(Unit 1)

Q- Indian capital markets? Development since 1991? Various financial

intermediaries?
A- The Indian capital market is the market for long term loanable funds as distinct
from money market which deals in short-term funds.
It refers to the facilities and institutional arrangements for borrowing and lending
‘term funds’, medium term and long term funds. In principal capital market loans
are used by industries mainly for fixed investment. It does not deal in capital
goods, but is concerned with raising money capital or purpose of investment.
Classification:
The capital market in India includes the following institutions (i.e., supply of funds
tor capital markets comes largely from these); (i) Commercial Banks; (ii) Insurance
Companies (LIC and GIC); (iii) Specialised financial institutions like IFCI, IDBI, ICICI,
SIDCS, SFCS, UTI etc.; (iv) Provident Fund Societies; (v) Merchant Banking
Agencies; (vi) Credit Guarantee Corporations. Individuals who invest directly on
their own in securities are also suppliers of fund to the capital market.

Thus, like all the markets the capital market is also composed of those who
demand funds (borrowers) and those who supply funds (lenders). An ideal capital
market at tempts to provide adequate capital at reasonable rate of return for any
business, or industrial proposition which offers a prospective high yield to make
borrowing worthwhile.

 The Indian capital market is divided into gilt-edged market and the
industrial securities market. The gilt-edged market refers to the market for
government and semi-government securities, backed by the RBI. The
securities traded in this market are stable in value and are much sought
after by banks and other institutions.

 The industrial securities market refers to the market for shares and
debentures of old and new companies. This market is further divided into
the new issues market and old capital market meaning the stock exchange.

 The new issue market refers to the raising of new capital in the form of
shares and debentures, whereas the old capital market deals with securities
already issued by companies.
  The capital market is also divided in primary capital market and secondary
capital market. The primary market refers to the new issue market, which
relates to the issue of shares, preference shares, and debentures of non-
government public limited companies and also to the realising of fresh
capital by government companies, and the issue of public sector bonds.

 The secondary market on the other hand is the market for old and already
issued securities. The secondary capital market is composed of industrial
security market or the stock exchange in which industrial securities are
bought and sold and the gilt- edged market in which the government and
semi-government securities are traded.

Growth of Indian Capital Market:

Indian Capital Market before Independence:

 Indian capital market was hardly existent in the pre-independence times.
Agriculture was the mainstay of economy but there was hardly any long
term lending to agricultural sector. Similarly the growth of industrial
securities market was very much hampered since there were very few
companies and the number of securities traded in the stock exchanges was
even smaller.

 Indian capital market was dominated by gilt-edged market for government

and semi-government securities. Individual investors were very few in
numbers and that too were limited to the affluent classes in the urban and
rural areas. Last but not the least, there were no specialised intermediaries
and agencies to mobilise the savings of the public and channelise them to
investment.

Indian Capital Market after Independence:

 Since independence, the Indian capital market has made widespread
growth in all the areas as reflected by increased volume of savings and
investments. In 1951, the number of joint stock companies (which is a very
important indicator of the growth of capital market) was 28,500 both public
limited and private limited companies with a paid up capital of Rs. 775
crore, which in 1990 stood at 50,000 companies with a paid up capital of Rs.
 20,000 crore. The rate of growth of investment has been phenomenal in
recent years, in keeping with the accelerated tempo of development of the
Indian economy under the impetus of the five year plans.

Factors Influencing Capital Market:

The firm trend in the market is basically affected by two important factors: (i)
operations of the institutional investors in the market; and (ii) the excellent results
flowing in from the corporate sector.

New Financial Intermediaries in Capital Market:

Since 1988 financial sector in India has been undergoing a process of structural
transformation.

Some important new financial intermediaries introduced in Indian capital

market are:
Merchant Banking:
Merchant bankers are financial intermediaries between entrepreneurs and
investors. Merchant banks may be subsidiaries of commercial banks or may have
been set up by private financial service companies or may have been set up by
firms and individuals engaged in financial up by firms and individuals engaged in
financial advisory business. Merchant banks in India manage and underwrite new
issues, undertake syndication of credit, advice corporate clients on fund raising
and other financial aspects.

Since 1993, merchant banking has been statutorily brought under the regulatory
framework of the Securities Exchange Board of India (SEBI) to ensure greater
transparency in the operation of merchant bankers and make them accountable.
The RBI supervises those merchant banks which were subsidiaries, or are affiliates
of commercial banks.

Leasing and Hire-Purchase Companies:

Leasing has proved a popular financing method for acquiring plant and machinery
specially or small and medium sized enterprises. The growth of leasing companies
has been due to advantages of speed, informality and flexibility to suit individual
needs.

The Narasimhan Committee has recognised the importance of leasing and hire-
purchase companies in financial intermediation process and has recommended
that: (i) a minimum capital requirement should be stipulated; (ii) prudential norms
and guidelines in respect of conduct of business should be laid down; and (iii)
supervision should be based on periodic returns by a unified supervisory
authority.

Mutual Funds:
It refers to the pooling of savings by a number of investors-small, medium and
large. The corpus of fund thus collected becomes sizeable which is managed by a
team of investment specialists backed by critical evaluation and supportive data.

A mutual fund makes up for the lack of investor’s knowledge and awareness. It
attempts to optimise high return, high safety and high liquidity trade off for
maximum of investor’s benefit. It thus aims at providing easy accessibility of
media including stock market in country to one and all, especially small investors
in rural and urban areas.

Mutual funds are most important among the newer capital market institutions.
Several public sector banks and financial institutions set up mutual funds on a tax
exempt basis virtually on same footing as the Unit Trust of India (UTI) and have
been able to attract strong investor support and have shown significant progress.

Government has now decided to throw open the field to private sector and joint
sector mutual funds. At present Securities and Exchange Board of India (SEBI) has
authority to lay down guidelines and to supervise and regulate working of mutual
funds.

The guidelines issued by the SEBI in January 1991, are related in advertisements
and disclosure and reporting requirements etc. The investors have to be informed
about the status of their investments in equity, debentures, government securities
etc.

The Narasimhan Committee has made the following recommendations regarding

mutual funds: (i) creation of an appropriate regulatory framework to promote
sound, orderly and competitive growth of mutual fund business: (ii) creation of
proper legal framework to govern the establishments and operation of mutual
funds (the UTI is governed by a special statute), and (iii) equality of treatment
between various mutual funds including the UTI in the area of tax concessions.

Global Depository Receipts (GDR):

Since 1992, the Government of India has allowed foreign investment in the Indian
securities through the issue of Global Depository Receipts (GDRs) and Foreign
Currency Convertible Bonds (FCCBs). Initially the Euro-issue proceeds were to be
utilised for approved end uses within a period of one year from the date of issue.

Since there was continued accumulation of foreign exchange reserves with RBI
and there were long gestation periods of new investment the government
required the issuing companies to retain the Euro-issue proceeds abroad and
repatriate only as and when expenditure for the approved end uses were
incurred.

Venture Capital Companies (VCC):

The aim of venture capital companies is to give financial support to new ideas and
to introduction and adaptation of new technologies. They are of a great
importance to technocrat entrepreneurs who have technical competence and
expertise but lack venture capital.

Financial institutions generally insist on greater contribution to the investment

financing, in which technocrat entrepreneurs can depend on venture capital
companies. Venture capital financing involves high risk.

According to the Narasimhan Committee the guidelines for setting up of venture

capital companies are too restrictive and unrealistic and have impeded their
growth. The committee has recommended a review and amendment of
guidelines.

Knowing the high risk involved in venture capital financing, the committee has
recommended a reduction in tax on capital gains made by these companies and
equality of tax treatment between venture capital companies and mutual funds.

Other New Financial Intermediaries:

Besides the above given institutions, the government has established a number of
new financial intermediaries to serve the increasing financial needs of commerce
and industry is the area of venture Capital, credit rating and leasing etc.

(1) Technology Development and Information Company of India (TDICI) Ltd., a

technology venture finance company, which sanctions project finance to new
technology venture since 1989.
(ii) Risk Capital and Technology Finance Corporation (RCTFC) Ltd., which provides
risk capital to new entrepreneurs and offers technology finance to technology-
oriented ventures since 1988.

(iii) Infrastructure Leasing and Financial Services (IL&FS) Ltd., set up in 1988
focuses on leasing of equipment for infrastructure development.

(iv) The credit rating agencies namely credit rating information services of India
(CRISIS) Ltd., setup in 1988; Investment and Credit Rating Agency (ICRA) setup in
1991, and Credit Analysis and Research (CARE) Ltd., setup in 1993 provide credit
rating services to the corporate sector.

Credit rating promotes investors interests by providing them information on

assessed comparative risk of investment in the listed securities of different
companies. It also helps companies to raise funds more easily and at relatively
cheaper rate if their credit rating is high.

(v) Stock Holding Corporation of India (SHCIL) Ltd., setup in 1988, with the
objective of introducing a book entry system for transfer of shares and other type
of scrips thereby avoiding the voluminous paper work involved and thus reducing
delays in transfers.

Q- Capital market instruments?

