UNIT-1 INTRODUCTION OF INDIAN FINANCIAL SYSTEM

Meaning of Indian financial system

The financial system enables lenders and borrowers to exchange funds. India
has a financial system that is controlled by independent regulators in the
sectors of insurance, banking, capital markets and various services sectors.

Thus, a financial system can be said to play a significant role in the economic
growth of a country by mobilizing the surplus funds and utilizing them
effectively for productive purposes.

FEATURES OF INDIAN FINANCIAL SYSTEM:

• It plays a vital role in economic development of a country.

• It encourages both savings and investment.

• It links savers and investors.

• It helps in capital formation.

• It helps in allocation of risk.

• It facilitates expansion of financial markets.

COMPONENTS/ CONSTITUENTS OF INDIAN FINANCIAL SYSTEM

The following are the four major components that comprise the Indian
Financial System:

1. Financial Institutions

2. Financial Markets

3. Financial Instruments/ Assets/ Securities

4. Financial Services.
COMPONENT IS DISCUSSED BELOW:

FINANCIAL INSTITUTIONS

Financial institutions are the intermediaries who facilitate smooth functioning

of the financial system by making investors and borrowers meet. They
mobilize savings of the surplus units and allocate them in productive activities
promising a better rate of return. Financial institutions also provide services
to entities (individual, business, government) seeking advice on various issue
ranging from restructuring to diversification plans. They provide whole range
of services to the entities who want to raise funds from the markets or
elsewhere.

Financial institutions are also termed as financial intermediaries because they

act as middle between savers by accumulating Funds them and borrowers by
lending these fund.

It is also act as intermediaries because they accept deposits from a set of

customers (savers lend these funds to another set of customers (borrowers).
Like - wise investing institutions such ICCIC, mutual funds also accumulate
savings and lend these to borrowers, thus perform the role of financial
intermediaries.

TYPES OF FINANCIAL INSTITUTIONS

Financial institutions can be classified into two categories:

A. Banking Institutions

B. Non - Banking Financial Institutions

A. BANKING INSTITUTIONS (Reserve Bank of India)

Indian banking industry is subject to the control of the Central Bank. The RBI
as the apex institution organises, runs, supervises, regulates and develops the
monetary system and the financial system of the country. The main legislation
governing commercial banks in India is the Banking Regulation Act, 1949.

The Indian banking institutions can be broadly classified into two categories:

1. Organised Sector

2. Unorganised Sector.

1. Organised Sector

The organised banking sector consists of commercial banks, cooperative

banks and the regional rural banks.

(a) Commercial Banks: The commercial banks may be scheduled banks or

non – scheduled banks. At present only one bank is a non - scheduled hank. All
other banks are schedule banks. The commercial banks consist of 27 public
sector banks, private sector banks and foreign banks. Prior to 1969, all major
banks with the exception of State Bank of India in the private sector. An
important step towards public sector banking was taken in July 1969, when
14 major private banks with a deposit base of 50 crores or more were
nationalised. Later in 1980 another 6 were nationalised bringing up the total
number banks nationalised to twenty.

(b) Co-operative banks: An important segment of the organized sector of

Indian banking is the co-operative banking. The segment is represented by a
group of societies registered under the Acts of the states relating to co-
operative societies. In fact, co-operative societies may be credit societies or
non-credit societies.

Different types of co-operative credit societies are operating in Indian

economy. These institutions can be classified into two broad categories:
(a) Rural credit societies which are primary agriculture, (b) Urban credit
societies which are primarily non-agriculture.
For the purpose of agriculture credit there are different co-operative credit
institutions to meet different kinds of needs.

(c) Regional Rural Banks (RRBs): Regional Rural Banks were set by the
state government and sponsoring commercial banks with the objective of
developing the rural economy. Regional rural banks provide banking services
and credit to small farmers, small entrepreneurs in the rural areas. The
regional rural banks were set up with a view to provide credit facilities to
weaker sections. They constitute an important part of the rural financial
architecture in India. There were 196 RRBs at the end of June 2002, as
compares to 107 in 1981 and 6 in 1975.

