Indian financial system

System which supplies the necessary financial
inputs for the production of goods and
services.
It is a mechanism- investors & people.
Improves the standard of living & well being
of nation.
o Economic development depends.
o Major assets-money and monetary assets.
o Responsibility- mobilize the savings & invest
into productive ventures.

Mobilizing savings – Transforming savings into
investment
Provision of liquidity – shouldnotbeanyshortageofmoney
Size transformation - Smallunitofcapitaltransformedintoa
bulksizeofcapital
Maturity transformation – Acceptindifferentmaturities &lend
Risk transformation - Risks are distributed in different
investment units

The following are the four main components of
Indian Financial system
 Financial institutions
 Financial Markets
 Financial Instruments/Assets/Securities
 Financial Services

Banking Extend credit & create credit
All commercial banks & co-
operative
Non Banking Not accept deposits but sell
their financial products
LIC,GIC,Orgns of PF.,Pension
Funds
Developmental Institutions Provide financial aid to
corporate customers
ICICI,IDBI,NABARD
Regulatory Institutions Regulates the financial
markets
SEBI,IRDA,RBI

 There is no specific place or location
 Pervasive in nature
 Issue of equity shares
 Granting of loans by term lending institutions
 Deposit money to the bank
 Purchase of debentures
 Sale of shares

• Unorganized market-Not controlled by RBI.
• Organized market-Controlled by RBI and
other regulatory bodies. High degree of
institutionalization and instrumentalisation.
• Capital markets- Deals with long term
securities, maturityperiod is above 1year or
indefinite.
Industrial securities mkt
Govt securities mkt
Long term loans mkt
• Money markets - Deals with financial assets and
securities may have maturity up to 1year. Its a
market for short term funds.

• Industrial security market-securities like shares and
debentures issued. Market where industrial concerns
raise their capital or debt by issuing appropriate
instruments.
• Equity shares
• Preference shares
• Debentures or bonds
Divided into Two
Primary or New Issue Market
Secondary or Stock Exchange

• 1.Primary market-Also known as new issue market. Deals
with those securities which are issued to the public for
the first time. Borrowers exchange new financial
securities for long term funds. It facilitates capital
formation.
• -Public issue – New cos.through sale of securities
• -Rights issue - Existing co.raise additional capital,
• securities offered to existing
• shareholders
• -Pvt placement- Selling securities privately to a small
• group of investors
•

• 2.Secondary market-Trading of securities takes
place which have passed through primary market.
Such securities are quoted in the Stock Exchange
and it provides a continuous and regular market
for buying and selling. This market consists of
all the stock exchanges recognized by the Govt
of India

• Government securities market
• Securities issued by central, state or semi government
authorities like e.g.-port trust, State Electricity
Boards, Public sector enterprises. It is otherwise
called as Gilt-edged securities.
• RBI plays special role – monetary mgmt-money supply
• Plc Debt Ofc
• Safe securities –principal n interest
• Long term & short term
• Issued in denominations of Rs.100
• Interest is payable half yearly
• Tax exemptions –wide range of tax rebate.
• Limited role of brokers
• Commercial banks –participants(SLR Requirements)
• Forms –Stock certificates, Promissory notes, Bearer
bonds

• Long term loan market
• loans are given for long term generally for 5 yrs to 20
yrs. Developmental banks & Commercial banks play a
vital role by supplying long term loans to corporate
customers
• Term loans market
• Mortgages market
• Financial guarantees market

• Term loan market
• Supply long term or medium term loan to
corporate customers.
• Many industrial financing institutions have been
created by the govt both regional and national
levels.
• These developmental banks dominate the
industrial finance in India.(IDBI, IFCI)
• They help in identifying investment opportunities,
encourage new entrepreneurs and support
modernization efforts.
• .

• Mortgage market-
• Loan given against immovable property.
• To individual customers
• Equitable mortgage – Created by mere
deposit of title deeds to properties as
security.
• Legal mortgage - Title is legally transferred
to the lender by the borrower.

