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INDIAN FINANCIAL SYSTEM

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e Notes MBA

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PPT - Indian Financial System

• Financial system is a mechanism that works for investors and people who want finance.
• It is an interaction of various intermediaries, market instruments, policy makers, and various regulations to aid the flow of savings from savers to investors and managing the proper functioning of the system.

• Close character of entrepreneurship
• Absence of financial intermediaries
• Low industrial growth rate.
• Public/Govt. ownership of financial institutions - RBI, Nationalized banks, Special purpose financial institutions
• Investors' protection - Companies act, Securities contract act
• Prof Sayers- money market is that area of market that deals in short term capital.
• Market for funds and assets that are close substitutes for money
• Focuses on providing means by which government and institutions are able to rapidly adjust their actual liquidity position.
• Call money instruments- one day loan
• Treasury bills- meeting short term deficits of govt.
• Commercial papers- short term instruments issued by corporate- introduced in Jan 1990
• Certificate of deposits- issues by banks to the depositor, introduced in June 989- lowest period 15 days for 5 lakhs
• Repo transactions- maturity of 1 day to six months
• Money market mutual funds-introduced by RBI in April 1992 and regulated by SEBI
• Primary market
• By prospectus
• Offer for sale
• Private placement
• Right issue
• Employees stock option
• Sweat equity
• Secondary Market
• Located at a fixed place
• Securities of listed companies are traded
• Purpose is to transfer ownership
• Equity shares
• Preference shares
• Debentures/ bonds
• Innovative debt instruments - Convertible debentures/bonds, Warrants, Zero interest bond, Secured premium notes, Floating rate bond
• Forward contract - Not standardized, regulated through trading, margin is required 
• Futures - Standardized , traded at over the counter market, involves counter party risk
• Banking - RBI, Commercial banks, Co-operative banks, Post office savings banks
• Non-banking - LIC, GIC, UTI, Housing development finance companies-HDFC, HUDCO
• Developmental - ICICI, IDBI, IFCI, NABARD, SIDBI, Tourism finance corporation SFCs
• Regulatory Institutions - SEBI, RBI, IRDA- insurance regulatory and development authority, Board of regulatory and development authority-BIFR

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Indian Financial System

The Indian Financial System is one of the most important aspects of the economic development of our country. This system manages the flow of funds between the people (household savings) of the country and the ones who may invest it wisely (investors/businessmen) for the betterment of both the parties.

This is an important topic with respect to the various  Government exams  conducted in the country, and aspirants must carefully consider going through this article and prepare themselves accordingly.

In this article, you shall know about what the Indian Financial system is, its components and how it helps in the economic growth of a country. Also, get some Sample Questions on the Indian Financial System further below in this article.

Indian Financial System PDF Notes:- Download PDF Here

Indian Financial System – An Overview

The services that are provided to a person by the various Financial Institutions including banks, insurance companies, pensions, funds, etc. constitute the financial system. 

Given below are the features of the Indian Financial system:

• It plays a vital role in the economic development of the country as it encourages both savings and investment
• It helps in mobilising and allocating one’s savings
• It facilitates the expansion of financial institutions and markets
• Plays a key role in capital formation
• It helps form a link between the investor and the one saving
• It is also concerned with the Provision of funds

Other Related links:

The financial system of a country mainly aims at managing and governing the mechanism of production, distribution, exchange and holding of financial assets or instruments of all kinds.

Further below in this article, we shall discuss the various components of the financial system in India.

Components of Indian Financial System

There are four main components of the Indian Financial System. This includes:

• Financial Institutions
• Financial Assets
• Financial Services
• Financial Markets

Let’s discuss each component of the system in detail. 

1. Financial Institutions

The Financial Institutions act as a mediator between the investor and the borrower. The investor’s savings are mobilised either directly or indirectly via the Financial Markets. 

The main functions of the Financial Institutions are as follows:

• A short term liability can be converted into a long term investment
• It helps in conversion of a risky investment into a risk-free investment
• Also acts as a medium of convenience denomination, which means, it can match a small deposit with large loans and a large deposit with small loans

The best example of a Financial Institution is a Bank. People with surplus amounts of money make savings in their accounts, and people in dire need of money take loans. The bank acts as an intermediate between the two.