(d) Foreign Banks: Foreign banks have been in India from British days.
Foreign banks as banks that have branches in the other countries and main
Head Quarter in the Home Country. With the deregulation (Elimination of
Government Authority) in 1993, a number of foreign banks are entering India.
Foreign Banks are: Citi Bank. Bank of Ceylon.

2. Unorganised Sector.

In the unorganised banking sector are the Indigenous Bankers, Money

Lenders.

1. Indigenous Bankers

Indigenous Bankers are private firms or individual who operate as banks and
as such both receive deposits and given loans. Like bankers, they also financial
intermediaries. They should be distinguished professional money lenders
whose primary business is not banking and money lending. The indigenous
banks are trading with the Hundies, Commercial Paper.

2. Money Lenders:

Money lenders depend entirely to on their one funds. Money Lenders may be
rural or urban, professional or non-professional. They include large number of
farmer, merchants, traders. Their operations are entirely unregulated. They
charge very high rate of interest.
B. NON – BANKING INSTITUTIONS
The non – banking institutions may be categorized broadly into two
groups:
(a) Organised Non – Banking Financial Institutions.
(b) Unorganised Non – Banking Financial Institutions.

(a) Organised Non – Banking Financial Institutions

The organised non - banking financial institutions include:
1. Development Finance Institutions.
These include: The institutions like IDBT, ICICI, IFCI, IIBI, IRDC at all India
level.
The State Finance Corporations (SFCs), State Industrial Development
Corporations (SIDCs) at the state level.
Agriculture Development Finance Institutions as NABARD,LDBS etc.
Development banks provide medium and long term finance to the corporate
and industrial sector and also take up promotional activities for economic
development
2. Investment Institutions.
These include those financial institutions which mobilise savings at the public
at large through various schemes and invest these funds in corporate and
government securities. These include LIC, GIC, LTT, and mutual funds.
The non - banking financial institutions in the organised sector) have been
discussed at length in detail in separate chapters of this book.
(b) Unorganised Non - Banking Financial Institutions
The unorganised non - banking financial institutions include number of non -
banking financial companies (NBFCs) providing whole range of financial
services. These include hire - purchase 300 consumer finance companies,
leasing companies, housing finance companies, factoring companies,
Credit rating agencies, merchant banking companies etc. NBFCs mobilise
public funds and provide loanable funds.
 FINANCIAL MARKET
It is through financial markets and institutions that the financial system of an
economic works. Financial markets refer to the institutional arrangements for
dealing in financial assets and credit instruments of different types such as
currency, cheques, bank deposits, bills, bonds etc.
Functions of financial markets are:
(i) To facilitate creation and allocation of credit and liquidity
(ii) To serve as intermediaries for mobilisaton of savings.
(iii) To assist the process of balanced economic growth.
(iv) To provide financial convenience.
(v) To cater to the various credit needs of the business houses.

These organised markets can be further classified into two they are

(i) Capital Market

(ii) Money Market

CAPITAL MARKET

The capital market is a market for financial assets which have a long or
indefinite maturity. Generally, it deals with long term securities which have a
maturity period of above one year. Capital market may be further divided into
three namely:

(I) Industrial securities market

(II) Government securities market and

(III) Long term loans market

1. INDUSTRIAL SECURITIES MARKET:

As the very name implies, it is a market for industrial securities namely:

(i) Equity shares or ordinary shares,
(ii) Preference shares and
(iii) Debentures or bonds.
It is a market where industrial concerns raise their capital or debt by issuing
appropriate instruments. It can be further subdivided into two. They are:
(i) Primary market or New issue market
(ii) Secondary market or Stock exchange

PrimaryMarket
Primary market is a market for new issues or new financial claims. Hence, it is
also called New Issue market. The primary market deals with those securities
which are issued to the public for the first time.
In the primary market, borrowers exchange new financial securities for long
term funds. Thus, primary market facilitates capital formation. There are
three ways by which a company may raise capital in a primary market.
They are:

(i) Public issue

(ii) Rights issue
(iii) Private placement

The most common method of raising capital by new companies is through sale
of securities to the public. It is called public issue. When an existing company
wants to raise additional capital, securities are first offered to the existing
shareholders on a pre-emptive basis. It is called rights issue. Private
placement is a way of selling securities privately to a small group of
investors.