• Financial guarantee market-
• It is a centre where finance is given against the
third party/ reputed person in the financial circle.
• Guarantee is a contract to discharge the liability of a
third party in case of a default.
• Guarantee acts as a security from the creditors point
of view.
• Commercial banks, development banks,

 Serves as an important source for the productive
use of the economy’s savings.
 Avoids the wastage of savings in unproductive
uses.
 Provides incentives and facilitates capital
formation by offering suitable rates of interest.
 Provides avenue for investors, particularly the
household sector to invest in financial assets.
 Enhances economic welfare of the society.
 Operations of different institutions give
qualitative and quantitative directions to the
flow of funds
 Rational allocation of scarce resources possible.

 Provides loans to the entrepreneurs
 Assistance in the promotion of companies
 Capital mkts help to generate foreign capital
 Share in the overseas mkts – bonds & other
securities
 Ready and continuous market
 Reliable guide to performance (companies)
 Easy liquidity – can sell off
 Permanent capital – raise thru c.mkts
 Development of backward areas

 Proper channelization – the market price of
the security and the relative yield are the
guiding factors for the people to channelise
their funds in a particular co.
 Provision of variety of services- granting long
term & medium term, underwriting,
assistance in promotion of companies, giving
expert advice etc

• Money market
• It is short term fund market may have maturity up to 1
year.
• Market for lending and borrowing of short term funds.
• It does not deal in cash or money
• Deals with near substitutes for money
• Trade bills, promissory notes and goverrnment papers
• Place where surplus disposal of financial institutions and
individuals are borrowed by individuals or institutions or govt
• It is between borrowers, lenders and middlemen through
telephone, mail or thru agents.
• No personal contact or presence of the two parties is
essential.

 According to Crowther, the money market is
the collective name given to the various
firms and institutions that deal in the various
grades of near money.
 Components of money market
 Call money mkt
 Commercial bills mkt
 Acceptance mkt
 Treasury bills mkt

• Call money market
• -loans are given for short period say 1day or 14
days.
• Interest rates vary from day to day and even from
hour to hour and centre to centre.
• Banks with surplus funds lend to other banks with
deficit funds
• It provides an equilibrating mechanism for
evening out the short term surpluses and deficits
• The loans are repayable on demand at the option
of either the lender or the borrower
• In India call money markets are associated with
the presence of stock exchanges
• Hence located in major industrial towns like
Mumbai, Kolkata, Chennai, Delhi, Ahmadabad etc

• Commercial bill market-It is a market for bill of exchange
• In credit sale the seller may draw a BOE on the buyer.
• The buyer accepts such a bill, promising to pay at a later
date the amount specified in the bill.
• The seller need not wait until the due date of the bill.
• He can get immediate payment by discounting the bill.
• Commercial banks play a significant role
• No specialised agencies for this.
• The Discount and Finance House of India was set up in
1988
• The borrowers and lenders inform the DFHI about their
fund requirement and availability at a specified rate of
interest.

 Sec. 5 of the Negotiable Instruments Act
defines a bill of exchange as follows
 An instrument in writing containing an
unconditional order, signed by the maker,
directing a certain person to pay a certain
sum of money only to, or to the order of a
certain or to the bearer of the instrument.

 Demand and usance bills
 Clean bills and documentary bills
 Inland and foreign bills
 Export bills and import bills
 Indigenous bills
 Accomodation and supply bills

 Demand bills are otherwise called as sight
bills
 Time of payment is not mentioned in it
 Usance bills are called time bills
 Payable immediately after the expiry of time
period mentioned in the bills

 When bills have to be accompanied by
documents of title to goods like
Railway receipt
Lorry receipt
Bill of lading
When bills are drawn without accompanying
any document, they are called clean bills

 Inland bills are drawn upon a person resident
in India and are payable in India
 Foreign bills are drawn outside India and may
be payable either in India or outside India.

 Export bills are drawn by Indian exporters on
importers outside India
 Import bills are drawn on Indian importers in
India by exporters outside India.

 Drawn and accepted according to native
custom or usage of trade.

