UPSC NCERT Notes – Indian Economy – Indian Financial System

The Indian financial system serves as the backbone of the country’s economy, facilitating the efficient allocation of resources, capital formation, and economic growth. Comprising a diverse array of institutions, markets, and regulations, it plays a crucial role in mobilizing savings and channeling them into productive investments. At its core are entities such as banks, non-banking financial companies (NBFCs), capital markets, insurance providers, and regulatory bodies like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). This intricate network enables individuals, businesses, and the government to access funds, manage risks, and engage in various financial activities, thus contributing significantly to India’s socioeconomic development. As the economy evolves and globalizes, the Indian financial system continues to adapt, innovate, and expand, striving to meet the diverse needs of its stakeholders while maintaining stability and inclusivity.

Financial Market

• The financial sector encompasses institutions, instruments, and regulatory frameworks facilitating transactions involving the incurring and settling of debts.
• Financial markets, acting as arenas for the exchange of financial instruments, provide a mechanism for the buying and selling of securities and commodities at efficient market prices. In essence, they serve as marketplaces where participants engage in the trade of assets such as equities, bonds, currencies, and derivatives.
• These markets play a vital role in the overall financial system, offering a platform for the exchange and trading of financial products guided by a policy framework. Participants include borrowers (issuers of securities), lenders (buyers of securities), and financial intermediaries.
• Financial markets serve multiple functions, including risk diversification and reduction, efficient payment mechanisms, the transformation of financial claims to align with the preferences of savers and borrowers, and the enhancement of liquidity for financial claims through trading.

Components of the Indian Financial Market

• The Indian Financial Market comprises various components, one of which is the Money Market. This market, integral to the financial landscape, deals with short-term funds with maturities ranging from overnight to one year. It includes financial instruments considered close substitutes for money and is a secure avenue for short-term fund placement.
• Capital Market: The capital market serves as a platform for the buying and selling of equity and debt instruments. It facilitates the flow of savings and investments among various stakeholders, including retail and institutional investors as suppliers of capital, and businesses, government, and individuals as users of capital.
• Commodities Market The commodities market is where traders and investors engage in the buying and selling of natural resources or commodities like corn, oil, meat, and gold. This specific market exists due to the unpredictable nature of commodity prices. It includes a commodities futures market where the prices of items to be delivered in the future are predetermined. Hard commodities comprise mined resources like gold, rubber, and oil, while soft commodities include agricultural products such as corn, wheat, coffee, sugar, soybeans, and pork.
• Derivatives Market: The derivatives market involves contracts or derivatives whose value is derived from the market value of the underlying asset. Examples include futures, options, contracts-for-difference, forward contracts, and swaps. The value of derivative contracts is regulated by the market price of the primary item.
• Future Market: A future market is an auction market where participants trade in commodities and futures contracts for delivery on a specified future date. Also known as futures contracts, these instruments allow traders to lock in the price of the underlying asset or commodity, with predetermined expiration dates and set prices.
• Forex Market: The forex market, or foreign exchange, is a financial market where investors trade currencies. As the most liquid financial market globally, it deals exclusively with currencies. Banks, commercial institutions, organizations, and investment entities are the primary participants in the forex market.

Financial Markets of India

The financial market in India is a crucial component of the financial sector, where significant financial transactions occur. Based on the duration of transactions, financial markets are classified into money markets and capital markets.

Money Market of India:

The money market in India encompasses financial institutions dealing in short-term securities, loans, gold, and foreign exchange. Money, having a time value, is bought and sold against payment of interest. Short-term money transactions occur in the money market, while long-term money transactions take place in the capital market.

Functions of Money Market:

The money market serves three primary functions:

• It acts as an equilibrating mechanism for the demand and supply of short-term funds.
• It enables borrowers and lenders of short-term funds to fulfill their borrowing and investment needs at an efficient market-clearing price.
• It provides a platform for Central Bank intervention, influencing the quantum and cost of liquidity in the financial system, and thereby transmitting monetary policy impulses to the real economy. The efficient functioning of the money market is crucial for the effectiveness of monetary policy.

Regulation of the Indian Money Market

• The organized part of the Indian Money Market is broadly divided into two segments: organized and unorganized. The Reserve Bank of India (RBI) serves as the apex organization overseeing the Indian Money Market.
• It regulates and develops the money market through instruments such as call money, notice money, term money, repo market, certificate of deposit, and commercial paper.

Sub-Market of the Money Market

• A sub-market is a specialized subdivision within a market. The Indian money market system comprises various sub-markets, each specializing in a specific type of lending. The key instruments integral to the Indian money market system include:

Call Money Market:

• The call/notice money market is a significant segment of the Indian money market, dealing with amounts borrowed or lent on demand for a very short period.
• Short-term financial assets, acting as close substitutes for money and repayable on demand, are transacted in the call money market. It primarily involves the day-to-day surplus funds of banks.
• The notice money market involves transactions with a maturity period between 2 days and 14 days.
• Term money involves borrowing/lending funds for a period exceeding 14 days. Collateral security is generally not required for these short-duration transactions, mainly conducted between banks.
• The interest rate for loans in this market is determined by the market, and transactions occur through auctions/negotiations facilitated by an electronic trading platform called the Negotiated Trading System.

Inter-bank Call Money Market:

• The inter-bank call money market refers comprehensively to a call money market for institutions, not exclusively limited to banks. Customers in this market can include other financial institutions, mutual funds, large corporations, and insurance companies.

Bill Market:

• The bill market was developed to enable banks and financial institutions to profitably invest their surplus funds by selecting suitable maturities. Types of bill markets include:

Commercial Bill Market:

• This market deals in commercial bills, short-term, negotiable, and self-liquidating money market instruments.
• Commercial bills, also known as trade bills, involve three parties: the drawer, the drawee, and the payee. When accepted by commercial banks, they are termed commercial bills.
• The duration of a commercial bill typically ranges from 1 to 14 days.

Treasury Bill (T-Bill):

• A short-term borrowing instrument for the government, issued through tenders to the money market and government departments.
• Tenders are invited weekly from bankers, discount houses, and brokers.
• T-Bills provide the government with a flexible and cost-effective means of borrowing money, while customers see them as a secure investment option in the money market.
• The Reserve Bank of India, as the government’s banker, issues treasury bills at a discount.
• There are four types of Treasury Bills issued by the Reserve Bank every week, comprising 91 days, 182 days, and re-introduced 364 days T-Bills on behalf of the Central Government.

Commercial Paper (CP):

• Commercial Paper is issued as a promissory note, sold directly by the issuer to investors or placed by borrowers through agents like merchant banks and security houses. 
• CP can be issued in denominations of 5 lakhs or multiples thereof, introduced in India in 1990 to facilitate corporate borrowers in raising short-term funds. It has a maturity ranging from a minimum of 7 days to a maximum of 1 year from the date of issue, is negotiable, transferable by endorsement, and can be issued by corporations with a tangible net worth of not less than 4 crores.

Promissory Note (PN):

• A promissory note is a legal document between a lender and a borrower, outlining conditions for the repayment of borrowed money. 
• Commercial paper, a specific form of promissory note, can be bought and sold. It serves as a written promise to pay within a specific period, establishing a clear record of a loan, and is commonly used in financial services. Promissory notes are usually issued by large corporations and, in some countries, are a common form of small business finance.

Certificate of Deposits (CD):

• Certificates of Deposits (CDs) are short-term financial securities issued by commercial banks and Special Financial Institutions (SFIs). They are freely transferable and issued in demat form or as a usance promissory note, representing funds deposited in a bank for a specified period. CDs were first issued in New York in the 1960s, denominated in dollars, with Sterling CDs following in 1968. The maturity period of CDs ranges from three months to one year, issued in dematerialized form or as a usance promissory note, and is issued for 1 lakh or its multiples.

Unorganized Money Market:

The unorganized money market consists of unregulated non-bank financial intermediaries such as moneylenders, chit funds, Nidhis, etc.

• Chit Funds: Chit funds are savings schemes with standardized members that operate in both organized and unorganized forms. Members make periodic contributions, and funds are periodically given to a member based on predetermined criteria, often through bids or draw of lots. Chit funds are prevalent in almost all states, with Kerala and Tamil Nadu accounting for a significant portion.
• Organized chit funds are regulated by the registrar of chit funds under the Chit Funds Act, 1982, but regulatory confusion exists as Collective Investment Schemes (CIS) are to be registered and regulated by SEBI.
• Nidhis: Nidhis are mutual benefit funds restricted to members only, operating in the unregulated credit market. They primarily rely on funds from members and provide secured loans to members at reasonable rates.
• Moneylenders and Loan Companies: Moneylenders and loan companies are present nationwide, extending loans to wholesale traders, artisans, and other self-employed individuals.
• Interest rates for these individuals range from 26% to 48%, and these 50 individuals generally find it challenging to approach commercial banks for loans.