Secondary Market
Secondary market is a market for secondary sale of securities. In other words,
securities which have already passed through the new issue market are
traded in this market. Generally, such securities are quoted the Stock
Exchange and it provides a continuous and regular market to buying and
selling of securities. This market consists of all stock exchanges recognised by
the Government of India. The stock exchanges in India are regulated under the
Securities Contracts (Regulation) Act 1956. The Bombay Stock Exchange is the
principal stock exchange in India which sets the tone of the other stock
markets.
II. GOVERNMENT SECURITIES MARKET

It is otherwise called Gilt - Edged securities market. It is a market where

Government securities are traded. In India there are many kinds of
Government Securities - short term and long term. Long term securities are
traded in this market while short term securities are traded in the money
market. Securities issued by the Central Government, State Governments,
Semi Government authorities like City Corporations, Port Trusts etc.
Improvement Trusts, State Electricity Boards, All India and State level
financial institutions and public sector enterprises are dealt in this market.

III. LONG TERM LOANS MARKET

Development banks and commercial banks play a significant role in this

market by supplying long term loans to corporate customers.

Long term loans market may further be classified into:

(1) Term loans market

(ii) Mortgages market

(iii) Financial Guarantees market.

Term Loans Market

In India, many industrial financing institutions have been created by the

Government both at the national and regional levels to supply long term and
medium term loans to corporate customers directly as well as indirectly.
These development banks dominate the industrial finance in India.
Institutions like IDBI, IFCI, ICICI, and other financial corporations come under
this category.

Mortgages Market

A mortgage loan is a loan against the security of immovable property like real
estate. The transfer of interest in a specific immovable property to secure a
loan is called mortgage. This mortgage may be equitable mortgage or legal
one.
 MONEY MARKET

Money market is a market for dealing with financial assets and securities
which have a maturity period of upto one year. In other words, it is a market
for purely short term funds. The money market may be subdivided into four.
They are:

(i) Call money market

(ii) Commercial bills market

(iii) Treasury bilis market

(iv) Short term loan market.

Call Money Market

The call money market is a market for extremely short period loans say one
day to fourteen days. So, it is highly liquid. 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 and hence, they are
located in major industrial towns like Bombay, Calcutta, Madras, Delhi,
Ahmedabad etc. The special feature of this market is that the interest rate
varies from day to day and even from hour to hour and Centre to Centre. It is
very sensitive to changes in demand and supply of call loans.

Commercial Bills Market

It is a market for Bills of Exchange arising out of genuine trade transactions. In

the case of credit sale, the seller may draw a bill of exchange on the buyer. The
buyer accepts such a bill promising to pay at a later date specified in the bill.
The seller need not wait until the due date of the bill. Instead, he can get
immediate payment by discounting the bill.

Treasury Bills Market

It is a market for treasury bills which have ' short - term ' maturity. A treasury
bill is a promissory note or a finance bill issued by the Government.
It is highly liquid because its repayment is guaranteed by the Government. It is
an important instrument for short term borrowing of the Government There
are two types of treasury bills namely (i) ordinary or regular and (ii) ad hoc
treasury bills popularly known as ' ad hocs’. Ordinary treasury bills are
issued to the public, banks and other financial institutions with a view to
raising resources for the Central Government to meet its short term financial
needs. Ad hoc treasury bills are issued in favour of the RBI only. They are not
sold through tender or auction. They can be purchased by the RBI only. Ad
hocs are not marketable in India but holders of these bills can sell them back
to RBI.

Short - Term Loan Market

It is a market where short - term loans are given to corporate customers for
meeting their working capital requirements. Commercial banks play a
significant role in this market. Commercial banks provide short term loans in
the form of cash credit and overdraft Over draft facility is mainly given to
business people whereas cash credit is given to industrialists. Overdraft is
purely a temporary accommodation and it is given in the current account
itself. But cash credit is for a period of one year and it is sanctioned in a
separate account.

