FMI All Modules

FINANCIAL MARKETS AND INSTITUTIONS
Module – I: Financial Market and Financial Institutions

Topic -1: Meaning and Structure of Financial Market
Financial market refers to those centers and arrangements which facilitate buying & selling of financial assets
/ instruments. Whenever a financial transaction takes place, it is deemed to have taken place in financial
market. There is no specific place or location to indicate a financial market. Financial market is a mechanism
enabling participants to deal in financial claims. The markets also provide a facility in which their demands &
requirements interact to set a price for such claims. The main organized financial markets in India are the
money market & capital market. The first is a market for short-term securities.
Structure of Financial Market:
Asst. Prof. Sandeep Kumar Mishra

Topic -2: Money Market
Money Market is the market for short term funds i.e. for a period up to one year. The money market is divided
into two: Unorganized and Organized Money Market.
1. Unorganized Market: Unorganized market consists of: Money lenders, Indigenous Bankers, Chit Funds, etc.
 Money Lenders: Money Lenders lend money to individuals at a high rate of interest.
 Indigenous Bankers: They operate like money lenders. They also accept deposits from public.
 Chit Funds: These collect funds from members and provide loans to members and others.
2. Organized Money Market: Organized Markets work as per the rules and regulations of the RBI. RBI keeps a
strict control over the Organized Financial Market in India. Organized Market consists of: Treasury Bills,
Commercial Paper (CP), Certificate Of Deposit (CD), Call Money Market, and Commercial Bill Market.
 Treasury Bills: To raise short term funds treasury bills are issued by Government. It is purchased by
Commercial Banks. At present, Government issues 91 days and 364 days treasury bills.
 Commercial Paper (CP): Commercial paper is issued by companies who are listed on Stock
Exchange. CP is issued at discount and repaid at face value. The maturity period ranges from 7 days to
one year. CP's are issued in multiple of 5 lakh. The company issuing CP must have tangible net worth
of at least 4 crore.
 Certificate Of Deposit (CD): CD's are used by Commercial Banks and Financial Institutions to raise
finance from the market. The maturity period for CD's is between 7 days to 1 year. CD's is issued at a
discount and repaid at face value. CD's is issued for a minimum of 25 lakhs.
 Call Money Market: A loan which is taken or given for a very short period that is for one day is
called Call Money Market. It involves lending and borrowing of money on a daily basis. No security is
required for these very short-term loans.
 Commercial Bill Market (CBM): This market deals with Bills of exchange. The drawer of the bill
can get the bills discounted with Commercial Banks. The Commercial Banks can get the bills
rediscounted with Financial Institutions.
Topic -3: Capital Market
A capital market is an organized market. It provides long term finance for business. “Capital Market refers to
the facilities and institutional arrangements for borrowing and lending long-term funds”. Capital Market is
divided into three groups:
1. Industrial / Corporate Securities Market: It is a market for industrial securities. Corporate securities
are equity and preference shares, debentures and bonds of companies. Industrial security's market is very
Sensitive and Active Financial Market. It can be divided into two groups: Primary and Secondary Market.
 Primary Market: It is a market for new issue of securities, which are issued to the public for first
time. It is also called as New Issue Market.
 Secondary Market: In the secondary market, there is a sale of secondary securities. It is also called as
Stock Market. It facilitates buying and selling of securities.
2. Government Securities Market: In this market, government securities are bought and sold. It is also
called as Gilt-Edged Securities Market. The securities are issued in the form of bonds and credit notes.
The buyers of such securities are Banks, Insurance Companies, Provident funds, RBI and Individuals.
These securities may be of short-term or long term.
3. Long-Term Loans Market: Banks and Financial institutions provide long-term loans to firms, for
modernization, expansion and diversification of business. Long-Term Loan Market can be divided into:
 Term Loans Market: Banks and Financial Institutions provide term loans to companies for a period
of one year. The financial institutions help in recognizing investment opportunities to motivate
emerging businessmen. They also give encouragement to modernization.
 Mortgages Market: It provides loans against securities of immovable assets like land and buildings.
 Financial Guarantees Market: Financial Institutions (FIS) and banks provide financial guarantees on
behalf of their clients to third parties.
Topic -4: FOREIGN EXCHANGE MARKET
The term foreign exchange refers to the process of converting the home currencies into foreign
currencies and vice versa. According to Dr. Paul Einzing “Foreign exchange is the system or process of
converting one national currency into account, and of transferring money from one country to another”. The
market where foreign exchange transitions take place is called a foreign exchange market. It does not refer to
a market place in the physical sense of the term. In fact, it consists of a number of dealers, banks and brokers
engaged in the business of buying and selling foreign exchange. It also includes the central bank of each
country and the treasury authorities who enter into this market as controlling authorities. Those engaged in the
foreign exchange business are controlled by the foreign exchange maintenance act (FEMA).
FUNCTIONS:
The most important functions of this market are:
1. To most important necessary arrangements to transfer purchasing power from one country to another.
2. To provide adequate credit facilities for the promotion of foreign trade.
3. To cover foreign exchange risks by providing hedging facilities.
In India, the foreign exchange business has a three- tired structure consisting of:
1. Trading between banks and their commercial customers.

2. Trading between banks through authorized brokers.
3. Trading with banks abroad.
Brokers play an important role in the foreign exchange market in India. Apart from authorized dealers, the
RBI has permitted licensed hotels and individuals (known as authorized money changers) to deal in

foreign exchange business. The FEMA helps to smoothen the flow of foreign currency and to prevent any
misuse of foreign exchange which is a scarce commodity.
CHARACTERISTICS: Some of the important features of foreign exchange market are:
1) Electronic market: Foreign exchange market does not have a physical place. It is a market where
trading in foreign currencies takes place through the electronically linked network banks , foreign
exchange brokers and dealers whose function is to bring together buyers and sellers of foreign
exchange.
2) Geographical dispersal: A redeeming feature of the foreign exchange market is that it is not to be
found in one place. The market is vastly dispersed throughout the leading financial centers of the
world such as London, New York, Paris, Zurich, Amsterdam, Tokyo, Hong Kong, Toronto, Frankfurt,
Milan, and other cities.
3) Transfer of purchasing power: Foreign exchange market aims at permitting the transfer of purchasing
power denominated in one currency to another whereby one currency to another whereby one currency
is traded for another currency. For example, an Indian exporter sells software to a U.S firm for dollars
and a U.S firm sells super computers to an Indian company for rupees. In these transactions, firms of
respective countries would like to have the payment settled in their currencies, i.e. Indian firm in
rupees and U.S dollars. It is the foreign exchange market, which facilitates such a settlement between
countries in their respective currency units.
4) Intermediary: Foreign exchange markets provide a convenient way of converting the currencies
earned into currencies wanted of their respective countries. For this purpose, the market acts as an
intermediary between buyers and sellers of foreign exchange.
5) Volume: A special feature of the FEM is that out of the total trading transactions that take place in the
FEM, around 95% takes the form of cross border purchase and sales of assets, that is, and international
capital flows. Only around 5% relates to the export and import activities.
6) Provision of credit: A foreign exchange market provider’s credit through specialized instruments such
as banker’s acceptance and letters of credit. The credit thus provided is of much help to the traders and
businessmen in the international market.
7) Minimizing risks: The FEM helps the importer and exporter in the foreign trade to minimize their risks
of trade. This is being done through the provision of ‘Hedging’ facility. This enables traders to transact
business in the international market with a view to earning a normal business profit without exposure
to an expected change in anticipated profit. This is because exchange rates suddenly change.
CONSTITUENTS: The activities of the foreign exchange market are carried out predominantly through the
world wide bank interbank market. The trading is generally done by telephone, telex or the swift (Society for

