New Financial Institutions
A number of institutions of finance have been established to cater to the credit requirements of various segments of industry and needs. A brief outline of these institutions is presented below;
Venture capital financing is a form of equity financing designed especially for funding new and innovative project ideas. Venture capital funds bring into force the hi-technology projects which are converted into commercial production. Many specialized financial institutions have promoted their own venture capital funds. They include Risk Capital Foundation of IFCI, Venture Fund of IDBI, SIDBI, Technology Development and Infrastructure Corporation of India (TDICI), and others.
Financial institutions that provide facilities for channeling savings of small investors into avenues of productive investments are called ‘Mutual Funds’. A mutual fund company invests the funds pooled from shareholders and gives them the benefit of diversified investment portfolio and a reasonable return.
Specialized financial institution like LIC, UTI, etc., beside commercial banks such as SBI, and Canara Bank are carrying out the business of mutual funds. The benefits of mutual fund are high return, easy liquidity, safety and tax benefits to the investors.
“Factoring” is an arrangement whereby a financial institution provides financial accommodation on the basis of assignment/ sale of account receivables. The factoring institutions collect the book debts for and on behalf of its clients. Some of the factoring institutions operating in India are SBI Factors and Commercial Services Private Limited, a subsidiary of State Bank of India and Canbank Factors Limited, a subsidiary of Canara Bank.
The OTCEI was set up by a premier financial institution to allow the trading of securities across the electronic counters throughout the country. It addresses some specific problems of both investors and medium-size companies. Some of the greatest strengths of OTCEI are transparency of transactions, quick deals, faster settlements and better liquidity.
NSEI was established in 1992 to function as a model stock exchange. The Exchange aims at providing the advantage of nation-wide electronic screen based “scripless” and “floorless” trading system in securities. The institution is expected to allow for an efficient and transparent system of securities trading.
Under the scripless trading system, settlement of transactions relating to securities takes place through a book entry. The entire scripless trading system comprises the following three segments:
a. National Trade Comparison and Reporting System which prescribes the terms and conditions of contract for the securities market
b. National Clearing System which aims at determining the net cash and stock liability of each broker on a settlement date
c. National Depository System which arranges to provide for the transfer of ownership of securities in exchange on payment by book entry on electronic ledgers without any physical movement of transfer deed
The NSDL was set up in the year 1996 for achieving a time bound dematerialization as well as rematerialization of shares. The establishment of NSDL is expected to alleviate the problems of post trade transactions in the secondary market.
Stock Holding Corporation of India Limited (SHCIL) aims at serving as a central securities depository in respect of transactions on stock exchanges. The Corporation also takes up the administration of clearing functions at a national level.
The foreign exchange market abets the foreign exchange trading. It is the largest, most liquid market in the world with an average traded value of more than $5 trillion per day. It includes all of the currencies in the world and any individual, company or country can participate in it.
The commodity market manages the trading in primary products which takes place in about 50 major commodity markets where financial transactions increasingly outstrip physical purchases which are to be delivered. Commodities are commonly classified in two subgroups.
• Hard Commodities Market
• Soft Commodities Market
Hard commodities are raw materials typically mined, such as gold, oil, rubber, iron, and ore.
Soft commodities are typically grown agricultural primary products such as wheat, cotton, coffee, and sugar.
Derivatives market facilitates the trading in financial instruments such as futures contracts and options used to help control financial risk. The instruments derive their value mostly from the value of an underlying asset that can come in many forms – stocks, bonds, commodities, currencies or mortgages.
Gilt-Edged Market also known as Government Securities market is the market for Government and semi-Government securities. An important feature of the securities traded in this market is that they are stable in value and are much sought after by banks.
• Guaranteed return on investments
• No speculation in securities
• Institutional based investors which are compelled by law to invest a portion of their funds in these securities.
• Predominated by such institutions as LIC, GIC, PFs and the commercial banks
• Heavy volume of transactions necessitating negotiation of each transaction