FINANCIAL INSREUMENTS

Financial instruments refer to those documents which represents financial

claims on assets. As discussed earlier, financial asset refers to a claim to a
claim to the repayment of a certain sum of money at the end of a specified
period together with interest or dividend. Examples: Bill of exchange,
Promissory Note, Treasury Bill.

Financial securities can be classified into:

(i) Primary or direct securities.

(ii) Secondary or indirect securities.

Primary Securities

These are securities directly issued by the ultimate investors to the ultimate
savers. Eg. shares and debentures issued directly to the public.

Secondary Securities

These are securities issued by some intermediaries called financial

intermediaries to the ultimate savers. Eg. Unit Trust of India and mutual funds
issue securities in the form of units to the public and the money pooled is
invested in companies.

Again these securities may be classified on the basis of duration as follows:

(i) Short - term securities

(ii) Medium term securities

(iii) Long - term securities.

Short - term securities are those which mature within a period of one year.
Eg, Bill of Exchange, Treasury bill, etc. Medium term securities are those
which have a maturity period ranging between one and five years. Eg.
Debentures maturing within a period of 5 years, Long - term securities are
those which have a maturity period of more than five years. Eg, Government
Bonds maturing after 10 years.

FINANCIAL SERVICES

Efficiency of emerging financial system largely depends upon the quality and
variety of financial services provided by financial intermediaries. The term
financial services can be defined as “activities, benefits, and satisfactions,
connected with the sale of money, that offer to users and customers, financial
related value. within the financial services industry the main sectors are
banks, financial institutions, and non-banking financial companies.
 KINDS OF FINANCIAL SERVICES

Financial services provided by various financial institutions, commercial

banks and merchant bankers can be broadly classified into two categories.

1. Asset based/fund based services.

2. Fee based/advisory services.

Asset based/fund based services

The asset/ fund based services provided by banking and non - banking
financial institutions as discussed below briefly.

1. Equipment Leasing/ Lease Financing

Leasing is a arrangement that provides a firm with the use and control over
assets without buying and owning the same. It is a form of renting assets.
However, in making an investment, the firm need not own the asset. It is
basically interested in acquiring the use of the asset. Thus, the firm may
consider leasing of the asset rather than buying it.

In comparing leasing with buying, the cost of leasing the asset should be
compared with the cost of financing the asset through normal sources of
financing, i. e. debt and equity. Since payment of lease rentals is similar to
payment of interest on borrowings and lease financing is equivalent to debt.

2. Hire Purchase and Consumer Credit

Hire purchase means a transaction where goods are purchased and sold on
the terms that (i) payment will be made it installments, (ii) the possession of
the goods is given to the buyer immediately, (iii) the property ownership) in
the goods remains with the vendor till the last installment is paid,(iv) the
seller can repossess the goods in case of default in payment of any instalment,
and (v) each instalment is treated as hire charges till the last instalment is
paid.
Consumer credit includes all asset based financing plans offered to
individuals to help them acquire durable consumer goods. In a consumer
credit transaction the individual/ consumer/ buyer pays a part of the cash
purchase price at the time of the delivery of the asset and pays the balance
with interest over a specified period of time.

3.VENTURE CAPITAL

In the real sense, venture capital financing is one of the most recent entrants
in the Indian capital market. There is a significant scope for venture capital
companies in our country because of increasing emergence of technocrat
entrepreneurs who lack capital to be risked. These venture capital
companies provide the necessary risk capital to the entrepreneurs so as to
meet the promoters contribution as required by the financial institutions. In
addition to providing capital, these VCFS (venture capital firms) take an active
interest in guiding the assisted firms.

