OVERVIEW OF INDIAN FINANCIAL SYSTEM

1. Introduction to the Indian Financial System:

Definition: The Indian financial system refers to the network of financial
institutions, markets, instruments, and services that facilitate the transfer of funds
and financial resources in the economy.
Importance: It plays a crucial role in mobilizing savings, allocating capital,
facilitating investments, and fostering economic growth.
2. Components of the Indian Financial System:
Financial Institutions: Banks (commercial banks, cooperative banks), Non-
Banking Financial Companies (NBFCs), Insurance Companies, Pension Funds,
Mutual Funds, etc.
Financial Markets: Money Market, Capital Market (Primary Market and
Secondary Market), Forex Market, Commodity Market, etc.
Financial Instruments: Equity shares, Debt instruments (bonds, debentures),
Derivatives, Government Securities, etc.
Financial Services: Investment Banking, Merchant Banking, Underwriting,
Portfolio Management, Insurance Services, Credit Rating, etc.

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3. Role and Functions of Financial Institutions:
Mobilization of Savings: Banks and other financial institutions collect savings
from individuals and institutions and channel them into productive investments.
Intermediation: Financial institutions act as intermediaries between savers and
investors by providing various financial services and instruments.
Allocation of Capital: They allocate funds to different sectors of the economy
based on their risk-return preferences and economic prospects.
Risk Management: Financial institutions help in managing risks by offering
services like insurance, hedging, and diversification.
4. Regulatory Framework of the Indian Financial System:
Reserve Bank of India (RBI): The central bank of India regulates and supervises
banks and NBFCs to maintain financial stability and promote economic
development.
Securities and Exchange Board of India (SEBI): SEBI regulates the capital
markets, protects investors' interests, and promotes the development of a fair and
transparent securities market.
Insurance Regulatory and Development Authority of India (IRDAI), Pension
Fund Regulatory and Development Authority (PFRDA), etc., regulate their
respective sectors.

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5. Introduction of New Financial Products and Services
In recent years, the financial landscape has witnessed a significant evolution
characterized by the introduction of innovative financial products and services.
These advancements are driven by the changing needs of consumers,
technological advancements, and regulatory reforms. Let's delve into some key
aspects of this evolution:
1. Diversification of Financial Products and Services:
Traditional financial products such as savings accounts, fixed deposits, and
mutual funds have been supplemented by a wide array of innovative offerings.
Examples include exchange-traded funds (ETFs), peer-to-peer lending platforms,
robo-advisors, cryptocurrency exchanges, and impact investing options.
2. Access to Alternative Investment Opportunities:
Previously inaccessible investment options, such as real estate investment trusts
(REITs), infrastructure bonds, and venture capital funds, are now available to
retail investors.
This diversification allows investors to spread their risk across different asset
classes and potentially enhance their investment returns.
3. Personalized Financial Services:
The rise of technology has enabled the delivery of personalized financial services
tailored to individual needs and preferences.

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Wealth management platforms, algorithmic trading tools, and digital financial
planning apps are examples of innovations that provide customized financial
solutions.
Adoption of Technology in Financial Transactions
The adoption of technology has revolutionized financial transactions, leading to
increased efficiency, accessibility, and security. Key developments in this area
include:
1. Digital Payments and Mobile Banking:
The proliferation of smartphones and internet connectivity has fuelled the growth
of digital payment platforms and mobile banking apps.
Consumers can now make payments, transfer funds, and manage their finances
seamlessly through mobile devices, eliminating the need for physical bank visits.
2. Fintech Innovations:
Fintech (financial technology) innovations have disrupted traditional financial
services by leveraging technology to offer innovative solutions.
Examples include peer-to-peer lending platforms, crowdfunding platforms,
blockchain-based payment systems, and robot-advisors.
3. Blockchain and Cryptocurrencies:
Blockchain technology, the underlying technology behind cryptocurrencies like
Bitcoin and Ethereum, has the potential to revolutionize various aspects of
financial transactions.
Its decentralized and tamper-proof nature enhances security and transparency in
transactions, with applications ranging from cross-border payments to smart
contracts.
Reforms in Regulatory Frameworks
In response to the evolving financial landscape and emerging challenges,
regulatory frameworks have undergone significant reforms aimed at enhancing
transparency, stability, and investor protection. Key reforms include:
1. Insolvency and Bankruptcy Code (IBC):
The Insolvency and Bankruptcy Code, enacted in 2016, has streamlined the
insolvency resolution process and improved creditor rights in India.

