The term "finance" in our simple understanding it is
perceived as equivalent to 'Money'. We read about Money and banking in Economics,
about Monetary Theory and Practice and about "Public Finance". But
finance exactly is not money, it is the source of providing funds for a
particular activity. Thus public finance does not mean the money with the
Government, but it refers to sources of raising revenue for the activities
and functions of a Government. Here some of the definitions of the word
'finance', both as a source and as an activity i.e. as a noun and a verb.
The American Heritage® Dictionary of the English Language,
Fourth Edition defines the term as under-
1:"The science of the management of money and other
assets.";
2: "The management of money, banking, investments, and credit. ";
3: "finances Monetary resources; funds, especially those of a government
or corporate body"
4: "The supplying of funds or capital."
Finance as a function (i.e. verb) is defined by the same
dictionary as under-
1:"To provide or raise the funds or capital for":
financed a new car
2: "To supply funds to": financing a daughter through law school.
3: "To furnish credit to".
Another English Dictionary, "WordNet ® 1.6, ©
1997Princeton University " defines the term as under-
1:"the commercial activity of providing funds and
capital"
2: "the branch of economics that studies the management of money and
other assets"
3: "the management of money and credit and banking and investments"
The same dictionary also defines the term as a function in
similar words as under-
1: "obtain or provide money for;" " Can we
finance the addition to our home?"
2:"sell or provide on credit "
All definitions listed above refer to finance as a source of
funding an activity. In this respect providing or securing finance by itself
is a distinct activity or function, which results in Financial Management,
Financial Services and Financial Institutions. Finance therefore represents
the resources by way funds needed for a particular activity. We thus speak of
'finance' only in relation to a proposed activity. Finance goes with
commerce, business, banking etc. Finance is also referred to as "Funds"
or "Capital", when referring to the financial needs of a corporate
body. When we study finance as a subject for generalising its profile and
attributes, we distinguish between 'personal finance" and
"corporate finance" i.e. resources needed personally by an
individual for his family and individual needs and resources needed by a
business organization to carry on its functions intended for the achievement
of its corporate goals.
INDIAN FINANCIAL SYSTEM
The economic development of a nation is reflected by the
progress of the various economic units, broadly classified into corporate
sector, government and household sector. While performing their
activities these units will be placed in a surplus/deficit/balanced budgetary
situations.
There are areas or people 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. A Financial System is a composition of
various institutions, markets, regulations and laws, practices, money
manager, analysts, transactions and claims and liabilities.
Financial System;
The word "system", in the term "financial
system", implies a set of complex and closely connected or interlined
institutions, agents, practices, markets, transactions, claims, and
liabilities in the economy. The financial system is concerned about
money, credit and finance-the three terms are intimately related yet are
somewhat different from each other. Indian financial system consists of
financial market, financial instruments and financial intermediation. These
are briefly discussed below;
FINANCIAL MARKETS
A Financial Market can be defined as the market in which
financial assets are created or transferred. As against a real transaction
that involves exchange of money for real goods or services, a financial
transaction involves creation or transfer of a financial asset. Financial
Assets or Financial Instruments represents a claim to the payment of a sum of
money sometime in the future and /or periodic payment in the form of interest
or dividend.
Money Market- The money market ifs
a wholesale debt market for low-risk, highly-liquid, short-term
instrument. Funds are available in this market for periods ranging from
a single day up to a year. This market is dominated mostly by
government, banks and financial institutions.
Capital Market - The
capital market is designed to finance the long-term investments. The
transactions taking place in this market will be for periods over a year.
Forex Market - The Forex
market deals with the multicurrency requirements, which are met by the
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.
Credit Market- Credit market is a
place where banks, FIs and NBFCs purvey short, medium and long-term loans to
corporate and individuals.
Constituents of a Financial System
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. When the borrower of funds approaches the
financial market to raise funds, mere issue of securities will not
suffice. Adequate information of the issue, issuer and the security
should be passed on to take place. There should be a proper channel
within the financial system to ensure such transfer. To serve this purpose, Financial
intermediariescame into existence. Financial intermediation in the
organized sector is conducted by a widerange of institutions functioning
under the overall surveillance of the Reserve Bank of India. In the initial
stages, the role of the intermediary was mostly related to ensure transfer of
funds from the lender to the borrower. This service was offered by
banks, FIs, brokers, and dealers. However, as the financial system
widened along with the developments taking place in the financial markets, the
scope of its operations also widened. Some of the important intermediaries
operating ink the financial markets include; investment bankers,
underwriters, stock exchanges, registrars, depositories, custodians,
portfolio managers, mutual funds, financial advertisers financial
consultants, primary dealers, satellite dealers, self regulatory
organizations, etc. Though the markets are different, there may be a few
intermediaries offering their services in move than one market e.g.
underwriter. However, the services offered by them vary from one market
to another.
Intermediary
|
Market
|
Role
|
Stock
Exchange
|
Capital
Market
|
Secondary
Market to securities
|
Investment
Bankers
|
Capital
Market, Credit Market
|
Corporate
advisory services, Issue of securities
|
Underwriters
|
Capital
Market, Money Market
|
Subscribe
to unsubscribed portion of securities
|
Registrars,
Depositories, Custodians
|
Capital
Market
|
Issue
securities to the investors on behalf of the company and handle share
transfer activity
|
Primary
Dealers Satellite Dealers
|
Money
Market
|
Market
making in government securities
|
Forex
Dealers
|
Forex
Market
|
Ensure
exchange ink currencies
|
FINANCIAL INSTRUMENTS
Money Market Instruments
The money market can be defined as a market for short-term
money and financial assets that are near substitutes for money. The term
short-term means generally a period upto one year and near substitutes to
money is used to denote any financial asset which can be quickly converted
into money with minimum transaction cost.