4. Insurance Services

Insurance is a contract where by the insurer e. insurance company agrees/

undertakes, in consideration of a sum of money (premium) to make good the
loss suffered by the insured (policy holder) against a specified risk such as fire
or compensate the beneficiaries (insured) on the happening of a specified
event such as accident or death. The document containing the terms of
contract, in black and white, between the insurer and the insured is called
policy. The property which is insured is the subject matter of insurance. The
interest which the insured has in the subject matter of insurance is known as
insurable interest. Depending upon the subject matter, insurance services are
divided into (i) life (ii) general.

5. Factoring

Factoring, as a fund based financial service provides resources to finance

receivables as well as it facilitates the collection of receivables. It is another
method of raising short - term finance through account receivable credit
offered by commercial banks and factors.
A commercial bank may provide finance by discounting the bills or invoices of
its customers. Thus, a firm gets immediate payment for sales made on credit.
A factor is a financial institution which offers services relating to management
and financing of debts arising out of credit sales.

B. FEE BASED ADVISORY SERVICES

(i) Merchant Banking

Fee based advisory services includes all these financial services rendered by
Merchant Bankers. Merchant bankers play an important role in the financial
services Sector. The Industrial Credit and Investment Corporation of India
(ICICI) was the first development finance institution to initiate such service in
1974. After mid - seventies, tremendous growth in the number of merchant
banking organisations les taken place. These include banks financial
institutions, non - banking financial companies (NBFCS), brokers and so on.
financial Services provided by these organisations include loan syndication
portfolio management, corporate counselling project counselling debenture
trusteeship, mergers acquisitions.

(ii) Credit Rating

Credit rating is the opinion of the rating agency on the relative ability and
willingness of the issuer of debt instrument to meet the debt service
obligations as and when they arise. As a fee based financial advisory service,
credit rating useful to investors, corporates (borrowers), banks and financial
institutions. For the investors, it is an indicator expressing the underlying
credit quality of a (debt) issue programme. The investor is fully formed about
the company as any effect of changes in business/ economic conditions on the
agency company is evaluated and published regularly by the rating agency.

(iii) Stock - Broking

Prior to the setting up of SEBI, stock exchanges were being supervised by the
Ministry of Finance under the Securities Contracts Regulation Act (SCRA) and
were operating more or less self-regulatory organisations.
 The need to reform stock exchanges was felt, when malpractices crept into
Trading and in order to protect investor's interests, SEBI was set up to ensure
that stock exchange perform their self - regulatory role properly. Since then,
stock broking has emerged as a professional advisory service Stockbroker is a
member of a recognised stock exchange who buys, sells or deals in shares/
securities. It is mandatory for each stockbroker to get him/ herself registered
with SEBI order to act as a broker. SEBI is empowered to impose conditions
while granting the certificate of registration.

FINANCIAL MARKET
It is through financial markets and institutions that the financial system of an
economic works. Financial markets refer to the institutional arrangements for
dealing in financial assets and credit instruments of different types such as
currency, cheques, bank deposits, bills, bonds etc.
Financial market classified into two they are:

(i) Money Market

(ii)Capital Market

(i) Money Market

Money market is a market for dealing with financial assets and securities
which have a maturity period of upto one year. In other words, it is a market
for purely short term funds.

The importance/functions of the money market is highlighted as under:

1. Economic development: The money market provides short term funds to

both public and private institutions. These institutions need money to finance
their capital needs.
In other words, the money market assures supply of funds; the financing is
done through discounting of the trade bills, commercial banks, acceptance
houses, discount houses and brokers. In this way, the money market helps in
the economic development by providing financial help to trade, commerce
and industry. The businessmen take advantage by investing their cash in
highly liquid assets to earn income and also to enjoy liquidity because these
assets can be converted into cash without much difficulty.

2. Profitable investment: The commercial banks deal with the deposits of

their customers. The banks are required to put their assets into cash form to
meet the directions of the central bank on the one hand, while on the other,
they have to put their excess reserves into productive channels to earn
income on them. The aim of the commercial banks is to maximize profits. The
excess reserves of the banks are invested in near money assets.