The financial institutions can further be divided into two types:

• Banking Institutions or Depository Institutions – This includes banks and other credit unions which collect money from the public against interest provided on the deposits made and lend that money to the ones in need
• Non-Banking Institutions or Non-Depository Institutions – Insurance, mutual funds and brokerage companies fall under this category. They cannot ask for monetary deposits but sell financial products to their customers.

Further, Financial Institutions can be classified into three categories:

• Regulatory – Institutes that regulate the financial markets like RBI, IRDA, SEBI, etc.
• Intermediates – Commercial banks which provide loans and other financial assistance such as SBI, BOB, PNB, etc. 
• Non Intermediates – Institutions that provide financial aid to corporate customers. It includes NABARD, SIBDI, etc. 

2. Financial Assets

The products which are traded in the Financial Markets are called Financial Assets. Based on the different requirements and needs of the credit seeker, the securities in the market also differ from each other. 

Some important Financial Assets have been discussed briefly below:

• Call Money – When a loan is granted for one day and is repaid on the second day, it is called call money. No collateral securities are required for this kind of transaction. 
• Notice Money – When a loan is granted for more than a day and for less than 14 days, it is called notice money. No collateral securities are required for this kind of transaction.
• Term Money – When the maturity period of a deposit is beyond 14 days, it is called term money.
• Treasury Bills – Also known as T-Bills, these are Government bonds or debt securities with maturity of less than a year. Buying a T-Bill means lending money to the Government.
• Certificate of Deposits – It is a dematerialised form (Electronically generated) for funds deposited in the bank for a specific period of time.
• Commercial Paper – It is an unsecured short-term debt instrument issued by corporations.

3. Financial Services

Services provided by Asset Management and Liability Management Companies. They help to get the required funds and also make sure that they are efficiently invested.

The financial services in India include:

• Banking Services – Any small or big service provided by banks like granting a loan, depositing money, issuing debit/credit cards, opening accounts, etc. 
• Insurance Services – Services like issuing of insurance, selling policies, insurance undertaking and brokerages, etc. are all a part of the Insurance services
• Investment Services – It mostly includes asset management
• Foreign Exchange Services – Exchange of currency, foreign exchange, etc. are a part of the Foreign exchange services

The main aim of the financial services is to assist a person with selling, borrowing or purchasing securities, allowing payments and settlements and lending and investing. 

4. Financial Markets

The marketplace where buyers and sellers interact with each other and participate in the trading of money, bonds, shares and other assets is called a financial market. 

The financial market can be further divided into four types:

• Capital Market – Designed to finance the long term investment, the Capital market deals with transactions which are taking place in the market for over a year. The capital market can further be divided into three types:

         (a) Corporate Securities Market

         (b) Government Securities Market 

         (c) Long Term Loan Market 

• Money Market – Mostly dominated by Government, Banks and other Large Institutions, the type of market is authorised for small-term investments only. It is a wholesale debt market which works on low-risk and highly liquid instruments. The money market can further be divided into two types:

         (a) Organised Money Market

         (b) Unorganised Money Market

• Foreign exchange Market – One of the most developed markets across the world, the Foreign exchange market, deals with the requirements related to multi-currency. The transfer of funds in this market takes place based on the foreign currency rate.
• Credit Market – A market where short-term and long-term loans are granted to individuals or Organisations by various banks and Financial and Non-Financial Institutions is called Credit Market

Aspirants for various Government exams can check the syllabus for respective exams at the links mentioned below:

Sample Questions on Indian Financial System

Given below are a few sample questions for the candidates to have an idea about the type of questions asked in the Government exams on the topic: Indian Financial System:

Q 1. Which of these is a type of Capital Market?

• Corporate Securities Market
• Government Securities Market
• Long Term Loan Market 
• All of the Above
• None of the Above

Answer: (4) All of the Above

Q 2. Which of these is not a type of Financial Assets?

• Notice Money
• Treasury Bill
• Commercial Paper

Answer: (1) Cheque

Q 3. Which of these is not a fundamental objective of Indian Financial System?

• To give time value to money
• Offer Services that reduce risk of loss
• Issuing Bank Notes
• Provide a payment System
• All of the above

Answer: (3) Issuing Bank Notes

Q 4. When a loan is granted for only one day, it is called _________?

• Immediate Bill
• Commercial Bill

Answer: (4) Call Money

Questions for descriptive answers can also be asked from this topic. 

The various Financial Institutions help balance the economic growth of the country and mobilise the flow of debit and credit in the country. With the help of rural development, the overall financial system of the country can be improved.