A- Instruments in capital markets can be classified into three categories: Pure,
Hybrid and Derivatives.
(1) Pure Instruments : Equity shares, preference shares, debentures and bonds
which are issued with the basic characteristics without mixing the features of
other instruments are called pure instrument.
(2) Hybrid Instruments : Instruments which are created by combining the features
of equity, preference, bond are called as hybrid instruments. Example: Hybrid
instruments are:
- Convertible preference shares
- Non-convertible debentures with equity warrant
- Partly convertible debentures
- Secured premium notes
(3) Derivative Instrument : A derivative instrument is a financial instrument
which derives its value from the value of some other financial instrument or
variable. Example: Futures and Options belong to the categories of derivatives.
Q- ECR, ADR & GDR
A- A Depository Receipt is a negotiable financial instrument that allows investors
of any country to trade or invest in the shares of a company in any other country,
entitling the shareholders to partake in the dividend and capital gains of that
foreign company.

A depository receipt is called:

·American Depository Receipt (ADR), when it is listed and traded on exchanges

based in the United States. ADRs are denominated in U.S. dollars, with the
underlying security held by a U.S. financial institution overseas. Holders of ADRs
realize any dividends and capital gains in U.S. dollars, but dividend payments in
euros are converted to U.S. dollars, net of conversion expenses and foreign taxes.
ADRs are listed on either the NYSE, AMEX or Nasdaq, but they are also sold over-
the-counter (OTC).

American depositary receipts were introduced in 1927 as an easier way for U.S.
investors to purchase stock in foreign companies

·Global Depository Receipt (GDR) when it is listed and traded in non-US

markets viz., London and Singapore. A GDR is very similar to an American
depositary receipt or an ADR. It is a type of bank certificate that represents shares
in a foreign company, such that a foreign branch of an international bank then
holds the shares. The shares themselves trade as domestic shares, but globally,
various bank branches offer the shares for sale. Private markets use GDRs to raise
capital denominated in either U.S. dollars or euros. When private markets attempt
to obtain euros instead of U.S. dollars we call GDRs EDRs.

·Indian Depository Receipts (IDR) when it is listed and traded in Indian Stock
Exchanges. IDR stands for Indian Depository Receipts. As per the definition given
in the Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an
instrument in the form of a Depository Receipt created by the Indian depository in
India against the underlying equity shares of the issuing company.
An IDR is a way for a foreign company to raise money in India. In an IDR, foreign
companies would issue shares,
to an Indian Depository, which would in turn issue depository receipts (IDR) to
investors in India.

Q-COMPANY LAW BOARD

A- The Company Law Board is an independent quasi-judicial body in India which
has powers to overlook the behaviour of companies within the Company Law. It
was constituted in its present form on May 31, 1991, under Section 10E of the
Companies Act, 1956 replacing the erstwhile Company Law Board which was
primarily as a delegate of the Central government since 1.2.1964. The Company
Law Board has framed Company Law Board Regulations 1991 wherein all the
procedure for filing the applications/petitions before the Company Law Board has
been prescribed. The Central Government has also prescribed the fees for making
applications/petitions before the Company Law Board under the Company Law
Board (Fees on applications and Petitions) Rules,1991.
Q-Secondary markets(SHCIL) stock holding corporation of india
 Stock Holding Corporation of India Limited (SHCIL) is India's largest
custodian and depository participant, based in Mumbai, Maharashtra.
 SHCIL was established in 1986 and was granted a status of a government
company as per section 2(45) of Indian Companies Act, 2013. in 2014.
 SHCIL is known for its online trading portal|Online Trading Portal]] with
investors and traders.[citation needed] It is also responsible for e-stamping
system around India.It is also authorised by Reserve Bank of India as Agency
Bank to distribute and receive Govt. of India savings/relief bond 2003 along
with nationalized banks.

Q- Share lending scheme

A- The SLB scheme is facilitated by the National Securities Clearing Corporation of
India (NSCCL), the clearing corporation of the National Stock Exchange of India
(NSE), through a screen based exchange-traded system called SLB-NEAT. It has a
centralized anonymous order book and all the borrowing and lending are cleared,
settled and guaranteed. The expected lending fee is quoted as price and the
tenures are available up to 12 months.
The Securities Lending and Borrowing facility on NSE/BSE offers investors an
opportunity to earn regular income on their Demat holdings in addition to
dividends and without risk! This facility is one of the lowest risk ways that
households internationally earn (apart from writing covered calls which is fraught
with risk) “rent” on their holdings and is slowly gaining currency in India.

All the securities traded in F&O segment are eligible for SLB activities. Similar to
F&O therefore, each lending cycle is also monthly and you may choose the month
of choice for which you wish to lend. Currently most SLB action happens only in
the current expiry but this will chance once participation deepens.

Q- Book building and reserve book building

A- Book building is a systematic process of generating, capturing, and recording
investor demand for shares during an initial public offering, or other securities
during their issuance process, in order to support efficient price discovery.
Book building is the process by which an underwriter attempts to determine the
price to place a securities offering, such as an initial public offering (IPO), based on
demand from institutional investors. An underwriter builds a book by accepting
orders from fund managers, indicating the number of shares they desire and the
price they are willing to pay.

Reverse Book Building is a mechanism provided for capturing the sell orders on
online basis from the share holders through respective Book Running Lead
Managers (BRLMs) which can be used by companies intending to delist its shares
through buy back process
In the Reverse Book Building scenario, the Acquirer/Company offers to buy back
shares from the share holders. The Reverse Book Building is basically a process
used for efficient price discovery. It is a mechanism where, during the period for
which the Reverse Book Building is open, offers are collected from the share
holders at various prices, which are above or equal to the floor price. The buy
back price is determined after the offer closing date.
Q- BUY BACK OF SHARES
A- A buyback, also known as a share repurchase, is when a company buys its own
outstanding shares to reduce the number of shares available on the open market.
Companies buy back shares for a number of reasons, such as to increase the value
of remaining shares available by reducing the supply or to prevent other
shareholders from taking a controlling stake

Buybacks are carried out in two ways:

1. Shareholders might be presented with a tender offer, where they have the
option to submit, or tender, all or a portion of their shares within a given time
frame at a premium to the current market price. This premium compensates
investors for tendering their shares rather than holding onto them.

2. Companies buy back shares on the open market over an extended period of
time and may even have an outlined share repurchase program that
purchases shares at certain times or at regular intervals.

A company can fund its buyback by taking on debt, with cash on hand or with
its cash flow from operations.

Q- What is Mergers & Acquisitions?

A- Mergers and acquisitions (M&A) are defined as consolidation of companies.
Differentiating the two terms, Mergers is the combination of two companies to
form one, while Acquisitions is one company taken over by the other. M&A is one
of the major aspects of corporate finance world. The reasoning behind M&A
generally given is that two separate companies together create more value
compared to being on an individual stand. With the objective of wealth
maximization, companies keep evaluating different opportunities through the
route of merger or acquisition.
Types of Mergers
From the perception of business organizations, there is a whole host of different
mergers. However, from an economist point of view i.e. based on the relationship
between the two merging companies, mergers are classified into following:
(1) Horizontal merger- Two companies that are in direct competition and share the
same product lines and markets i.e. it results in the consolidation of firms that are
direct rivals. E.g. Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce
and Lamborghini
(2) Vertical merger- A customer and company or a supplier and company i.e.
merger of firms that have actual or potential buyer-seller relationship eg. Ford-
Bendix
(3) Conglomerate merger- generally a merger between companies which do not
have any common business areas or no common relationship of any kind.
Consolidated firma may sell related products or share marketing and distribution
channels or production processes.

Mergers & Acquisitions can take place:

• by purchasing assets
• by purchasing common shares
• by exchange of shares for assets
• by exchanging shares for shares

Reasons for Mergers and Acquisitions:

• Financial synergy for lower cost of capital
• Improving company’s performance and accelerate growth
• Economies of scale
• Diversification for higher growth products or markets
• To increase market share and positioning giving broader market access
• Strategic realignment and technological change
• Tax considerations
• Under valued target
• Diversification of risk
REGULATIONS:-
1- Indian companies are regulated by the Companies Act, 2013 ("Companies Act"),
which provides, amongst other matters, for the manner of share transfers and
subscriptions, business transfers and reconstructing.
2- Companies with listed securities are also regulated by the Securities and
Exchange Board of India ("SEBI") under the Securities and Exchange Board of India
Act, 1992, the Securities Contracts (Regulation) Act, '1956 and subordinate
regulations. Key regulations applicable to MA involving a listed company are the
SEBI (SubstantiaI Acquisition of Shares and Takeovers) Regulations, 2011
("Takeover Regulations"), which regulates acquisitions of substantial shareholding
or control of a listed company, the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015 ("Listing Regulations"), which sets out disclosure
and other obligations of a listed company and the SEBI (Prohibition of Insider
Trading Regulations, 2015, which implements a framework for prohibiting insider
trading.
3- Transactions involving non-residents are regulated by the Foreign Exchange
Management Act, 1999 and subordinate regulations ("FEMA"), including
regulations governing transfers of shares or assets and foreign currency
transactions involving non-residents.
4- The Competition Commission of India ("CCI") is the Indian competition
regulator and has issued regulations regarding notification and consent
requirements for M&A - these may apply if the relevant thresholds are triggered
by M&A.
5- Tax considerations applicable to M&A are guided by the Income Tax Act, 1961
and for cross-border M&A. double taxation avoidance treaties could additionally
apply.
6- Sectoral Laws may apply to M&A involving companies in regulated businesses,
such as insurance or banking.
Q- Merchant bankers
A-

A merchant bank is a company that deals mostly in international finance, business

loans for companies and underwriting. These banks are experts in international
 trade, which makes them specialists in dealing with multinational corporations. A
merchant bank may perform some of the same services as an investment bank,
but it does not provide regular banking services to the general public.