3. Borrowings by the government:

The money market helps the government in borrowing short term funds at
very low interest rates. The borrowing is done on the basis of treasury bills.
But in case the government resorts to deficit financing or to print more
currency or to short term funds at the money supply over and above the
borrow from the central bank, it will merely raise Thus it is clear that the
needs of the economy and hence the price level will boost up. Money market is
very useful for the government since it meets its financial needs.

4. Importance for central bank:

If the money market is well - developed, the central bank implements the
monetary policy successfully. It is only through the money market that the
central bank can control the banking system and thus contribute to the
development of trade and commerce. The money market is very sensitive a
change in one sub – market affects the other sub - markets immediately. It
means the central bank can affect the whole money market by changing just
one sub - market.

5. Mobilisation of funds:

The money market helps in transferring funds from one sector to another.
The development of any economy depends on availability of finance. No
country can develop its trade, commerce and industry until and unless the
financial resources are mobilized.
6. Savings and investment

The money market is that it helps in promoting liquidity and safety of

financial assets. By doing so it can help in encouraging savings and
investment. The saving and investment equilibrium of demand and supply of
loanable funds helps the allocation of resources.

CAPITAL MARKET

The capital market is a market for financial assets which have a long or
indefinite maturity. Generally, it deals with long term securities which have a
maturity period of above one year.

FUNCTIONS OF CAPITAL MARKET

' The major functions performed by a capital/ security market are:

1. Helps in capital formation.

The capital market plays an important role in mobilisation of savings and

channel them into productive investments for the development of commerce
and industry. As such, the capital market helps in capital formation and
economic growth of the country.

2. Act as link between savers and investors.

The capital market acts as an important link between savers and investors.
The savers are lenders of funds while investors are borrowers of funds. The
savers who do not spend all their income are called "Surplus units" and the
borrowers are known as " deficit units. The capital market is the transmission
mechanism between surplus units and deficit units. It is a conduit through
which surplus unity lend their surplus funds to deficit units.

3. Helps in increasing national income.

Funds come into the capital market from individuals and financial
intermediaries and are used by commerce, industry and government. It thus
facilitates the transfer of funds to be used more productively and profitability
to increases the national income.
4. Facilitates buying and selling.

Surplus units buy securities with their surplus funds and deficit wits ells
securities to raise the funds they need. Funds flow from lenders to borrowers
either directly or indirectly through financial institutions such as banks, unit
trusts, mutual funds, etc. The borrowers issue primary securities which are
purchased by lenders either directly or indirectly through financial
institutions.

5. Channelizes funds from unproductive to productive resources.

The capital market provides a market mechanism for those who have savings
and to those who need funds for productive investments. It divers resources
from wasteful and unproductive channels such as gold, jewellery, real estate,
conspicuous consumption, etc, to productive investments

6. Minimises speculative activities.

It does so by providing capital to the needy al reasonable interest rates and

helps in minimising speculative activities.

7. Brings stability in value of stocks.

A well - developed capital market comprising expert banking and non -

banking intermediaries brings stability in the value of stocks and securities..

8. Promotes economic growth. The capital market encourages economic

growth. The various institutions which operate in the capital market give
quantities and qualitative direction to the flow of funds and bring rational
allocation of resources. They do so by converting financial assets into
productive physical assets. This leads to the development of commerce and
industry through the private and public sector, thereby inducing economic
growth.
Primary Market / New Issue Market

Primary market is a market for new issues or new financial claims. Hence, it is
also called New Issue market. The primary market deals with those securities
which are issued to the public for the first time.

In the primary market, borrowers exchange new financial securities for long
term funds. Thus, primary market facilitates capital formation. There are
three ways by which a company may raise capital in a primary market.

FEATURES OF PRIMARY MARKETS

(i) This is the market for new long term equity capital. The primary market is
the market where the securities are sold for the first time. Therefore it is also
called the new issue market (NIM).

(ii) in a primary issue, the securities are issued by the company directly to
investors.

(iii) The company receives the money and issues new security certificates to
the investors

(iv) Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.

(v) The primary market performs the crucial function of facilitating capital
formation in the economy.