Some of the important money market instruments are briefly discussed
below;
1. Call/Notice
Money
2. Treasury
Bills
3. Term
Money
4. Certificate
of Deposit
5. Commercial
Papers
1. Call /Notice-Money Market
Call/Notice money is the money borrowed or lent on demand for
a very short period. When money is borrowed or lent for a day, it is known as
Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for
this purpose. Thus money, borrowed on a day and repaid on the next working
day, (irrespective of the number of intervening holidays) is "Call
Money". When money is borrowed or lent for more than a day and up to 14
days, it is "Notice Money". No collateral security is required to
cover these transactions.
2. Inter-Bank Term Money
Inter-bank market for deposits of maturity beyond 14 days is
referred to as the term money market. The entry restrictions are the same as
those for Call/Notice Money except that, as per existing regulations, the
specified entities are not allowed to lend beyond 14 days.
3. Treasury Bills.
Treasury Bills are short term (up to one year) borrowing
instruments of the union government. It is an IOU of the Government. It is a
promise by the Government to pay a stated sum after expiry of the stated
period from the date of issue (14/91/182/364 days i.e. less than one year).
They are issued at a discount to the face value, and on maturity the face
value is paid to the holder. The rate of discount and the corresponding issue
price are determined at each auction.
4. Certificate of Deposits
Certificates of Deposit (CDs) is a negotiable money market
instrument nd issued in dematerialised form or as a Usance Promissory Note,
for funds deposited at a bank or other eligible financial institution for a
specified time period. Guidelines for issue of CDs are presently governed by
various directives issued by the Reserve Bank of India, as amended from time
to time. CDs can be issued by (i) scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select
all-India Financial Institutions that have been permitted by RBI to raise
short-term resources within the umbrella limit fixed by RBI. Banks have the
freedom to issue CDs depending on their requirements. An FI may issue CDs
within the overall umbrella limit fixed by RBI, i.e., issue of CD together
with other instruments viz., term money, term deposits, commercial papers and
intercorporate deposits should not exceed 100 per cent of its net owned
funds, as per the latest audited balance sheet.
5. Commercial Paper
CP is a note in evidence of the debt obligation of the issuer.
On issuing commercial paper the debt obligation is transformed into an
instrument. CP is thus an unsecured promissory note privately placed with
investors at a discount rate to face value determined by market forces. CP is
freely negotiable by endorsement and delivery. A company shall be eligible to
issue CP provided - (a) the tangible net worth of the company, as per the
latest audited balance sheet, is not less than Rs. 4 crore; (b) the working
capital (fund-based) limit of the company from the banking system is not less
than Rs.4 crore and (c) the borrowal account of the company is classified as
a Standard Asset by the financing bank/s. The minimum maturity period of CP
is 7 days. The minimum credit rating shall be P-2 of CRISIL or such
equivalent rating by other agencies. (for more details visit www.indianmba.com faculty
column)
Capital Market Instruments
The capital market generally consists of the following long
term period i.e., more than one year period, financial instruments; In the
equity segment Equity shares, preference shares, convertible preference
shares, non-convertible preference shares etc and in the debt segment
debentures, zero coupon bonds, deep discount bonds etc.
Hybrid Instruments
Hybrid instruments have both the features of equity and
debenture. This kind of instruments is called as hybrid instruments. Examples
are convertible debentures, warrants etc.
Conclusion
In India money market is regulated by Reserve bank of India (www.rbi.org.in) and Securities
Exchange Board of India (SEBI) [www.sebi.gov.in ]
regulates capital market. Capital market consists of primary market and
secondary market. All Initial Public Offerings comes under the primary market
and all secondary market transactions deals in secondary market. Secondary
market refers to a market where securities are traded after being initially
offered to the public in the primary market and/or listed on the Stock
Exchange. Secondary market comprises of equity markets and the debt markets.
In the secondary market transactions BSE and NSE plays a great role in
exchange of capital market instruments. (visit www.bseindia.com and www.nseindia.com ).
(The author acknowledges Prof. R K Mishra, Director, Institute
of Public Enterprise, Osmania University, Hyderabad, for his immense help and
encouragement through out this study and Dr. S S S Kumar, Assistant
Professor, Finance and Accounting Area, Indian Institute of Management,
Kozhikode, for his motivation and inspiration)
References
1. Bhole L M, "Financial Institutions and markets",
Tata McGraw-Hall, New Delhi, 1999.
2. Khan M Y, "Indian Financial System, Tata Mc Graw-Hill, New Delhi,
2001.
3. S. Gurusamy,Financial markets and Institutions,Thomson publications, First
Edition,2004.
4. Pandey I M, Financial Management, Vikas Publications, New Delhi, 2000.
5. Mishra R K, An Overview of financial services, financial services,
emerging trends, Delta, Hyderabad, 1997.
6. Mishra R K, "Development of financial services in India some
perspectives", Financial services in India Delta, Hyderabad, 1998.
7. Mishra R K, "Global financial services Industry and the specialized
financial services institutions in India, Utkal University, 1997.
8. www.bseindia.com
9. www.nseindia.com
10. www.rbi.org.in
11. www.sebi.gov.in
12. www.indiainfoline.com
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