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It provides a time-bound framework for resolving insolvency cases, promoting
ease of doing business and boosting investor confidence.
2. Goods and Services Tax (GST) Implementation:
The implementation of GST in 2017 marked a significant milestone in India's tax
reform journey, replacing a complex system of indirect taxes with a unified tax
regime.
GST aims to simplify tax compliance, eliminate cascading taxes, and create a
common national market, thereby fostering economic growth and improving tax
transparency.
Financial Inclusion, Non-Performing Assets (NPAs), Cybersecurity threats,
Regulatory Compliance, Global Economic Uncertainties, etc.
1. Financial Inclusion
Financial inclusion refers to the availability and accessibility of financial services
to all segments of society, particularly the marginalized and underprivileged. It
aims to promote economic empowerment, reduce poverty, and foster inclusive
growth. Key aspects of financial inclusion include:
• Access to Banking Services: Ensuring that individuals and businesses have
access to basic banking services such as savings accounts, credit facilities,
and insurance products.
• Digital Financial Inclusion: Promoting the use of digital financial services,
including mobile banking, digital payments, and online lending, to reach
underserved populations in remote areas.
• Financial Literacy and Education: Educating individuals about financial
concepts, products, and services to enable them to make informed financial
decisions and improve their financial well-being.
• Government Initiatives: Governments and regulatory authorities
implement policies and programs to promote financial inclusion, such as
the Pradhan Mantri Jan Dhan Yojana (PMJDY) in India, which aims to
provide access to financial services to all households.
2. Non-Performing Assets (NPAs)
Non-Performing Assets (NPAs), also known as bad loans, are loans on which the
borrower has failed to make interest or principal repayments for a specified
period. NPAs pose significant challenges to banks and financial institutions,
impacting their profitability, liquidity, and stability. Key considerations regarding
NPAs include:

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Causes of NPAs: NPAs can arise due to various factors, including economic
downturns, borrower defaults, inadequate credit assessment, wilful defaulters,
and fraudulent activities.
Impact on Financial Institutions: NPAs erode banks' profitability, weaken their
capital base, and affect their ability to lend, leading to a credit crunch in the
economy.
Resolution Mechanisms: Regulatory authorities implement measures to address
NPAs, including debt restructuring, asset reconstruction, insolvency proceedings,
and recovery through legal mechanisms like the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act.
Preventive Measures: Financial institutions implement risk management
practices, credit monitoring systems, and stringent lending criteria to prevent the
accumulation of NPAs and mitigate credit risks.
3. Cybersecurity Threats
Cybersecurity threats pose significant risks to the financial sector, including
banks, payment systems, and financial infrastructure. These threats encompass
various forms of cyberattacks, data breaches, and fraudulent activities aimed at
compromising the confidentiality, integrity, and availability of financial
information. Key considerations regarding cybersecurity threats include:
Types of Threats: Cybersecurity threats include malware, phishing attacks,
ransomware, insider threats, distributed denial-of-service (DDoS) attacks, and
identity theft, among others.
Impact on Financial Institutions: Cyberattacks can result in financial losses,
reputational damage, regulatory sanctions, and loss of customer trust. They also
pose systemic risks to the stability of the financial system.
Preventive Measures: Financial institutions implement robust cybersecurity
measures, including encryption, firewalls, multi-factor authentication, intrusion
detection systems, and security awareness training for employees.
Regulatory Compliance: Regulatory authorities mandate compliance with
cybersecurity regulations and standards, such as the Reserve Bank of India's
(RBI) Cyber Security Framework for Banks, to ensure the resilience of the
financial sector against cyber threats.
Regulatory compliance refers to the adherence of financial institutions to laws,
regulations, and guidelines prescribed by regulatory authorities. Compliance with
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regulatory requirements is essential to maintain the integrity, stability, and
transparency of the financial system. Key considerations regarding regulatory
compliance include:
• Regulatory Framework: Financial institutions operate within a regulatory
framework established by regulatory authorities such as the RBI, Securities
and Exchange Board of India (SEBI), Insurance Regulatory and
Development Authority of India (IRDAI), and others.
• Compliance Requirements: Financial institutions need to comply with
various regulatory requirements related to capital adequacy, liquidity
management, risk management, customer protection, anti-money
laundering (AML), and know your customer (KYC) norms.
• Regulatory Reporting: Financial institutions are required to submit
periodic reports and disclosures to regulatory authorities, providing
information on their financial condition, risk exposures, compliance status,
and governance practices.
• Consequences of Non-Compliance: Non-compliance with regulatory
requirements can result in penalties, fines, reputational damage, suspension
of licenses, and legal action against financial institutions and their key
personnel.