Dated Government Securities:

• Dated Government Securities are issued by the Government of India and State Governments. They derive their name from the specified date mentioned on the securities, making them known as dated securities.

Capital Market:

• The capital market is a vital segment of the Indian Financial System (IFS), serving as a platform for buying and selling equity and debt instruments. 
• It caters to the long-term fund requirements of companies.
• The market involves various individuals and institutions, including the government, that facilitate the supply and demand for long-term capital and its claims.
• Demand for long-term capital primarily comes from the private sector, including manufacturing industries, agriculture, trade, and government agencies. 
• The supply of funds for the capital market is mainly sourced from individual and corporate savings, banks, insurance companies, specialized financing agencies, and government surpluses.
• The Indian capital market is broadly divided into the Industrial Securities Market and the Gilt-edged Market.

Types of Capital Market:

Two types of capital markets are the Industrial Securities Market and the Gilt-edged Market.

(1) Industrial Securities Market:

The Industrial Securities Market (ISM) deals with equities and debentures of corporates and is further divided into the primary market and secondary market.

Primary Market:

• The primary market, also known as the new issue market, handles new securities not previously available, offered to the public for the first time.
• It focuses on raising fresh capital through shares and debentures, allowing companies to start new enterprises or expand existing ones. New offerings are made through Initial Public Offerings (IPOs) or rights issues.

Secondary Market/Stock Market:

• The secondary market or stock market is where existing company securities are bought and sold after being initially offered in the primary market and listed on the stock exchange. 
• Stock exchanges serve as exclusive centers for trading securities, acting as sensitive barometers reflecting economic trends through price fluctuations.

Difference between Primary Market and Secondary Market

Base	Meaning
Primary Market	Sale of new shares
Secondary Market	Trading of already sold/old shares
Mode of Purchase	Direct
Mode of Sale	Indirect
Sale of Security	Once
Sale of Security	Many times
Buy-Sale Value	Fixed Price
Buy-Sale Value	According to demand and supply
Mediator	Underwriter
Mediator	Commission agent
Structural Framework	No definite geographic framework
Structural Framework	Fixed geographical setting, where the securities are sold and bought
Availability of Capital	For establishment and expansion of the company
Availability of Capital	Company not getting capital

(ii) Gilt-Edged Market:

• The gilt-edged market refers to the market for government securities traded at the Reserve Bank of India (RBI). These securities are instruments issued by the government to meet its financial requirements.
• The term “gilt-edged” signifies the best quality, indicating that these securities are of the highest standard and do not carry the risk of default. They are highly liquid, and easily tradable in the market at their current price. The RBI also conducts open market operations using such securities.

Capital Market Instruments:

Instruments of the capital market include the following:

Bond Market:

• The bond market involves the issuance and trading of debt securities. It encompasses government-issued securities and corporate debt securities. 
• This market facilitates the transfer of capital from savers to issuers, supporting government projects, business expansions, and ongoing operations. Bonds and debentures are the primary sources of external finance used by companies.

Types of Bond Market:

• The Securities Industry and Financial Markets Association (SIFMA) classifies the bond market into five specified bond markets:
  • Corporate
  • Government and agency
  • Municipal
  • Fund
  • Mortgage-backed

Bond Market Participants:

• Participants in the bond market are similar to those in most financial markets and include institutional investors and traders.

Some Important Bonds:

• Corporate Bond: A bond issued by a corporation to raise capital for its economic activities, giving the holder the right to exchange the bond for a specified number of the company’s common shares.
• Electoral Bond: Introduced by the Government of India in 2018, it is like a promissory note that can be bought by any Indian citizen or company from SBI. The bond can be donated to any eligible political party of the buyer’s choice, valid for 15 days from the date of issue.
• Government Bond: A sovereign instrument with a fixed coupon, payable on a specified date, supporting the borrowing program of the Government of India. Government securities with a term of more than 1 year are called government bonds.
• Green Bond: A fixed-income instrument specifically earmarked to raise money for climate and environmental projects. It comes with tax incentives, promoting sustainable environmental projects such as renewable energy, clean transportation, and sustainable water management.
• Masala Bond: A bond issued outside India but denominated in Indian Rupees, shielding Indian companies against currency fluctuation risks associated with borrowing in foreign currency. Indian companies were permitted to sell masala bonds in 2015.
• Zero Coupon Bond: A bond issued at a price less than its face value, payable on its due date at its face value, bearing no rate of interest. It does not make periodic interest payments, and investors receive its par value at maturity.
• debt instruments issued by urban local bodies, municipal bodies, and municipal corporations with the objective of providing loans for projects implemented by urban local bodies. The funds obtained from these bonds are utilized for necessary infrastructural development, loan repayments, and meeting working capital requirements.
• India’s first municipal bond was issued by the Bangalore Municipal Corporation in 1997. In 2026, the Lucknow Municipal Corporation issued a bond worth ₹200 crore. Previously, similar bonds were issued by the Municipal Corporations of Indore, Hyderabad, and Pune.
• Inflation-Indexed Bond: The RBI issued Inflation-Indexed Bonds to safeguard investors’ income from the impact of inflation. Announced in the Union Budget 2013-14, these bonds provide returns consistently higher than inflation. Both the principal and interest of these bonds are protected against inflation. 
• The first inflation-based bonds were introduced in India in 1997, named Capital Index Bonds.

Other Instruments of the Capital Market:

• Derivatives: Derivatives, as the term suggests, derive their value entirely from an underlying asset, which can be securities, commodities, currencies, etc. They include forward contracts, futures contracts, options contracts (call and put), and forwards contracts.

Major Concepts of the Capital Market:

• Right Shares: Shares issued by a company to its existing stockholders, ensuring the protection of their proprietary rights.
• Bonus Shares: When a company distributes its stock among stockholders in the form of a dividend.
• Paid-up Capital: A portion of the subscribed capital provided by investors, representing the money invested by the company in its operations.
• Curb Trading: The trading of securities outside mainstream stock exchanges, often due to strict listing requirements or investors’ interest in trading after official business hours.
• Short Selling: A trading strategy where an investor borrows shares of a stock, expecting its price to fall, sells the shares, and buys them back at a lower price to make a profit.
• Chit Fund: A rotating savings and credit association system practiced in India and other Asian countries, organized by financial institutions or informally among friends, relatives, or neighbors. Chit funds are often micro-finance organizations.

Bubble

• An economic cycle characterized by rapid escalation in market value, followed by a quick decrease in value, often referred to as a “bubble.”
• Share Warrant: Share warrants or stock warrants are documents issued by a company that grant the holder the right to buy or sell the company’s shares at a specific price on a particular date or within a set period.

Sweat Share: Sweat equity shares are discounted shares issued by a company to its employees or directors in exchange for value-added contributions. These shares are commonly utilized when establishing startups with limited funding.

