LESSON

16
INDIAN FINANCIAL SYSTEM
CONTENTS
16.0 Aims and Objectives
16.1 Introduction
16.2 Organised Capital Market
16.3 Un-organized Capital Market
16.4 Organized Money Market
16.4.1 Market for Banking Financial Institutions
16.4.2 Market for Non Banking Financial Institutions
16.5 Un-organized Money Market
16.6 Let us Sum up
16.7 Lesson-end Activity
16.8 Keywords
16.9 Questions for Discussion
16.10 Suggested Readings
16.0 AIMS AND OBJECTIVES
The purpose of this lesson is to discuss the typical structure of the Indian financial
system. After studying this lesson you will be able to:
(i) describe components of financial markets
(ii) understand organised and unorganised capital markets
(iii) explain various segments of money market
16.1 INTRODUCTION
The Indian financial system coined more particularly immediately after the independence
1947. Since 1947, the role of the financial system is more vibrant in meeting the needs
and demands of not only the country but also the corporate sectors. It outperformed in
the economy for the development of the nation through the collection of saving from the
households for development of the nation as well as the corporate sectors. The Indian
financial system could be bifurcated into two different segments viz.
Capital Market and Money market
These two markets are further classified into organized and unorganized.
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16.2 ORGANISED CAPITAL MARKET
The capital market which was initially controlled and organized by the Controller of
Capital Issues act and then it was replaced by the Securities Exchange Board of India
for the governance of capital market in India. The capital market in India is known as
regulated in spheres by SEBI then and there.
The organised capital market is bifurcated into two categories viz Primary market and
Secondary market.
Primary market: It is the market for the fresh issuance of securities by the new as well
as existing companies, in order to raise the capital from the investors.
The Primary market is further classified into many segments
Initial Public offering: As a new company registered under the Companies Act 1956 is
permitted to raise the capital from the market through the abridged prospectus.
Public issue: It is another mode of raising the capital from the common public by the
existing companies.
Private placement: During the issue, the larger investment houses are invited for the
subscription of the issue of securities in bulk quantities at a discount price prior to the
issue. After the issue, according to the investment policy of the Institutional investors,
they sell them at higher price to the individual investors. This facilitates the institutional
investors to book profits through the process of private placement.
Underwriting: It is another mode of issuing the securities during the issue, more
particularly this mode of issue is found to be an avenue to off-load the risk of managing
the issue of securities as well as to secure the issue as fully subscribed.
Secondary market: It is the market for the securities which are already available in the
market, to buy and sell among the players. This is the market further classified into two
different categories viz mutualisation and demutualisation of stock exchanges.
Mutualised Stock exchanges: These are the exchanges never have any distinction
among the members, management and governing body of the stock exchange. These
are purely administered by the members/brokers of the stock exchange, e.g.,. Traditional
stock exchanges.
Demutualised stock exchanges: These are separate distinct faces among themselves.
The roles and responsibilities of the brokers, governing body members and people in the
management are clearly defined and performed by them without any ambiguity e.g.
OTCEI, NSE and so on.


Indian financial System
Capital market Moneymarket
Organised Un organized Organised Un organized
Primary market
Secondary
Kerb trading
Bills Market
Discount Market
Gilt edged
Short term
Pawn Brokers
Chit funds IPOs
Public Issues
Private Placement
Institutional offer
Underwriting