4. Global Economic Uncertainties

Global economic uncertainties refer to unpredictable events and factors that
impact the stability and performance of the global economy, including
geopolitical tensions, trade disputes, natural disasters, and pandemics. Key
considerations regarding global economic uncertainties include:
Impact on Financial Markets: Global economic uncertainties can lead to
increased volatility, market disruptions, and fluctuations in asset prices, affecting
investor confidence and portfolio returns.
Risk Management: Financial institutions need to implement robust risk
management practices to mitigate the impact of global economic uncertainties,
including diversification of portfolios, stress testing, and scenario analysis.
Policy Responses: Central banks and governments implement monetary and
fiscal policies to address global economic uncertainties, including interest rate
adjustments, liquidity injections, fiscal stimulus packages, and regulatory
interventions.

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Business Continuity Planning: Financial institutions develop business continuity
plans to ensure operational resilience and continuity of services in the face of
global economic uncertainties, including remote working arrangements, disaster
recovery plans, and cybersecurity measures.
Features/Characteristics of Financial System
1. Financial system acts as a bridge between savers and borrowers
2. It consists of a set of inter-related activities and services
3. It consists of both formal and informal financial sectors. The existence of both
formal and
informal system is also called as financial dualism.
4. It formulates capital, investment, and profit generation
5. It is universally applicable at firm level, regional level, national level, and
international level
6. It consists of financial institutions, financial markets, financial services,
financial instruments,
financial practices and financial transactions.
LIMITATIONS OR WEAKNESSES OF INDIAN FINANCIAL SYSTEM
The measures taken by the government over the years to develop a strong
financial system has resulted in a considerable amount of consistency and growth
in the economy.
However, some of the weaknesses or limitations of Indian Financial System are
that are still to be addressed are:
1. Lack of coordination between different financial institutions
2. Monopolistic market structures
3. Dominance of development banks in industrial financing
4. Inactive and erratic capital market
5. Imprudent & immoral financial practice.

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 Institutional Structure of Investment Banking in India

Investment Banks: Both domestic and international investment banks operate in

India, offering a range of services including underwriting, advisory, syndication,
and research.
Merchant Banks: Merchant banks in India are regulated by the Securities and
Exchange Board of India (SEBI) and play a crucial role in managing public
offerings, private placements, and corporate restructuring.
Functions of Investment Banking:
• Capital Raising: Investment banks assist corporations and governments in
raising capital through various means such as initial public offerings
(IPOs), follow-on public offerings (FPOs), private placements, and debt
issuances.
• Advisory Services: They provide strategic advice to clients on mergers,
acquisitions, divestitures, restructuring, and other corporate finance
transactions.
• Underwriting: Investment banks underwrite securities issuances, thereby
assuming the risk of selling the securities to investors at a predetermined
price.
• Market Making: They facilitate liquidity in the secondary market by acting
as market makers, buying and selling securities to ensure smooth trading.
Recent Developments in Investment Banking in India:
• Digital Transformation: Investment banks are leveraging technology for
process automation, data analytics, and digital platforms to enhance
efficiency and client experience.
• Regulatory Reforms: SEBI has introduced regulatory reforms to strengthen
corporate governance, enhance transparency, and improve investor
protection in capital markets.
• Increasing Competition: The Indian investment banking landscape is
witnessing increased competition from domestic and international players,
driving innovation and efficiency in services.
Challenges Ahead for Investment Banking in India:

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 • Economic Uncertainty: Volatility in global and domestic economic
conditions poses challenges for investment banks in forecasting market
trends and advising clients.
• Regulatory Compliance: Investment banks need to navigate complex
regulatory frameworks and comply with evolving regulations, which can
impact business operations and profitability.
• Talent Management: Recruiting and retaining skilled professionals in
investment banking remains a challenge due to intense competition for
talent and specialized skill sets required in the industry.
What is Investment Banking?
Investment banking is a special segment of banking operation that helps
individuals or organisations raise capital and provide financial consultancy
services to them.
They act as intermediaries between security issuers and investors and help new
firms to go public. They either buy all the available shares at a price estimated by
their experts and resell them to public or sell shares on behalf of the issuer and
take commission on each share.
Investment banking is among the most complex financial mechanisms in the
world. They serve many different purposes and business entities. They provide
various types of financial services, such as proprietary trading or trading
securities for their own accounts, mergers and acquisitions advisory which
involves helping organisations in M&As,; leveraged finance that involves lending
money to firms to purchase assets and settle acquisitions, restructuring that
involves improving structures of companies to make a business more efficient
and help it make maximum profit, and new issues or IPOs, where these banks
help new firms go public.
Let’s understand how an investment bank earns money by providing acquisition
advisories.
Think of company ABC buying another company XYZ. ABC is not sure how
much company XYZ is worth and what will be the long-term benefits in terms of
revenues, costs, etc. In this scenario, the investment bank will go through the
process of due diligence to determine the value of the company, settle the deal by
helping ABC prepare necessary documents and advising it on the appropriate
timing of the deal.