Candidates who are looking forward to applying for the upcoming Government exams can visit BYJU’S for more information. 

Frequently Asked Question – Financial System in India

Q.1. what is the use of the financial system, q.2. what is the financial system, q.3. what are the important functions of a financial system, q.4. what are the objectives of a financial system, q 5. indian financial system is divided into how many categories.

Ans. Broadly there are two categories of Indian Financial System, i.e. Indian Money market and Indian capital Market:

• Indian Money Market – in which short term funds are lent and borrowed.
• Indian Capital Market – where medium and long term exchanges happen.

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Indian Financial System (With Diagram)

Indian financial markets are sub-divided broadly into money markets (that deal in short-term funds) and capital markets (that deal in long-term funds).

Structurally, money market comprises both organised and unorganised sectors.

Unorganised sector is normally made up of indigenous money lenders and bankers who do not follow formal lines of business.

Their businesses are informal and thus independent of the Reserve Bank of India or banks for any fund support. This sector is shrinking but, during the period of economic reforms launched after 1991, the activities of these institutions have become a matter of serious concern and anxiety.

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The organised component of money market consists of the RBI, commercial banks and cooperative banks. The RBI is the head of the financial institutions as well as the monetary authority of the country. In the diagram, we have not shown anything about the RBI.

The second most important component of the organised money market is the commer­cial banks. The first commercial bank in this country—Bank of Bengal—was set up in 1806 in Kolkata. In addition to this Presidency Bank of Kolkata, two other Presidency Banks were established in 1840 in Mumbai and in 1843 in Chennai. Integrating these three commercial banks or Presidency Banks, the Imperial Bank of India was formed in 1921.

This Imperial Bank was nationalised in 1955 and then came to be known as the State Bank of India. Its seven subsidiary banks were nationalised in 1956. However, Indira Gandhi nationalised 14 commercial banks—having deposits of Rs. 50 crore and above—in 1969. Another 6 private banks were nationalised in 1980. At present, the number of public sector banks is 27.

In terms of size and business, cooperative banks in India are rather tiny compared to commercial banks. It is a three-tier banking structure (i) with the State Cooperative Bank operating in each state as an apex bank, (ii) at the district level, the central cooperative hanks, and (iii) at the village level, the primary agricultural credit societies. However, long- term loans beyond five years are given by the Primary Cooperative Agricultural and Rural Development Banks (PCARDBs).

Although public sector commercial banks is the dominant banking sector, privately- owned banks are nonetheless important in the liberalised regime. Following the Narasimham Committee recommendations made in 1991 and in 1998, private banks are now being allowed to operate. In addition, there are some foreign banks operating in India with little or no restrictions now.

Finally, regional rural banks have been functioning since 1975 to meet the credit needs of the rural people. At present, the number of regional banks stands at 76.

The other side of the Fig. 10.1 deals with ‘other financial institutions’. The main three elements of other financial institutions are: (i) insurance sector, (ii) mutual funds, and (iii) development banks. The two notable insurance institutions are the Life Insurance Corporation of India and the General Insurance Corporation.

The most prominent mutual funds institution is the Unit Trust of India. Finally, as the name suggests, development banks provide long-term capital to industries in a rather non-conventional way. At present, there are as many as 60 develop­ment banks in the country. The largest of them is the Industrial Development Bank of India (IDB1).

Finally, in the realm of industrial finance, there is an institution called capital market that provides long-term funds to both public and private sector units. Security market is the most important component of the capital market that deals in both corporate and government or gilt-edged securities. In India, the capital market has undergone a revolutionary change in recent years following the launching of the new economic policies in 1991.

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Indian Financial System - PowerPoint PPT Presentation

Indian Financial System

... (mof), reserve bank of india ... started providing working capital also set up credit rating agencies crisil ... also co-ordinates with u.n. agencies. – powerpoint ppt presentation.