Worldwide Interbank Financial Telecommunications) system. In addition, there are a number of players who
assist in trading of foreign currencies. Several of the foreign exchange markets are discussed briefly.
The Interbank market: It is an important segment of the foreign exchange market. It is the wholesale
market through which most currency transactions are channeled. It is used for trading amongst bankers. It is a
typical foreign exchange market through which around 95 percent of the foreign exchange transactions are
carried out. 20 major banks dominate the market.
There are three constituents of interbank market. They are spot market, forward market and swap
market. The spot market, currencies are traded for immediate delivery extending for a period not exceeding
two business days after the completion of the transaction. Spot transactions account for a share of 60 percent
of the foreign exchange market. In the case of forward market, delivery of currencies takes place at a future
date and contracts for buying and selling take place at the current date. Its transactions account for 10 percent
of the foreign exchange market. Swap market comprises around 30 percent of the transactions of the foreign
exchange market.
The Society for Worldwide Interbank Financial Telecommunications: The swift is an important
mode of trading in a foreign exchange market. It is an international bank communications network that links
electronically all brokers and traders in foreign exchange.
PARTICIPANTS:
The categories of participants take part in the operations of the foreign exchange market. They are bank and
non-bank foreign exchange dealers, individuals and firms conducting commercial and investment
transactions, speculators and arbitragers, central banks, and treasuries and foreign exchange brokers.
Foreign Exchange Dealers: Banks and non-bank agencies take part in the activities of the foreign exchange
dealers. Their role comprise, in actual market making. They are the actual market makers in the foreign
exchange market. They actively deal in foreign exchange for their own accounts. These banks buy and sell
major foreign currencies on a continuous basis. They trade with other banks in their own monetary centers
and in other centers of the world in order to maintain the inventory of foreign currencies within the trading
limits. Their profit comes from buying foreign exchange at a bid price and reselling it at a slightly higher
offer/ask price. Competition among dealers worldwide makes the foreign exchange market efficient and
vibrant.
Individuals and Firms: These are the exporters and importers, international portfolio investors, MNCs,
tourists and others who use foreign exchange market to facilitate the execution of commercial or investment

transactions. Firms that operate internationally must pay suppliers and workers in the local currency of each
country in which they operate and may receive payments from customers in many different countries. They
will eventually convert their foreign currency earnings into their home currency. In fact, for ages, supporting
international trade and travel has been the main aim of currency trading. It is interesting to note that some of
these participants use the foreign exchange market for hedging foreign exchange risks.
The activities of FDI require the investor to obtain the currency of the foreign country. Large sums of money
are committed to international portfolio investments, the purchase of bonds, shares or other securities
denominated in a foreign currency. For this purpose, the investor needs to enter the foreign exchange markets
to obtain the currency to make a purchase, to convert the earnings from its foreign investments into home
currency and repatriate the capital when the investment is terminated.
Speculators and Arbitragers: Speculators buy and sell currencies solely to profit from anticipated changes
in exchange rates, without engaging in other sorts of business dealings for which foreign exchange is
essential. Currency speculation is often combined with speculation in short-term financial instruments, such as
treasury bills. The biggest speculators include leading banks and investment banks. Speculators and
arbitragers trade in the foreign exchange market in their own way trying to make profit through normal and
speculative operations. Main source of profit for dealers is the spread between the bid price and offer price
whereas speculators profit from exchange rate changes. It is interesting to note that a large portion of the
speculation and arbitrage takes place on behalf of major banks.
Central Banks and Treasuries: National treasuries or central banks may trade currencies for the purpose of
affecting exchange rates. A government’s deliberate attempt to alter the exchange rate between two currencies
by buying one and selling the other is called ‘intervention’. The amount of currency intervention varies
greatly from country to country and time to time, and depends mainly on how the government has decided to
manage its foreign exchange arrangements.
Central banks and treasuries use the foreign exchange market for the purposes of buying and selling country’s
foreign exchange reserves. They also aim at influencing the value of their own currencies in accordance with
the priorities of the national economic planning. They also use the foreign exchange market to work in unison
with the commitment entered into with the international trade agreements such as European Monetary System
etc. This is often done by the central bank in order to ensure stability and orderliness in the matters of foreign
currency transactions.
Foreign Exchange Brokers: These are the commission agents who bring together suppliers and buyers of
foreign currency. They specialize in certain currency although they deal in all major foreign currencies such
as American Dollar, British Pound, Sterling, and Deutsche Mark, etc. Some of the services rendered by the
brokers include provision of information on the prevailing and future rates of exchange; maintaining
confidentiality of participants in the foreign exchange market and helping banks to keep at minimum the
contacts with other traders.
TRANSACTIONS:
Several types of transactions are carried out in a foreign exchange market among the various players. They
are: Spot transactions, Forward transactions and Swap transactions.
Spot Transaction: An inter-bank transaction whereby the purchase of foreign exchange, and delivery and
payment for the same take place between banks usually on the following second business day is referred to as
‘spot transaction’. The rate quoted in such transactions is called ‘spot rate’. The date of settlement is known as
‘value date’.
Forward Transaction: Where a specified amount of one currency is exchanged for a specified amount of
another currency at a future value date, it is a case of a ‘forward transaction’. Under this transaction, only the
delivery and payment take place at a future date, the exchange rate being determined at the time of agreement.
The rate quoted in such transactions is called ‘forward rate’. Forward exchange rates are normally quoted for
value dates of one, two, three, six and twelve months.
Swap Transaction: The simultaneous purchase and sale of a given amount of foreign exchange for different
value dates is referred to as ‘swap transactions’. Both the purchase and sale are with the same counter party.
There are two types of swap transactions. They are spot-against-forward swaps and forward-forward swaps.
In the case of spot-against-forward swaps, the dealer buys a currency in the spot market and simultaneously
sells the same amount back to the same bank in the forward market. The dealer incurs no unexpected foreign
exchange risk since the transaction is executed within a single counter party.
Topic -5: The Nature of the unorganized sector of the Indian Money Market
UNORGANISED SECTOR: The segment of money market which is not under control of RBI is known
as the unorganized segment of Indian money market. It consists of:
1. Moneylenders: money lenders are of three types:
 Professional moneylenders
 Itinerant moneylenders
 Non-professional moneylenders.
Professional money lenders are those whose main activity is money lending. Pathans and kabulls are
itinerant money lenders charge very high rate of interest; they do not receive deposits from people. Their

lending activities are based on their own funds and interest receipts. Mainly economically weaker section
of people goes to these moneylenders for consumption and production loans.
2. Indigenous bankers: since commercial banks do not provide unsecured loans, the credit needs of a
large section of small traders remain unfulfilled. Indigenous bankers to some extent bridge this gap, since
their operation and establishment costs are lower. Although they do some important activity, they do not
care about the end use of these loans and they are not regulated by RBI. There are mainly four types of
indigenous bankers, viz., Guajarati shroffs, multani or shikarpuri shroffs, south Indian chettiars and
Marwari kayas. Indigenous bankers accept deposits and provide loans to individuals or organizations.
3. Unregulated non-bank financial intermediaries: most notable unregulated non-bank financial
intermediaries are chit funds and Nidhis. Chit funds have regular members making periodical
subscriptions to the funds. Some members of the funds, selected by some previously agreed criteria are
then allotted the fund. Nidhis are also like chit funds, as their principal source of capital base is provided
by its members and some of its members receive the loan. Both chit funds and Nidhis operate mainly in
south India and RBI has no control on them.
Topic -6: Various constituents of the organized sector of the Indian Money Market
The segment of money market which is under the control of RBI is known as organized market. It
includes:
1. Reserve bank of India: the reserve bank of India is the highest institution of the Indian money market.
This is the central bank of the country. The reserve bank of India plays a dominant role in controlling the
money market.
2. Public sector banks: the public sector banks are those banks whose ownership lies with the
government. The government controls them. In India, in 1969, 14th and in 1980, 6 banks were
nationalized all these banks are in the public sector. Their chief aim is social service. After the merger of
the new bank of India with the Punjab national bank in 1993, their number now stands at 19. In addition
to this the state bank of India and its subsidiaries are also included in the same category. Their number is
8. In this way, a total number of 27 banks are working in the public sector.
3. Private sector banks: private sector banks are those banks which are owned by private individuals.
They run them. Such banks include the Jammu and Kashmir bank ltd. The Punjab bank ltd., etc. an
individual has control over the bank to the extent of the shares he holds in it. Their main aim is to earn
profit.
4. Co-operative banks: co-operative banks are organized collectively by some individuals. These people
alone run these banks. The aim of these banks is to help their own members. They include the state co-
operative bank, the central district co-operative bank and primary loan committees.
Topic -7: Classification of Financial Institutions in India:
1. Regulatory institutions
 Reserve Bank of India (RBI)
 Securities and Exchange Board of India (SEBI)
 Central Board of Direct Taxes (CBDT)
 Central Board of Excise& Customs
2. Intermediaries.
 Securities Trading Corporation of India (STCI)
 Unit Trust of India (UTI)
 Industrial Development Bank of India (IDBI) Ltd.
 Reconstruction Bank of India (IRBI), now (Industrial Investment Bank of India)
 Export - Import Bank of India (EXIM Bank)
 National Bank for Agriculture and Rural Development (NABARD)
 Life Insurance Corporation of India (LIC)
 General Insurance Corporation of India (GIC)
 Housing and Urban Development Corporation Ltd. (HUDCO)
 Shipping Credit and Investment Company of India Ltd. (SCICI)
 National Housing Bank (NHB)
3. Banking Institutions and Non Banking Institutions