Merchant bankers, lead managers and registrars play a key role and
facilitate primary market activities by their advice and guidance. Let us discuss
the role of merchant bankers in this article.
As per SEBI rules, a merchant banker refers to,

“any person who is engaged in the business of issue management either by

making arrangement regarding buying, selling or subscribing to securities or
acting as manager, consultant or rendering corporate advisory services in relation
to such issue management”.
The Webster’s New Collegiate Dictionary defines merchant bank as,

“that specializes in bankers’ acceptances and in underwriting or syndicating equity

or bond issues”.

Services provided by merchant bankers

The services provided by Merchant Bankers include:

i. Project counseling
ii. Market survey and forecasting
iii. Estimating the amount of funds required.
iv. Raising funds from capital market.
v. Raising of funds through new instruments.
vi. Bought out deals.
vii. OTC market operations.
viii. Mergers and amalgamations.
ix. Loan syndication.
x. Technology tie-ups.
xi. Working Capital Finance.
xii. Venture Capital.
xiii. Lease Finance.
xiv. Fixed deposit management.
xv. Factoring
 xvi. Portfolio management of mutual funds.
xvii. Rehabilitation of sick units.

PRE-ISSUE ACTIVITIES

1. Documents to be submitted:

MOU

Due diligence certificate

List of promoters

Draft prospectus in computer floppy

Ten copies of draft offer

2. Appointment of Intermediaries:

Intermediaries such as advisor, bankers to the issue, registrar, underwriters are

appointed in consultation with lead merchant banker.

3. Underwriting:

Lead merchant banker shall undertake minimum of 5% or 25lacs whichever is

low

Offer documents to be made public:Draft offer document shall be made public for
a period of 21 days from date of filling the offer document with the Board.

5. Appointment of compliance officer:

Compliance officer have liaison with Board with regard to various laws, rules,
regulations and other directions issued by Board.

6. Mandatory collection centres:

Minimum number of collection centres for issue of capital shall be

- 4 metropolitan cities
 -All centres of stock exchange where registered office of company is situated.

7. Final offer document:

Furnish a new due diligence certificate, final prospectus copy, offer document.

8. Application forms:

Application form must be accompanied by abridged prospectus. Disclaimer

clause of SEBI should be printed in bold. Application form for new issue is made

9. Minimum application amount:

It shall not be less than 25% of issue price and total amount payable is not less
than Rs.2000

10. Listing of securities:

11. Period of subscription:

Subscription shall be kept open for atleast 3 working days and not more than
10 working days.

12. Oversubscription:

POST - ISSUE ACTIVITIES

1. Redressal of investor grievances:

2. Co-ordination with intermediaries:

Maintaining close co-ordination with registrars to the issue and to depute its
officers to various intermediaries.

3. Stock Invest:

Ensure compliance with instructions issued by the RBI.

4. Underwriters
 a. Issue is closed at earliest date then issue shall b fully subscribed before
closure.

b. No definite figure of subscription, the issue should be kept open.

c. In devolvement of underwriters,underwriters shall honour commitment

within 60 days.

d. In undersubscribed issues, lead merchant banker furnish information who

failed to meet their underwriting de-volvements.

5. Bankers to an issue

Maintain a separate bank (Bankers to an issue) as per provisions of

section73(3) of the Companies Act 1956

6. Post issue advertisements

All issues and details are released within 10 days from completion of activities.

7. Basis of allotment

In oversubscription allotments are to be made in the prescribed manner.

8. Compliance with guidelines on advertisement:

The lead merchant banker shall ensure compliance with guidelines on

advertisemnet by issuer company.

Q- Venture capital financing

A- It is a private or institutional investment made into early-stage / start-up

companies (new ventures). As defined, ventures involve risk (having uncertain
outcome) in the expectation of a sizeable gain. Venture Capital is money invested
in businesses that are small; or exist only as an initiative, but have huge potential
to grow. The people who invest this money are called venture capitalists (VCs).
The venture capital investment is made when a venture capitalist buys shares of
such a company and becomes a financial partner in the business.
Venture Capital investment is also referred to risk capital or patient risk capital, as
it includes the risk of losing the money if the venture doesn’t succeed and takes
medium to long term period for the investments to fructify.
Venture Capital typically comes from institutional investors and high net worth
individuals and is pooled together by dedicated investment firms.
It is the money provided by an outside investor to finance a new, growing, or
troubled business. The venture capitalist provides the funding knowing that
there’s a significant risk associated with the company’s future profits and cash
flow. Capital is invested in exchange for an equity stake in the business rather than
given as a loan.

venture capital financing (also known as venture capital funding or VC funding) is

risk-equity investing through funds that are professionally managed and provide
seed, early-stage and later-stage funding to accelerated growth companies.
Venture capital funds provide an important link between finance and innovation
and are intended to propel a product's success or growth in the marketplace. The
main benefit to venture capitalists (or VCs) is multiple returns on their initial
investment.

Features of Venture Capital investments

 High Risk

 Lack of Liquidity

 Long term horizon

 Equity participation and capital gains

 Venture capital investments are made in innovative projects

 Suppliers of venture capital participate in the management of the company

Methods of Venture capital financing

 Equity

 participating debentures
  conditional loan

THE FUNDING PROCESS: Approaching a Venture Capital for funding as a

Company

The venture capital funding process typically involves four phases in the
company’s development:

 Idea generation

 Start-up

 Ramp up

 Exit

The venture capital funding procedure gets complete in six stages of financing
corresponding to the periods of a company’s development

 Seed money: Low level financing for proving and fructifying a new idea

 Start-up: New firms needing funds for expenses related with marketingand
product development

 First-Round: Manufacturing and early sales funding

  Second-Round: Operational capital given for early stage companies which
are selling products, but not returning a profit

 Third-Round: Also known as Mezzanine financing, this is the money for

expanding a newly beneficial company

 Fourth-Round: Also calledbridge financing, 4th round is proposed for

financing the "going public" process

Q- mutual funds

A- A mutual fund is formed when capital collected from different investors is

invested in company shares, stocks or bonds. Shared by thousands of investors
(including you), a mutual fund is managed collectively to earn the highest possible
returns. The person driving this investment vehicle is a professional fund manager.

 Money pooled from various individuals (investors)

 Well-regulated (by SEBI)

 Access to large portfolios

 Professionally Managed

 Higher returns than conventional investing

 Allows to invest in small amounts

Investing in mutual funds is the easiest means to grow your wealth. This is why
the fund manager’s expertise (thereby the fund house’s reputation) is an
important factor to consider. All mutual funds are registered with SEBI (Securities
Exchange Board of India) and therefore, quite safe.

In terms of ease with which investors can enter and exit funds, mutual funds are
broadly divided into two classes:

 Open-ended funds: Investors can buy and sell the units from the fund, at
any point of time.
  Close-ended funds: These funds raise money from investors only once.
Therefore, after the offer period, fresh investments can not be made into
the fund. If the fund is listed on a stocks exchange the units can be traded
like stocks (E.g., Morgan Stanley Growth Fund). Recently, most of the New
Fund Offers of close-ended funds provided liquidity window on a periodic
basis such as monthly or weekly. Redemption of units can be made during
specified intervals. Therefore, such funds have relatively low liquidity.

There are various classes of mutual funds depending upon the nature of
investments. Here are three broad classes from which one can choose to invest,
depending upon his risk-return profile.

 Equity funds

 Balanced funds

 Debt funds

Equity funds
These funds invest in equities and equity related instruments. With fluctuating
share prices, such funds show volatile performance, even losses. However, short
term fluctuations in the market, generally smoothens out in the long term,
thereby offering higher returns at relatively lower volatility. At the same time,
such funds can yield great capital appreciation as, historically, equities have
outperformed all asset classes in the long term. Hence, investment in equity funds
should be considered for a period of at least 3-5 years.
 Suitability Preferred
Portfolio Advantag Risk-return
Equity funds Drawbacks for investment
Allocation es profile
investors duration
Index funds Track a key A Since it is Low risk- Suitable Equity index
stock convenient more of a return profile for investing should
market way of passive amongst investors preferably be for
index, like investing strategy of equity funds. who wants long-term.
BSE Sensex in equity portfolio to earn
or Nifty. index. managemen index
Their t, the linked
portfolio returns are returns.
mirrors the highly
benchmark linked with
index both index
in terms of returns. In
composition India,
and active funds
individual offer higher
stock risk-
weightages. adjusted
returns than
index
funds.
Dividend yield funds Similar to Since As Low risk- Apt for Long term horizon is
the equity dividend appreciatio return profile conservativ preferred (at least 3
diversified yield n in the compared to e equity years)
funds stocks are value of a equity investor.
except that less dividend diversified
they invest volatile yield stock fund.
in such funds is not very
companies are high, these
offering associated funds offer
high with low lower return
dividend level of than equity
yields. risk. Less diversified
risky than funds.
a
diversified
equity
fund.
Equity diversified Invest -Purely -Limits the Diversificatio Suitable Long term horizon is
funds 100% of the diversified return n across for an preferred (at least 3
capital in across potential sectors equity years)
equities stocks and compared moderates investor
spreading sectors. to other the risk- seeking to
across aggressive return profile invest in
different Such funds equity as compared moderately
sectors and are known funds such to sector and aggressive
stocks. to be less as sector thematic scheme
volatile and funds. within the
than sector thematic category of
and funds. equity
thematic funds.
funds.
Thematic funds Invest Offer High risk is High risk and Suitable Since they invest in
100% of the higher involved high return for a set of sectors and
assets in potential because if category. aggressive industry cycle of all
sectors returns the selected investors. sectors may not be
which are than equity sectors Less of the same
related diversified perform aggressive duration, it is
through funds by poorly, the than sector preferred that
some taking fund funds. investment should
theme. advantage suffers. be made for ideally
of boom in 3-5 years.
Example- various
 Balanced funds
Their investment portfolio includes both debt and equity. As a result, on the risk-
return ladder, they fall between equity and debt funds. Balanced funds are the
ideal mutual funds vehicle for investors who prefer spreading their risk across
various instruments. Following are balanced funds classes:

 Debt-oriented funds

 Equity-oriented funds

Balanced fund Portfolio Advantages Drawbacks Risk-return Suitability for Preferred

Allocation profile investors investment
duration
Debt-oriented funds
Investment below They are less Limited These funds are Suitable for More than
65% in equities. risky as opportunities less aggressive those, who one year.
compared to of capital and hence offer want to invest
equity-oriented appreciation lower risk and in moderately
balanced due to less lower return risky fund
schemes. involvement than equity-
in equities. oriented funds.

Equity-oriented funds Invest at least 65% in A balanced fund Higher risk Due to Suitable for Investment
equities, remaining in with higher due to equity- investment in those, who in these
debt. allocation to market debt market, want to invest funds
equities. orientation. they are less in moderately should be
aggressive than risky fund with made for
Have the equity funds. higher equity long term,
potential to allocation. say 2-3
 generate higher years.
returns than
debt oriented
balanced funds.

Debt Funds
They invest only in debt instruments, and are a good option for investors averse to
idea of taking risk associated with equities. Therefore, they invest exclusively in
fixed-income instruments like bonds, debentures, Government of India securities;
and money market instruments such as certificates of deposit (CD), commercial
paper (CP) and call money. Put your money into any of these debt funds
depending on your investment horizon and needs.

 MIPs

 Arbitrage Funds

 FMPs

 Arbitrage Funds

 Income Funds

 Floating rate funds

 Gilt funds

 Liquid funds

Risk-
Portfolio Suitability for Preferred
Debt funds Advantages Drawbacks return
Allocation investors investment duration
profile
Liquid funds These funds They offer a They, They offer They are Investment duration
invest 100% high degree however, the lowest suitable for in liquid funds
in money of safety as give the return and highly risk should be short term,
market well as lowest of have the averse investors 1-3 months.
instruments, quick returns lowest risk who want to
a large maturity. among all involved. park their
portion Not only do the classes surplus for a
being liquid funds of mutual short period of
invested in offer higher funds. time.
call money returns than
 market. bank
deposits,
there’s no
tax
deduction at
source
(TDS) on
them, unlike
bank
deposits.
Gilt funds ST They invest Level of risk Return Since they Good for Investment duration
100% of associated is potential is invest in conservative could be short or
their very low. very low. governme investors who long. It is advisable
portfolio in Advantageo Investing in nt would like to to invest in short
government us to invest long term securities avail the term gilt funds when
securities of in short term gilt funds and T- benefits of the interest rates are
and T-bills. gilt fund when the bills, capital safety predicted to go up.
when the interest negligible with
interest rates rates are credit risk government
are likely to predicted to is security.
go up. fall could associated
give poor with them.
returns. They lie in
low risk-
low return
category.
Floating rate Invest in Apt avenue Typically, Interest Suitable for Investment duration
funds/ short- short-term during rising returns on rate risk is highly could be short,
term income debt papers. interest such funds very low conservative medium or long.
funds scenario, as are lower investors Long term implies
Floaters interest rate than long- duration of greater
invest in risk is term funds than 1 year. Medium
debt minimal when term is a period of 6
instruments interest months- 1 year. Short
which have rates are term is considered as
variable falling 1-3 months.
coupon rate
Arbitrage funds They Due to the Attractive These Suitable for Suitable for short as
generate usage of arbitrage funds are conservative well as long term
income arbitrage opportuniti less risky investors who investment. Some
through strategy, es may not than MIPs would like to funds charge exit
arbitrage equity risk is occur since their avail better loads if redeemed
opportunitie negligible. always. exposure returns than before a specific
s due to Hence they Assets are in equities debt funds. period. This factor
mis-pricing can deliver therefore is hedged. should be considered
between superior allocated to before making an
cash market risk-adjusted money investment in a fund.
and returns than markets.
derivatives other short This lowers
market. term debt the return
Funds are funds. potential.
allocated to
equities, Some funds
 derivatives do not offer
and money the facility
markets. of
Higher redeeming
proportion units on
(around any
75%) is put working
in money day, thus
markets, in reducing
the absence the
of arbitrage liquidity
opportunitie associated
s. with the
fund.
Gilt funds LT They invest Level of Give Credit risk Suitable for Depends on factors
100% of credit risk/ slightly is highly like outlook for
their default risk lower minimal. conservative interest rate,
portfolio in is very low. return that Interest investors (like investor’s investment
long-term other long- rate risk in trusts, pension horizon etc.
government Offer good term these funds etc.) not
securities returns with income funds is willing to invest
low risk funds higher beyond govt.
when which than short- securities
interest rates invest in term
are falling corporate income
bonds. funds.
Returns not
favourable
when
interest
rates are
rising
Income funds Typically, They offer In a rising Interest Apt to invest in Depends on factors
LT such funds better return interest rate rate risk in long term funds like outlook for
invest a than other scenario, these in a declining interest rate,
major short-term income funds is interest rate investor’s investment
portion of income funds may higher scenario. horizon etc.
the portfolio funds in not give than short-
in long-term falling fruitful term
debt papers. interest rate results. income
scenario funds.
MIPs Have an Offer better Low return They are Suitable for More than one year.
exposure of returns than potential as the most conservative/de
70%-90% to income compared aggressive bt investors
debt and an funds due to to equity among all who do not
exposure of their gain oriented debt mind a small
10%-30% to from the funds funds, due exposure to
equities. upside of to their equities.
stock exposure
market. to
equities.
FMPs They invest Interest rate Illiquidity Very low Suitable for FMPs offered for
 in debt risk is due to lock- risk fixed deposit varying durations,
papers almost nil in period investors such as 1 month, 3
whose willing to have months, 6 months, 1
maturity is Due to better post tax year, 3years etc.
in line with favourable returns
that of the tax treatment Should be chosen
fund of debt based on one’s
funds requirement
against bank
fixed
deposits,
post tax
returns are
usually
higher

One can
lock-in
prevailing
yields in the
market by
investing in
the fund

Q-What is 'Greenshoe Option'?

A- In security issues, a greenshoe option is an over-allotment option. In the

context of an initial public offering (IPO), it is a provision in an underwriting
agreement that grants the underwriter the right to sell investors more shares than
originally planned by the issuer if the demand for a security issue proves higher
than expected.

A green shoe option is a clause contained in the underwriting agreement of

an initial public offering (IPO). Also known as an over-allotment provision, it allows
the underwriting syndicate to buy up to an additional 15% of the shares at
the offering price if public demand for the shares exceeds expectations and
the stock trades above its offering price

(UNIT-2)
Money Market is a segment of Financial Market where borrowing and lending of
short-term funds take place. The maturity of money market instruments is from
one day to one year. In India, this market is regulated by both RBI and SEBI.

The nature of transactions in this market is such that they are large in amount and
high in volume. Thus we can say that the entire market is dominated by a small
number of large players.

Indian money market is divided into two segments

1. Unorganized money market

The unorganized money market is an old and ancient market, mainly it made of
Indigenous Bankers and Money Lenders etc.

2. Organized money market

The organized money market is that part which comes under the regulatory ambit
of RBI & SEBI. Governments (Central and State), Discount and Finance House of
India (DFHI), Mutual Funds, Corporate, Commercial or Cooperative Banks, Public
Sector Undertakings, Insurance Companies and Financial Institutions and Non-
Banking Financial Companies (NBFCs) are the key players of Organized Indian
Money Market.

Structure of organized money market of India

The organized money market in India is not a single market. It is a combination of

markets of various instruments.

1. Call money or notice money

Call money, notice money, and term money markets are sub-markets of
the Indian money market. These markets provide funds for very short-term.
Lending and borrowing from the call money market for 1 day.

Whereas lending and borrowing of funds from notice money market are for 2 to
14 days. And when there are borrowing and lending of funds for the tenor of
more than 14 days, it refers to “Term Money”.
2. Treasury bills

The Bill market is a sub-market of this market in India. There are two types of the
bill in the money market. They are treasury bills and commercial bill. The treasury
bills are also known as T-Bills, T-bills are issued by the Central bank on behalf of
Government, whereas Commercial Bills are issued by Financial Institutions.

Treasury bills do not yield any interest, but it is issued at discount and repaid at
par at the time of maturity. In T-bills there is no risk of default; it is a safe
investment instrument.

3. Commercial bills

Commercial bill is a money market instrument which is similar to the bill of

exchange; it is issued by a Commercial organization to raise money for short-term
needs. In India, the participants of the commercial bill market are banks and
financial institutions.