• Spread: In trading, a spread is the difference between the buy (offer) and sell (bid) prices quoted for an asset. It is a crucial aspect of CFD (Contract for Difference) trading, influencing how CFDs are priced.
• Securitisation: Securitisation involves pooling various contractual debts, such as residential mortgages, commercial mortgages, or other debt obligations, and selling the related cash flows to third-party investors as securities like bonds or Collateralised Debt Obligations (CDOs).
• Insider Trading: Insider trading refers to the trading of a public company’s stock or securities based on material, non-public information. In many countries, trading based on insider information is illegal due to its perceived unfair advantage.
• Round Tripping: Round tripping involves money leaving the country through various channels and returning, often as foreign investment. It is frequently associated with black money and is allegedly used for stock price manipulation.
• Blue Chip Share: Blue chip stocks represent well-established companies with a history of stability, reliability, and strong performance. These companies are typically industry leaders with widespread recognition.
• Hedging: Hedging is a strategy that aims to limit risks in financial assets. Investors use financial instruments or market strategies to offset adverse price movements, essentially protecting their investments.
• Venture Capital Fund: A venture capital fund provides early-stage, high-risk funding to promising startup companies with significant growth potential. This funding is typically provided after the seed funding round and during the growth funding stage.
• Angel Investor: An angel investor is an individual with substantial financial resources who invests capital in a business startup in exchange for equity or convertible debt. Angel investors often provide initial seed money or ongoing support to help companies navigate challenging times.
• Hedge Fund: A hedge fund is an actively managed investment portfolio that employs advanced strategies, including long, short, leveraged, and derivative positions, to generate high returns. Hedge funds are usually open to a limited group of investors capable of making substantial initial investments.
• Bank Sathi: Bank Sathi facilitates deposits and withdrawals for beneficiaries in rural areas, particularly in branchless regions.
• Participatory Notes: Participatory Notes are financial instruments used by wealthy investors to diversify their investment portfolios.
• Usually, Hedge funds often include this type of investment.
• Sovereign Wealth Fund: A Sovereign Wealth Fund (SWF) is a financial reserve sourced from a country’s financial assets. It is designed to invest in areas that will benefit the nation’s economy and its citizens in the future. For example, a country like India might establish a Sovereign Wealth Fund to invest in energy resources abroad, securing energy security for the future.
• Exchange Traded Funds (ETFs): A variation of mutual funds, Exchange-Traded Funds (ETFs) are structured as investment trusts traded on stock exchanges. They incorporate strategies consistent with mutual funds while enjoying the added benefits of stock features.
• Market Capitalization: Market Capitalization represents the total valuation of a company based on its current share price and the total number of outstanding stocks. It is calculated by multiplying the current market price per share by the total outstanding shares of the company.

Stock Market

• The equity market, stock market, or share market serves as the collective platform for buyers and sellers of stocks. 
• This includes securities listed on stock exchanges and those privately traded. A share represents one unit of the total share capital into which a company is divided.

Types of Shares:

• Equity Share: Equity shares, also known as security receipts, are issued and traded daily in the stock market. Equity shareholders receive dividends after preference shareholders and debenture holders, and their returns depend on the company’s profits. The distribution of dividends is decided by the Board of Directors and can be accepted or rejected by shareholders during the annual general meeting. Equity shareholders also have the right to vote on resolutions.
• Preference Share: Preference shares, a hybrid of equity shares and debentures, are market instruments that pay a fixed rate of dividends, similar to debentures. Preference shareholders receive dividends irrespective of the company’s profits, and the company is obligated to pay interest to preference shareholders.

Share Market:

• The term “share market” commonly refers to the secondary market. The stock market offers instant and continuous trading, security in transactions and investments, and information related to price and sales, serving as a measure of business and economic conditions.

Debentures: 

• Debentures, also known as bonds, are debt instruments used by companies and governments to issue loans at a fixed rate of interest. Since debentures lack collateral backing, their reliability depends on the creditworthiness and reputation of the issuer.
• A debenture is a legal instrument executed by a company under its common seal, acknowledging indebtedness to specific individuals to secure a sum provided in advance. 
• Typically, debentures are secured by the company through fixed or floating debentures at periodic intervals, usually every six months. The company commits to repaying the principal amount at the end of the agreed period based on the terms of issue.
• Similar to shares, debentures are offered to the public at par value, at a premium, or at a discount. Debenture holders are considered creditors of the company, lacking voting rights. However, their claims take precedence over those of preference shareholders and equity shareholders.
• The exact rights of debenture holders depend on the nature of the debentures they hold.

Advantages of Debentures:

• Investors view debentures as a relatively less risky investment, resulting in a lower required rate of return.
• Interest payments on debentures are tax-deductible, and the floatation costs are typically lower than those associated with common shares. Debenture holders lack voting rights, preventing dilution of ownership, and they do not participate in the extraordinary earnings of the company, limiting their payments to interest.
• During periods of high inflation, debenture issuance benefits the company, as the fixed obligations for interest and principal decline in real terms.

Terms Related to the Stock Market:

• Bull Market: A bull market signifies a period of generally rising prices in the stock market.
• Bear Market: A bear market refers to a general decline in the stock market.
• Penny Stock: Penny stocks are common shares of small public companies that trade at a low price per share.
• Badla System: Badla was an indigenous carry-forward system designed to address the perpetual liquidity lock in the Bombay Stock Exchange (BSE) secondary market. However, it was banned by SEBI in 1994.

Difference between Capital Market and Money Market

Basis	Meaning
Market	Money Market
Capital Market	Capital market is a market for short-term loanable funds for a period of not exceeding one year.
Capital Market	It is a market for long-term funds exceeding a period of one year.
Regulatory Body	Money Market is regulated and executed by RBI.
Regulatory Body	Capital market is regulated and executed by SEBI.
Transactions	Transactions have to be conducted without the help of brokers.
Transactions	Transactions have to be conducted only through authorised dealers.
Institutions	The Central Bank and Commercial Banks are the major institutions in the money market.
Institutions	Development banks and insurance companies play a dominant role in the capital market.
Instruments	The instruments of money market are bill of exchange, treasury bills, commercial paper, certificate of deposits, etc.
Instruments	Capital market deals in instruments like shares, debentures, government bonds, etc.

Stock Exchanges in India

• Stock Exchanges in India have a rich history, with the Bombay Stock Exchange (BSE) being the oldest in Asia, established in 1875 and synonymous with Dalal Street. In 2005, BSE underwent corporatization and was renamed.
• The Ahmedabad Stock Exchange began operations in 1894, focusing on facilitating dealings in the shares of textile mills. In 1908, the Calcutta Stock Exchange was established to serve as a market for shares of plantations and jute mills.
• As of July 31, 2021, there are 25 stock exchanges in the country, including those that are currently inactive. 
• Some of the approved stock exchanges in India are:
  • UP Stock Exchange, Kanpur
  • Vadodara Stock Exchange, Vadodara
  • Coimbatore Stock Exchange, Coimbatore
  • Bombay Stock Exchange, Mumbai
  • Over The Counter Exchange of India, Mumbai
  • National Stock Exchange, Mumbai
  • Ahmedabad Stock Exchange, Ahmedabad
  • Bangalore Stock Exchange, Bengaluru
  • Bhubaneshwar Stock Exchange, Bhubaneshwar
  • Calcutta Stock Exchange, Kolkata
  • Cochin Stock Exchange, Cochin
  • Delhi Stock Exchange, Delhi
  • NSE IFSC Ltd., Gandhi Nagar
  • Metropolitan Stock Exchange of India Ltd, Mumbai
  • India INX, Gandhi Nagar
  • Saurashtra Kutch Stock Exchange, Gujarat
  • Mangalore Stock Exchange, Mangalore
  • Guwahati Stock Exchange, Guwahati
  • Hyderabad Stock Exchange, Hyderabad
  • Jaipur Stock Exchange, Jaipur
  • Ludhiana Stock Exchange, Ludhiana
  • Madras Stock Exchange, Chennai
  • MP Stock Exchange, Indore
  • Pune Stock Exchange, Pune
  • Interconnected Stock Exchange of India Limited, Mumbai (Active Stock Exchange)

Commodity Exchanges in India

• A commodity exchange is a legal entity that establishes and enforces rules and procedures for trading standardized commodity contracts and related investment products. 
• The Forward Market Commission, established in 1953, initially regulated the commodity market in India. However, in 2015, it merged with the Securities and Exchange Board of India (SEBI). 
• Some notable commodity exchanges in India include:
  • Multi Commodity Exchange (MCX) of India Limited, Mumbai
  • National Commodity and Derivatives Exchange (NCDEX) Limited, Mumbai
  • Indian National Multi-Commodity Exchange (NMCE)
  • Indian Commodity Exchange (ICEL) Limited, Navi Mumbai (Active Commodity Exchanges)
  • Key Stock Exchanges in India

Some important stock exchanges in India are as follows:

National Stock Exchange (NSE)

• NSE was incorporated in November 1992, following the recommendations of the Pherwani Committee. Unlike other stock exchanges in the country, NSE is a tax-paying company. It was promoted by leading financial institutions at the behest of the Indian government.