Banking institutions: A bank is an institution that accepts deposits of money from the public, which are
repayable on demand and withdraw able by cheques. The banking institutions of India play a major role in the
economy of the country. The banking institutions are the providers of depository and transaction services.
These activities are the major sources of creating money. The banking institutions are the major sources of
providing loans and other credit facilities to the clients.
Non Banking Financial Institutions (NBFC): An Institution which carried on as its business or part of its
business the following activities: - financing - acquisition of securities - hire purchase - insurance - chit fund -
mutual benefit company But does not include Institutions which carries on as its principal business: -
agricultural operations, - industrial activities - Sale and purchase of goods - providing of services - purchase,
sale and construction of immovable property.
 All India Institutions

 IFCI
 IDBI
 ICICI
 SIDBI
 LIC
 State level Institutions

 State Financial Institutions
 State Industrial Development Corporations
Topic -8: All India Developmental Financial institutions:

A wide variety of financial institutions have been set up at the national level. They cater to the diverse
financial requirements of the entrepreneurs. They include all India development banks like IDBI, SIDBI, IFCI
Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI; investment institutions
like LIC, GIC, UTI; etc.
All-India Development Banks (AIDBs):- Includes those development banks which provide institutional
credit to not only large and medium enterprises but also help in promotion and development of small scale
industrial units.
1. Industrial Development Bank of India (IDBI):- was established in July 1964 as an apex financial
institution for industrial development in the country. It caters to the diversified needs of medium and
large scale industries in the form of financial assistance, both direct and indirect. Direct assistance is

provided by way of project loans, underwriting of and direct subscription to industrial securities, soft
loans, technical refund loans, etc. While, indirect assistance is in the form of refinance facilities to
industrial concerns.
2. Industrial Finance Corporation of India Ltd (IFCI Ltd):- was the first development finance
institution set up in 1948 under the IFCI Act in order to pioneer long-term institutional credit to
medium and large industries. It aims to provide financial assistance to industry by way of rupee and
foreign currency loans, underwrites/subscribes the issue of stocks, shares, bonds and debentures of
industrial concerns, etc. It has also diversified its activities in the field of merchant banking,
syndication of loans, formulation of rehabilitation programmes, assignments relating to amalgamations
and mergers, etc.
3. Small Industries Development Bank of India (SIDBI):- was set up by the Government of India in
April 1990, as a wholly owned subsidiary of IDBI. It is the principal financial institution for
promotion, financing and development of small scale industries in the economy. It aims to empower
the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of
economic growth, employment generation and balanced regional development.
4. Industrial Investment Bank of India Ltd (IIBI):- was set up in 1985 under the Industrial
reconstruction Bank of India Act, 1984, as the principal credit and reconstruction agency for sick
industrial units. It was converted into IIBI on March 17, 1997, as a full-fledged development financial
institution. It assists industry mainly in medium and large sector through wide ranging products and
services. Besides project finance, IIBI also provides short duration non-project asset-backed financing
in the form of underwriting/direct subscription, deferred payment guarantees and working capital/other
short-term loans to companies to meet their fund requirements.
Topic -9: Investment Institutions: - Investment Institutions are the most popular form of financial
intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets
largely in marketable securities.
1. Life Insurance Corporation of India (LIC):- was established in 1956 as a wholly-owned corporation
of the Government of India. It was formed by the Life Insurance Corporation Act, 1956, with the
objective of spreading life insurance much more widely and in particular to the rural area. It also
extends assistance for development of infrastructure facilities like housing, rural electrification, water
supply, sewerage, etc. In addition, it extends resource support to other financial institutions through
subscription to their shares and bonds, etc. The Life Insurance Corporation of India also transacts
business abroad and has offices in Fiji, Mauritius and United Kingdom. Besides the branch operations,
the Corporation has established overseas subsidiaries jointly with reputed local partners in Bahrain,
Nepal and Sri Lanka.
2. Unit Trust of India (UTI):- was set up as a body corporate under the UTI Act, 1963, with a view to
encourage savings and investment. It mobilizes savings of small investors through sale of units and
channelises them into corporate investments mainly by way of secondary capital market operations.
Thus, its primary objective is to stimulate and pool the savings of the middle and low income groups
and enable them to share the benefits of the rapidly growing industrialization in the country. In
December 2002, the UTI Act, 1963 was repealed with the passage of Unit Trust of India (Transfer of
Undertaking and Repeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I
and UTI-II with effect from 1st February 2003.
3. General Insurance Corporation of India (GIC):- was formed in pursuance of the General Insurance
Business (Nationalization) Act, 1972(GIBNA), for the purpose of superintending, controlling and
carrying on the business of general insurance or non-life insurance. Initially, GIC had four subsidiary
branches, namely, National Insurance Company Ltd , The New India Assurance Company Ltd , The
Oriental Insurance Company Ltd and United India Insurance Company Ltd . But these branches were

delinked from GIC in 2000 to form an association known as 'GIPSA' (General Insurance Public Sector
Association).
Topic -10: Specialized Financial Institutions (SFIs):- Specialized Financial Institutions are the institutions
which have been set up to serve the increasing financial needs of commerce and trade in the area of venture
capital, credit rating and leasing, etc.
1. IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital & Technology Finance
Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of
broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative
product/process/technology. Initially, it started providing financial assistance by way of soft loans to
promoters under its 'Risk Capital Scheme’. Since 1988, it also started providing finance under
'Technology Finance and Development Scheme' to projects for commercialization of indigenous
technology for new processes, products, market or services. Over the years, it has acquired great deal
of experience in investing in technology-oriented projects.
2. ICICI Venture Funds Ltd: - formerly known as Technology Development & Information Company
of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India.
Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance
company, set up to sanction project finance for new technology ventures. The industrial units assisted
by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines,
biotechnology, environmental engineering, etc.
3. Tourism Finance Corporation of India Ltd. (TFCI):- is a specialized financial institution set up by
the Government of India for promotion and growth of tourist industry in the country. Apart from
conventional tourism projects, it provides financial assistance for non-conventional tourism projects
like amusement parks, ropeways, car rental services, ferries for inland water transport, etc.
Topic -11: State level financial institutions: Several financial institutions have been set up at the State level,
which supplement the financial assistance provided by the all India institutions. They act as a catalyst for
promotion of investment and industrial development in the respective States. They broadly consist of 'State
financial corporations' and 'State industrial development corporations'.
1.State Financial Corporations (SFCs):- are the State-level financial institutions which play a crucial role in
the development of small and medium enterprises in the concerned States. They provide financial assistance
in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of
exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalyzing higher
investment, generating greater employment and widening the ownership base of industries. They have also
started providing assistance to newer types of business activities like floriculture, tissue culture, poultry
farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State
Financial Corporations (SFCs) in the country:-
 Andhra Pradesh State Financial Corporation (APSFC)
 Himachal Pradesh Financial Corporation (HPFC)
 Madhya Pradesh Financial Corporation (MPFC)
 North Eastern Development Finance Corporation (NEDFI)
 Rajasthan Finance Corporation (RFC)
 Tamil Nadu Industrial Investment Corporation Limited
 Uttar Pradesh Financial Corporation (UPFC)
 Delhi Financial Corporation (DFC)
 Gujarat State Financial Corporation (GSFC)
 The Economic Development Corporation of Goa ( EDC)
 Haryana Financial Corporation ( HFC )