 If the bills do not arise out of genuine trade
transactions
 Kite bills or wind bills
 Two parties draw bills on each other for
mutual financial accomodation.
 Discounted with bankers and the proceeds
are shared among themselves.
 Supply bills are drawn by suppliers or
contractors on the government depts for the
goods supplied by them.These are used for
getting advances from commercial banks .

 Liquidity - discounting with banks
 Negotiable asset – transferred freely by mere
delivery or by endorsement
 Certainty of payment – bills r drawn n
accepted by business people. Bills imposes a
strict financial discipline on them.
 Ideal investment – best invmt prone to profit
n return.commercial banks can invest their
funds on bills n compensate the fixed
maturities
 .

 Control – with the control and supervision of
RBI only commercial banks discount the bills
 Elastic – whenever need arise - can discount
 Simple legal remedy – if bills r dishonored
the legal remedy is simple. And the amt
should be debited from customers a/c
 High and quick yield –discount rate is high.
Discount is deducted at the time of
discounting itself

 Absence of bill culture
 Absence of rediscounting among banks – tough n
risky
 Stamp duty
 Absence of secondary market – rediscounting is
available in important centres and it is restricted
to the apex level financial institutions
 Difficulty in ascertaining genuine trade bills
 Limited foreign trade –ltd percentage to national
income.
 Absence of acceptance services
 Attitude of banks
 Domination of indegenous banks – doing
discounts for meagre money

 Capital market
Liquidity
 Capital market securities are considered liquid
because of stock exchange but compared to
money market instruments these are less liquid.
Investment outlays
The investment in capital market does not
require huge financial investment[
Participants
 Thee participants of capital market are financial
institutions, banks, public and private
companies, foreign and ordinary retail investors
from public.
Safety
 The instruments of the capital market are
riskier .
Instruments
 The instruments dealt in this market are bonds,
debentures, equity shares and stock.
 Money market
 Money market securities enjoy higher degree of
liquidity.
 The money market instruments are quite
expensive so huge financial investment is
required.
 Thee participants of money market are banks,
private and public companies but foreign and
ordinary retail investors do not participate in
money market.
 The instruments in the money market are safe
and less risky due to short duration.
 The instruments dealt in the market are bills of
exchange, treasury bills, banker's acceptance,
etc

•Treasury bills market-
•They have short term maturity, issued by
government.
•Treasury bills are money market instruments are issued by
the Government of India as a promissory note with
guaranteed repayment at a later date.
•
•Funds collected through such tools are typically used to
meet short term requirements of the government, hence,
to reduce the overall fiscal deficit of a country.
•They are primarily short-term borrowing tools, having a
maximum tenure of 364 days, available at zero coupons
(interest) rate.
•They are issued at a discount to the published nominal
value of government security (G-sec).
• .

Government treasury bills can be procured by
individuals at a discount to the face value of the
security and are redeemed at their nominal value,
thereby allowing investors to pocket the difference.
For example, a 91-day treasury bill with a face value of
Rs. 120 can be bought at a discounted price of Rs.
118.40. Upon maturity, individuals are eligible to
receive the entire nominal value of Rs. 120, which
allows them to realise a profit of Rs. 1.60.
Types of treasury bills
91 days tb
182 days tb
364 days tb

 Ordinary/ regular
 Adhoc
 Ordinary bills are issued to the public and
other financial institutions for meeting the
short term financial requirements of the
Central government.
 Adhoc bills are always issued in favour of the
RBI only.
 They are issued by RBI and the RBI is
authorised to issue currency notes against
them.The holders of these bills can always
sell them back to the RBI.

Features of treasury bills
Form:
T-bills are issued either in physical form as a promissory
note or dematerialized form by a credit to Subsidiary
General Ledger (SGL) Account.
Eligibility:
Individuals, firms, companies, trust, banks, insurance
companies, provident funds, state government, and
financial institutions are eligible to invest in treasury bills.
Minimum Bid:
The minimum amount of bid is Rs. 25000 and in
multiples thereof.
Issue price:
T-bills are issued at a discount but redeemed at par.