Indices of NSE include:

• S and P CNX Nifty (NSE-50, renamed in July 1998)
• CNX Nifty Junior
• CNX 100
• S and P CNX 500 (Crisil 500 renamed in July 1998)
• CNX Midcap
• Nifty Midcap 50
• S and P CNX Defty
• S and P CNX Nifty Dividend
• India VIX

MIBOR and MIBID

• The Mumbai Inter-Bank Bid Rate (MIBID) and Mumbai Inter-Bank Offer Rate (MIBOR) were launched on June 15, 1998, by the Committee for the Development of Debt Market. 
• MIBID is the interest rate a bank is willing to pay to secure a deposit from another bank in the Indian Interbank Market. It is the weighted average of all interest rates offered by participating banks on deposits on a specific day, calculated by the National Stock Exchange (NSE).
• On the other hand, MIBOR is the rate at which banks borrow unsecured funds from each other in the interbank market. 
• As of July 2020, it serves as a reference rate for various financial instruments, including floating rate notes, corporate debentures, term deposits, interest rate swaps, and forward rate agreements. 
• Modeled on the London Inter Bank Overnight Rate (LIBOR), MIBOR reflects the benchmark interest rate at which major global banks lend to each other for short-term loans.

Index	Country
Hang Seng	Hong Kong
JCI	Indonesia
Nikkel 225	Japan
Kospi	South Korea
Global Indices
Kualalumpur Composite	Malaysia
TSEC Weighted Index	Taiwan
SSE Composite Index	China
SET	Thailand
FTSE 100	London (UK)
NASDAQ Composite Index	US
STOXX	Europe
Dow Jones	US

The World’s largest stock exchange market (as of June 2021) is the New York Stock Exchange It is followed by the Nasdaq Stock Market Infosys was the first company to be listed on this index

Bombay Stock Exchange (BSE)

• Established in 1875, BSE Limited (formerly known as Bombay Stock Exchange Limited) stands as Asia’s inaugural stock exchange and one of India’s foremost exchange groups.
• Over its 137-year history, BSE has played a pivotal role in fostering the growth of the Indian corporate sector, offering an efficient platform for capital raising.
• With approximately 5000 listed companies, BSE holds the title of the world’s No.1 exchange in terms of listed members.
• BSE Limited ranks as the world’s 5th most active exchange by the number of transactions conducted through its electronic trading system. It also holds the position of the 5th largest exchange globally (May 2012) for index options trading (source: World Federation of Exchanges).
• Notably, BSE is the first exchange in India and the second globally to achieve ISO 9001:2000/00 certification. It is also the second exchange worldwide to obtain the Information Security Management System Standard certification for its BSE Online Trading System, BOLT.
• Recognized as the fastest stock exchange globally, BSE boasts a transaction speed of 6 milliseconds.

Major BSE Indices:

• SENSEX: Comprising 30 companies, it is measured by the sensory index.
• BSE 500: Initiated in 1999, this index is the largest based on 500 companies and reflects the value of the American Dollar (also known as Dollex).
• BSE 200: Representing the top 200 companies, it is also referred to as Dollex.
• Indo Next: Established to encourage liquidity among small companies, it is a collaboration between BSE and the Federation of Indian Stock Exchange (FISE).
• India INX: A wholly owned subsidiary of BSE, it is India’s first international exchange situated at the International Financial Service Centre (IFSC) in GIFT City, Gujarat, inaugurated on January 9, 2017.

BSE-GREENEX:

• Launched on February 22, 2012, BSE introduced ‘BSE-GREENEX,’ an index measuring companies’ performance in terms of carbon emissions. This index aids investors in assessing risks and opportunities associated with climate change. The top-ranking companies from various sectors like power, steel, and cement contribute to the BSE-GREENEX.

MCX-SX Stock Exchange:

• Founded in 2008, the MCX-SX Stock Exchange, headquartered in Mumbai, commenced operations on February 11, 2013. Serving as the third complete share market in India after BSE and NSE, it plays a significant role in the country’s financial landscape.
• Offering currency futures contracts for US Dollar-Rupee, Euro-Rupee, British Pound-Rupee, and Japanese Yen-Rupee, the exchange provides an electronic trading platform in currency futures contracts. In addition, it has received permission to deal with interest rate derivatives, equity, futures, and options on equity, and the wholesale debt segment, as per SEBI’s letter dated July 10, 2012.

OTC Exchange of India

• Incorporated in 1990 under the Companies Act, of 1956, the Over the Counter Exchange of India (OTCEI) is recognized as a stock exchange under the Securities Contracts Regulation Act, of 1956. Originally set up to facilitate enterprising promoters in raising finance for new projects and provide investors with a transparent and efficient trading mode, it was de-recognized by SEBI order dated March 31, 2015.

TREDS Exchange (RXIL)

• Established on February 25, 2016, as a joint venture between SIDBI and NSE, Receivables Exchange (RXIL) operates the Trade Receivables Discounting System (TReDS) platform. It was the first entity to receive RBI approval on December 1, 2016, to launch India’s first TReDS exchange, facilitating the electronic platform for financing trade receivables.

Social Stock Exchange

• The Social Stock Exchange (SSE) is a platform enabling investors to invest in select social enterprises or initiatives. Proposed in the Union Budget (2019-20), it aims to create a stock exchange under the market regulator’s ambit, channeling greater capital to private and non-profit sector providers.

Demat Account

• A Demat account contains details of shares and other securities in an individual’s name, providing a digitally secure and convenient way of holding shares and securities. Demat is short for Dematerialization, converting physical shares and securities into electronic form.

Securities Exchange Board of India (SEBI)

• Established on April 12, 1992, under the SEBI Act, 1992, SEBI is the regulatory authority to protect investor interests in securities and promote the development of the capital market. Headquartered in Mumbai, it has regional offices in New Delhi, Kolkata, Chennai, and Ahmedabad, respectively. SEBI regulates stock market business, supervises entities like stock brokers and share transfer agents, and prohibits unfair trade practices in the securities market.

Functions of SEBI

• SEBI’s functions include regulating the business of the stock market and other securities markets, promoting and regulating self-regulatory organizations, prohibiting fraudulent and unfair trade practices, promoting investor awareness, prohibiting insider trading, and regulating significant acquisition of shares and takeovers of companies.

SEBI’s Guidelines in 1999

• In 1999, SEBI issued guidelines (referred to as ESOP Guidelines) to provide a regulatory framework for listed companies to implement security-based compensation schemes.

SEBI (Amendment) Act, 2014

• Enacted in August 2014, the Securities and Exchange Board of India (SEBI) Amendment Act granted additional powers to SEBI, empowering it to order the arrest of violators and request call data records of individuals under investigation. The new law bestowed SEBI with the authority to search and obtain information, including call records, related to any suspected entity within or outside a firm. The primary objectives of the SEBI Amendment Act, 2014, include:
• Empowering SEBI to seek permission for search and seizure from a designated Court/Magistrate in Mumbai.
• Addressing the excessive delegation of power to SEBI concerning Collective Investment Schemes.
• Authorizing disgorgement (repayment) of profits or losses averted in fraudulent transactions.
• Introducing new provisions (Section 26(A) to 26(E)) for the establishment of Special Courts to expedite the trial of offenses under the SEBI Act.
• Rationalizing the penalties that can be imposed under the Act.

Credit Rating

• Credit rating is a process by which a company assigns credit ratings to institutions issuing debt obligations, such as assets backed by receivables on loans (e.g., mortgage-backed securities). These institutions can include companies, cities, non-profit organizations, or national governments, and the securities they issue can be traded on a secondary market.
• As of July 2021, there are four prominent Reserve Bank of India (RBI)-recognized credit rating agencies in India, including:
  • Credit Rating Information Services of India (CRISIL)
  • Investment Information and Credit Rating Agencies of India (ICRA)
  • Credit Analysis and Research (CARE)
  • Duff & Phelps Credit Rating India Private Limited (DCR India)

Important Credit Agencies

• CRISIL (Credit Rating Information Services of India Limited): Established in 1988, CRISIL is a subsidiary of Standard and Poor (S&P) Global. It was the first credit rating agency in India, introduced jointly by ICICI and UTI with share capital from SBI, LIC, and United India Insurance Company. CRISIL’s headquarters is in Mumbai, and it has rated/assessed a wide array of entities in India.
• ICRA (Investment Information and Credit Rating Agencies of India): Originally named Investment Information and Credit Rating Agency of India Limited (IICRA, India), ICRA was established in 1991. It is the second-largest Indian rating company in terms of customer base, operating as a joint venture between Moody’s and various Indian commercial banks and financial services companies. ICRA’s headquarters is in Gurugram.
• CARE (Credit Analysis and Research): Commencing operations in 1993, CARE has established itself as the second-largest credit rating agency in India. It has emerged as the leading agency for covering various rating segments, including those for banks, sub-sovereigns, and IPO gradings.