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Here the investment bank works on the buy side and some other investment banks
may be working on the sell side to help XYZ. The bigger the deal size, the more
commission the bank will earn.
Bank of America, Barclays Capital, Citigroup Investment Banking, Deutsche
Bank, and JP Morgan are some of the largest investment banks in India.
History of Investment Banking in India
The history of investment banking in India traces back to when European
merchant banks first established trading houses in the region in the 19th century.
Since then, foreign banks (non-Indian) have dominated investment and merchant
banking activities in the country.

In the 1970s, the State bank of India entered the business by creating the Bureau
of Merchant Banking and ICICI Securities became the first Indian financial
institution to offer merchant banking services.
By 1980, the number of merchant banks had risen to more than 30. This growth
in the financial services industry included the rapid expansion of commercial
banks and other financial institutions.
Association of Investment Bankers of India
According to the Association of Investment Bankers of India (AIBI), the
merchant banking industry started to take off in the 1990s with over 1,500
merchant bankers registering with the Securities and Exchange Board of India
(SEBI). To regulate and govern the new wave of banks that opened up, the
Association of Investment Bankers of India (AIBI) was created to ensure
members were in compliance with banking regulations and that their activities
were kept in check.
AIBI’s purpose is to ensure members institutions follow its ethical and legal
practices, as well as to promote the industry of investment banking in India and
the business interests of its members.
Investment Banking in India – List of AIBI Member Investment Banks:
• A.K. Capital Services Ltd.
• Ambit Corporate Finance Pvt. Ltd.
• Anand Rathi Advisors Ltd.
• Ashika Capital Ltd.
• Avendus Capital Pvt.Ltd.

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 • Axis Bank Ltd.
• Axis Capital Ltd.
• Barclays Bank Plc
• Bcb Brokerage Pvt.Ltd.
• Birla Capital & Financial Services Ltd.
• Bnp Paribas
• Bob Capital Markets Ltd.
• Boi Merchant Bankers Ltd.
• Canara Bank
• Central Bank Of India
• Centrum Capital Ltd.
• Chartered Finance Management Ltd.
• Choice Capital Advisors Pvt.Ltd.
• Citigroup Global Markets India Pvt.Ltd.
• Credit Suisse Securities (India) Pvt.Ltd.
• Deutsche Equities India Pvt.Ltd.
• DSP Merrill Lynch Ltd.
• Edelweiss Financial Services Ltd.
• Ernst & Young Merchant Banking Services Pvt.Ltd.
• HDFC Bank Ltd.
• HSBC Securities & Capital Markets (India) Pvt.Ltd.
• ICICI Securities Ltd.
• IDBI Capital Market Services Ltd.
• IDFC Securities Ltd.
• LIFL Holdings Ltd.
• Il&Fs Capital Advisors Ltd.
• Indian Overseas Bank
• Inga Capital Pvt.Ltd.
• Jefferies India Pvt.Ltd.
• JM Financial Institutional Securities Ltd.
• JP Morgan India Pvt.Ltd.
• Karvy Investor Services Ltd.
• Keynote Corporate Services Ltd.
• KJMC Corporate Advisors (India) Ltd.
• Kotak Mahindra Capital Co.Ltd.
• Lazard India Pvt.Ltd.
• Morgan Stanley India Co.Pvt.Ltd.