• Indian financial system consists of formal and informal financial system.
• Based on the financial system financial market, financial instruments and financial intermediation can be categorized depending upon functionality.
• The financial systems of most developing countries are characterized by co-existence and co-operation between the formal and informal financial sectors.
• The formal financial sector is characterized by the presence of an organized, institutional and regulated system which caters to the financial needs of the modern spheres of economy.
• The informal financial sector is an unorganized, non-institutional and non-regulated system dealing with traditional and rural spheres of the economy.
• Financial Institutions
• Financial Markets
• Financial Instruments
• Financial Services
• The formal financial system comes under the regulations of the ministry of finance (MOF), reserve Bank of India (RBI), Securities and Exchange board of India (SEB) and other regulatory bodies.
• Upto 1951 Pvt. Sector
• 1951 to 1990 Public Sector
• Early Nineties Privatisation
• Present Status Globalisation
• Orderly mechanism structure in economy.
• Mobilises the monetary resources/capital from surplus sectors.
• Distributes resources to needy sectors.
• Transformation of savings into investment consumption.
• Financial Markets Places where the above activities take place
• Control of Money Lenders
• No Laws / Total Private Sector
• No Regulatory Bodies
• Hardly any industrialization
• Banks Traditional lenders for Trade and that too short term
• Main concentration on Traditional Agriculture
• Narrow industrial securities market (i.e. Gold/Bullion/Metal but largely linked to London Market)
• Absence of intermediatary institutions in long-term financing of industry
• Industry had limited access to outside saving/resources.
• Moneylenders ruled till 1951. No worth-while Banks at that time. Industries depended upon their own money. 1951 onwards 5 years PLAN commenced.
• PVT. SECTORS TO PUBLIC SECTOR MIXED ECONOMY
• 1st 5 year PLAN in 1951 Planned Economic Process. As part of Alignment of Financial Systems Priorities laid down by Govt. Policies.
• MAIN Elements of Fin. Organisations
• Public ownership of Financial Institution
• Strengthening of Institutional Structure
• Protection to Investors
• Participation in Corporate Management
• Organisational Deficiencies.
• Nationalization
• SBI 1956 (take-over of Imperial Bank of India)
• LIC 1956 (Merges of over 250 Life Insurance Companies)
• Banks 1969 (14 major banks with Deposits of over Rs. 50 Crs.nationalised)
• 1980 (6 more Banks)
• Insurance 1972 (General Insurance Corp. GIC by New India, Oriental, united and National.
• Development
• Directing the Capital in conformity with Planning priorities
• Encouragement to new entrepreneurs and small set-ups
• Development of Backward Region
• IFCI (1948)
• State Finance Corporation (1951) Purely Mortgage institution
• IDBI (1964) As subsidiary of RBI to provide Project / Term Finance
• ICICI (1966) Channelizing of Foreign Currency Loan from World Bank to Pvt. Sector and underwriting of Capital issues.
• SIDCs SIIC State Level Corporations for SME sector
• UTI (1964) to enable small investors to share Industrial Growth
• IRCI (1971) to take care of rehabilitation of sick-mills promoted by IDBI, Banks LIC-Name changed to IIBI in 1997
• IMPORTANT DEVELOPMENTS
• Development Financial Institutions (DFIs)
• Started providing Working Capital also
• Set up CREDIT RATING AGENCIES
• CRISIL(IPO IN 1993-94 standard poor acquires 9.68 in 1996-97 S P acquires shares / holding up to 58.46)
• ICRA Set up in 1991 by leading FIs/Banks/Fin. Ser. Cos. And Moodys CARE Set-up by IFCI/Banks.
• FITCH a 100 subsidiary of FITCH Group.
• Privatisation of DFI
• Reduction in Govt. holding Public Participation e.g. IFCI Ltd., IDBI Ltd., ICICI Ltd.
• Conversion into Banking / Merger into Banking Companies IDBI Bank ICICI Bank
• Issuance of Bond by DFIs without Govt.s Guarantees to mobilize resources.
• Reduction in holding of Govt. in Banks, i.e. Public Participation / Listing
• Rise Growth of Service Sector industries.
• Reliance Dependence on technology.
• E-mail mobile made sea-change in communication, data collection etc.
• Computerization a catch phrase and inevitable need of an hour.
• Dependent on Capital Market rather than only Debts dependency.
• Scalability of operations through globally competitive size.
• Broad basing of Board.
• Professional Management.
• NBFC under RBI governance to finance retail assets and mobilize small/medium sized savings.
• Very large NBFCs are emerging (Shri Ram Transport Finance, Birla, Tata Finance, Sundaram Finance, Reliance Finance, DLF, Religare etc.
• Commercial Bank
• Mutual Funds
• Capital Market
• Secondary Market
• Money Market
• IBRD (World Bank) Long-Term Capital Assistance
• IFCI To finance PRIVATE enterprises in the form of loans equity
• IDA Affiliate of World Bank Soft Loan window of the Bank. Mainly for
• developing under-developed nations. Re-payment period upto 50 years Govt. Private, both, eligible.
• MIGA Multilateral Investment Guarantee Agency an affiliate of World
• (1988) Bank Provides guarantee for investment in needy countries.
• ECAFE (Economic Commission for Asia Far East)
• promote investment in Asia Far East and also finance priority
• area. Also co-ordinates with U.N. agencies.
• Functions of Financial Market
• Price Discovery
• Cost of Transactions (saver search information costs)
• Transfer of savings from one sector to other
• Reflects as Barometer for economic growth
• Financial Assets
• Treasury Bonds
• Commercial Paper/Debentures etc.
• Euro Bonds.
• Gold/Silver
• Cross Border Bonds /instruments.
• Financial Markets in India