Credit Rating Agencies Worldwide

• The global credit rating industry exhibits a high level of concentration, with three major agencies—Fitch, Moody’s, and Standard & Poor’s.

Fitch Ratings

• Fitch, positioned among the top three global credit rating agencies, operates in New York and London. It assesses company debt, considering its sensitivity to factors like interest rates. Countries often engage Fitch and other agencies to evaluate their financial status in conjunction with political and economic climates.

Moody’s Investors Service

• Moody’s assigns letter grades to countries and company debt in a distinctive manner. Investment-grade debt ranges from Aaa (the highest grade) to Baa3, indicating the debtor’s ability to repay short-term debt.

Standard & Poor’s

• Standard & Poor’s has a comprehensive set of 17 ratings for corporate and sovereign debt. Anything rated AAA to BBB falls under the category of investment grade, signifying the debtor’s capability to repay debt without significant concern.

Credit Grades Table

Grade	Moody’s	Fitch	Standard & Poor’s
Highest Grade Credit	Aaa	AAA	AAA
Very High-Grade Credit	Aa1, Aa2, Aa3	AA+, AA, AA-	AA+, AA, AA-
High-Grade Credit	A+, A, A-	A+, A, A-	A+, A, A-
Good Credit Grade	A1, A2, A3	A, A-, A+	BBB+, BBB, BBB-
Speculative Grade Credit	Baa1, Baa2, Baa3, Baa4	BBB, BBB-, BB+	BBB+, BBB, BBB-
Very Speculative Credit	B1, B2, B3	BB+, BB, BB-	BB+, BB, BB-
Substantial Risk-In Default	Caa3, Ca	CCC, CC, C	CCC+, CCC, CC, C, D

Futures Market

• A futures market is an auction market where participants engage in buying and selling commodities and future contracts for delivery on a specified future date. Examples include the New York Mercantile Exchange, Kansas City Board of Trade, Chicago Mercantile Exchange, Chicago Board of Options Exchange, and Minneapolis Grain Exchange.

Merging of SEBI and Forward Market Commission

• The regulatory authority of the commodity market in India, the Forward Market Commission, 
• merged with SEBI on September 28, 2015. This consolidation made SEBI the sole regulator of both capital and commodity markets in India, aiming to foster trust and development in the commodities market.

Future Trading of Foreign Currency

• Future trading of foreign currency involves exchanging one currency for another at a fixed exchange rate on a specified future date. As the value of the contract depends on the underlying currency exchange rate, currency futures are considered a financial derivative. India also has regional exchanges under the Intercontinental Exchange (ICE).

Reference Rate

• A reference rate serves as an accurate measure of the market price, particularly in the fixed-income market, where it represents an interest rate that commands respect and close observation. It plays a crucial role in various financial situations.

Depository System

• A depository is a repository or a collection of files where data is stored securely for safekeeping or identity verification.
• In India, the Depositories Act, of 1996 defines a depository as a company formed and registered under the Companies Act, 1956, and granted a certificate of registration under Sub-Section (1A) of Section 12 of the Securities and Exchanges Board of India Act, 1992.

Types of Depository System

There are two types of depository systems:

• Securities Immobilization System of Depository Under this system, securities certificates are securely deposited in the depository, and their complete details are recorded in a computer.
• Once certificates are digitized, all related transactions can only be conducted through an electronic accounting system until the securities are withdrawn from the depository.
• Securities Dematerialization System of Depository Dematerialization is the process by which physical certificates are converted into electronic balances.
• Investors wishing to dematerialize their securities must have an account with a Depository Participant (DP).

The client submits the defaced certificates registered in their name to the DP, who then electronically informs NSDL. Subsequently, the DP sends the securities to the relevant Issuer/R&T agent.

Depository System in India

• The depository system in India was introduced in 1996 with the enactment of the Depositories Act, which led to the establishment of the Stock Holding Corporation of India Limited (SHCIL).
• MD-SHCIL, R Chandrashekhar, submitted a report to the Government of India in December 1993, recommending the implementation of a depository system in India. The key objectives included the maintenance of accounts, facilitating electronic fund transfers, and enabling trade without physical certificates to mitigate trading risks.

Under the Depositories Act, of 1996, SEBI registered two companies:

• National Securities Depository Ltd (NSDL)
• Central Depository Services India Ltd (CDSL)
• The introduction of electronic accounts through depository registration abolished the need for physical certificates, a process known as dematerialization of shares.
• NSDL, registered by SEBI on June 7, 1996, serves as India’s first depository, facilitating trading and settlement of securities in demat form. It is promoted by NSE, UTI, and IDBI.
• CDSL commenced operations in February 1999 and was promoted by the Stock Exchange, Mumbai, in collaboration with Bank of Baroda, Bank of India, SBI, and HDFC Bank.

Company and Its Types

• A company is a legal entity representing an association of individuals, whether a mixture of both, with a natural, legal, or specific objective. Company members share a common purpose and unite to achieve specific declared goals. The types of companies are as follows:

Public Company

• A public company is a company whose ownership is organized via shares of stock intended to be freely traded on a stock exchange or in over-the-counter markets. It can be listed on a stock exchange (listed company), facilitating the trade of shares, or not (unlisted public company).

Limited and Unlimited Company

• In a limited liability company or partnership, business partners are only liable for the amount of money they have invested in the company. In an unlimited liability company, the owner is inseparable from the business is personally accountable for the company’s liabilities, and also entitled to the company’s profits after taxes.

Private Company

• A private company is held under private ownership. While private companies may have shareholders and issue stock, their shares do not trade on public exchanges and are not issued through an Initial Public Offering (IPO).

Large Cap Companies

• Large-cap companies, with a market cap significantly above 20,000 crores, generally have an excellent track record and a strong market presence. They are often included in broad market indices such as NIFTY and SENSEX.

Mid Cap Companies

• Mid cap companies, with a market cap ranging from 5,000 to 20,000 crores, have a moderate to strong market presence and may or may not be widely included in broad market indices.

Small Cap Companies

• Small cap companies, with a market cap below 5,000 crores, generally have little to no market presence and are mostly not included in broad market indices.

Types of Capital Related to Companies

• Authorized Capital: The number of stock units (shares) a company can issue, as stated in its memorandum of association or articles of incorporation.
• Paid-up Capital: The amount of money received from shareholders in exchange for shares, created through the sale of shares on the primary market, usually through an IPO.
• Issued Capital: The monetary value of shares a company offers for sale to investors, generally corresponding to the subscribed share capital, with neither amount exceeding the authorized amount.
• Risk capital refers to funds allocated to speculative activities, used for high-risk, high-reward investments.

Participatory Notes

• Participatory Notes or P-Notes (PNs) are financial instruments issued by a registered Foreign Institutional Investor (FII) to an overseas investor wishing to invest in Indian stock markets without registering themselves.
• Market regulator, the Securities and Exchange Board of India (SEBI), oversees Participatory Notes (P-Notes), which are Offshore Derivative Investments (ODIs) with equity shares or debt securities as underlying assets.
• P-Notes offer liquidity to investors, allowing the transfer of ownership through endorsement and delivery. While Foreign Institutional Investors (FIIs) must report these investments quarterly to SEBI, the actual investors’ identities need not be disclosed.

Portfolio Investment

• Portfolio Investment, in investment terminology, comprises a collection of financial assets like stocks, bonds, and cash tailored to individual investors, hedge funds, or banks. Portfolios aim to fulfill investors’ objectives, such as risk management and return on investment, with different ratios of cash, stocks, bonds, etc.

Insurance Sector in India

• The Insurance Sector in India has grown from 7 insurers in 2000 to 57 insurers in 2021. The Insurance Regulatory and Development Authority of India (IRDAI) recognizes 24 life insurance and 34 non-life insurance companies. These companies protect against losses, offering life, marine, and vehicle insurance.
• Insurance companies collect investors’ savings and reinvest them in the market. In February 2021, Finance Minister Nirmala Sitharaman announced a 3000 crore infusion into state-owned general insurance companies to enhance their financial health.

Life Insurance Corporation

• Life Insurance Corporation (LIC) of India, established on September 1, 1956, played a pivotal role in nationalizing the insurance sector. LIC, headquartered in Mumbai, operates internationally in countries like Bahrain, Nepal, Sri Lanka, Kenya, and Saudi Arabia. 
• It supports infrastructure development and is the single largest investor in the country.