 Jammu & Kashmir State Financial Corporation ( JKSFC)
 Karnataka State Financial Corporation (KSFC)
 Kerala Financial Corporation ( KFC )
 Maharashtra State Financial Corporation (MSFC )
 Odisha State Financial Corporation (OSFC)
 Punjab Financial Corporation (PFC)
 West Bengal Financial Corporation (WBFC)
2.State Industrial Development Corporations (SIDCs):- have been established under the Companies Act,
1956, as wholly-owned undertakings of State Governments. They have been set up with the aim of
promoting industrial development in the respective States and providing financial assistance to small
entrepreneurs. They are also involved in setting up of medium and large industrial projects in the joint
sector/assisted sector in collaboration with private entrepreneurs or wholly-owned subsidiaries. They are
undertaking a variety of promotional activities such as preparation of feasibility reports; conducting
industrial potential surveys; entrepreneurship training and development programmes; as well as developing
industrial areas/estates. The State Industrial Development Corporations in the country are:-
1. Assam Industrial Development Corporation Ltd (AIDC)

2. Andaman & Nicobar Islands Integrated Development Corporation Ltd (ANIIDCO)
3. Andhra Pradesh Industrial Development Corporation Ltd (APIDC)
4. Bihar State Credit and Investment Corporation Ltd. (BICICO)
5. Chhattisgarh State Industrial Development Corporation Limited (CSIDC)
6. Goa Industrial Development Corporation
7. Gujarat Industrial Development Corporation (GIDC)
8. Haryana State Industrial & Infrastructure Development Corporation Ltd. (HSIIDC)
9. Himachal Pradesh State Industrial Development Corporation Ltd. (HPSIDC)
10. Jammu and Kashmir State Industrial Development Corporation Ltd.
11. Karnataka State Industrial Investment & Development Corporation Ltd. (KSIIDC)
12. State Infrastructure & Industrial Development Corporation of Uttaranchal Ltd. (SIDCUL)
13. Tripura Industrial Development Corporation Ltd. (TIDC)
14. Kerala State Industrial Development Corporation Ltd. (KSIDC)
15. Maharashtra Industrial Development Corporation (MIDC)
16. Manipur Industrial Development Corporation Ltd. (MANIDCO)
17. Nagaland Industrial Development Corporation Ltd. (NIDC)
18. Odisha Industrial Infrastructure Development Corporation
19. Omnibus Industrial Development Corporation (OIDC), Daman & Diu and Dadra & Nagar Haveli.
20. Pondicherry Industrial Promotion Development and Investment Corporation Ltd. (PIPDIC)
21. Uttar Pradesh State Industrial Development Corporation
22. Punjab State Industrial Development Corporation Ltd. (PSIDC)
23. Rajasthan State Industrial Development & Investment Corporation Ltd. (RIICO)
24. Sikkim Industrial Development & Investment Corporation Ltd. (SIDICO)
25. Tamilnadu Industrial Development Corporation Ltd. (TIDCO)

Module-II Capital Market
Topic -1: Introduction to Capital Market:
Capital market is a market for financial assets which have a long or indefinite maturity. Generally it
deals with long term securities having a maturity period of above one year. Capital market may be
further divided into three parts i.e.
(i) Industrial security market
(ii) Govt. securities market
(iii) Long term loan market
Capital market serves as a important source for the productive use of economy’s savings and
investment. These savings and investments facilitate capital formation and through this facilitate
increase in production and productivity in the economy. A capital market thus serves as an important
link between those who saves and those who aspire to invest their savings.

Capital markets – Types
(i) Industrial Security Market – It is market where industrial concerns raise their capital or debt by
issuing instruments like equity hares or ordinary shares, preference shares, debentures or bonds. This
market can be sub divided into:
(a) Primary Market or new issue market
(b) Secondary Market or stock Exchange
Primary Market is a market for new issues and hence it is called new issue market. It deals with
securities which are issued to the public for the first time. There are three ways through which capital is
raised in primary market. These are:
- Public issue
- Right Issue
- Private placement
Secondary market is a market for secondary sale of securities i.e. securities which already passed
through the new issue market are traded in this secondary market. Generally, such securities are quoted
in stock exchange and it provides a continuous; and regular market for buying and selling of securities.
(ii) Govt. Security Market – It is a market where Long term Govt securities are traded which are issued
by central Govt, State Govt, Semi Govt authorities like City Corporations, Port Trusts, Improvement
Trusts, State Electricity Boards, All India and State level financial institutions and public sector
organizations/enterprises are dealt in this market. Govt. Securities are in many forms such as:
- Stock Certificates or inscribed stock
- Promissory Notes
- Bearer bonds.
Govt securities are sold through public debt office of RBI. Interest on these securities influences price
and yield in market.
(iii) Long Term loan market – Commercial banks and development banks play a significant role in this
market by supplying long term loans to corporate customers. Long term loan market may further be
classified into:
- Term loan market
- Mortgage Market
- Financial guarantee Market.
Term Loan Market – In India many industrial finance institutions have been created by Central and
State Govts. which provide medium and long term loans to corporate customers. Institutions like IDBI,
IFCI, ICICI and other state financial corporations come in this category.
Mortgage Market – Refers to those centres which supply mortgage loan mainly to individual customers
against security of immovable property like real estate.
Financial guarantee Market – Refers to centres where finance is provided against the guarantee of
reputed person in financial circle. This guarantee may be in the form of (i) Performance guarantee or (ii)
Financial guarantee. Performance guarantee covers the payment of earnest money retention money,
advance payments and non compilation of contracts etc. The financial guarantee covers only financial
contracts.
Topic -2: Primary Market, Role of the Primary market

A primary market issues new securities on an exchange. Companies, governments and other groups obtain
financing through debt or equity based securities. Primary markets, also known as "new issue markets," are
facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for
a given security and then oversee its sale directly to investors.
The primary markets are where investors have their first chance to participate in a new security issuance. The
issuing company or group receives cash proceeds from the sale, which is then used to fund operations or
expand the business.
The key role of the primary market is to facilitate capital growth by enabling individuals to convert savings
into investments. It facilitates companies to issue new stocks to raise money directly from households for
business expansion or to meet financial obligations. It provides a channel for the government to raise funds
from the public to finance public sector projects.
“Going public” marks a milestone in a company's growth. The primary market is the first place where the
company's securities are sold. The major players of the primary market are large institutional investors, and
the market requirements are stringent. Therefore, the company as an investment potential is evaluated on
multiple levels. The primary issue is traded in the secondary market by individual investors. Failure to
generate interest in the primary market is translated as poor investment potential.
Role of the Primary market
 Capital Generation
 Liquidity
 Diversification
 Cost Reduction
2. Need for Companies to issue shares to the public:

Most companies are usually started privately by their promoter(s). However, the promoters' capital and the
borrowings from banks and financial institutions may not be sufficient for setting up or running the
business over a long term. So companies invite the public to contribute towards the equity and issue shares
to individual investors. The way to invite share capital from the public is through a 'Public Issue'. Simply
stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is
done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by
SEBI.
Topic -3: Different kinds of Issues: Capital instruments, namely, shares and debentures can be issued to the
market by adopting any pf the four modes: Public issues, Private placement, Rights issues and Bonus issues.
Let us briefly explain these different modes of issues.
A. Public Issue
Only public limited companies can adopt this issue when it wants to raise capital from the general
public. The company has to issue a prospectus as per requirements of the corporate laws in force inviting the
public to subscribe to the securities issued, may be equity shares, preference shares ;or debentures/bonds. A
private company cannot adopt this route to raise capital. The prospectus shall give an account of the prospects
of investment in the company. Convinced public apply to the company for specified number of
shares/debentures paying the application money, i.e., money payable at the time of application for the
shares/debentures usually 20 to 30% of the issue price of the shares/debentures.
Public issues enable broad-based share-holding. General public's savings directed into corporate
investment. Economy, company and individual investors benefit. The company management does not face the