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Presentation Topic: Indian Financial System

Jan 01, 2020

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Presentation Topic: Indian Financial System. Presented by: Arif Ahmad Wani Assistant Professor, Commerce GDC Kulgam. Financial System. An institutional framework existing in a country to enable financial transactions Three main parts

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• money market
• capital market
• money market instruments
• stock market bond market

Presentation Transcript

Presentation Topic:Indian Financial System Presented by: Arif Ahmad Wani Assistant Professor, Commerce GDC Kulgam.

Financial System • An institutional framework existing in a country to enable financial transactions • Three main parts • Financial assets (loans, deposits, bonds, equities, etc.) • Financial institutions (banks, mutual funds, insurance companies, etc.) • Financial markets (money market, capital market, forex market, etc.) • Regulation is another aspect of the financial system (RBI, SEBI, IRDA, FMC)

Financial assets/instruments • Enable channelising funds from surplus units to deficit units • There are instruments for savers such as deposits, equities, mutual fund units, etc. • There are instruments for borrowers such as loans, overdrafts, etc. • Like businesses, governments too raise funds through issue of bonds, Treasury bills, etc. • Instruments like PPF, KVP, etc. are available to savers who wish to lend money to the government

Money Market Instruments • Call money- money borrowed/lent for a day. No collateral is required. • Inter-bank term money- Borrowings among banks for a period of more than 7 days • Treasury Bills- short term instruments issued by the Union Govt. to raise money. Issued at a discount to the face value • Certificates of Deposit- Issued by banks to raise money. Minimum value is Rs. 1 lakh, tradable in the market • CDs can be issued by banks/FIs

Money Market Instruments (2) • Commercial Paper (CPs) are issued by corporates to raise short term money • Issued in multiple of Rs.25 lakhs, can be issued by companies with a net worth of at least Rs. 5 crores • CP is an unsecured promissory note privately placed with investors at a discount rate to face value. The maturity of CP is between 3 and 6 months

Financial Institutions • Includes institutions and mechanisms which • Affect generation of savings by the community • Mobilisation of savings • Effective distribution of savings • Institutions are banks, insurance companies, mutual funds- promote/mobilise savings • Individual investors, industrial and trading companies- borrowers

Financial Markets • Money Market- for short-term funds (less than a year) • Organized (Banks) • Unorganized (money lenders, chit funds, etc.) • Capital Market- for long-term funds • Primary Issues Market • Stock Market • Bond Market

Organized Money Market • Call money market • Bill Market • Treasury bills • Commercial bills • Bank loans (short-term) • Organized money market comprises RBI, banks (commercial and co-operative)

Call money market (1) • It deals with one-day loans (overnight, to be precise) called call loans or call money • Participants are mostly banks. Also called inter-bank call money market. • The borrowing is exclusively limited to banks, who are temporarily short of funds. • On the lending side, besides banks with excess cash and as special cases few FIs like LIC, UTI • All others have to keep their funds in term deposits with banks to earn interest

Call money market (2) • Call loans are generally made on a clean basis- i.e. no collateral is required • The main function of the call money market is to redistribute the pool of day-to-day surplus funds of banks among other banks in temporary deficit of funds • The call market helps banks earn interest and yet improve their liquidity • It is a highly competitive and sensitive market • It acts as a good indicator of the liquidity position

Bill Market • Treasury Bill market- Also called the T-Bill market • These bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of India • It is an IOU of the government, a promise to pay the stated amount after expiry of the stated period from the date of issue • They are issued at discount to the face value and at the end of maturity, the face value is paid • The rate of discount and the corresponding issue price are determined at each auction • Commercial Bill market- Not as developed in India as the T-Bill market