General Insurance Corporation

• General Insurance Corporation (GIC), founded on January 1, 1973, with four subsidiaries, de-linked from GIC in 2000 to form the General Insurers’ Public Sector Association (GIPSA) of India. GIC ceased to be a holding company of its subsidiaries on March 21, 2003.
• GIC Re, approved as the Indian Reinsurer on November 3, 2000, operates with branch offices in Dubai and London and a representation office in Moscow.

General Insurance in India

• General Insurance Business Nationalisation Act (GIBNA) in 1972 nationalized the entire general insurance business in India. The Government of India took over shares of 55 Indian Insurance Companies and the undertaking of 52 insurers engaged in general insurance business.

 Insurance sector in India

• The insurance sector in India is categorized into life insurance and non-life insurance (General Insurance), both governed by IRDAI. The Union Budget 2021 increased the FDI limit in insurance from 49% to 74%. As of July 2021, India has 57 operating insurance companies, including prominent public and private sector entities.

Public Sector Insurance Companies:

• National Insurance Company
• New India Assurance
• The Oriental Insurance Company
• United India Insurance Company
• Agriculture Insurance Company of India

Private Sector Insurance Companies:

• Bajaj Allianz General Insurance
• HDFC ERGO General Insurance Company
• ICICI Lombard General Insurance Company Ltd.
• Max Bupa Health Insurance Company Ltd.
• Religare Health Insurance Company Ltd.
• Shriram General Insurance Company Ltd.
• Reliance General Insurance
• TATA AIG General Insurance
• Kotak Mahindra General Insurance

Terms Related to Insurance:

• Term Insurance: Provides financial coverage to the beneficiary if the life insured dies during the active term of the policy.
• Endowment Policy: Pays a lump sum after a specified term or upon death.
• Motor Insurance: Mandatory for all vehicles in India, protecting against physical damage or losses sustained by the insured vehicle.

Some Important Insurance Companies in India:

• National Insurance Company Limited (Established: 1906)
• New India Assurance Company Limited (Founded: 1919)
• Oriental Insurance Company Limited (Incorporated: 1947)
• United India Insurance Company Limited (Incorporated: 1938)
• These companies offer a wide range of insurance services catering to various segments of general insurance business.
• Several entities were consolidated with United India Insurance Company Limited, including 4 Cooperative Insurance Societies, 5 Foreign Insurers’ Indian operations, and the General Insurance operations of the Southern region of the Life Insurance Corporation of India. This company offers insurance services across various segments of general insurance.
• Agriculture Insurance Company of India Limited (AIC) was incorporated on December 20, 2002, exclusively to address the insurance needs of individuals involved in agriculture and allied activities in India. It commenced operations on April 1, 2003, with its headquarters in New Delhi, 17 regional offices in State Capitals, and 3 district-level offices.
• The Deposit Insurance and Credit Guarantee Corporation (DICGC), established on July 15, 1978, under the DICGC Act, 1961, provides deposit insurance and guarantees credit facilities. DICGC’s Head Office is in Mumbai, and it is a wholly-owned subsidiary of RBI, insuring various financial institutions.

Bank Locker Insurance

• Indian Farmers Fertiliser Co-operative Limited (IFFCO) Tokio General Insurance introduced the Bank Locker Protector Policy, the first stand-alone bank locker cover. This policy safeguards the contents of a bank locker, including jewelry, title documents, and valuables, against risks such as fire, earthquake, burglary, holdup, infidelity by bank staff, or acts of terrorism. It offers flexible sum insured options and affordable premiums.

Liberalisation of the Insurance Sector in India

• In 1993, the Malhotra Committee, led by Finance Secretary and RBI Governor RN Malhotra, was formed to assess the Indian insurance industry. This led to the liberalization of the insurance sector in March 2000, with the enactment of the Insurance Regulatory and Development Authority of India (IRDAI) Bill. The IRDAI facilitated entry for private players and allowed limited foreign ownership. Subsequently, the FDI limit was raised to 74%.
• Under the Banking Regulation Act, of 1949, banks can undertake insurance as a permissible business, as specified in the Government of India notification dated August 3, 2000. Non-Banking Financial Companies (NBFCs) registered with RBI can engage in insurance agency business under certain conditions.

Insurance Regularly and Development Authority of India

• The IRDA was renamed IRDAI following the Insurance Laws (Amendment) Ordinance, 2014. Established in 1999 by the Indian Government, IRDAI aims to safeguard policyholders’ interests and enhance the insurance sector. The organization addresses industry shortcomings and oversees the relationship between insurance companies and shareholders.
• IRDAI, established under the Insurance Regulatory and Development Authority Act, 1999, has announced the issuance of digital insurance policies through Digilocker by insurance firms.

Functions of IRDAI:

• Ensuring and safeguarding the interests of policyholders, including:
• Nomination by policyholders.
• Settlement of insurance claims.
• Practical training for insurance agents and other intermediaries.
• Recognition of insurable interest.
• Determination of surrender value for policyholders.
• Enforcing the code of conduct for insurance intermediaries.
• Assistance in obtaining correct information about policies.
• Creation of a management information system.
• Promotion of self-regulation within the insurance sector.
• Insurance Laws (Amendment) Act, 2015:
• Enacted on March 23, 2015, and effective from August 12, 2016, this act brought about significant reforms in the Insurance Act, 1938, the General Insurance Business (Nationalisation) Act, 1972, and the Insurance Regulatory and Development Authority (IRDA) Act, 1999.

Salient Features:

• Increase in the total foreign investment limit in the insurance sector from 26% to 49%.
• Establishment of Life Insurance Council and General Insurance Council as self-regulating bodies for the insurance sector.
• Provision for 10 years of imprisonment for selling insurance policies without registration with the regulatory body.

Other Ways of Insurance:

Bancassurance:

• Bancassurance refers to selling insurance through a bank’s established distribution channels. It involves the distribution of insurance and other financial products through bank branches.

Advantages of Bancassurance:

• Adds to the bank’s profit margins.
• Provides an additional area of profitability to banks without significant capital outlay.
• Enables one-stop customer service.
• Enhances competitive edge by offering insurance products.
• Allows banks to provide comprehensive financial planning services.

Status of Bancassurance in India:

• RBI recognizes Bancassurance, allowing banks to provide physical infrastructure within selected branch premises for selling insurance products. Banks earn referral fees based on premia collected, utilizing banking sector resources more profitably.

Unit Linked Insurance Plan (ULIP):

• A ULIP is a product that combines insurance and investment in a single integrated plan. Premiums are divided into mortality charges for life cover and investments in funds chosen by the policyholder, earning market-linked returns. ULIP policyholders enjoy features like top-up facilities, fund switching, flexibility in protection levels, surrender options, additional riders for enhanced coverage, and tax benefits.

Features	ULIP	Mutual Fund
Nature	Offered by insurance companies.	Not associated with insurance companies.
Investment Pooling	Channels premiums into various funds.	Pools money from investors for securities.
Benefits	The dual benefit of investment and insurance.	Focuses solely on investment.
Suitability	Suitable for short to medium term.	Suitable for the long term.
Exit Flexibility	Easy exit is possible.	Exit may have associated complexities.
Fund Switching	Permits switching between funds.	Allows switching between different securities.
Tax Benefits	Tax benefits are available on tax-saving funds.	Tax benefits are subject to specific fund types.

Reinsurance

• Reinsurance is a practice where insurers transfer portions of their risk portfolios to other parties, reducing the likelihood of facing a substantial obligation from an insurance claim.
• It involves two main categories: treaties and facultative.
• Treaties cover a broad group of policies, such as all of a primary insurer’s auto business.
• Facultative deals with specific individuals, often high-value or hazardous risks, not accepted under a treaty, like a hospital.

Insurance Ombudsman

• An Ombudsman is an office appointed by the Government of India, with 17 Insurance Ombudsman offices working in different parts of the country.
• Individuals with grievances against an insurance company can file an official complaint with the Insurance Ombudsman, either personally or through their legal heir, nominee, or assignee.

Non-Banking Financial Companies (NBFCs)

• NBFCs are financial institutions operating without a banking license, and not meeting the legal criteria of a bank.
• Incorporated under the Companies Act, they engage in various financial businesses with a minimum net owned fund of 20 lakhs.
• Categories include companies receiving deposits, financial institutions, and other non-banking institutions specified by the RBI.