(vi) The new issue market does not include certain other sources of new long
term external finance, such as loans from financial institutions. Borrowers in
the new issue market may be raising capital for converting private capital into
public capital, this is known as “going public.”
FUNCTIONS OF NEW ISSUE MARKET

A three service functions:

The main functions of a new issue sue market can divided into new project.

1. Origination.

It refers to the work of investigation analysis and processing of new project

proposals.. It starts before an issue is actually floated in the market. This
function is done by merchant bankers who may be commercial banks, all India
financial institutions or private firms. At present, financial institutions and
private firms also perform this service is highly important the success of the
issue depends, to a large extent on the efficiency of the market.

2. Underwriting.

It is an agreement whereby the underwriter promises to subscribe to

specified number of shares or debentures or a specified amount 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 remains
unsold, the underwriter will buy the shares. Thus, underwriting is a guarantee
for marketability of shares. There are two types of underwriters in India -
Institutional (LIC, UTI, IDBI, ICICI) and Non - institutional are brokers.

3. Distribution.

It is the function of sale of securities to ultimate investors. This service is

performed by specialized agencies like brokers and agents who maintain a
regular direct contact with the ultimate investors.
SECONDARY MARKET

Secondary market is a market for secondary sale of securities. In other words,

securities which have already passed through the new issue market are
traded in this market. Generally, such securities are quoted the Stock
Exchange and it provides a continuous and regular market to buying and
selling of securities. This market consists of all stock exchanges recognised by
the Government of India. The stock exchanges in India are regulated under the
Securities Contracts (Regulation) Act 1956. The Bombay Stock Exchange is the
principal stock exchange in India which sets the tone of the other stock
markets.

FUNCTIONS OF STOCK EXCHANGE

The stock exchanges play an important role in the economic development of a

country.

The importance of stock exchange will be clear from the functions they
perform and discussed as follows:

1. Ensure Liquidity of Capital.

The stock exchanges where buyers and sellers are converted into cash. The
exchanges provide a ready market. Had are always available and those who
are in need of hard cash can sell their holdings this not been possible then
many persons would have feared for blocking their savings in Securities as
they cannot again convert them into cash.

2. Continuous Market for Securities.

The stock exchanges provide a ready market in securities. The securities once
listed continue to be traded at the exchanges irrespective the fact that owners
go on changing. The exchanges provide a regular market for trading in
securities.
3. Mobilising Surplus Savings.

The stock exchanges provide a ready market for various securities. The
investors do not have any difficulty in investing their savings by purchasing
shares, bonds etc, from the exchanges. If this facility is not there then many
persons who want to invest their savings will not find avenues to do so. In this
way stock exchanges play an important role in mopping up surplus funds of
investors.

4. Helpful in Raising New Capital.

The new and existing concerns need capital for their activities. The new
concerns raise capital for the first time and existing units increase their capital
for expansion and diversification purposes. The shares of new concerns are
registered at stock exchanges and existing companies also sell their shares
through brokers etc, at exchanges. The exchanges are helpful in raising capital
both by nets old concerns.

5. Safety in Dealings.

The dealings at stock exchanges are governed by well - defined rules and
regulations of Securities Contract (Regulation) Act, 1956. There is no scope
manipulating transactions. Every contact is done according to the procedure
laid down and there is no fear in the minds of contracting parties. The safety
in dealings brings confidence in the minds of all concerned parties and helps
in increasing various dealings.

6. Listing of Securities.

Only listed securities can be purchased at stock exchanges. Every company

desirous of listing its securities will apply to the exchange authorities. The
listing is allowed only after a critical examination of capital structure,
management and prospects of the company. The listing of securities gives
privilege to the company. The investors can form their own views about the
securities because listing a security does not guarantee the financial stability
of the company.
7. Smoothens the Price Movements.

A stock exchange smoothens the price movements of stocks in the market by

ensuring a continuous flow of securities,

8. Investor Protection.

The stock exchange renders safeguarding activities for investors in securities.

It provides a grievance redressal mechanism for investors. Stock exchanges
also operate a compensation fund for the protection of investors.