Repayment:
The repayment of the bill is made at par on the maturity
of the term.
Availability:
Treasury bills are highly liquid negotiable instruments,
that are available in both financial markets, i.e. primary
and secondary.
Method of the auction:
Uniform price auction method for 91 days T-bills,
whereas multiple price auction method for 364 days T-
bill.
Day count:
The day count is 364 days, in a year, for treasury bills.
Besides this, other characteristics of treasury bills
include the market-driven discount rate, selling through
auction, issued to meet short-term mismatches in in
cash flows, assured yield, low transaction cost, etc

Importance of Treasury Bills:
The following importance of treasury bills below is:
Safety:
Investments in TBs are highly safe since the payment
of interest and repayment of principal are assured by
the Government. They carry zero default risk since
they are issuing by the RBI for and on behalf of the
Central Government.
Liquidity:
Investments in TBs are also highly liquid because they
can convert into cash at any time at the option of the
inverts. The DFHI announces daily buying and selling
rates for TBs. They can discount with the RBI and
further refinance facility is available from the RBI
against TBs. Hence there is a market for TBs.

Ideal Short-Term Investment:
Idle cash can profitably invested for a very short period in TBs. TBs
are available on top throughout the week at specified rates. Financial
institutions can employ their surplus funds on any day.
Ideal Fund Management:
TBs are available on top as well through periodical auctions. They
are also available in the secondary market. Fund managers of
financial institutions build the portfolio of TBs in such a way that the
dates of maturities of TBs may match with the dates of payment on
their liabilities like deposits of short-term maturities. Thus, TBs help
financial managers & it manages the funds effectively and profitably.

Statutory Liquidity Requirement:
As per the RBI directives, commercial banks have to
maintain SLR (Statutory Liquidity Ratio) and for measuring
this ratio of investments in TBs takes into account. TBs are
eligible securities for SLR purposes. Moreover, to maintain
CRR (Cash Reserve Ratio). TBs are very helpful. They can
readily convert into cash and thereby CRR can maintain.
Source of Short-Term Funds:
The Government can raise short-term funds for meeting its
temporary budget deficits through the issue of TBs. It is a
source of cheap finance to the Government since the
discount rates are very low.

Non-Inflationary Monetary Tool:
TBs enable the Central Government to support its monetary
policy in the economy. For instance excess liquidity, if any,
in the economy can absorb through the issue of TBs.
Moreover, TBs are subscribing by investors other than the
RBI. Hence they cannot mention and their issue does not
lead to any inflationary pressure at all.
Hedging Facility:
TBs can use as a hedge against heavy interest rate
fluctuations in the call loan market. When the call rates are
very high, money can raise quickly against TBs and invest
in the call money market and vice versa. TBs can use in
ready forward transitions.

 Commercial papers
 Certificate of deposits
 Inter bank participation certificates
 Repo instruments

 Commercial paper is a money-market
security issued (sold) by large corporations to
obtain funds to meet short-term debt
obligations (for example, payroll) and is
backed only by an issuing bank or company
promise to pay the face amount on the
maturity date specified on the note.

 They are typically issued by large banks or
corporations to cover short-term receivables
and meet short-term financial obligations,
such as funding for a new project.
 As the instrument is not backed by
collateral, only large firms with considerable
financial strength are authorized to issue the
instrument.

 Commercial paper is a short-term money market
instrument comprising since promissory note
with a fixed maturity.
 It is a certificate evidencing an unsecured
corporate debt of short-term maturity.
 Commercial paper is issued at a discount to face
value basis but it can be issued in interest-
bearing form.
 The issuer promises to pay the buyer some fixed
amount on some future period but pledge no
assets, only his liquidity and established earning
power, to guarantee that promise.
 Commercial paper can be issued directly by a
company to investors or through banks/merchant
banks.