challenge of dilution of control over the affairs of the company. And good price for the share and competitive
interest rate on debentures are quite possible.
B. Private Placement
Private placement involves the company issuing security places the same at the disposal of financial
institutions like mutual funds, investment funds >r banks the entire issue for subscription at the mutually
agreed upon pro-rata of interest.
This mode is preferred when the capital market is dull, shy and] depressed During the late 1990s and
early 2010s, Indian companies preferred private placement, even the debt issues, as the general public totally
deserted the} capital market since their hopes in the capital market were totally shattered, Private placement
is inexpensive as no promotion is issued. It is a wholesale} deal.
C. Right Shares
Whenever an existing company wants to issue new equity shares, the existing shareholders will be
potential buyers of these shares. Generally the Articles or Memorandum of Association of the Company gives
the right to existing shareholders to participate in the new equity issues of the company. This right is known
as 'pre-emptive right" and such offered shares are called ‘Right shares' or 'Right issue.
A right issue involves selling securities in the primary market by issuing rights to the existing
shareholders. When a company issues additional share capital, it has to be offered in the first instance to the
existing shareholders on a pro rata basis. This is required in India under section 81 of the Companies' Act,
1956. However, the shareholders may by a special resolution forfeit this right, partially or fully, to enable the
company to issue additional capital to public.
Significance of rights issue
i) The number of rights that a shareholder gets is equal to the number of shares held by him.
ii) The number rights required to subscribe to an additional share is determined by the issuing
company.
iii) Rights are negotiable. The holder of rights can' sell them fully or partially.
iv) Rights can be exercised only during a fixed period which is usually less than thirty days.
v) The price of rights issues is generally quite lower than market price and that a capital gain is quite
certain for the share holders.
vi) Rights issue gives the existing shareholders an opportunity for the protection of their pro-rata share
in the earning and surplus of the company.
vii) There is more certainty of the shares being sold to the existing shareholders. If a rights issue is
successful it is equal to favourable image and evaluation of the company's goodwill in the minds of
the existing shareholders.
D. Bonus Issues

Bonus issues are capital issues by companies to existing shareholders whereby no fresh capital is
raised but capitalization of accumulated earnings is done. The shares capital increases, but accumulated
earnings fall. A company shall, while issuing bonus shares must ensure the following:
i) The bonus issue is made out of free reserves built out of the genuine profits and shares premium
collected in cash only.
ii) Reserves created by revaluation of fixed assets are not capitalized.
iii) The development rebate reserves or the investment allowance reserve is considered as free reserve
for the purpose of calculation of residual reserves only.
iv) All contingent liabilities disclosed in the audited accounts which have, bearing on the net profits,
shall be taken into account in the calculation; of the residual reserve.
v) The residual reserves after the proposed capitalization shall be at k 40 per cent of the increased
paid up capital.
vi) 30 per cent of the average profits before tax of the company for previous three years should yield a
rate of dividend on the net capital base of the company at 10 per cent.
vii) The capital reserves appearing in the balance sheet of the company as a result of revaluation of
assets or without accrual of cash resources are capitalized nor taken into account in the
computation of the residual reserves of 40 percent for the purpose of bonus issues.
viii) The declaration of bonus issue, in lieu of dividend is not made.
ix) The bonus issue is not made unless the partly paid shares, if any existing, are made fully paid-up.
x) The company - a) has not defaulted in payment of interest or principal in respect of fixed deposits
and interest on existing debentures or principal on redemption thereof and (b) has sufficient reason
to believe that it has not defaulted in respect of the payment of statutory dues of the employees
such as contribution to provident fund, gratuity on bonus.
xi) A company which announces its bonus issue after the approval of the board of directors must
implement the proposals within a period of six months from the date of such approval and shall not
have the option of changing the decision.
xii) There should be a provision in the Articles of Association of the Company for capitalization of
reserves, etc. and if not, the company shall pass a resolution at its general body meeting making
decisions in the Articles of Association for capitalization.
xiii) Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the
authorized share capital, a resolution shall be passed by the company at its general body meeting
for increasing the authorized capital.
xiv) The company shall get a resolution passed at its generating for bonus issue and in the said
resolution the management's intention regarding the rate of dividend to be declared in the year
immediately after the bonus issue should be indicated.

xv) No bonus shall be made which will dilute the value or rights of the holders of debentures,
convertible folly or partly.
SEBI General Guidelines for public issues
i) Subscription list for public issues should be kept open for at least 3 working days and disclosed
in the prospectus.
ii) Rights issues shall not be kept open for more than 60 days.
iii) The quantum of issue, whether through a right or public issue, shall not exceed the amount
specified in the prospectus/letter of offer. No retention of over subscription is permissible under
any circumstances, except the special case of exercise of green-shoe option.
iv) Within 45 days of the closures of an issue a report in a prescribed form with certificate from the
chartered accounts should be forwarded to SEBI to the lead managers.
v) The gap between the closure dates of various issue e.g. Rights and Indian public should not
exceed 30 days.
vi) SEBI will have right to prescribe further guidelines for modifying the existing norms to bring
about adequate investor protection, enhance the quality of disclosures and to bring about
transparency in the primary market.
vii) SEBI shall have right to issue necessary clarification to these guidelines to remove any difficulty
in its implementation.
viii) Any violation of the guidelines by the issuers/intermediaries will be punishable by prosecution
by SEBI under the SEBI Act.
ix) The provisions in the Companies Act, 1956 and other applicable lai shall be complied with the
connection with the issue of shares debentures.
Topic -4: Prospectus: A large number of new companies float public issues. While a large number of these
companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an
investor before applying for any issue identifies future potential of a company. A part of the guidelines issued
by SEBI (Securities and Exchange Board of India) is the disclosure of information to the public. This
disclosure includes information like the reason for raising the money, the way money is proposed to be spent,
the return expected on the money etc. This information is in the form of 'Prospectus' which also includes
information regarding the size of the issue, the current status of the company, its equity capital, its current and
past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc.
It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps
investors to evaluate short term and long term prospects of the company.
Topic -5: Pricing an issue: The pricing of issues is done by companies in consultation with Merchant bankers.
An existing company with 5 years track record of profitability can freely price the issue. The premium has to be
decided after taking into account net asset value, profit earning capacity and market price. The justification for
price has to be stated and included in the prospectus.
Topic -6: Price discovery through Book building process:

Book Building: - Is a method of issuing / offering shares to investors in which the price at which share
are issued is discovered through bidding process. In this, bidder’s (potential investors) have the
flexibility to bid for shares at a price they are willing to pay. Book Building is basically a process used in
IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids
are collected from investors at various prices, which are above or equal to the floor price. The offer price is
determined after the bid closing date.
Book Building Process
Book Building process is price discovery mechanism in an IPO. This process is helpful to discover a
better offer prices based on the price and demand discovery .under this process bids are collected from
the investors using the network of BSE/ NSE, which are above , below or equal to the floor price. Floor
price is a minimum bid price it is decided at beginning of the bidding process. Offer price is determined
after the bid closing date. The process Bidding shall be permitted only if electronic linked facility is
used. Issuing company appoint a lead merchant banker called book runner. Issuing company should
disclose the following information:
 Price band
 Nominated lead merchant banker
 Syndicated members with who orders can be placed by the investors.
Investor can quota the price with the help of syndicate members. Bid price should always be more than the floor
price and it can be revised before closure of the issue. After closing the issue book runner analysis the bids and
evaluated the bid prices. This evaluation is based on many factors example Price Aggression, investor quality or
earliness of bids. Company and the book runner finalized the price. Finally Securities allocated to the success.
Topic -7: Registrar to an Issue:

The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the
corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of
refund orders to those applicable are sent. The Lead Manager coordinates with the Registrar to ensure follow
up so that that the flow of applications from collecting bank branches, processing of the applications and other
matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and
securities listed.
Topic -8: Listing of securities: Listing of securities means that the securities are admitted for trading on a
recognized stock exchange. Transactions in the securities of any company cannot be conducted on stock
exchanges unless they are listed by them. Hence, listing is the very basis on stock exchange operations. It is
the green signal given to selected securities to get the trading privileges of the stock exchange concerned.
Securities become eligible for trading only through listing. Listing means admission of the securities for
trading on the stock exchange through a formal agreement between the stock exchange and the
company. Securities are buy and sell in the recognized through members who are known as brokers.
The price at which the securities are buy and sales are known as official Quotation.
Listing is compulsory for those companies which intend to offer shares/debentures to the public for
subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting permission
to a new issue by a public limited company. Again, financial institutions do insist on listing for underwriting
new issues. Thus, listing becomes an unavoidable one today.
The companies which have got their shares/debentures listed in one or more recognized stock exchanges must
submit themselves to the various regulatory measures of the stock exchange concerned as well as the SEBI.
They must maintain necessary books; documents etc. and disclose any information which the stock exchange
may call for.

