Apna Sapna Money-Money

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Apna Sapna Money-Money
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• Money doesn't create man but it is the man who
  created money.
• -Warren Buffet

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WELCOME To ALL OF YOU IFS Course

• RAHUL JAIN
• (Striving for excellence)
• BCOM (H), MBA, FCS

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Overview of Indian Financial System and Economic
Development

• By- Rahul Jain
• (PGPM (MBA), FCS)
• rahulkjain16_at_yahoo.co.in
• www.learningfinancialmanagement.pbworks.com
• Ph 9811228852

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Our Strategy for Learning

• Concepts, Practice and Class Discussion
• Punctuality, Participation and Preparation
• Judgment challenge
• Learning to communicate ideas
• Learning from each other
• Learning through discovery

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Outline

• Overview of financial markets
• Institutional infrastructure
• Role and functions of stock exchange

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Some Important rules

• Switch off your Mobiles
• Attendance rules will be strictly applied
• Non completion of Assignment will lead to strict
  disciplinary measures
• Students can gather additional bonus points by
  being a Performer 4 times in the whole course.
• Students falling in the Improvement category
  would be penalized.

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Website activity

• Each one of you write your bio in your course
  page. For example Foundation students will write
  in Foundation Batch course page.
• Bio will be written as per following guidelines
• Include your name, prior education background and
  institutes name
• Include your hobbies, 2 strengths and 2 unique
  talents
• Include your achievements
• Include what you want to learn from this course
• www.learningfinancialmanagement.pbworks.com

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The Financial System

• Financial System set of markets, individuals
  and institutions which trade in those markets
• Channels funds from lenders to borrowers
• Creates liquidity and money
• Provides a payments mechanism
• Provides financial services such as insurance and
  pensions
• Offers portfolio adjustment facilities

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Financial System
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Constituents of Financial System
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Regulation of the Financial System

• To increase the information available to
  investors
• To ensure the soundness of financial
  intermediaries (and the overall financial
  system)
• Restrictions on entry
• Disclosure
• Restrictions on Assets and Activities (e.g. Basel
  II)
• Deposit Insurance
• Limits on Competition
• Restrictions on Interest Rates

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Financial Markets

• Markets in which funds are transferred from
  people who have an excess of available funds to
  people who have a shortage of funds
• Example lenders/savers and borrowers/investors
• Important effects on economic performance

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Structure of Financial Markets

• Debt and Equity Markets
• U.S. markets (2005) debt 41 trillion, equity
  18 trillion
• Different return profiles
• Primary and Secondary Markets
• Investment Banks underwrite securities in primary
  markets
• Brokers and dealers work in secondary markets
• Exchanges and Over-the-Counter (OTC) Markets
• Money and Capital Markets
• Money markets deal in short-term (lt 1 yr) debt
  instruments
• Capital markets deal in longer-term (gt 1 yr) debt
  and equity instruments
• Growing internationalization of financial markets

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Overview of Financial Markets

• Types of financial markets
• Money markets
• Capital markets
• Debt Market
• Hybrid

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The Hierarchy of Markets
Asset backed securities derivatives
Corporate bonds equities
Government bond market
Govt T Bills
Money market
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Instruments

• Equities
• Debt

Most popular investing instruments Stocks and
shares Bonus issues Rights issues
Corporate Government
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Supporting agents
Financial Market
Insurance cos
Capital market
Primary Mkt Inst
Money market
NIS
Commercial banks
Primary market
Credit unions
Secondary market
Stock exchange
Firms raise capital
Short term instruments
Investors trade securities issued in primary
market
debt
equity
Public
Private placement
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Risk-Return Trade off
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India- Young and Restless
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Indian Economy and Capital Market at a glance

• Second fastest growing economies after China with
  an average annual growth rate of more than 8 per
  cent in the last three years
• Indias growth rate has surpassed some of the
  developed economies
• GDP at current market prices is over US 778
  billion

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Indian Economy A Snapshot

• One of the fastest growing in the world
• Consumption growth fuelling economic growth
  consumption expenditure forming 78 of GDP
• Services sector contributing over 60 to GDP
• Emerging as a hub of manufacturing excellence.
  new growth engines of Indian economy include IT,
  ITes, pharmaceuticals, bio-technology, nano
  technology, agri. businesses
• Where forces of competition are at work
• Innovation driving enterprises
• Economic reforms well on course entering second
  phase         

