity
• Assure Finance
• Protect Investors
Demerits of Listing
• Leads to Speculation
• Degrades companies reputation
• Disclosure of information.
Listing Procedure:
• Company has to apply for Listing in the prescribed format along with the following details.

– Certified copy of Memorandum and Articles of Association

– Prospectus, underwriting agreement with vendors and promoters.
– Specimen copy of share and debenture certificates, letter of call, allotment, acceptance and renunciation
– Audited financial statement.
– Copies of advertisement offering any securities for subscription
– Copy of agreement with managerial personnel.
– Particular of dividend and bonus paid during last 10 years.
– A brief history of company.
– A statement of distribution of share.
– Particulars of share forfeited.
– Listing agreement and Receipt of annual listing fee.

• At least 60% of securities must be offered to the public for subscription

• Minimum issued capital should be 3 crores.

• The issue must be opened at least for a period of 2 days.

• There must be at least 10 public shareholders for every 1 lakh share of fresh issue and 20 in case of subsequent issue.

• A company with 5 crore paid up capital must list its securities in more than one stock exchange. Listing in regional stock exchange is

• Company should pay interest on excess application money received.

• Articles of the company must provide every information related to shares.

• Expenditure of Public Issue must within the limit fixed by SEBI from time to time.

• Share allotment to promoters must be submitted.

Obligation after Listing
– Information of Board meeting, declaration of
dividend, right issue and bonus
– Information about change of company’s directorate
– Information about new issue of shares, right share
– Information about change of capital structure.
– Information of change of company’s principal
– Copies of all circular, notice and information sent to
shareholders are to be sent to stock exchange.

In the Defence Rule of India, 1943, provision were made to check the flow of capital in to the production of
essential commodities during the II World War period. This provision was temporary and after the war, it was
culminated in to the Capita Issue (Control) Act, 1947. The objectives of this act were;

• Growth of Company with Sound capital structure

• Avoid overcrowding of capital issue
• Ensure orderly and healthy growth of capital markets with adequate protection to investor.

For achieving these objectives, an office of the Comptroller of Capital Issue (CCI) was set up to regulate the
capital issue in the country. CCI was vested with the power to approve the kind of instruments, size, timing and
premium of issue.

It was proved that the Capita Issue (Control) Act, 1947 were totally inadequate to regulate the growing dimensions
of capital market activity. The government realized the necessity of creating a more secure environment for the
business to grow. This led to enactment of companies act and Securities Contract (Regulation) Act, 1956. Due to
remarkable changes in the industrial policy during 6th Five year plan, it was necessary for the government to
control the activities of stock market of high importance. Government tried to erode the Malpractices and
defiencies of Capital market and to achieve this Government set up an apex body to develop and regulate Stock
Market in India. This led to set up of Securities and Exchange Board of India on April 12, 1988 and it took almost
4 years for the government to bring about a separate legislation in the name of Securities and Exchange Board of
India Act, 1992 conferring statutory power.
• Protection of investor’s interest
• Regulate securities market to ensure fair
• Promote efficient services of brokers,
bankers, etc to make them professional
Section 11 SEBI Act, 1992 Functions of
SEBI are classified in to two categories;

Regulatory Functions;
• Regulation of stock exchange and self regulatory organization

• Regulate the Registration and functions of Brokers, Sub-brokers,

bankers, underwriter, portfolio manager and other intermediaries
in the stock market

• Regulation of mutual fund investments

• Prohibition of fraudulent and unfair trade practice

• Prohibit insider trading

• Regulate substantial acquisition of shares and take over of the

Developmental Function
• Promote investor’s education
• Training intermediaries
• Conducting research and publishing
information for market participants
• Develop code of conduct and promote
fair practices