Characteristics of NBFCs

• NBFCs cannot accept demand deposits or issue cheques drawn on themselves.
• RBI regulates NBFCs.
• They are allowed to accept/renew public deposits for a period ranging from a minimum of 12 months to a maximum of 60 months.

Mutual Fund

• A mutual fund is a registered body with the Securities Exchange Board of India (SEBI), pooling money from individuals and corporate investors.
• It invests these funds in various financial instruments like equity shares, government securities, bonds, and debentures.
• Mutual funds act as financial intermediaries, collecting funds from the public and investing on behalf of the investors, issuing units in return.
• which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors.
• The investment objectives outlined by a mutual fund in its prospectus are binding on the Mutual Fund Scheme. In a mutual fund, investors’ subscriptions are accounted for as unit capital.
• The investment objectives specify the class of securities. A mutual fund can invest in various asset classes like equity, bonds, debentures, basics of financial markets, etc.

Types of Mutual Funds

• Based on closure time permitted, a mutual fund is classified into
• Open-Ended Schemes These are allowed to issue and redeem units any time during the life of the scheme. But close-ended funds cannot issue new units except in case of bonus or rights issues. Therefore, unit capital of open-ended funds can fluctuate on daily basis (as new investors may purchase fresh units).
• Close-Ended Schemes New investors can join the schemes by directly applying to the mutual fund at applicable net asset value related prices in case of open-ended schemes, but not in case of close-ended schemes. In case of close-ended schemes, new investors can buy the units only from secondary markets.
• Offshore Mutual Funds Schemes These make investments in international markets and hence, are also referred to as international funds.
• These schemes invest in stocks of overseas firms and MNCs and also in fixed income securities of a foreign country. In the case of domestic mutual fund, money is invested in stocks of domestic firms and MNCs.
• The major difference between domestic and offshore mutual fund is that in the latter, the investors of abroad have to face many regulation issues in the investing countries.
• Because of high risk, higher returns are also expected in case of offshore mutual funds.

Money Market Mutual Fund

• A money market mutual fund is a type of mutual fund that invests in high quality and short-term debt instruments such as cash and cash equivalents. RBI introduced a scheme of MMMF in India in April, 1992.
• Money market securities have an average maturity of one-year, that is why these are termed as money market instruments. The objective behind this scheme was to provide an additional short term avenue to the individual investors.

Mutual Funds in India

• The first Indian Mutual Fund was setup in 1963, when the Government of India created the Unit Trust of India (UTI).
• Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market and sold a range of mutual funds through a network of financial intermediates,
• At the end of 1988, UTI had 6,700 crore of assets under management. In 1993, with the creation of SEBI and better regulation, transparency and liberalisation of capital markets (which included the creation of the NSE and the NSDL), the private sector was allowed to enter the mutual fund industry.

Mutual Fund Regulations

• The erstwhile Unit Trust of India (UTI) was setup by the Reserve Bank of India in 1963 and it functioned under its regulatory and administrative control till 1978, the Industrial Development Bank of India (IDBI) took over regulatory and administrative control of the UTI thereafter. 
• The Government of India enacted the Securities and Exchange Board of India Act, 1992 on 4th April, 1992 which created the Securities and Exchange Board of India (SEBI).
• SEBI issued a comprehensive set of regulations in 1993 and revised them again in 1996

Net Asset Value

• Net Asset Value (NAV) represents the value of an entity’s assets minus its liabilities, commonly associated with open-end or mutual funds. It signifies the market value of all securities held by the Mutual Fund Scheme.
• The NAV can represent the total equity value or be divided by the number of shares outstanding, indicating the net asset value per share.
• It serves as the price for various mutual fund transactions, including new purchases, sales, and exchanges within the same fund family. This calculation is performed on a daily basis.

Government Initiatives:

Various government schemes are as follows

Pradhan Mantri Social Security Scheme

• Launched by Prime Minister Narendra Modi on May 9, 2015, as part of Jan Suraksha Yojana.
• Includes three schemes: Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and Atal Pension Yojana.
• Aims to enhance financial inclusion in the country.

Pradhan Mantri Jeevan Jyoti Bima Yojana

• Available for individuals aged 18 to 50 with a bank account.
• Provides life cover for death due to any cause or disability due to an accident.
• Premium is Rs. 330 per annum, auto-debited in a single installment from the subscriber’s account.
• Risk coverage of Rs. 2 lakh in case of death for any reason.

Pradhan Mantri Suraksha Bima Yojana

• Open to individuals aged 18 to 70 with a saving bank account and Aadhaar Card.
• Offers accidental death and disability cover for death or disability due to an accident.
• Nominal premium of Rs. 12 per year, covering Rs. 2 lakh in case of death and Rs. 1 lakh for permanent disability.
• Renewable on a yearly basis, with the cover period from June 1 to May 31.
• Government Contribution: Various ministries can co-contribute premiums for different categories of beneficiaries.
• The contribution may come from their budget or Public Welfare Fund created from unclaimed money, decided separately during the year.

Atal Pension Yojana (APY):

• The Atal Pension Yojana (APY) targets citizens in the unorganised sector participating in the National Pension System (NPS) under the administration of the Pension Fund Regulatory and Development Authority (PFRDA), who are not members of any statutory social security scheme.
• Key features include a minimum joining age of 18 and a maximum age of 40, requiring a minimum contribution period of 20 years or more. The scheme primarily benefits unorganised sector workers.
• Eligible bank account holders in the specified category can join APY with an auto-debit facility, reducing contribution collection charges.

Varishtha Pension Bima Yojana (VPBY):

• Relaunched on August 14, 2014, by Union Finance Minister Arun Jaitley, VPBY provides a monthly pension ranging from 500 to 5000 to senior citizens aged 60 and above. Implemented through LIC, the scheme aims to support senior citizens’ financial well-being.

Swavalamban:

• The government contributes 1000 per year to each New Pension System (NPS) account opened in 2010-11 and the following three years. The benefit is available to those contributing a minimum of 1000 and a maximum of 12,000 per annum. Swavalamban has been succeeded by the Atal Pension Yojana.

Aam Admi Bima Yojana:

• Administered through LIC, this scheme, introduced on October 2, 2007, until March 31, 2015, targets individuals aged 18 to 59 who are either heads of rural landless households or earning members in their families.
• In case of death, a sum assured of 30,000 becomes payable to the nominee. Additional benefits for accident-related deaths or disabilities are specified, with the premium set at 200, with 50% contributed by the State Government.

Rashtriya Swasthya Bima Yojana (RSBY):

• Announced by former Prime Minister Manmohan Singh on August 15, 2007, RSBY is a health insurance scheme for Below Poverty Line (BPL) families in the unorganized sector, officially launched on October 1, 2007.
• BPL families receive coverage for over 700 in-patient medical procedures, costing up to 30,000 annually, for a nominal registration fee of 30.
• The Union Cabinet approved the extension of RSBY to include rickshaw pullers, rag pickers, mine workers, sanitation workers, auto-rickshaw drivers, and taxi drivers.

Prelims Facts 

• The primary source of long-term credit for a business unit is -Issuing stocks and bonds to the public (UPPSC (Pre) 2012)
• Agriculture income tax can be imposed in India by the -State Government [UPPSC (Mains) 2009]
• Who assigns agricultural income tax to the State Governments? -Constitution of India [IAS (Pre) 1995]
• Excise duty on liquor is imposed by -State Government [UPPSC (Mains) 2014]
• Which tax is levied by Gram Panchayats? – Tax on local fairs (UPPSC (Pre) 2018]
• By which department was the ‘e-Sahyog’ project launched in October 2015? -Income tax (MPPSC (Pre) 2016]
• In which year was service tax introduced in India? 1994 to 1995 (BPSC (Pre) 2015]
• CENVAT is associated with -Value Added Tax (UPPSC (Mains) 2004, 2008)
• When was the wealth tax first introduced in India? -1957 (MPPSC (Pre) 2006)
• The tax imposed on imports and exports is known as -Custom duty (UPPSC (Mains) 2005]
• In which budget was the Commodities Transaction Tax (CIT) introduced in India? -2013 to 2014 (UPPSC (Mains) 2005]
• The sales tax you pay while purchasing a toothpaste is a tax imposed and collected by the -State Government [IAS (Pre) 2014]
• Value Added Tax was first introduced in India in which year? 2005 [UPPSC (Mains) 2015]
• Which state was the first to implement Value Added Tax in India? -Haryana [IPSC (Pro-Excise duty (UPPSC (Pre) 2010
• The Minimum Alternative Tax (MAT) was introduced in the budget of the -1996 to 1997 [IAS (Pre) 1997
• Who suggested the imposition of ‘expenditure tax for the first time in India? Kaldor Committee [UPPSC (Pre) 2002
• Who was the Chairman of the 1st Finance Commission in India? Shri KC Neogy [UPPSC (Pre)
• The primary function of the Finance Commission in India is to -Distribute revenue between the Centre and the States [IAS (Pre) 2021
• Generally, after every 5 years, which commission is appointed in India to determine the share of the state in the Central grants and revenue of the Union? -Finance Commission. [UPPSC (Pre)2002
• The non-plan grants to the states by the Central Government are made on the recommendations of which commission? -Finance Commission [UPPSC (Mains) 2011]
• Under the recommendations of the 13th Finance Commission, what will be the minimum percentage of the state’s participation in Central tax? -32.0% (UPPSC (Pre) 1994
• The ‘Goods and Services Tax’ was proposed by a task force, whose President was -Vijay Kelkar (MPPSC (Pre) 2017