Types of listing
A. Initial listing
 Listing public issue of shares and debentures
 Listing of right issue of shares and debentures
 Listing of Bonus issue of shares
 Listing share issued on Amalgamation, mergers etc.
Advantage of listing
To The Company:
 The company enjoys concession under direct tax laws.
 The company goodwill increase at the international & national Level.
 Term loan facilities/extend by the financial institution / bankers the form of Rupee currency and
the foreign currency.
 Avoiding the fear of easy takeovers of the organization by others because of wide distribution.
To the investors
 Maintain liquidity and safety in securities.
 Listed securities are preferred by the bankers for extending term facility.
 Rule of the stock exchange protect the interest of the investor.
 Official quotation of the securities on the stock exchange corroborate the valuation taken by the
investor for the purpose of tax assessments under income tax act , wealth tax act.
Minimum Listing Requirements for new companies

The following revised eligibility criteria for listing of companies on the Exchange, through Initial Public
Offerings (IPOs) & Follow-on Public Offerings (FPOs), effective August 1, 2006.
ELIGIBILITY CRITERIA FOR IPOs/FPOs

a. Companies have been classified as large cap companies and small cap companies. A large cap
company is a company with a minimum issue size of Rs. 10 crores and market capitalization of not less
than Rs. 25 crores. A small cap company is a company other than a large cap company.
I. In respect of Large Cap Companies

i. The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the
Company") shall be Rs. 3 crores; and
ii. The minimum issue size shall be Rs. 10 crores; and
iii. The minimum market capitalization of the Company shall be Rs. 25 crores (market capitalization
shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price).
II. In respect of Small Cap Companies

i. The minimum post-issue paid-up capital of the Company shall be Rs. 3 crores; and
ii. The minimum issue size shall be Rs. 3 crores; and
iii. The minimum market capitalization of the Company shall be Rs. 5 crores (market capitalization shall
be calculated by multiplying the post-issue paid-up number of equity shares with the issue price); and
iv. The minimum income/turnover of the Company should be Rs. 3 crores in each of the preceding
three 12-months period; and
v. The minimum number of public shareholders after the issue shall be 1000.
Vi. A due diligence study may be conducted by an independent team of Chartered Accountants or
Merchant Bankers appointed by the Exchange, the cost of which will be borne by the company. The
requirement of a due diligence study may be waived if a financial institution or a scheduled commercial
bank has appraised the project in the preceding 12 months.
III. For all companies:

I. In respect of the requirement of paid-up capital and market capitalization, the issuers shall be
required to include in the disclaimer clause forming a part of the offer document that in the event of the
market capitalization (product of issue price and the post issue number of shares) requirement of the
Exchange not being met, the securities of the issuer would not be listed on the Exchange.
II. The applicant, promoters and/or group companies, should not be in default in compliance of the
listing agreement.
III. The above eligibility criteria would be in addition to the conditions prescribed under SEBI
(Disclosure and Investor Protection) Guidelines, 2000.
Minimum Listing Requirements for companies listed on other stock exchanges

The Governing Board of the Exchange at its meeting held on 6th August, 2002 amended the direct
listing norms for companies listed on other Stock Exchange(s) and seeking listing at BSE. These norms
are applicable with immediate effect.
1. The company should have minimum issued and paid up equity capital of Rs. 3 crores.
2. The Company should have profit making track record for last three years. The revenues/profits
arising out of extra ordinary items or income from any source of non-recurring nature should be
excluded while calculating distributable profits.
3. Minimum net worth of Rs. 20 crores (net worth includes Equity capital and free reserves excluding
revaluation reserves).
4. Minimum market capitalization of the listed capital should be at least two times of the paid up
capital.
5. The company should have a dividend paying track record for the last 3 consecutive years and the
minimum dividend should be at least 10%.
6. Minimum 25% of the company's issued capital should be with Non-Promoters shareholders as per
Clause 35 of the Listing Agreement. Out of above Non Promoter holding no single shareholder should
hold more than 0.5% of the paid-up capital of the company individually or jointly with others except in
case of Banks/Financial Institutions/Foreign Institutional Investors/Overseas Corporate Bodies and
Non-Resident Indians.
7. The company should have at least two years listing record with any of the Regional Stock Exchange.
8. The company should sign an agreement with CDSL & NSDL for demat trading.
Topic -9: Regulations Governing Primary capital markets in India: The overall responsibility of
development, regulation and supervision of the stock market rests with the Securities & Exchange Board of
India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried
to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on
market participants, in case of a breach. Any company making a public issue or a listed company making a
rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its
observations. The company can proceed further on the issue only after getting observations from SEBI. The
validity period of SEBI's observation letter is three months only i.e. the company has to open its issue within
three months period.
Topic -10: Public issue in foreign capital markets: Indian companies are permitted to raise foreign currency
resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as
'Euro' issues and b) issue of ordinary shares through depository receipts namely 'Global Depository Receipts

(GDRs)/American Depository Receipts (ADRs)' to foreign investors i.e. to the institutional investors or
individual investors.
Topic -11: The Secondary Market/ Stock Exchanges:
The market where existing securities are traded is referred to as the secondary market or stock
market. In a stock market, purchases and sales of securities whether of Government or Semi-
Government bodies or other public bodies and also shares and debentures issued by joint stock
companies are affected. The securities of government are traded in the stock market as a separate
component, called guilt edged market. Government securities are traded outside the trading wing
in the form of over the counter sales or purchases. Another component of the stock market deals
with trading in shares and debentures of limited companies.
Control over Secondary Market
For the effective functioning of secondary market, proper control must be exercised. At present,
control is exercised through the following three important processes:
a) Recognition of Stock Exchanges
b) Listing of Securities
c) Registration of Brokers.
a) Recognition of Stock Exchanges : Stock exchanges are the important ingredient of the capital
market. They are the citadel of capital and fortress of finance. They are the theatres of trading in
securities and as such they assist and control the buying and selling of securities. Thus, according
to Husband and Dockeray “securities or stock exchanges are privately organized markets which
are used to facilities trading in securities.” However, at present stock exchanges need not
necessarily be privately organized once.
As per the securities Contacts Regulation Act, 1956 a stock exchange has been defined as follows:
“It is an association, organization or body of individuals whether incorporated or not, established
for the purpose of assisting, regulating and controlling business in buying, selling and dealing in
securities.” In brief, stocks exchanges constitute a market where securities issued by the central
and state governments, public bodies and joint stock companies are traded.
b. Listing of securities: Listing of securities means that the securities are admitted for trading
on a recognized stock exchange. Transactions in the securities of any company cannot be
conducted on stock exchanges unless they are listed by them. Hence, listing is the very basis on
stock exchange operations. It is the green signal given to selected securities to get the trading
privileges of the stock exchange concerned. Securities become eligible for trading only through
listing.

Listing is compulsory for those companies which intend to offer shares/debentures to the public for
subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting
permission to a new issue by a public limited company. Again, financial institutions do insist on
listing for underwriting new issues. Thus, listing becomes an unavoidable one today.
The companies which have got their shares/debentures listed in one or more recognized stock
exchanges must submit themselves to the various regulatory measures of the stock exchange
concerned as well as the SEBI. They must maintain necessary books; documents etc. and disclose
any information which the stock exchange may call for.
C. Registration of Brokers: A broker is none other than a commission agent who transacts
business in securities on behalf of his clients who are non-members of a stock exchange. Thus, a
non-member can purchase and sell securities only through a broker who is the member of the stock
exchange. To deal in securities on recognized stock exchanges, the broker should register his name
as a broker with the SEBI. A stock broker must possess the following qualification to register as a
broker:
(a) He must be an Indian citizen with 21 years of age.