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Indian Economy and Capital Market at a Glance

• 9040 brokers in cash segment and 1064 in
  derivative segment of the market
• 122 investment bankers in the market
• 58 under writers to support primary issues
• 34 foreign venture capital funds
• 120 Portfolio managers

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Indian Economy and Capital Market at a Glance

• Business Week says that of 100 emerging market
  firms which are rapidly globalising 21 are Indian
  firms
• Economists project India to become the third
  largest economy in the world by 2040
• Indian capital market regulator has acquired
  international credibility in the least possible
  time

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Indian Economy and Capital Market at a Glance

• India has a disclosure based regime of regulation
• Disclosure and Investor Protection guidelines
  available
• Indias accounting standards are closer to
  international standards
• India has a well laid down legal framework

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Indian Economy and Capital Market at a Glance

• India has T2 rolling settlement as opposed to
  T3 in NYSE.
• In India the transactions are totally electronic
  on a real time basis.
• India has several protective safeguards for the
  retail investor such as grading system of public
  offering, retail quota at 25 per cent etc.

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Indian Economy and Capital Market at a Glance

• As an integral part of risk management trading
  and exposure limits, various margins and mark to
  market margins are in vogue
• Clearing houses in place
• Almost 100 per cent risk free electronic
  settlement through depository system
• SEBI has a surveillance and enforcement system in
  place

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Indian Economy and Capital Market at a Glance

• India - one of 10 fastest-growing population of
  HNWIs globally
• There are at least 23 Indian citizens amongst the
  richest people on the planet
• Non Resident Indians can invest in all Indian
  Asset Classes
• Salary increases in India 13.9 is the highest
  in the world
• Increasing Investment avenues Art, Realty
  Funds, Commodities
• The number of companies listed on the Bombay
  Stock Exchange, at more than 6,000, is second
  only to NYSE.
• Each year 2,500 tonnes of gold is mined (fifth of
  the world's gold output.) and 3,500 tonnes is
  consumed, of which 1,000 tonnes is consumed in
  India alone.

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Indian Equities Long term prospects are intact
Consumerism Retail credit, low interest rates,
changing aspirations
Infrastructure Development of roads, ports,
telecom
Demographics Half the population below 25 yrs
Reforms FDI, Tax reforms
Sustained GDP Growth
Exports
Global competitiveness
Outsourcing
High GDP Growth Growth Gap Over The World
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Money Market Instruments

• Short-term debt is traded in the money markets.
• Short-term is any debt instrument sold with a
  life that is 365 days or shorter.
• Typically, money market securities have the
  following features
• No stated rate of interest instead, sold at a
  price that is at a discount from the par or face
  value of the security.
• Examples include
• Treasury bills
• Commercial Paper

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Short-Term Debt and the Money MarketCommercial
Paper

• Short-term debt instruments, usually unsecured,
  issued by corporations.
• Involve credit risk because the financial health
  of a corporation can deteriorate and jeopardize
  the repayment of the amount borrowed.
• Sold at a discount from their face value
• Maturities less than a year
• Because of the credit risk, usually there is only
  a market for commercial paper offered by the most
  credit worthy corporate issuers.

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Bank FinancingShort-Term Financing

• Banks are an important source of financing
• They provide
• Lines of Credit in support of working capital
  needs
• Term Loans in support of longer term investment
  in equipment

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Market infrastructure

• Stock exchange
• Clearing and settlement
• Education and training
• Investors protection
• Rating agency

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Intermediaries

• Financial intermediaries may stand in between
  ultimate lenders and ultimate borrowers
• Merchant Bankers
• Stock brokers
• Advisors
• Banks
• Mutual Funds etc

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Function of Financial Intermediaries Indirect
Finance

• Why is there indirect finance, i.e., what is the
  rationale for financial intermediation?
• Lower transaction costs
• Risk management
• Asymmetric information

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1. Transaction Costs

• Transaction Costs resources (time/money) used
  in carrying out the exchange of assets, goods or
  services
• Economies of scale
• Reduction in transaction costs per dollar of
  transaction
• Example legal costs for blueprint contract
• Liquidity services
• Coordination across deposit-taking and lending
  activities