Indian Banking System • Central Bank (Reserve Bank of India) • Commercial banks • Co-operative banks • Banks can be classified as: • Scheduled (Second Schedule of RBI Act, 1934) • Non-Scheduled • Scheduled banks can be classified as: • Public Sector Banks • Private Sector Banks (Old and New) • Foreign Banks • Regional Rural Banks

Indigenous bankers • Individual bankers like Shroffs, Seths, Sahukars, Mahajans, etc. Combine trading and other business with money lending. • Vary in size from petty lenders to substantial Shroffs • Act as money changers and finance internal trade through hundis (internal bills of exchange) • Indigenous banking is usually family owned business employing own working capital • At one point, it was estimated that IB met about 90% of the financial requirements of rural India

RBI and indigenous bankers (1) • Methods employed by the indigenous bankers are traditional with vernacular system of accounting. • RBI suggested that bankers give up their trading and commission business and switch over to the western system of accounting. • It also suggested that these bankers should develop the deposit side of their business • Ambiguous character of the hundi should stop • Some of them should play the role of discount houses (buy and sell bills of exchange)

RBI and indigenous bankers (2) • IB should have their accounts audited by certified chartered accountants • Submit their accounts to RBI periodically • As against these obligations the RBI promised to provide them with privileges offered to commercial banks including • Being entitled to borrow from and rediscount bills with RBI • The IB declined to accept the restrictions as well as compensation from the RBI • Therefore, the IB remain out of RBI’s purview

Development Oriented Banking • Historically, close association between banks and some traditional industries- cotton textiles in the west, jute textiles in the east • Banking has not been mere acceptance of deposits and lending money to include development banking • Lead Bank Scheme- opening bank offices in all important localities • Providing credit for development of the district • Mobilising savings in the district. ‘Service area approach’

The Indian Capital Market (1) • Market for long-term capital. Demand comes from the industrial, service sector and government • Supply comes from individuals, corporates, banks, financial institutions, etc. • Can be classified into: • Gilt-edged market • Industrial securities market (new issues and stock market)

The Indian Capital Market (2) • Development Financial Institutions • Industrial Finance Corporation of India (IFCI) • State Finance Corporations (SFCs) • Industrial Development Finance Corporation (IDFC) • Financial Intermediaries • Merchant Banks • Mutual Funds • Leasing Companies • Venture Capital Companies

Industrial Securities Market • Refers to the market for shares and debentures of old and new companies • New Issues Market- also known as the primary market- refers to raising of new capital in the form of shares and debentures • Stock Market- also known as the secondary market. Deals with securities already issued by companies

Financial Intermediaries (1) • Mutual Funds- Promote savings and mobilise funds which are invested in the stock market and bond market • Indirect source of finance to companies • Pool funds of savers and invest in the stock market/bond market • Their instruments at saver’s end are called units • Offer many types of schemes: growth fund, income fund, balanced fund • Regulated by SEBI

Financial Intermediaries (2) • Merchant banking- manage and underwrite new issues, undertake syndication of credit, advise corporate clients on fund raising • Subject to regulation by SEBI and RBI • SEBI regulates them on issue activity and portfolio management of their business. • RBI supervises those merchant banks which are subsidiaries or affiliates of commercial banks • Have to adopt stipulated capital adequacy norms and abide by a code of conduct

Conclusion • There are other financial intermediaries such as NBFCs, Venture Capital Funds, Hire and Leasing Companies, etc. • India’s financial system is quite huge and caters to every kind of demand for funds • Banks are at the core of our financial system and therefore, there is greater expectation from them in terms of reaching out to the vast populace as well as being competitive.

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NYS Ag & Markets-Fundamentals of Grant Opportunities Presentation

• Wednesday, May 29, 2024, 3:45 PM - 5:00 PM

This presentation will discuss finding and applying for grant opportunities made available through the NYS Department of Agriculture and Markets, including how to access and submit applications for grants in the Statewide Financial System. The session will also share insights to address common stumbling blocks and raise awareness of essential sections within grant opportunities to support comprehensive proposals and applications.

There is no fee to attend, however, pre-registration is required. Link to register here : https://events.gcc.teams.microsoft.com/event/e6c8e735-e933-460c-b33a-41384537bee7@f46cb8ea-7900-4d10-8ceb-80e8c1c81ee7

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Last updated May 13, 2024

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• Labour codes: Accelerating India’s Labour Law Revolution

India’s economic landscape has been undergoing significant transformations, driven by technological advancements, globalization...