(b) He should neither be a bankrupt nor compounded with creditors.
(c) He should not have been convicted for any offence, fraud etc.
(d) He should not have engaged in any other business other than that of a broker in securities.
(e) He should not be a defaulter of any stock exchange.
(f) He should have completed 12th std examinations.
Functions of stock exchange: Stock market performs pivotal position in the financial system. It
performs several economic functions and renders invaluable service to the investors, and to the
economy as a whole
1. Liquidity and marketability of securities: Stock exchanges provide liquidity to securities since
securities can be converted to cash at any time according to the discretion of the investor by selling
them at the listed prices. They facilitate buying and selling of securities at listed prices by
providing continuous marketability to the investors in respect of securities they hold or intend to
hold. Thus, they create a ready outlet for dealing in securities
2. Safety of funds: Stock exchanges ensure safety of funds invested because they have to function
under strict rules and regulations and bye-laws are meant to ensure safety of investible funds.
Over- trading, illegitimate speculation etc. are prevented through carefully designed set of rules.
This would strengthen the investor’s confidence and promote larger investment.
3. Supply of long term funds: The securities traded in the stock market are negotiable and
transferable in character and as such they can be transferred with minimum of formalities from one

hand to another. So, when a security is transacted, one investor is substituted by another, but
company is assured of long term availability of funds
4. Flow of capital to profitable ventures: The profitable and popularity of companies are reflected in
stock prices. The prices quoted indicate the relative profitability and performance of companies.
Funds tend to be attracted towards securities of profitable companies and this facilitates the flow of
capital into profitable channels.
5. Motivation for improved performance: The performance of a company is reflected on the prices
quoted in the stock market. These prices are more visible in the eyes of the public. Stock market
provides room for this price quotation for these securities listed by it. This public exposure makes
a company conscious of its status in the market and it acts as a motivation to improve its
performance further
6. Promotion of investment: Stock exchanges mobilize the savings of the public and promote
investment through capital formation. But for these Stock exchanges, surplus funds available with
individuals and institutions would not have gone for productive and remunerative ventures
7. Reflection of business cycle: The changing business conditions in the economy are immediately
reflected on the stock exchanges. Booms and depressions can be identified through the dealings on
the Stock exchanges and suitable monetary and fiscal policies can be taken by the government.
Thus a Stock market portrays the prevailing economic situation instantly to all concerned so that
suitable actions can be taken.
8. Marketing of new issues: If the new issues are listed, they are readily acceptable to the public,
since listing presupposes their evaluation by concerned stock exchange authorities. Costs of
underwriting such issues would be less. Public response to such new issues would be relatively
high. Thus, a stock market helps in the marketing of new issues also
9. Miscellaneous services: Stock exchange supplies securities of different kinds with different
maturities and yields. It enables the investors to diversify their risks by a wider portfolio of
investment. It also inculcates saving habits among the community and paves the way for capital
formation. It guides the investors in choosing securities by supplying the daily quotation of listed
securities and by disclosing the trends of dealings on the Stock exchange. It enables companies and
the government to raise resources by providing a ready market for their securities.
FEATURES OF SECONDARY MARKET: The market where securities are traded after
they are initially offered in the primary market. Most trading is done in the secondary market.
 In Secondary market share are traded between two investors.

 In secondary market there is no issuing of the fresh securities but trading of the already issued
securities

 In secondary market both buying and selling can take place
 It has a special and fixed place known as stock exchange. However, it must be noted that it is not
essential that all the buying and selling of securities will be done only through stock exchange. Two
individuals can buy or sell them manually. This will also be called a transaction of the secondary
market. Generally, most of the transactions are made through the medium of stock exchange.
Example are the New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE),National
Stock Exchange NSE, bond markets, over-the-counter markets, residential mortgage loans, governmental
guaranteed loans etc.
 The prices of securities in secondary market are determined by demand and supply.
 Only investors do the trading among themselves in secondary market.
 The trading of securities does not take place first. A security can be traded in the secondary market
only if issued in the primary market.
 Secondary market creates liquidity, hence, indirectly promotes capital formation.
 It creates liquidity in securities. Liquidity means immediate conversion of securities into cash. This
job is performed by the secondary market.
 Secondary market comes after primary market. New securities are first sold in the primary market and
thereafter it is the turn of the secondary market.
Topic -12: Trading Mechanisms:
Trading at Indian stock exchanges takes place through an open electronic limit order book, in which order
matching is done by the trading computer. There are no market makers or specialists and the entire process is
order-driven, which means that market orders placed by investors are automatically matched with the best
limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is
that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the
absence of market makers, there is no guarantee that orders will be executed.
All orders in the trading system need to be placed through brokers, many of which provide online trading
facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA)
option, in which they use trading terminals provided by brokers for placing orders directly into the stock
market trading system.
Topic -13: Dematerialization of shares: In order to mitigate the risks associated with share trading in paper
format, dematerialization concept was introduced in Indian Financial Market. Dematerialisation or Demat in
short is the process through which an investor’s physical share certificate gets converted to electronic format
which is maintained in an account with the Depository Participant. India adopted the demat System
successfully and there are plans to facilitate trading of almost all financial assets in demat format in future.
Through this article, we will try to understand the demat process and its benefits from common investor’s
perspective.
What is it?
Dematerialisation is the process of converting physical shares into electronic format. An investor who wants
to dematerialize his shares needs to open a demat account with Depository Participant. Investor surrenders his
physical shares and in turn gets electronic shares in his demat account.
Storage of Dematerialized Shares – Depository

Depository is the body which is responsible for storing and maintaining investor's securities in demat or
electronic format. In India there are two depositories i.e. NSDL and CDSL.
Who is a Depository Participant?

Depository Participant (DP) is the market intermediary through which investors can avail the depository
services. Depository Participant provides financial services and includes organizations like banks, brokers,
custodians and financial institutions.
Advantages of Demat
Dealing in demat format is beneficial for investors, brokers and companies alike. It reduces the risk of holding
shares in physical format from investor’s perspective. It’s beneficial for brokers as it reduces the risk of
delayed settlement and enhances profit because of increased participation.
From share issuing company’s perspective, issuance in demat format reduces the cost of new issue as papers
are not involved. Efficiency and timeliness of the issue is also maintained while companies deal in demat
format.
There are a lot of other benefits, but let’s focus on benefits with respect to common investor and the same are
listed below.
• Demat format reduces the risk of bad deliveries

• Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker for
taking delivery or submitting the share certificate
• Liquidity is very high in case of demat format as whole process in automated.
• All the benefits of corporate action like bonus, stock split, rights etc are managed through the depository
leading to elimination of transit losses
• Interest on loan against demat shares are less as compared to physical shares
• Investors save stamp duty while transferring shares in demat format.
• One needs to pay less brokerage in case of demat shares
Demat Conversion
Most of the trading in shares are done in demat format now a day, but there are few investors who still hold
shares in paper format. You cannot deal in paper shares now, so you need to dematerialize them first. In order
to dematerialize physical/paper shares, investors need to fill Demat Request Form (DRF), and submit the
same along with physical shares. DRF is available with the DP and you simply need to raise a request for
demat conversion with the DP. Their representative will come and get the DRF form signed. So the complete
process of dematerialization involves:
1. Investor surrenders the physical certificates for dematerialization to the DP along with DRF.
2. DP updates the account of the investor and shares are allocated in investor demat holding.
Topic -14: Settlement cycle: Equity spot markets follow a T+2 rolling settlement. This means that any trade
taking place on Monday gets settled by Wednesday. All trading on stock exchanges takes place between 9:55
am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must
be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement
risk, by serving as a central counterparty.
Topic -15: Clearing corporations: An organization associated with an exchange to handle the confirmation,
settlement and delivery of transactions, fulfilling the main obligation of ensuring transactions are made in a
prompt and efficient manner. They are also referred to as "clearing firms" or "clearing houses". In order to
make certain that transactions run smoothly, clearing corporations become the buyer to every seller and the
seller to every buyer. In other words, they take the offsetting position with a client in every transaction.