 Simplicity:
 The advantage of commercial paper lies in its simplicity. It
involves hardly any documentation between the issuer and
the investor.
 Flexibility:
 The issuer can issue commercial paper with the maturities
tailored to match the cash flow of the company.
 Easy To Raise Long-Term Capital:
 The companies which are able to raise funds through
commercial paper become better known in the financial
world and are thereby placed in a more favorable position
for rising such long them capital as they may, from time to
time, as required. Thus there is an inbuilt incentive for
companies to remain financially strong.

 High Returns:
 The commercial paper provides investors
with higher returns than they could get from
the banking system.
 Movement of Funds:
 Commercial paper facilities securitization of
loans resulting in the creation of a secondary
market for the paper and efficient
movement of funds providing cash surplus to
cash deficit entities.

The Certificate of Deposit (CD) is an agreement between the
depositor and the bank where a predetermined amount of
money is fixed for a specific time period
Issued by the Federal Deposit Insurance Corporation (FDIC)
and regulated by the Reserve Bank of India, the CD is a
promissory note, the interest on which is paid by the bank
The Certificate of Deposit is issued in dematerialised form
i.e. issued electronically and may automatically be renewed
if the depositor fails to decide what to do with the matured
amount during the grace period of 7 days
It also restricts the holder from withdrawing the amount on
demand or paying a penalty, otherwise. When the Certificate
of Deposit matures, the principal amount along with the
interest earned is available for withdrawal

Eligibility: Not all institutions or banks are allowed to issue
Certificates of Deposit and not every individual or organization
can purchase one. There are certain conditions laid down by
the RBI that allow the purchase of CDs
Maturity Period: A Certificate of Deposit issued by the
commercial banks can have a maturity period ranging from 7
days to 1 year. For financial institutions, it ranges from 1 year
to 3 years
Minimum investment amount– A CD can be issued to a single
issuer for a minimum of Rs.1 Lakh and its multiples
Transferability: Certificates that are available in Demat forms
must be transferred according to the guidelines followed by
Demat securities. While dematerialised/electronic certificates
can be transferred by endorsement or delivery
Non-availability of loan: Since these instruments do not have
any lock-in period, banks do not grant loans against them. In
fact, banks cannot even buy back certificates of deposit before
maturity
Discount offered– Certificate of deposit is issued at a
discounted rate on the face value. Moreover, banks and
financial institutions can also issue CDs on a floating rate basis

What Is a Repurchase Agreement?
A repurchase agreement (repo) is a form of
short-term borrowing for dealers
in government securities. In the case of a
repo, a dealer sells government securities
to investors, usually on an overnight basis,
and buys them back the following day at a
slightly higher price. That small difference
in price is the implicit overnight interest
rate. Repos are typically used to raise
short-term capital. They are also a common
tool of central bank open market
operations.

New issue market plays a vital role in mobilizing funds
from savers to entrepreneurs who seek to establish
new enterprises or to carry out expansion/
diversification / modernization of existing ones. This
may be done by issue of fresh equity or preference
shares at par or premium, issue of debentures
convertible and non convertible, issue of cumulative
convertible preference shares or issue shares or
debenture through public issue, private placement
while the existing enterprises may issue shares as
rights or bonus as well.

1) Functions of New Issue Market
The main function of new issue market is to
facilitate transfer of resources from savers to
the users. The savers are individuals,
commercial banks, insurance company etc. The
users are public limited companies and the
government. The new issue market plays an
important role of transferring shares for
production purposes, an important requisite for
economic growth. It is not only a platform for
raising finance to establish new enterprises but
also for expansion/ diversification/
modernization of existing units. NIM performs
three main functions which include 1)
Origination 2) Underwriting and 3) Distribution.

a) Origination It refers to the work of investigation,
analysis and processing of new project proposals.
This function starts before an issue is actually
floated in the market. There are two aspects of this
function. A careful study of the technical, economic
and financial viability is necessary to ensure
soundness of the project. This is a preliminary
investigation undertaken by the sponsors of the
issue. The other aspect is advisory services, which
improve the quality of capital issues and ensure its
success. The function of origination is done by
merchant bankers who may be commercial banks, all
India financial institutions or private firms.

b) Underwriting It is an agreement whereby
the underwriter promises to subscribe to a
specified number of shares or debentures or
a specified quantity of stock in the event of
public not subscribing to the issue. If the
issue is fully subscribed, then there is no
liability for the underwriter. If a part of
share issues remain unsold, the underwriter
will buy the unsold shares.

c) Distribution Distribution is the function of sale
of securities to ultimate investors. This service is
performed by brokers and agents who maintain
regular and direct contact with the ultimate
investors.