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2. Risk Management

• Risk sharing
• Asset transformation
• Risk transformation sell low-risk assets and use
  acquired funds to buy riskier assets
• Maturity transformation convert funds lent for a
  short-period into loans of longer duration
• Diversification the holding of multiple (not
  perfectly correlated) assets
• Take advantage of portfolio effects

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3. Asymmetric Information

• Asymmetric distribution of information between
  agents
• Example borrower has better information about
  investment project than the lender
• Economic incentives matter
• Adverse Selection (before the transaction)
• Example more likely to select risky borrower
• Moral Hazard (after the transaction)
• Example activities making loan repayment by
  borrower less likely

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Role and Functions of a stock exchange

• Established for the purpose of assisting,
  regulating and controlling business of buying,
  selling and dealing in securities

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Role and Functions of a stock exchange contd

• Provides a market for the trading of securities
  to individuals and organizations seeking to
  invest their saving or excess funds through the
  purchase of securities

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Role and Functions of a stock exchange contd

• Provides a physical location for buying and
  selling securities that have been listed for
  trading on that exchange

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Role and Functions of a stock exchange contd

• Establishes rules for fair trading practices and
  regulates the trading activities of its members
  according to those rules

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Role and Functions of a stock exchange contd

• The exchange itself does not buy or sell the
  securities, nor does it set prices for them

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Fair

• The exchange assures that no investor will have
  an undue advantage over other market participants

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Efficient market

• This means that orders are executed and
  transactions are settled in the fastest possible
  way

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Transparency

• Investor make informed and intelligent decision
  about the particular stock based on information

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Transparency contd

• Listed companies must disclose information in
  timely, complete and accurate manner to the
  Exchange and the public on a regular basis

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Transparency contd

• Required information include stock price,
  corporate conditions and developments dividend,
  mergers and joint ventures, and management
  changes etc

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Doing business

• People who buy or sell stock on an exchange do
  so through a broker

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Doing business contd

• The broker takes your order to the floor of the
  exchange looks for a broker representing someone
  wanting to buy/sell
• If a mutually agreeable price is found the trade
  is made

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Price

• At any point in time, the price of previously
  issued stock is determined by the ebb and flow of
  supply and demand

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Listing requirements

• There are specific requirements for allowing a
  public company to list its securities on the
  Stock Exchange these are set out in the
  legislation

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Benefits of listing

• Visibility
• Market support
• Investors confidence
• Increased demand for products and services
• Overall increase in profitability

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Once traded

• Aura of reliability
• Accuracy in reporting financial data
• Reputation
• Strength

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Delisting

• Stock exchange can delist companies for a number
  of reasons including -
• Merger with another company
• Solvency problems
• Name change company asked to be removed
• Failure to comply with exchange rules

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Desirable Characteristics of a stock market

• Liquidity

Ability to sell an asset quickly at a fairly
known price Low transactions costs
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Desirable Characteristics of a stock market
contd

• Availability of information Market efficiency
• Prices react quickly to new information
• Small price fluctuations
• Narrow price spread

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Financing the exchange

• Transaction fees paid by members for each order
  executed
• Fees paid by firms when their securities are
  originally listed
• Annual fees by firms
• Entrance fees from new members
• sale of historic trading and market information

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Major challenges for the Exchanges

• Cross border trading
• Issuers and investors are expanding their
  horizons beyond their home markets
• Investors becoming much more demanding

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Regulatory improvementTransparency and Corporate
Governance
Protection to minority Shareholders
Strong industry regulator
Enhance market confidence
Corporate Governance
Disclosure
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Ownership of the company is by the public in the
form of shares one share, one vote
Owners
Board is elected by shareholders to represent the
best interests of the owners
Board of Directors
Board hires and fires the management of the
company
Managers
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Assignment I 11th July

• Individual Assignment- 3minute presentation on
  Financial News Analysis (Refer Economic times and
  other business news papers/ magazine) Compulsory
  for first 5 roll numbers. Also submit a report on
  A4 size paper (Give intext citations)
• Individual Assignment 2 minute presentation on
  Key learnings of the previous class. (Compulsory
  for all)
• Name of Groups (Maximum 7 students)

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Some important points

• Academic Honesty
• Individual Work Only, Allows for Group Discussion
  of Concepts and Problems
• Do Not Copy Work
• Reference Any Source
• When Confused Ask Instructor
• Contact me Rahul Jain (9811228852,
  rahulkjain16_at_yahoo.co.in, Yahooidrahulkjain16)