UPSC NCERT Practice Questions

1. Which one of the following is a specialised sub market of the money market?

(a) Collateral loan market

(b) Discount market

(c) Bond market

(d) Acceptance market

2. In the context of the Indian economy, non-financial debt includes which of the following? IAS (Pre) 2020

1. Housing loans owed by households

2. Amounts outstanding on credit cards

3. Treasury bills

Select the correct answer by using the codes given below.

(a) Only 1

(b) 1 and 2

(c) Only 3

(d) All of these

3. Which of the following is true about the distinction between money market and capital market? IAS (Pre) 2020

1. Money market deals with long-term funds and capital market deals with short-term funds.

2. Money market deals in securities like treasury bills, commercial papers, etc and capital market deals with securities like shares, debentures, etc.

3. Money market participants are Commercial Banks, NBFs, etc and capital market participants are stock brokers, individual investors, etc.

4. Money market is regulated by SEBI and capital market is regulated by. RBI.

Codes

(a) 1, 2 and 4

(b) 2 and 3

(c) 1 and 3

(d) All of these

4. Financial reforms in India include BPSC (Pre) 2015

(a) CRR and SLR to reduce

b) entry of private companies in the insurance sector

c) deregulation of interest rate

(d) All of the above

5. Consider the following statements about the Indian Capital Market.

1. Primary market in India is mainly dealt with the new issues and debentures.

2. Primary market in India is supervised by the Insurance Regulatory Development Authority.

Codes

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) Neither 1 nor 2

6. Consider the following markets. IAS (Pre) 2023

1. Government Bond Market

2. Call Money Market

3. Treasury Bill Market

4. Stock Market

How many of the above are included in capital markets?

(a) Only 1

(b) Only 2

(c) Only 3

(d) All of these

7. Concerning Indian Capital Market, consider the following statements.

1. CRISIL was set up in the Eighth Five Year Plan.

2. CRISIL rates the debt instruments of the public sectors.

Which of the statements) given above is/are correct?

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) Neither 1 nor 2

8. What is ‘NIKKEI?

(a) Share Price Index of Tokyo Share Market

(b) Name of Japanese Central Bank

(c) Japanese Name of Country’s Planning Commission

(d) Foreign Exchange Market of Japan

9. A rise in SENSEX means

(a) a rise in prices of shares of all companies registered with Bombay Stock Exchange.

(b) a rise in prices of shares of all companies registered with National Stock Exchange.

(c) a rise in prices of shares of all companies belonging to group of companies registered with Bombay Stock Exchange.

(d) None of the above

10. Which of the following statements in relation to Bombay Stock Exchange is correct?

(a) It is the oldest exchange of India.

(b) It is known by the name of Dalal street.

(c) It’s share index is known by the name of SENSEX.

(d) All of the above

11. Which of the following, controls the working of share market in India?

(a) FEMA

(b) SEBI

(c) MRTP Act

(d) None of these

12. The terms ‘Bulls’ and ‘Bears’ are associated with which business sector?

(a) Foreign Trade

(c) Stock Market

(b) Banking

(d) Object Manufacturing

13. India’s market regulator SEBI is on course to relax investment norms for sovereign wealth funds, the investment vehicles, which are directly controlled by the government of a country? The main reason behind this move is

(a) the desire of the Government of India to attract more foreign investment.

(b) pressure by Foreign Governments on India to execute specific mutual agreements on financial services.

(c) SEBI’s desire to create a more level playing field for foreign investors.

(d) RBI’s relevant directive to SEBI.

14. To prevent recurrence of scams in Indian Capital Market, the government has assigned regulatory powers to ISA (Pre) 2018

(a) RBI

(b) SBI

(c) SEBI

(d) ICICI

15. Consider the following statements about the Indian Capital Market.

1. The Securities Exchange Board of India (SEBI) was set-up in the Seventh Five Year Plan.

2. The Capital Issue (Control) Act, 1947 was repealed and replaced by the SEBI.

Which of the statements) given above is/are correct?

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) Neither 1 nor 2

16. With reference to ‘IFC Masala bonds’ sometimes seen in the news, which of the statements) given above is/are correct? ISA (Pre) 2016

1. The International Finance Corporation which offers these bonds is an arm of the World Bank.

2. They are the rupee denominated bonds and are a source of debt financing for the public and a print sector.

Codes

(a) Only 1

(b) Only 2

(c) Both 1 and 2

(d) Neither 1 nor 2

17. The SEBI was given statutory status in 1992 on the recommendation of WBCS (Pre) 2017

(a) the Chakraborty Commission

(b) the Chelliah Committee

(c) the Tendulkar Committee

(d) the Narasimham Committee

18. IRDAI has setup a panel under whose Chairmanship to examine need for standard cyber liability insurance product? CGPSC (Pre) 2020

(a) Prabin Kutumte

(b) P Umesh

(c) K Ganesh

(d) TL Alamelu

19. By the Government of India, Insurance Regulatory and Development Authority was founded in UKPSC (Pre) 2012

(a) April, 2000

(b) April, 2001

(c) April, 2002

(d) April, 2003

20. In the context of finance, the term ‘beta’ refers to JAS (Pre) 2023

(a) the process of simultaneous buying and selling of an asset from different platforms.

b) an investment strategy of a portfolio manager to balance risk versus reward.

(c) a type of systemic risk that arises where perfect hedging is not possible.

(d) a numeric value that measures the fluctuations of a stock to changes in the overall stock market.

Know Right Answer

1 (c)

2 (d)

3 (b)

4 (d)

5 (a)

6 (b)

7 (b)

8 (a)

9 (c)

10 (d)

11 (b)

12 (c)

13 (a)

14 (c)

15 (c)

16 (c)

17 (d)

18 (b)

19 (a)

20 (d)

Frequently Asked Questions (FAQs)

1. FAQ: What is the significance of the Indian Financial System in the context of the Indian economy?

Answer: The Indian Financial System plays a crucial role in the economic development of the country. It facilitates the efficient mobilization and allocation of resources, channeling savings into productive investments. The system includes various institutions such as banks, financial markets, and regulatory bodies that ensure the smooth functioning of monetary transactions. Additionally, it supports the government’s fiscal policies and provides a platform for individuals and businesses to access funds for economic activities.

2. FAQ: How does the Reserve Bank of India (RBI) contribute to the stability of the Indian Financial System?

Answer: The Reserve Bank of India (RBI) acts as the central bank and the apex monetary authority in India. It plays a pivotal role in ensuring the stability and soundness of the Indian Financial System. The RBI formulates and implements monetary policies to control inflation, regulate interest rates, and maintain financial stability. It also supervises and regulates banks and financial institutions, aiming to safeguard the integrity of the financial system. The RBI’s interventions through various measures, including open market operations and monetary policy instruments, are crucial in maintaining a balanced and stable financial environment.

3. FAQ: What are the key components of the Indian Financial System, and how do they interact with each other?

Answer: The Indian Financial System comprises various components, including financial institutions, financial markets, and financial instruments. Financial institutions such as banks, non-banking financial companies (NBFCs), and insurance companies form the backbone of the system. Financial markets, including money markets and capital markets, provide platforms for buying and selling financial instruments. These instruments, such as stocks, bonds, and derivatives, enable the transfer of funds between savers and borrowers. The interaction between these components facilitates the flow of funds, risk management, and efficient allocation of resources in the economy, contributing to overall economic growth.

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