2) Designing the Instrument A wide array of
financial instruments designed for varying risk-
reward levels and liquidity preferences have been
developed. Designing of financial products calls for
exacting skills in financial engineering. The
limitations imposed by the legal framework have
also to be taken into consideration. There are
various factors that influence the choice of
instrument decision and a few of which are listed
below:

a) Purpose of the Offer While designing an issue, the
purpose for which the issue is made will largely
determine the type of security to be used. Tangible
assets are more readily financed by debt while growth
opportunities which involve intangible assets such as
intellectual property rights are better financed with
equity.

b) Debt Servicing The choice of security issued is
also dictated by the ability of the firm to service
periodic payments for the interest and principal for
debt securities. While debt securities help in
leveraging the firm's earnings per share, it also
entails the additional financial risk of not being able
to meet future obligations. The lead manager should
weigh the pros and cons before deciding on the
selection of the security.

c) Tax Considerations The tax implications
to the issuer and the investor should be
examined. The implications vary depending
on the nature of the instrument. In case of
debt instruments, the amount of interest
paid is tax-deductible to the issuer.
However, the amount of interest received is
taxable for the investor. The issuer has to
pay a special dividend tax on the amount
distributed as dividends also. However, the
dividends are totally tax free for the
investor.

d)Credit Rating The riskiness of the firm also has
an impact on the debt/equity choice. Firms
whose debt issues have high ratings will be able
to borrow at a lower interest cost. Such firms
may also be able to price favourably their equity
issues. The best alterative would be based on the
precise impact of the choice of debt/equity on
the firm's projected EPS and its effect on
expected stock price.

e) Asset Cover Lenders of debt normally
insist on adequate security. Debt
securities, secured and backed by
tangible assets, are more attractive to
lenders. Debenture/bond trustees often
indicate the minimum asset cover.
Therefore, companies without adequate
asset cover are forced to issue equity.

f) Dilution of Ownership Equity offers dilute
the ownership control of the promoter
group. Companies susceptible to takeover
threats prefer issuing debt to equity.

Advantages of primary market or the New issue market
1. It provides opportunity for new investors to start new
enterprises: Persons with technical know-how may resort to promote
new ventures which are profit-oriented. The new issue market gives
them an opportunity to materialize their ideas.
2. Existing companies will be in a position to expand their
activities: When the existing companies find their products obsolete,
they would like to venture into new areas of production for which they
require additional capital. The new issue market helps them raise the
required funds.
3. Promotion of partnership firm into Public Limited companies or
merger of companies or facilitates buy-back of shares: When new
ventures are started, a management may wish to have a control on the
ownership and for this purpose, they would like to enter into a buy-back
arrangement. By this arrangement, the shares will be issued to a group
of persons (NRIs) for a specific period after which they will be bought
back from out of the profits. This ensures the retention of ownership
and prevents any change in management.

Securities dealt in the new issue market or primary market are classified as
1.Equity Shares.
2.Preference Shares.
3.Debentures.
1. Equity shares: These are shares issued by companies for raising capital.
The owners of these shares are shareholders. Normally, the face value of the
shares may be Rs.10 or Rs.100. A group of fully paid shares are called stock
and these can be transferred. The shareholders are entitled for profit, which are
distributed to them in the form of dividend. The share capital will be refunded to
them only during the winding up of the company, provided the company has
sufficient assets.
2. Preference shares: Preference shares are similar to equity shares but are
given on a preference basis to certain shareholders like promoters, auditors, etc.
There are cumulative, non-cumulative, participating, redeemable, irredeemable,
convertible and non-convertible preference shares. Preference shareholders will
get the first preference in the distribution of dividend over equity shareholders.
The same condition applies in the repayment of capital at the time of winding up.
3. Debentures: It is a loan obtained by the company from the public for a fixed
interest rate for a fixed period. Those investors who do not want to take any risks
will prefer debentures as they have less risk on the repayment compared to
shares. There are debentures which have mortgage charge on the assets of the
company and these debenture holders are assured of the repayment.

