FINANCIAL MARKETS

MAHENDRA K PATIDAR
PGDMBIF
Institute of Public Enterprise, Hyderabad
Arbitration

It is a form of alternative dispute resolution (ADR), is

a legal technique for the resolution of disputes outside
the courts, wherein the parties to a dispute refer it to one or
more persons, by whose decision they agree to be bound. It is
a settlement technique in which a third party reviews the case
and imposes a decision that is legally binding for both sides.
Advantages:
 when the subject matter of the dispute is highly technical,
arbitrators with an appropriate degree of expertise can be
appointed.
 Arbitration is often faster than litigation in court.
 Arbitration can be cheaper and more flexible for businesses.
 Arbitral award are generally non-public, and can be made
confidential.
 Because of the provisions of the New York Convention 1958,
arbitration awards are generally easier to enforce in other
nations than court judgments
Disadvantages:

 Arbitration may become highly complex.

 Arbitration may be subject to pressures from powerful law
firms representing the stronger and wealthier party
 In some arbitration agreements, the parties are required to pay
for the arbitrators, which adds an additional layer of legal cost
that can be prohibitive, especially in small consumer disputes
Investor Protection Fund

 In accordance with the guidelines issued by the Ministry of

Finance, Government of India, the Exchange has set up an
Investor Protection Fund (IPF) on July 10, 1987.
 The Fund is managed by the trustees appointed by the
Exchange.
 The maximum amount of claim payable from the IPF to the
investor is Rs. 10lakh.
Contd..

 IPF is maintained by NSE to make good investor claims.

 IPF is utilized to settle claims of such investors where the
trading member through whom the investor has dealt has been
declared a defaulter.
 Payments out of the IPF may include claims arising of non
payment/non receipt of securities by the investor from the
trading member who has been declared a defaulter.
Compensation
The Investors’ Protection Fund may provide compensation
against a genuine and bonafide claim made by any client, who
has either not received the securities bought from a trading
member for which the payment has been made by such client
to the trading member there against or has not received the
payment for the securities sold and delivered to the trading
member or has not received any amount or securities which
is/are legitimately due to such client from the trading member
HEDGING
 Risk management strategy used in limiting or
offsetting probability of loss from fluctuations in
the prices of commodities, currencies, or securities.

 It employs various techniques but, basically, involves

taking equal and opposite positions in two
different markets (such as cash and futures markets)
Picking the Right Hedging Tool
• Forward contracts: 
 The most complete risk hedging tool.  
 The customized design may result in a higher transaction
cost for the firm
 May expose both parties to credit risk

• Futures contracts :
 Standardized
  A cheaper alternative to forward contracts
 Eliminate credit risk, but they require margins and cash
flows on a daily basis.
 Option Contracts:
 If the currency flow is known, forward contracts
provide much more complete protection and
should therefore be used. If the currency flow is
unknown, options should be used, since a
matching forward contract cannot be created.
 Self- insure or Third party insurance product:
Self insurance makes sense if the firm can
achieve the benefits of risk pooling on its own
To hedge or not to hedge
What risks can be hedged?

1. Exchange rate risk:

Three reasons for this phenomenon

A)It is ubiquitous

B)It effects earnings

C)It is easy to hedge

2.Commodity price risk:
 Varies from company to company
 Hedge against output price risk (trying to reduce the
volatility in their revenues) as opposed to companies that
hedge against input price risk(trying to reduce the
volatility in their costs)
 Strength lies not in forecasting future commodity prices
but in their operational expertise.
Benefits of Hedging

a. Tax Benefits

b. Better investment decisions

c. Distress costs

d. Capital structure

e. Informational benefits
Financial Services Regulatory Bodies

 The financial system in India is regulated by

independent regulators in the field of banking,
insurance, and capital market. Government of India
plays a significant role in controlling the financial
market in India.
 Ministry of Finance, Government of India controls
the financial sector in India.
Banking System Regulator-RBI 
• The Reserve Bank of India (RBI) is an apex
institution in controlling banking system in the
country. It's monetary policy acts as a major
weapon in India's financial market.
• It is also called as the central bank of the country.
The bank was established on April1, 1935
according to the Reserve Bank of India act 1934.
The Central Office of the Reserve Bank has been in
Mumbai. It was nationalized in 1949, the Reserve
Bank is fully owned by the Government of India.
Functions of RBI
1. Custodian of Foreign Exchange and other Reserves
2. Maintains Currency Chests – Print Notes
3. Bankers’ Bank
4. Controller of Credit – Selective Credit control
5. Banker to Government – Treasury & other Debt Management
6. Regulatory Function – Commercial Banks, Money Market, Foreign
Currency Market, NBFCs
7. Supervisory & Control of Banks & NBFCs -Collects information ,
Conducts Inspection / Audit, Issues operational guidelines,
permission for Branch Expansion, appointment of executives
8. Control of interest , inflation and exchange rates in the economy
(Zero risk rates, Control of credit & market liquidity / money
supply, buying and selling of currency in the market)
Capital Market Regulator-SEBI
• Securities and Exchange Board of India (SEBI) is
one of the regulatory authorities for India's capital
market.
• Securities and Exchange Board of India (SEBI) was
first established in the year 1988 as a non-statutory
body for regulating the securities market. It became
an autonomous body in 1992 and more powers were
given through an ordinance.
Objectives of SEBI

• To develop the securities market.

• Promotes Investors Interest.
• Makes rules and regulations for the securities market.
Functions Of SEBI
• Regulates Capital Market
• Checks Trading of securities.
• Checks the malpractices in securities market.
• It enhances investor's knowledge on market by
providing education.
• It regulates the stockbrokers and sub-brokers.
• To promote Research and Investigation
Insurance Regulator-IRDA
 Insurance Regulatory and Development
Authority (IRDA) is a national agency of the
Government of India, based in Hyderabad. It was
formed by an act of Indian Parliament known as
IRDA Act 1999, which was amended in 2002 to
incorporate some emerging requirements.
 Objectives of IRDA: "to protect the interests of
the policyholders, to regulate, promote and ensure
orderly growth of the insurance industry and for
matters connected therewith or incidental thereto."
Other Regulators
 Commodity Market – Forward market Commission
(FMC)
 Mutual Funds-SEBI
 NBFCs-RBI
 Housing finance companies-National Housing Bank
(NHB)
 Venture capital Financing-SEBI
 Credit Rating Agencies-SEBI
 Pension Funds-PFRDA
 Hedge Funds-No statutory body