4. Certificate of deposits

Certificate of Deposits also known as CDs. It is a negotiable money market

instrument. It is like a promissory note. Rates, terms, and amounts vary from
institution to institution. CDs are not supposed to trade publically neither it is
traded on any exchange.

In general institutions issue certificate of deposit at discount on its face value. The
banks and financial institutions can issue CDs on a floating rate basis.

5. Commercial paper

The commercial paper is another money market instrument in India. We also call
commercial paper as CP. CP refers to a short-term unsecured money market
instrument. Big corporations with good credit rating issue commercial paper as a
promissory note. There is no collateral support for CPs. Hence, only large firms
with considerable financial strength can issue the instrument.
 6. Money market mutual funds (MMMFs)

Money Market Mutual Funds were introduced by RBI in 1992 and since 2000 they
are brought under the regulation of SEBI. It is an open-ended mutual fund which
invests in short-term debt securities.

This kind of mutual fund is a mutual fund which solely invests in instruments of
this market.

7. Repo and reverse repo market

Repo means “Repurchase Agreement”. It exists in India since December

1992. REPO means selling a security under an agreement to repurchase it at a
predetermined date and rate. Those who deal in government securities they use
repo as an overnight borrowings.

Discount and Finance House of India (the DFHI)

The RBI establishes DFHI in 1988. RBI, Public Sectors Banks, and other Indian
financial institutions jointly own DFHI. The DFHI paid-up capital consists of the
contribution of these institutions jointly.

DFHI plays an important role in developing an active secondary market. It deals in

T-Bills, Commercial bills, CDs, CPs, call money market and government securities.

Functions of Indian money markets

The instruments of this market are liquid when we compare it with other financial
instruments. We can convert these instruments into cash easily. Thus, they are
able to address the need for the short-term surplus funds of the lenders and
short-term fund requirements of the borrowers.

The major functions of such market instrument are to cater to the short-term
financial needs of the economy. Some other functions are as following:

1. It helps in effective implementation of the RBI’s monetary policy.

2. This market helps to maintain demand and supply equilibrium with regard
to short-term funds.

3. It also meets the need of short-term fund requirement of the government.

4. It helps in maintaining the liquidity in the economy.

Importance of Money Market

A developed money market plays an important role in the financial system of a

country by supplying short-term funds adequately and quickly to trade and
industry. The money market is an integral part of a country’s economy. Therefore,
a developed money market is highly indispensable for the rapid development of
the economy. A developed money market helps the smooth functioning of
the financial system in any economy in the following ways:

 Development Of Trade And Industry: Money market is an important source

of financing trade and industry. The money market, through discounting
operations and commercial papers, finances the short-term working capital
requirements of trade and industry and facilities the development of industry
and trade both – national and international.

 Development Of Capital Market: The short-term rates of interest and the

conditions that prevail in the money market influence the long-term interest as
well as the resource mobilization in capital market. Hence, the development of
capital depends upon the existence of a development of capital money market.

 Smooth Functioning of Commercial Banks: The money market provides

the commercial banks with facilities for temporarily employing their surplus
funds in easily realizable assets. The banks can get back the funds quickly, in
times of need, by resorting to the money market. The commercial banks gain
immensely by economizing on their cash balances in hand and at the same time
meeting the demand for large withdrawal of their depositors. It also enables
commercial banks to meet their statutory requirements of cash reserve ratio
(CRR) and Statutory Liquidity Ratio (SLR) by utilizing the money market
mechanism.
 Effective Central Bank Control: A developed money market helps the
effective functioning of a central bank. It facilities effective implementation of
the monetary policy of a central bank. The central bank, through the money
market, pumps new money into the economy in slump and siphons if off in
boom. The central bank, thus, regulates the flow of money so as to promote
economic growth with stability.

 Formulation Of Suitable Monetary Policy: Conditions prevailing in a money

market serve as a true indicator of the monetary state of an economy. Hence, it
serves as a guide to the Government in formulating and revising the monetary
policy then and there depending upon the monetary conditions prevailing in the
market.

 Non-Inflationary Source Of Finance To Government: A developed money

market helps the Government to raise short-term funds through the treasury
bills floated in the market. In the absence of a developed money market, the
Government would be forced to print and issue more money or borrow from
the central bank. Both ways would lead to an increase in prices and the
consequent inflationary trend in the economy.

Q- Scrip issue

A- A scrip issue (also called a capitalisation issue or a bonus issue) is the issue of
new shares to existing shareholders at no charge, pro rata to their existing
shareholdings.

The term capitalisation issue is less common but more accurate than the terms
scrip or bonus issue. It reflects what happens in the books of the company.
The share capital (on the balance sheet) has to increase by the nominal value of
the newly issued shares. This is balanced by an equal decrease in another part of
the shareholders' funds, such as retained earnings or a revaluation reserve. This is
capitalisation

A scrip issue moves money from one account that belongs to the shareholders to
another account that belongs to the shareholders. It is therefore basically a
bookkeeping exercise and the value of any shareholding is unchanged by a bonus
issue despite the increase in the number of shares held.
Share price charts and other comparisons should be adjusted for the bonus issue.
For example, if a 1 for 5 bonus issue has taken place, then prices from before the
share went ex-scrip should be adjusted by multiplying by 5/6 in order to make
them comparable with the current price.

In spite of being a bookkeeping exercise, a scrip issue can have an impact on the
share price for two reasons:

 A scrip issue is a gesture of confidence. The amount available to pay

dividends is reduced — therefore it can be inferred that the
management of the company is sure that the amount capitalised will
not be needed to pay dividends.

 It can improve the liquidity of very high priced shares, if the old share
price was so high as to make the trading of small blocks awkward.

PROCEDURE FOR SCRIP ISSUE

STEP-I

Call the Board Meeting:

 As per Section 173(3): Issue Notice of atleast 7 days for calling meeting of
Board of Directors.

STEP-II

Hold the Board Meeting:

 Check the Quorum as per Section 174(1): Quorum for the Meeting of Board
of Directors is 1/3rd of total strength of Board or 2 directors, whichever is
higher.

 Place before the Board Resolution for issue of Bonus Shares.

 Pass Board Resolution for issue of shares.

 Decide the Ration of Shares offering to share holders.

 Fixing the date, time, and venue of the general meeting and authorizing a
director or any other person to send the notice for the same to the members.

 Provisions of the Section 101 of the Companies Act 2013 provides for issue
of notice of EGM in writing to below mentions atleast 21 days before the actual
date of the EGM :

o All the Directors.

o Members

o Auditors of Company

 The notice shall specify the place, date, day and time of the meeting and
contain a statement on the business to be transacted at the EGM.

 Authorize a director to do all the work relating to issue notice of right issue.

STEP-III

File MGT-14:

 File e-form- MGT-14 with in 30 days of Passing of Board Resolution for issue
of shares.

Attachment:

 Resolution for issue of shares.

STEP-IV

CONVENE A GENERAL MEETING:

 Check the Quorum.

 Check whether auditor is present, if not. Then Leave of absence is Granted

or Not. (As per Section- 146).
 Pass Ordinary Resolution for bonus issue of shares.

STEP-V

Call the Board Meeting: As per Section 173(3): Issue Notice of atleast 7 days for
calling meeting of Board of Directors.

Hold the Board Meeting

 Pass Board Resolution for allotment of shares.

STEP-VI

Filling of e-Forms

1. File PAS-3:

 File e-form PAS-3 with in 30 days of passing of Board Resolution for

allotment of shares.

Attachment:

 Ordinary Resolution for Bonus issue of shares.

 Board Resolution for allotment of shares.

 List of Allottees. (as per annexure –B of PAS-3)- Mentioning Name, Address,

occupation if any and number of securities allotted to each of the allottees and
the list shall be certified by the signatory of the form pas-3.

STEP-VII

Issue Share Certificates:

 Company will issue share certificate to the share holders with in 2 month
from the date of allotment of shares.
Q- Types of Issue of Shares in Indian Capital Market

A- 1. Public Issue through Prospectus

This method is the most common and popular method of issue of securities. The
securities are offered to the investors through a detailed statement of terms and
conditions known as prospectus. The prospectus is also known as the offer
document. One of the shortcomings of this method is that it is an expensive
method. High cost of advertisement, flotation, brokerage and underwriting are
involved. In order to save the high cost of issue by prospectus, the companies are
allowed to issue the securities through an abridged prospectus also. The contents
of the abridged prospectus are less than the regular prospectus.

2. Offer for Sale

In certain cases, the companies do not offer the securities directly to the
investors. Instead, the securities are issued to an issue house or a merchant
banker who will subsequently offer the securities for sale to the investors.
Sometimes, the existing shareholder(s) (a holding company or a foreign parent
company) may offer to offload their holding to the investors. The difference
between the issue price by the company and the offer price by the issue house is
the gain to the latter. Disinvestment of shares in PSU by the Government is offer
for sale. Contents of the Letter of Offer for Sale are given in Chapter VI(Section III)
of the SEBI Guidelines, 2000.

3. Issue through Private Placement of Securities

In this case, the issuing company does not offer the securities to investors in
general. Instead, the securities are offered to selected big institutional clients only.
The institutional investors may be selected in conformity with the merchant
banker. The terms and conditions are agreed between the company and the
institutional buyer. SEBI Guidelines, 2000 are not applicable in case of private
placement, because there is no public offer involved. Unlisted companies may also
adopt this method. Even listed companies may adopt private placement method
for raising of funds through debt instruments.