2
Functions
raise long-term
funds through
fresh issue of
securities. So
only buying of
securities takes
place securities
can't be sold
here by
investors.
continuous and
ready market
for existing
long-term
securities. In
this market,
both buying
and selling of
securities by
the investors
takes place.
3
Participants
The main
participants of
this market are
financial
institutions,
mutual
funds.underwri
ters, individual
investors etc.
The main
participants of
secondary
market are the
participants of
primary
market,stock
broker and the
members of
stock
exchanges.
4
Listing
Requirements
In case of
primary
market,listing
of securities
are not
In the case of
secondary
market,listing
of securities
are required
for their

Recent developments in Indian money markets
1. Nationalization of commercial banks to boost money
market in India
Commercial banks were nationalised in order to stimulate
the growth of Indian money market. The nationalization
enabled banking sector to provide more loans to
agriculture and discount agricultural bills.
2. Introduction of various relief acts to boost up growth
of Indian money market
The passing of Public Debt Relief Act has released many
people, especially in rural areas from the clutches of
the money lenders. The Urban Debt Relief Act has given
relief to the urban poor. In 1988, the discount and finance
house was set up for discounting commercial bills brought
by commercial banks.

3. Reduction of stamp duty
Reduction of stamp duty and re-discounting rate on promissory notes has made it more
popular. In 1986, the Government issued 180-days treasury bills and in 1989 certificate of
deposits, and commercial paper in 1990.
In 1991,money market mutual fund was set up to allow more people to take part in the
money market activities in India.
4. Steps taken to curb disparity in Interest rates
The interest rate of commercial banks which was controlled by RBI has been deregulated.
This curtails the adverse effect of disparity in Interest rates among various money
markets and in turn helps boost up the growth of Indian money market.
5. Repurchase of options of treasury bills to boost bill market
RBI has introduced repurchase of options of treasury bills to provide more additional
funds to commercial banks. This attracts more activity in the bill market and help boost
money market in India.
6. Relaxation fore foreign institutions by Indian Government
More relaxation for foreign institutions to invest foreign funds in the Indian money
market. This brings in more liquidity during the period of busy season (between June to
February).
7. Introduction of Credit rating for commercial paper and promissory notes
B credit rating has been introduced for promissory notes as well as commercial paper by
which the credibility of these instruments has gone up. Credit worthiness of these
instrument plays a major role for the growth of Indian
money market.

main steps of shares to the public through a prospectus involve the
following steps:
1. Board Meeting: A meeting of the board of directors is called to discuss the public offer of shares.
2. Lead Manager(s): A merchant banker is appointed as the lead manager(s) who orchestrates the issue in consultation with the counseling purpose.
3. Co-managers: In case of requirement the lead manager may appoint co-managers to share the work.
4. Advisors: Also the lead manager may appoint advisors for counseling purpose.
5. Underwriters: Underwriting can be defined as, “an agreement between the capital issuing company and the underwriter(s), whereby the
underwriters guarantee to subscribe the whole or part of the issued capital that would remain unsubscribed by the public, in consideration for a
commission.”
Purpose of Underwriting:
The company may not be in the position to get full subscription for its capital issue. To protect its interest the company appoints underwriters. The
underwriters guarantee minimum subscription or even entire share capital. If the amount of share capital remains unsubscribed, then it is the
obligation of the underwriters to subscribe for the same.
At present the government rule is that the company has to get minimum 90% subscription, including the devolvement of underwriters and it must be
received within 60 days from the close of public issue. If the minimum subscription is not obtained, the money received on application must be
refunded to applicants, and not allotment can be made. The underwriting commission is fixed at 5 percent of the nominal value (including premium, if
any) of the equity capital issued to the public.
6. Bankers: As per SEBI guidelines the bankers to the issue must collect the money, along with duly completed application form, on behalf of the
company from the applicants.
7. Brokers and Principal Brokers: Members of recognized stock exchanges are appointed as brokers who inturn facilitate the subscription of the
issue. Depending on the size of the issue a principal broker may be appointed to co-ordinate the work of brokers. In all types of public issues of
industrial securities the applicable brokerage is 1.5 per cent whether the issue is underwritten or not. In case of managing brokers they can be paid a
maximum remuneration of 0.5 percent of the nominal value of the capital issued to public.