Short term financial
instruments market
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Indian Financial System
16.3 UN-ORGANIZED CAPITAL MARKET
Due to stringent guidelines of SEBI, unofficial market trading activities are banned only
in order to safeguard the interest of the investors.
Kerb trading which was taken place among the players of the stock market during the
non working hours of the stock exchange. This trading is known in other words as un-
official trading or black trading among the players.
The next segment is nothing but the money market which controlled and monitored by
the Reserve Bank of India.
16.4 ORGANIZED MONEY MARKET
The organised money market can be further segmented into two categories:
16.4.1 Market for Banking Financial Institutions
Under this the entire banking network is administered by RBI, which has the following
many more classification viz Public sector banks, Scheduled banks, Private sector bank,
Co-operative banks, Regional Rural banks and Land development banks
16.4.2 Market for Non Banking Financial Institutions
The non banking financial institutions are nothing but development banks, state financial
institutions
The money market is further divided into various segments viz
Bills market
Discounting market
Acceptance market
Marketable securities market
Gilt edged securities market and so on
Bill market: In this market only, the bills are bought and sold among the players. It is the
market for both commerce bill and finance bill. The commerce bill is nothing but the bill
of exchange defined in accordance with the Sec. 5 of the Negotiable Instruments Act. It
arises only due to credit sales among the parties, only in order to safeguard the interest
of the suppliers who supplied the goods and articles on credit.
Discounting market: It is another most important market for discounting of the bills of
the trade. These are normally carried out by the banking and financial institutions in
addition to Discounting Housing Finance of India which is the apex body for rediscounting
in India next to Reserve Bank of India. The bills are discounted by the banking and non
banking financial institutions only on the basis of the credibility of the parties involved in
the bill who has accepted to make the payment on the maturity of the bill.
Acceptance market: In India, there is no separate acceptance market for accepting the
bills before discounting, but in U.K., there is greater scope for accepting the bill before
the process of discounting. Normally, the discounting is carried out only on the basis of
the extent of acceptance given by the acceptance houses on the bills produced.
Govt Securities market: The govt securities are also tradable in the secondary market
immediately after the issuance. According to the Public debt act, the central and state
govt are empowered to issue the securities to raise financial resources from the public
for developmental aspects of the state or region.
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The treasury bills are mainly traded in the market immediately after the issuance
The following are the major type of treasury bills traded in the market are 91 days
treasury bills, 182 days treasury bill and 364 days treasury bill
Bonds market: It is a separate market available to raise the financial resources through
long term debt instrument. The bonds are normally issued by the corporate sectors and
govt organizations. They are many in categories viz
Secured and unsecured bonds
Pay in kind bonds
Redeemable bonds and irredeemable bonds and so on.
16.5 UN-ORGANIZED MONEY MARKET
This particular market is dominated by the pawn brokers, chit funds, nidhis, and so on.
There is no stringent guidelines prevailing to control and monitor the role of the above
mentioned players.
In addition to the above classifications, one more classification is that of insurance
companies which are separately governed by the IRDA
Which has got its own segments as following:
Life insurance sector
Non life insurance sector
Pension funds
Health insurance and so on.
Check Your Progress
What are the main components of Indian financial system?
16.6 LET US SUM UP
The Indian financial system could be bifurcated into two different segments viz. Capital
Market and Money Market.
The money market is further divided into various segments viz
Bills market
Discounting market
Acceptance market
Marketable securities market
Gilt edged securities market and so on.
16.7 LESSON-END ACTIVITY
Examine critically the role of Financial markets in industrial development of India.
16.8 KEYWORDS
Organised Capital Market
Primary market
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Indian Financial System
Initial Public offering
Public issue
Secondary market
Mutualised Stock exchanges
Demutualised Stock exchanges
Unorganized Capital market
Bill market
Discounting market
Acceptance market
Govt Securities market
Bonds market
Un-organized money market
16.9 QUESTIONS FOR DISCUSSION
1. Write elaborate note on the organized capital market. Explain the role of SEBI in
controlling the capital market.
2. Draw the role of RBI in controlling and monitoring the various entities in the regulated
money market environment.
3. Explain the various steps involved in the bills market.
4. Illustrate the role of acceptance market.
5. Explain the various type of bonds and treasury bills under the organized money
market.
16.10 SUGGESTED READINGS
R.L. Gupta and Radhaswamy, Advanced Accountancy.
V.K. Goyal, Financial Accounting, Excel Books, New Delhi.
Khan and Jain, Management Accounting.
S.N. Maheswari, Management Accounting.
S. Bhat, Financial Management, Excel Books, New Delhi.
Prasanna Chandra, Financial Management Theory and Practice, Tata McGraw
Hill, New Delhi (1994).
I.M. Pandey, Financial Management, Vikas Publishing, New Delhi.
Nitin Balwani, Accounting & Finance for Managers, Excel Books, New Delhi.