4. Offer through Book-building Process

Public issue of securities through the book-building process is a relatively new

concept for Indian capital market. In case of book-building, the company decides
the funds to be raised. The number of securities and issue price are decided by
the demand and supply forces. In this case, offers are invited from the public,
stating the price as well as the number of shares, the investors are ready to buy.
On the basis of bids received from the investors, the issue price is decided by the
company. At the price, all the eligible investors are issued securities.

5. Public Offer through Stock Exchange On-line System

Securities and Exchange Board of India (SEBI) has also allowed to offer shares
through the on-line systems of stock exchanges. In this case, the issuing company
has to fulfil the general requirements of public offer as well as some other
conditions. The company has to enter into an agreement with a stock exchange
which has an on-line system. It has to appoint the requisite merchant bankers. The
company shall announce the process of application and allotment, opening and
closing dates of the subscription, etc. The applications are to be submitted
through stock brokers. The brokers enter the application in the on-line system as a
buy order. On the closure of the issue, the stock exchange and the merchant
banker ensure that there is a fair and proper allotment of shares. The successful
applicants may get the shares in physical form or dematerialised form.

Q- What is a 'Road Show'

A- A road show is a presentation given by an issuer of securities to potential

buyers. The management of a company or its underwriters issuing securities or
doing an initial public offering (IPO) travels around the country to give
presentations to analysts, fund managers, and potential investors. The road show
is intended to generate excitement and interest in the issue or IPO, and is often
critical to the success of the offering.

Q- What is a 'Commercial Bank'

A- A commercial bank is a type of financial institution that accepts deposits; offers

checking account services; makes business, personal and mortgage loans; and
offers basic financial products like certificates of deposit (CDs) and savings
accounts to individuals and small businesses. A commercial bank is where most
people do their banking, as opposed to an investment bank.

Functions
Banking functions

 Acceptance of Deposits from Public

 Credit creation

 Advancing Loans

 Use of Cheque system

 Remittance of Funds

Non-Banking functions

 Agency Services

 General Utility Services

Q- Meaning and Features of a Development Bank?

A- Development bank is essentially a multi-purpose financial institution with a
broad development outlook. A development bank may, thus, be defined as a
financial institution concerned with providing all types of financial assistance
(medium as well as long term) to business units, in the form of loans,
underwriting, investment and guarantee operations, and promotional activities —
economic development in general, and industrial development, in particular.In
short, a development bank is a development- oriented bank.

Following are the main characteristic features of a development bank:

1. It is a specialised financial institution.

2. It provides medium and long term finance to business units.

3. Unlike commercial banks, it does not accept deposits from the public.

4. It is not just a term-lending institution. It is a multi-purpose financial institution.

5. It is essentially a development-oriented bank. Its primary object is to promote
economic development by promoting investment and entrepreneurial activity in a
developing economy. It encourages new and small entrepreneurs and seeks
balanced regional growth.

6. It provides financial assistance not only to the private sector but also to the
public sector undertakings.

7. It aims at promoting the saving and investment habit in the community.

8. It does not compete with the normal channels of finance, i.e., finance already
made available by the banks and other conventional financial institutions. Its
major role is of a gap-filler, i. e., to fill up the deficiencies of the existing financial
facilities.

9. Its motive is to serve public interest rather than to make profits. It works in the
general interest of the nation.

Q- What is a 'Custodian'

A- A custodian is a financial institution that holds customers' securities

for safekeeping so as to minimize the risk of their theft or loss. A custodian holds
securities and other assets in electronic or physical form. Since they are
responsible for the safety of assets and securities that may be worth hundreds of
millions or even billions of dollars, custodians generally tend to be large and
reputable firms. A custodian is sometimes referred to as a "custodian
bank."Custodians are clearing members but not trading members. They settle
trades on behalf of their clients that are executed through other trading members.
A trading member may assign a particular trade to a custodian for settlement. The
custodian is required to confirm whether he is going to settle that trade or not. If
the custodian confirms the trade, NSE Clearing assigns the obligation to the
custodian. If the custodian rejects the trade, the obligation is assigned back to the
trading member.Custodians Clearing members are required to request Clearing
Corporation for allotment of Custodian Participant (CP) code for the clients for
which they wish to clear and settle.

Q- Issue Manager - Any financial institution / intermediary which can carry out
the activities connected with issue management is registered with SEBI and follow
its regulations and guidelines is capable of venturing into issue management.
Issue management is an important activity for merchant bankers.

Requirements:

The issue manager needs to satisfy the following requirements before being
allowed by the SEBI to carry out various issue management activities:

1) Adequate and necessary infrastructure such as adequate office space,

equipments and manpower to various issue management activities.
2) Minimum number of two persons needed, who are professionally qualified in
Law, Finance or Business Management and have the experience to conduct the
business of the merchant banker.
3) Fulfilling the capital adequacy requirements i.e. a minimum net worth of Rs 5
crores.

Categories of Issue Managers:

SEBI has classified Issue Managers into four categories:

1) Category I: Merchant banker who is authorized to act as issue manager, advisor,

consultant, underwriter and portfolio manager.
2) Category II: Merchant banker who is authorized to act only as advisor,
consultant, underwriter and portfolio manager.
3) Category III: Merchant banker who is authorized to act as underwriter, advisor
and consultant to an issue
4) Category IV: Merchant banker who is authorized to act only as advisor or
consultant to an issue.
Q- Credit Rating Agency

A- A credit rating agency (CRA) is a company that rates debtors on the basis of
their ability to pay back their interests and loan amount on time and the
probability of them defaulting. These agencies may also analyse the
creditworthiness of debt issuers and provide credit ratings to only organisations
and not individuals consumers. The assessed entities may be companies, special
purpose entities, state governments, local governmental bodies, non-profit
organisations and even countries. Individual customers are rated by specialised
agencies known as credit bureaus that provide a credit score to every customer
based on his/her financial history.

Credit rating serves following functions:

(1) Provides superior Information:
Provides superior information on credit risk for three reasons: (i) An independent
rating agency, unlike brokers, financial intermediatories, underwriters who have
vested interest in an issue, is likely to provide an unbiased opinion; (ii) Due to
professional and highly trained staff, their ability to assess risk is better, and finally,
(iii) the rating firm has access to a lot of information which may not be publically
available.

(2) Low cost information:

Rating firm gathers, analyses, interprets and summarises complex information in a
simple and readily understood formal manner. It is highly welcome by most
investors who find it prohibitively expensive and simply impossible to do such
credit evaluation of their own.

(3) Basis for a proper risk and return:

If an instrument is rated by a credit rating agency, then such instrument enjoys
higher confidence from investors. Investors have some idea as to what is the risk
associated with the instrument in which he/she is likely to take, if investment is
done in that security.

(4) Healthy discipline on corporate borrowers:

Higher credit rating to any credit investment tends to enhance the corporate
image and visibility and hence it induces a healthy discipline on corporate.

(5) Greater credence to financial and other representation:

When credit rating agency rates a security, its own reputation is at stake. So it
seeks financial and other information, the quality of which is acceptable to it. As
the issue complies with the demands of a credit rating agency on a continuing
basis, its financial and other representations acquire greater credibility.

(6) Formation of public policy:

Public policy guidelines on what kinds of securities are eligible for inclusions in
different kinds of institutional portfolios can be developed with greater confidence
if debt securities are rated professionally.

Credit rating suffers from the following limitations;

a. Non-disclosure of significant information. Firm being rated may not provide

significant or material information, which is likely to affect the investor’s decision
as to investment, to the investigation team of the credit rating company. Thus any
decisions taken in the absence of such significant information may put investors at
a loss.

b. Static study. Rating is a static study of present and past historic data of the
company at one particular point of time. Number of factors including economic,
political, environment, and government policies have direct bearing on the
working of a company. Any changes after the assignment of rating symbols may
defeat the very purpose of risk indicativeness of rating.

c. Rating is no certificate of soundness. Rating grades by the rating agencies are

only an opinion about the capability of the company to meets its interest
obligations. Rating symbols do not pinpoint towards quality of products or
management or staff etc. In other words rating does not give a certificate of the
complete soundness of the company. Users should form an independent view of
the rating symbol.

d. Rating may be biased. Personal bias of the investigating team might affect the
quality of the rating. The companies having lower grade rating do not advertise or
use the rating while raising funds from the public. In such a case the investors
cannot get the true information about the risk involved in the instrument.

e. Rating under unfavorable conditions. Rating grades are not always

representative of the true image of a company. A company might be given low
grade because it was passing through unfavorable conditions when rated. Thus,
misleading conclusions may be drawn by the investors which hampers the
company’s interest.

f. Difference in rating grades. Same instrument may be rated differently by the

two rating agencies because of the personal judgment of the investigating staff on
qualitative aspects. This may further confuse the investors.

Some of the credit rating agencies in India:

 CRISIL (Credit Rating Information Services of India Limited )

 CARE (Credit Analysis and Research limited)

  ICRA (Investment Information and Credit Rating Agency)

 SMERA (Small and Medium Enterprises Rating Agency of India)

 FITCH India

 ONICRA Credit Rating Agency

(UNIT-3)

Q- What Is Risk Management?