20. Minimum Subscription: As per the SEBI guidelines if the company does not receive a minimum of 90% of the issue amount from the public subscription
including devolvement from underwriters within 120 days from the date of the issue, the amount of subscription received is required to be refunded to the
applicants. In case of disputed devolvement also, subscription is required to be refunded 90% of the issued amount plus accepted devolvement from underwriters,
if any is not received within 120 days of the issue of prospectus. All money received from the applicants for shares is required to be repaid forthwith without
interest and if any such money is not so repaid forthwith without interest and if any such money is not so repaid in the next 10 days (after the expiry of 120
days), the directors of the company are jointly and severally liable to repay that money, with interest from the expiry of the 130 days.
The company should refund the amount within 10 weeks of the closing of the subscription list and pay interest, if refunds are delayed by more than 8 days after
this periods.
21. Underwriters Liability: The liability of the underwriters has to be established in case the issue is undersubscribed. The following procedure is followed for
that purpose:
a. First, segregate the applications which bear the stamp of an underwriter and the applications which do not bear the stamp of any underwriter. Find out the
number of shares produced by each underwriter and carry the shares which do not bear the stamp of any underwriter to a general pool.
b. Compare the number of shares procured by each underwriter with his underwriting commitment. In case of excess than his underwriting commitment, carry
the excess to the general pool. In case an underwriter has procured less shares than his underwriting commitment, determine his shortfall.
c. Finally, credit the total number of shares in the general pool to the underwriters with shortfall in proportion to their underwriting commitments and then
find out the net shortfall of each underwriter who could not procure enough shares. This indicates the underwriter’s liability.
22. Allotment of Shares: The allotment has to be done as per SEBI guidelines.
Proportion of the Net Public Offer Reserved for Applications
One-half : upto 1,000 shares
Balance one-half : larger applications
The “proportionate” system of allotment has to be followed for each of these segments and the allotment formalities should be completed within 30 days after
the subscription list is closed or such extended period as permitted by the lead stock exchange.
A return of allotment in Form no. 2 of the Companies (Central Government’s) General Rules and Form, 1956 should be filed with Registrar of Companies within 30
days of the date of allotment alongwith the fees payable, as prescribed in Schedule X of the Act.
In case, the issue is over-subscribed, the basis of allotment has to be decided in consultation with the stock exchange authorities as per the guidelines laid down
by the stock exchanges.
23. Over Subscription: The over-subscribed amount should after the finalization of allotment, refunded to the applicants within 10 weeks of the closure of
subscription list. If the money is not so refunded, the company is liable to refund the money with interest as specified from the expiry of the 8 days after 10
weeks of the closure of subscription list.
24. Compliance Report: As stipulated by SEBI guidelines within 45 days of the closure of issue, a report in the prescribed form alongwith a compliance
certificate from statutory auditor/practicing chartered accountant or by a company secretary in practice is to be forwarded to SEBI by the lead managers.
25. Listing: A detailed listing application alongwith the listing agreement and the listing fees has to be submitted to the concerned stock exchanges for listing of
the issue. The listing fees consists of two components i.e. initial listing fees and annual listing fees.
26. Issuance of share certificates: As per Section 113, the company should deliver the share certificate within 3 months after the allotment of shares.

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