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 • Motilal Oswal Investment Advisors Pvt. Ltd.
• Munoth Financial Services Ltd.
• Pantomath Capital Advisors Pvt.Ltd.
• Religare Capital Markets Ltd.
• Rothschild (India) Pvt.Ltd.
• Saffron Capital Advisors Pvt.Ltd.
• SBI Capital Markets Ltd.
• SMC Capitals Ltd.
• Trust Investment Advisors Pvt.Ltd.
• UBS Securities India Pvt.Ltd.
• Union Bank Of India
• Vivro Financial Services Pvt.Ltd.
• Yes Bank Ltd.
Introduction to Merchant Banking
Merchant banking is a specialized form of financial intermediation that provides
a wide range of services including underwriting, corporate advisory, portfolio
management, and investment management to corporations, governments, and
high-net-worth individuals.
The concept of merchant banking originated in Europe during the medieval
period when merchants engaged in trade and banking activities.
Institutional Structure of Merchant Banking in India:
• Merchant Banks: Merchant banks in India are regulated by the Securities
and Exchange Board of India (SEBI) and are involved in managing public
offerings, private placements, and corporate restructuring.
• They act as intermediaries between issuers of securities and investors,
facilitating capital raising and providing advisory services.
Functions of Merchant Banking:
• Underwriting: Merchant banks underwrite securities issuances, assuming
the risk of selling the securities to investors at a predetermined price.
• Advisory Services: They provide strategic advice to corporations on capital
structuring, mergers and acquisitions, divestitures, and other corporate
finance transactions.
• Portfolio Management: Merchant banks manage investment portfolios on
behalf of institutional and individual clients, aiming to achieve specific
financial objectives.

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SEBI Guidelines for Merchant Bankers:
• Registration: SEBI regulates and registers merchant bankers, ensuring
compliance with eligibility criteria, capital adequacy requirements, and fit
and proper criteria for key personnel.
• Obligations and Responsibilities: Merchant bankers are required to adhere
to SEBI regulations regarding due diligence, disclosures, conflict of
interest, and investor protection in their dealings.
• Code of Conduct: SEBI prescribes a code of conduct for merchant bankers,
emphasizing integrity, professionalism, and ethical behavior in their
interactions with clients and stakeholders.
Regulations Regarding Continuance of Association of Lead Manager with
an Issue:
SEBI Regulations: SEBI has laid down regulations governing the continuance of
association of lead managers with an issue, ensuring transparency, fairness, and
investor protection in the issuance process.
Responsibilities of Lead Managers: Lead managers are responsible for managing
the entire issuance process, including due diligence, pricing, marketing, and
distribution of securities, in compliance with SEBI regulations.
Merchant banking plays a crucial role in capital markets by facilitating capital
raising, providing advisory services, and managing investment portfolios.
Compliance with SEBI regulations and adherence to ethical standards are
essential for merchant bankers to maintain trust and credibility in the financial
markets.
SEBI Guidelines for Merchant Bankers
1. Registration of Merchant Bankers:
SEBI regulates the registration of merchant bankers under the SEBI (Merchant
Bankers) Regulations, 1992.
Eligibility Criteria: Merchant bankers need to meet certain eligibility criteria
regarding net worth, infrastructure, and experience in the securities market.
Application Process: Interested entities apply to SEBI for registration as merchant
bankers and need to comply with the prescribed application form and fee.

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2. Obligations and Responsibilities of Merchant Bankers:
Due Diligence: Merchant bankers are required to conduct thorough due diligence
on the issuer company and the proposed issue to ensure accuracy and
completeness of information disclosed to investors.
Disclosure Requirements: They must ensure compliance with disclosure
requirements as per SEBI regulations, providing investors with all material
information necessary for making investment decisions.
Investor Protection: Merchant bankers have a responsibility to safeguard the
interests of investors by ensuring fair and transparent dealings, avoiding conflicts
of interest, and adhering to ethical standards.
3. Role and Responsibilities of Lead Managers:
Lead Manager Appointment: The issuer appoints a lead manager for managing
the issuance process, including due diligence, drafting of offer documents,
pricing, marketing, and distribution of securities.
Due Diligence: Lead managers conduct due diligence on behalf of the issuer to
verify the accuracy and adequacy of disclosures in the offer documents, ensuring
compliance with SEBI regulations.
Pricing and Allocation: They assist the issuer in determining the issue price and
allocation of securities, considering market conditions, investor demand, and
regulatory requirements.
4. Regulations Regarding Continuance of Association of Lead Manager with
an Issue:
SEBI Regulations: SEBI has laid down regulations regarding the continuance of
association of lead managers with an issue to ensure fairness, transparency, and
investor protection.
Change in Lead Manager: If there is a change in the lead manager during the
issuance process, SEBI regulations require adequate disclosure of reasons for the
change and its impact on the issue.
5. Compliance with SEBI Regulations:
SEBI mandates strict compliance with regulations by merchant bankers and lead
managers to maintain the integrity and credibility of the securities market.

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Non-compliance with SEBI regulations may lead to penalties, suspension, or
cancellation of registration, affecting the reputation and business operations of
merchant bankers and lead managers.
SEBI guidelines for merchant bankers and lead managers aim to ensure investor
protection, market integrity, and regulatory compliance in the issuance process.
Compliance with SEBI regulations is essential for maintaining trust and
confidence in the securities market and promoting investor confidence and
participation.

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