A- It is a process or group in an organization that takes management action to

reduce risk. In this activity, there is an involvement of the process of measuring
and developing strategies in order to manage the risk. The strategies employed
might include the transferring of the risk to another party or avoiding the risk. It
also seeks to reduce the negative effect of risk and again accept some of the
consequences of a particular risk. Now do you think that investing in the stock
market is a risk? Well to some traders it is a risk and so they always try to make
a good research of the stocks before investing.

There is day trading for people who wish to go for short term investments. But
there are many traders who do not wish to take this type of risk as they think that
this type of trading is very risky and this is the reason they do not dare to invest in
day trading. But there are some investors who think that this is the best possible
means to get good benefits. So there is a difference between the thinking of
different investors.

Q- Investor Grievances

A- BSE has established a Department of Investors Services (DIS) to redress

 investors' grievances. Since its establishment in 1986, the DIS has played a
pivotal role in enhancing and maintaining investors' faith and confidence by
resolving their grievances either against listed companies or against BSE's
Trading Members. The services offered by DIS are as under:

(a) Investors' Grievances against Listed Companies

Investors' complaints against listed companies are forwarded by BSE to the

concerned companies, with a copy sent to the complainant. The investors
are advised to inform BSE if the complaints are not resolved within 30 days.
If a company fails to redress the complaint within 30 days, BSE sends a
reminder to the company. BSE follows-up with the companies and / or their
Registrar & Transfer Agents, to resolve such complaints. If the total number
of pending complaints against a company exceeds 25 and remain
unresolved by the company for more than 45 days, then steps are initiated
by BSE to suspend trading in the securities of such company till the
complaints are resolved. BSE may also transfer such scrips to, "Z" Group.

A "Z" category company indicates that it has not complied with various
provisions of the listing agreement including non-resolution of investors'
complaints. Through creation of "Z' category, BSE cautions investors to be
more careful in their investments in such companies.

Investors are expected to submit their complaints in the

prescribed Complaint format to the nearest Regional Investor Service
Centre of BSE on the basis of an investor's address. Filing of complaint at
the concerned Regional Investor Service Centre will enable to process the
complaint expeditiously.

(b) Investors' Grievances against BSE's Trading Members

Investors are expected to submit their complaints in the

prescribed Complaint Form.

Q- Badla- was an indigenous carry-forward system invented on the Bombay Stock

Exchange as a solution to the perpetual lack of liquidity in the secondary
market. Badla were banned by the Securities and Exchange Board of India (SEBI)
in 1993, effective March 1994, amid complaints from foreign investors, with the
expectation that it would be replaced by a futures-and-options exchange. Such an
exchange was not established and badla were legalized again in 1996 (with a
carry-forward limit of Rs 200 million per broker) and banned again on 2 July 2001,
following the introduction of futures contracts in 2000

Carry forward:

Carry forward are usually related to the firms that have cyclic working such as
transportation. This is often referred to as tax loss. This is the operating loss in a
business. This can be claimed after a fixed number of years in a future period. A
loss in the current year will be carry forward to a later period in a future year and
this can be used to offset profit.

There are no limits set on the capital loss that can be used to offset profit in a year
for carry forward. The losses that are in excess of gains only will be used to offset
income. This is also referred to as carry over. Carry forward is a term used to apply
to personal pensions. This takes into consideration the tax rules. This means that
the individual can make contributions apart from the taxes of the current tax year.
Before applying the carry forward, the contributions for the current year has to be
paid in full.

If an account has a year end balance and that is positive, the amount will be
automatically carry forwarded to the nest fiscal year. The budget will be
appropriated before the calculations for the next fiscal year is made. Carry
forward has several rules that need to be documented and is dependent on the
place where it is going to be executed. The rules need to be followed in
connection to the carry forward of surplus or deficit in a budget.

The carry forward needs to be executed in connection to the department where it

is applicable. There are university rules concerning the carry forward in specific
departments in carry forward. There can be special rules as to how the budget
needs to be carry forwarded to the next fiscal year. The balance can be adjusted to
be used for the next fiscal year and this requires that the rules are strictly
followed. This has to be properly documented and submitted to the concerned
authority to make the rule analysis proper
Q- What is ALBM?

A- Automated Lending and Borrowing Mechanism (ALBM) is a scheme introduced

by the NSE that acts as a facilitator for securities lending. It also facilitates
financing in addition to securities lending.

ALBM provides a facility to members to lend or borrow securities at market

determined rates.This mechanism is designed essentially to facilitate the members
to meet the settlement obligations by borrowing the securities from the members
willing to lend securities.

Q- What is 'Insider Trading'

A- Insider trading is the buying or selling of a security by someone who has access
to material nonpublic information about the security. Insider trading can be illegal
or legal depending on when the insider makes the trade. It is illegal when the
material information is still nonpublic.

Insider trading is defined as a malpractice wherein trade of a company's securities

is undertaken by people who by virtue of their work have access to the otherwise
non public information which can be crucial for making investment decisions.

When insiders, e.g. key employees or executives who have access to the strategic
information about the company, use the same for trading in the company's stocks
or securities, it is called insider trading and is highly discouraged by the Securities
and Exchange Board of India to promote fair trading in the market for the benefit
of the common investor.

Insider trading is an unfair practice, wherein the other stock holders are at a great
disadvantage due to lack of important insider non-public information. However, in
certain cases if the information has been made public, in a way that all concerned
investors have access to it, that will not be a case of illegal insider trading.

Q- DEFINITION of 'Circular Trading'

A- Circular trading is a fraudulent scheme where sell orders are entered by a

broker who knows that offsetting buy orders for the exact same number of
shares.This refers to a fraudulent trading scheme where a broker or trader or
another person’s in collusion with each other enter into sell order exactly
offsetting the buy orders since they have prior information. This is done to operate
the price of the underlying assets by increasing the volume of trade.

They are aware of the exact number of shares at the exact time for the exact price
that should be entered to neutralize or offset the deal. This discourages
competition and there is no change in the beneficial ownership of the security.
When the trading volume increases, there is a false belief among the investors
about a major event such as a merger or an acquisition ahead and some day
traders or small investors may lose money in this process.

Q- price rigging

A- Also known as collusion or price fixing, price rigging occurs when a group of
people or businesses agree to set the price for something. rice rigging is an illegal
action that occurs when parties conspire to fix or inflate prices to achieve higher
profits at the expense of the consumer. Also known as "price fixing" or "collusion,"
price rigging can be found in any industry.

Cases of price rigging may be prosecuted under the antitrust laws of several
different countries, as it runs contrary to natural market forces (such as supply and
demand). It has the effect of dampening competition, which tends to favor the
consumer with greater variety and lower prices. Price rigging is a form of market
manipulation. As a term, "price rigging" is most commonly used in British English,
while "price fixing" is more common in North America.

In the stock market, traders with inside information might conspire to work
together on trades in order to benefit from the inside information. Likewise,
sellers might inflate the price of an asset to realize more profits.

Q- Types of Speculators in Stock Exchanges

A- There are 4 types of speculators in a stock exchange. They are Bulls, Bears,
Stags and Lame Ducks. They are briefly explained below.
1. Bull
A Bull is a speculator who anticipates rise in the price of securities. He buys
securities with a view to sell them in future at a higher price and thereby earns
profits. In case the prices of securities fall, he loses. He has the option to carry
forward the transaction to the next settlement by paying a charge termed,
‘contango’.
In India, a bull is also known as tejiwala. He is said to be a bull because just like a
bull which tries to throw its victim up in the air, he expects to profit from increase
in share prices.

2. Bear
A Bear is a speculator, who anticipates fall in the price of securities. He sells-
securities for future delivery. He sells securities which he does not possess with
the hope to buy the securities at a lower price before the date of delivery. In India,
a bear is also known as mandiwala.

3.Stag
A stag is bullish in nature. A stag applies for securities of a new company with the
idea of selling them at a premium after allotment. His profit is the excess of the
price at which he sells his allotment over the amount paid by him while applying.
He expects that the prices of securities that he applies for would increase.
Let us assume Mr.X applies for 100 shares of Rs.10 each in ABC Ltd., In case he is
allotted 100 shares and he sells it for Rs.15, his profit will be Rs.500 (100 x Rs.15 –
100 x Rs. 10).

The activity undertaken by a stag is not free from risk. The price of securities
might decline after allotment. This situation can arise even in case of at par issues
but happens mostly in case of issues which carry a high premium.

4. Lame duck
This refers to the condition of a bear who is not able to meet his commitments. A
bear sell securities which he does not hold, with the expectation that prices are
going to fall. His intention is to buy them at a lower price later and profit from the
difference. On the fixed date he may not be able to deliver the security as it may
not be available in the market. The buyer may not be inclined to carry forward the
transaction. In such a case, the bear is said to be struggling like a lame duck.

Q- Regulations of stock exchange in India

A- Indian Capital Markets are regulated and monitored by the Ministry of Finance,
The Securities and Exchange Board of India and The Reserve Bank of India.
The Ministry of Finance regulates through the Department of Economic Affairs -
Capital Markets Division. The division is responsible for formulating the policies
related to the orderly growth and development of the securities markets (i.e.
share, debt and derivatives) as well as protecting the interest of the investors. In
particular, it is responsible for
 institutional reforms in the securities markets,
 building regulatory and market institutions,
 strengthening investor protection mechanism, and
 providing efficient legislative framework for securities markets.