• KPMG India Blog Home
• Parizad Sirwalla , Partner |

India's economic landscape has been undergoing significant transformations, driven by technological advancements, globalization, and evolving global geopolitical scenario. Amidst these changes, the introduction of new labour codes by the Indian Government aims to reshape the way companies compensate, regulate, and manage their workforce. In this dynamic environment, Indian companies must proactively prepare themselves to adapt to the new regulatory framework while remaining agile and competitive.

In furtherance of its motto of ease of doing business and with a view to harmonize the multiple labour legislations prevailing in the country, the government has consolidated 29 central labour laws (out of 44 existing central laws) into four labour codes i.e. Code on Wages, 2019; Code on Social Security, 2020; Industrial Relations Code, 2020 and Occupational, Safety, Health and Working Conditions Code, 2020 – (collectively referred to as the “Labour Codes”).

It is worthwhile to note that labour codes had received the approval of both houses of the parliament as well as Hon. President’s assent in the year 2019 and 2020 and the draft central rules on all the four labour codes have already been pre-published by the Central Government. As labour is a concurrent subject any change requires even the State Governments to be on board. As per the latest published data, many of the states and Union Territories had also published the state level draft rules for all four or few of the Labour codes. However, the final notification of making these codes effective is something which has been on the anvil for some time now.

With the groundwork laid and the spotlight on post-election priorities, the implementation of the labor codes may take center stage for the new government. But the pressing question remains: are businesses adequately prepared for this monumental shift?

As the countdown to potential enforcement begins, we have unveiled key strategies that companies may need to consider to stay ahead of the curve in India's evolving business landscape.

Analyzing the codes and assessing the financial impact

The first step in testing for readiness could be to understand the changes introduced by the new labour codes and its impact on the business from a financial perspective. Introduction of uniform definition of ‘wages’; social security benefits/scheme for ‘fixed term employees’, 'gig worker' and 'platform worker' etc. requires a detailed assessment of its impact on the existing compensation structure, social security contributions, retirement/terminal benefits payable to the employees.

The financial impact (if any) may need to be assessed when developing future business plans. Some of the big-ticket compensation elements which are likely to undergo a change and have a direct financial impact includes gratuity, provident funds, leave encashments, maternity benefits, overtime, etc.

Re-visiting / drafting new HR policies

There may be a need to identify the amendments to the HR policies and procedures to comply with the new labour codes. In this regard, the existing HR policies and processes relating to (but not limited to) the working hours, over-time, leave entitlements, provision of health benefits, grievance redressal mechanism, appointment letter, employing of contractual workers for business operations, fixed term staff, full and final settlements, etc may need to be re-visited. The changes may vary depending on the region and industry in which the company is operating.

New age businesses which engage employees in a more non-traditional manner – e.g., platform workers, gig workers could also have to factor in social security policies and benefits for this type of workforce.

Decode compliance requirements and training employees

To ensure adherence to the applicable labour laws and regulations, businesses would need to establish robust processes and systems as per the provisions of the new labour codes. Companies should adopt a proactive approach in identifying and addressing new/modified compliance requirements under the new labour codes.

Companies may need to focus on investing in upgrading their compliance processes including technology and training of the employees responsible for carrying out the labour law compliances to ensure smooth implementation and transition to the new labour codes.

Aligning internal systems with updated reporting requirements

Implementation of new labour codes may necessitate significant changes as to how companies manage employee data and track compliance. This could lead to the need for modifications to existing IT systems, including:

• Payroll Systems:  New regulations regarding minimum wages, overtime pay, leave entitlements, gratuity payouts, etc. might require updates to payroll calculations and reporting functions;
• HR management software (‘HRMS’):  Any changes to record-keeping requirements, additional benefits, administration of employee facilities might necessitate adjustments to HRMS functionalities.

By proactively identifying and addressing potential IT system issues, companies can ensure a smooth transition to compliance with new labour codes.

Becoming future ready for the new labour codes as and when enacted requires a proactive outlook and multi-faceted approach. By analyzing the impact of changes, conducting a comprehensive review of existing policies and compliance requirements, building a cross-functional team and keeping the internal systems ready can help with smooth transition to the labour codes.

A version of this article was published on May 06, 2024 by The Times of India

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Parizad Sirwalla

Partner, National Head – Tax, Global Mobility Services

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