The Division administers legislations and rules made under the

 Depositories Act, 1996,
 Securities Contracts (Regulation) Act, 1956 and
 Securities and Exchange Board of India Act, 1992.

The Regulators
Securities & Exchange Board of India (SEBI)
The Securities and Exchange Board of India (SEBI) is the regulatory authority
established under the SEBI Act 1992 and is the principal regulator for Stock
Exchanges in India. SEBI’s primary functions include protecting investor interests,
promoting and regulating the Indian securities markets. All financial
intermediaries permitted by their respective regulators to participate in the Indian
securities markets are governed by SEBI regulations, whether domestic or foreign.
Foreign Portfolio Investors are required to register with DDPs in order to
participate in the Indian securities markets.
Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act,
1934. The RBI is responsible for implementing monetary and credit policies,
issuing currency notes, being banker to the government, regulator of the banking
system, manager of foreign exchange, and regulator of payment & settlement
systems while continuously working towards the development of Indian financial
markets. The RBI regulates financial markets and systems through different
legislations. It regulates the foreign exchange markets through the Foreign
Exchange Management Act, 1999.
National Stock Exchange (NSE) – Rules and Regulations
In the role of a securities market participant, NSE is required to set out and
implement rules and regulations to govern the securities market. These rules and
regulations extend to member registration, securities listing, transaction
monitoring, compliance by members to SEBI / RBI regulations, investor protection
etc. NSE has a set of Rules and Regulations specifically applicable to each of its
trading segments. NSE as an entity regulated by SEBI undergoes regular
inspections by them to ensure compliance.

Q- Stock market indices

A- It is a procedure of measuring certain stocks. They are used to measure the

performance of the certain portfolios.The prime use of the indices is to
understand the trends of the market. A stock market index is a statistical measure
which shows changes taking place in the stock market. To create an index, a few
similar kinds of stocks are chosen from amongst the securities already listed on
the exchange and grouped together.
The criteria of stock selection could be the type of industry, market capitalisation
or the size of the company. The value of the stock market index is computed using
values of the underlying stocks. Any change taking place in the underlying stock
prices impact the overall value of the index. If the prices of most of the underlying
securities rise, then the index will rise and vice-versa.
In this way, a stock index reflects overall market sentiment and direction of price
movements of products in the financial, commodities or any other markets.
Some of the notable indices in India are as follows:
Here we have listed some major stock market indices of Indian stock market.

1. BSE Sensex

2. NSE Nifty

3. CNX IT- C = Credit Rating Information Services of India Limited (CRISIL) and the
N = National Stock Exchange of India (NSE) & X = Exchange

4. CND Nifty

5. BSE Bankex
 6. C&P CNX 500

7. Nifty 50 - the full form of Nifty is “National and Fifty”. It means that
nifty consists of 50 stocks that are actively traded. Furthermore, these
stocks belong to 12 different sectors of the economy.

8. There are broader indices like BSE 500.

Q- Role of Foreign Institutional Investors or FIIs

A- Foreign Institutional Investors or FIIs are funds or investment firms that are
from outside the country in which they are investing. In the context of the share
market, the FIIs may include Foreign Mutual Funds, Pension Funds, Insurance
Companies, Hedge Funds, etc.

Foreign Institutional Investors play an important role in the share markets because
of their heavy investment capacity. They are generally cash rich and look for good
avenues to invest their money.

They bring in lot of advantages to the share market

1. FIIs pump in a huge money in a company share, thereby increasing the

valuation of the company and increasing the demand for the company
share

2. More the FIIs invest in a particular company share, a positive sentiment

prevails in the market on the share, thereby increasing the demand

FIIs investment in a share comes with its own share of downsides

1. Even though FIIs investment in a share increases its visibility and valuation,
it makes the share tightly coupled with the global investors and makes it
more vulnerable to global cues
 2. In general, factors like currency rate or political sentiments or economic
factors or policy changes in a foreign land do not impact the valuation of a
share in the local market.

However, if there is a huge involvement from FIIs from any of the countries where
the political environment or the economic environment is not stable or if there is
a major shift, it will have a big chain effect on the share in which the FII has
invested.

Q- What are some roles of an investment bank?

A- Investment banks serve a number of purposes in the financial and investment
world, including underwriting of new stock issues, handling mergers and
acquisitions, and acting as a financial advisor.

Other roles of investment banks include asset management for large investment
funds and personal wealth management for high-net-worth individuals. Some of
the major investment banks include Goldman Sachs, JPMorgan Chase and Credit
Suisse.

Underwriting New Stock Issues

One of the primary roles of an investment bank is to serve as a sort of
intermediary between corporations and investors through initial public offerings
(IPOs). Investment banks provide underwriting services for new stock issues when
a company decides to go public and seeks equity funding. Underwriting basically
involves the investment bank purchasing an agreed-upon number of shares of the
new stock, which it then resells through a stock exchange.

Part of the investment bank's job is to evaluate the company and determine a
reasonable price at which to offer stock shares. IPOs, especially for larger
companies, commonly involve more than one investment bank. This way, the risk
of underwriting spreads across several banks, reducing the exposure of any single
bank and requiring a relatively lower financial commitment to the IPO. Investment
banks also act as underwriters for corporate bond issues.

Financial Advisory Roles

Investment bankers act in several different advisory capacities for their clients. In
addition to handling IPOs, investment banks offer corporations advice on taking
the company public or on raising capital through alternative means. Investment
banks regularly advise their clients on all aspects of financing.

Mergers and Acquisitions

Handling mergers and acquisitions is a major function of investment bankers. As
with IPOs, one of the main areas of expertise for an investment bank is its ability
to evaluate the worth of a possible acquisition and arrive at a fair price. An
investment bank can additionally assist in structuring and facilitating the
acquisition to make the deal go as smoothly as possible.

Q- What is the 'Bond Market'

A- The bond market – also called the debt market or credit market – is a financial
market in which the participants are provided with the issuance and trading
of debt securities. The bond market primarily includes government-issued
securities and corporate debt securities, facilitating the transfer of capital from
savers to the issuers or organizations requiring capital for government projects,
business expansions and ongoing operations. Debt market refers to the financial
market where investors buy and sell debt securities, mostly in the form of bonds.
These markets are important source of funds, especially in a developing economy
like India. India debt market is one of the largest in Asia. Like all other countries,
debt market in India is also considered a useful substitute to banking channels for
finance.

The most distinguishing feature of the debt instruments of Indian debt market is
that the return is fixed. This means, returns are almost risk-free. This fixed return
on the bond is often termed as the 'coupon rate' or the 'interest rate'. Therefore,
the buyer (of bond) is giving the seller a loan at a fixed interest rate, which equals
to the coupon rate.
Classification of Indian Debt Market

Indian debt market can be classified into two categories:

Government Securities Market (G-Sec Market): It consists of central and state
government securities. It means that, loans are being taken by the central and
state government. It is also the most dominant category in the India debt market.
Bond Market: It consists of Financial Institutions bonds, Corporate bonds and
debentures and Public Sector Units bonds. These bonds are issued to meet
financial requirements at a fixed cost and hence remove uncertainty in financial
costs.

Advantages
The biggest advantage of investing in Indian debt market is its assured returns.
The returns that the market offer is almost risk-free (though there is always
certain amount of risks, however the trend says that return is almost assured).
Safer are the government securities. On the other hand, there are certain
amounts of risks in the corporate, FI and PSU debt instruments. However,
investors can take help from the credit rating agencies which rate those debt
instruments. The interest in the instruments may vary depending upon the
ratings.
Another advantage of investing in India debt market is its high liquidity. Banks
offer easy loans to the investors against government securities.

Disadvantages
As there are several advantages of investing in India debt market, there are certain
disadvantages as well. As the returns here are risk free, those are not as high as
the equities market at the same time. So, at one hand you are getting assured
returns, but on the other hand, you are getting less return at the same time.
Retail participation is also very less here, though increased recently. There are also
some issues of liquidity and price discovery as the retail debt market is not yet
quite well developed.

Debt Instruments
There are various types of debt instruments available that one can find in Indian
debt market.

Government Securities
It is the Reserve Bank of India that issues Government Securities or G-Secs on
behalf of the Government of India. These securities have a maturity period of 1 to
30 years. G-Secs offer fixed interest rate, where interests are payable semi-
annually. For shorter term, there are Treasury Bills or T-Bills, which are issued by
the RBI for 91 days, 182 days and 364 days.

Corporate Bonds
These bonds come from PSUs and private corporations and are offered for an
extensive range of tenures up to 15 years. There are also some perpetual bonds.
Comparing to G-Secs, corporate bonds carry higher risks, which depend upon the
corporation, the industry where the corporation is currently operating, the current
market conditions, and the rating of the corporation. However, these bonds also
give higher returns than the G-Secs.

Certificate of Deposit
These are negotiable money market instruments. Certificate of Deposits (CDs),
which usually offer higher returns than Bank term deposits, are issued in demat
form and also as a Usance Promissory Notes. There are several institutions that
can issue CDs. Banks can offer CDs which have maturity between 7 days and 1
year. CDs from financial institutions have maturity between 1 and 3 years. There
are some agencies like ICRA, FITCH, CARE, CRISIL etc. that offer ratings of CDs. CDs
are available in the denominations of ` 1 Lac and in multiple of that.

Commercial Papers
There are short term securities with maturity of 7 to 365 days. CPs are issued by
corporate entities at a discount to face value.