Topic -16: Price bands: The prospectus may contain either the floor price for the securities or a price band
within which the investors can bid. The spread between the floor and the cap of the price band shall not be
more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The
price band can have a revision and such a revision in the price band shall be widely disseminated by
informing the stock exchanges, by issuing a press release and also indicating the change on the relevant
website and the terminals of the trading members participating in the book building process. In case the price
band is revised, the bidding period shall be extended for a further period of three days, subject to the total
bidding period not exceeding ten days. It may be understood that the regulatory mechanism does not play a
role in setting the price for issues. It is up to the company to decide on the price or the price band, in
consultation with Merchant Bankers.
Topic -17: Risk management: The risk management system in case of Indian stock exchanges is based on
two pillars. While margins calculated on open positions and collateral deposited against it forms the first line
of defence, deposit based capital (base minimum capital, liquid net worth) given by trading member
(TM)/clearing member (CM) becomes the second line of defence against failure of any market participant.
As against net positions serving as the basis for levying margins on brokers for positions taken by
them and their clients as implemented in other jurisdictions, in India VaR (Value at Risk) based margins are
imposed at a client level i.e. net for a client and gross across all clients for the broker, thereby ignoring any
netting-off that may occur between client-client and client proprietary positions. VaR based margins are
updated 5 times per day to keep the margin requirements in sync with the current level of market volatility. In
addition to VaR based initial margins there are additional requirements specified, as a second level of defence,
in the form of an exposure margin/extreme loss margins which provides extra cushion in case of tail risk
events and finally mark-to-market losses are collected and paid in cash on a daily basis.
Indian stock exchanges have a deposit based capital requirement over and above entry level and
continuing net worth criteria for market participants undertaking the trading/clearing activity. Such net worth
requirements vary based on the nature of the business activity, trading or clearing or both, of the participant.
Further in addition to the minimum capital requirements, Stock Exchanges/Clearing Corporations have been
empowered to collect additional deposits in order to satisfy itself on the parameter of credit risk. This is as
against a balance sheet based capital adequacy requirement prevalent in many other jurisdictions.
A sound risk management system is integral to an efficient clearing and settlement system. NSE
introduced for the first time in India, risk containment measures that were common internationally but were
absent from the Indian securities markets. Risk containment measures include capital adequacy requirements
of members, monitoring of member performance and track record, stringent margin requirements, position
limits based on capital, online monitoring of member positions and automatic disablement from trading when
limits are breached, etc.
Topic -18: Trading Rules:
A Stock exchange is a corporation or organization that provides trading facilities for stockbrokers and traders.
Instruments traded on stock exchanges include stocks, investment trusts, commodities, options, mutual funds,
unit trusts and bonds. Only members can trade on an exchange.
Specialists: A stock specialist is a member of a stock exchange who provides several services. They make a
market in stocks by providing the best bid and best ask during trading hours. Specialists also maintain a fair
and orderly market.
Floor Brokers: Floor brokers trade on the floor on the major exchanges. Floor brokers buy and sell securities
in their own account. Floor brokers are required to take and pass written tests in order to trade. They must
abide by exchange rules, and they must be a member of the exchange on which they trade.
Stock brokers/Financial Advisers: Stock brokers, financial advisers, certified financial planners and
registered representatives buy and sell stocks on behalf of their clients and customers. They must pass certain
written exams in order to carry out trades and adhere to ethical standards.
Day Traders: Day traders are individuals who buy and sell securities for their own accounts. Day traders will
trade quickly--making purchases and sales on the same day.
Casual Traders: A casual trader is a person who tries to build up a portfolio by buying and selling securities
for his own account over a period of time. Technology has simplified the process and given the casual trader
much of the same information and tools available to professional traders.
Online Trading: Online trading is available to any person that has an account at an online trading firm. A
person can enter trades from a personal computer and set price limits and targets. Commissions are often
much less than at a full-service brokerage firm.
How to do Buying and Selling of Stocks
Now a days, there is no any physical trading, means going physical to stock exchange and do buying
and selling of shares. Now everything is done online in electronic format .No need to go to any stock
exchange. Stock transaction takes place in 3 major steps.
1. You place order (buy or sell) online -

2. The order goes to your broker (broker like indiabulls, 5paisa etc)
3. From broker the order goes to stock exchange (either BSE or NSE)
And finally based on your price your order gets executed. Your role is to place only buy or sell order. No need
to worry about broker part and stock exchange part. You just need to place your order. There are two methods
for placing orders; Online trading and Offline trading.
Online Stock Trading - The online stock trading is done by self. If you want to do trading yourself then you
can go for online trading.
For online trading you need computer, Internet connection, demat and trading account. You can even make
use of internet café, if you do not want buy computer and internet connection at the beginning. But demat
account and trading accounts are must for trading in stock market.
Offline stock trading - In this method the orders will be placed by the broker on your behalf. Means you have
to tell your broker which stocks to buy and sell and based on your instruction he carries out transaction. In
this method you don’t need any computer and internet connection.
Topic -19: Regulatory Framework:

 Capital issue (control) act ,1947
 Securities contract (regulation) act, 1956
 SEBI act, 1992 Depositories Act, 1996
 Companies Act, 1956
Capital issue (control) act ,1947

Any firm, issuing shares needed central government permission Also determine the amount and price of the
issue The act was repealed in 1992, Market determined allocation started
Securities contract (regulation) act, 1956

It provided for control on: all aspect of securities trading and running of stock exchange to prevent
undesirable transaction It give central government regulatory jurisdiction over:
 Stock exchanges: recognition and supervision
 Contracts in securities
 Listing of securities
Stock exchanges: recognition and supervision processing application of recognition of stock exchanges grant
of recognition to stock exchange, procedure of corporatisation and demutualization of stock exchanges,
withdrawal of recognition to stock exchange.
Demutualization and BSE: BSE has completed the process of Demutualization in terms of The BSE
(Corporatisation and Demutualization) Scheme, 2005. The Bombay Stock Exchange Limited has succeeded
'The Stock Exchange, Mumbai' in accordance with the Scheme The Securities and Exchange Board of India
(SEBI) had approved and published the Scheme of 'The Stock Exchange, Mumbai' . This act also empowers
the Central government to call for periodical returns and make direct enquiries to direct rules to be made and
powers of SEBI to make or amend bye-laws of recognized stock exchanges have been laid down. to supersede
governing body of recognized stock exchange and vests with the Central Government the power to suspend
business of recognized stock exchanges
Contracts in Securities: If the Central Government is not satisfied regarding the nature or the volume of
transactions in securities it may, by notification in the Official gazette, declare contracts in notified areas
illegal
Listing of Securities: The act also provides conditions of listing, delisting of securities, right of appeal against
refusal of stock exchanges to list securities of public companies, right of appeal to SAT against refusal of
stock exchange to list securities of public companies, procedures and powers of SAT, Right to legal
representation.
Penalties and Procedures: The act also provides various cases when a person is liable for penalties such as
when there is failure to: Furnish information, return, etc. Enter into agreements with clients Redress investor's
grievances Segregate securities or moneys of client or clients Comply with provision of listing and delisting
conditions etc.
SEBI Act, 1992

The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for protecting the interests of
investors in securities, promoting the development of the securities market and regulating the securities
market by measures it thinks fit.
The measure provide for: Regulating the business in stock exchanges and other securities markets. Registering
and regulating the working of: stock brokers, sub-brokers, share transfer agents bankers to an issue, trustee of
trust deeds, registrar to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and
other intermediaries
Registering and regulating the working of the depositories, participants, foreign institutional investors, credit
rating agencies and such other Registering and regulating the working of venture capital funds and collective
investment schemes, including mutual funds.
 Prohibiting fraudulent and unfair trade practices relating to securities markets.
 Promoting investors education and training of intermediaries of securities markets.
 Prohibiting insider trading in securities.
 Regulating substantial acquisition in shares and takeover of companies.
 Undertaking inspection, conducting inquires and audits of the stock exchanges, mutual funds, other
persons associated with the securities market,

Companies Act, 1956
It deals with issue, allotment and transfer of securities and various aspects relating to company management
Provide for standard disclosure in public issues Company management. Management perception of the risk
factors information about other listed companies under the same management Company ‘s other projects
Depositories Act, 1996

Depository Act, 1996 Provides for the
 Establishment of depositories in securities
 Ensure free transferability of securities with speed and accuracy
 By making securities freely transferable
 Dematerializing the securities
 On line transfer
The Depositories Act, 1996 provides for the establishment of depositories for securities to ensure
transferability of securities with speed, accuracy and security. The act provides the rights and obligations of
depositories, participants, issuers and beneficial owners.
A depository is required to enter into an agreement with one or more participants as its agents. Any person
through a participant can enter into an agreement for availing its services. Any person who enters into an
agreement with depository should surrender the certificate of security for which he requires the services of a
depository to the issuer
After the issuer receives the certificate of security, he should cancel the certificate of security and substitute in
its records the name of the depository as a registered owner in respect of that security the depository should
enter the name of the person who has entered into agreement, as the beneficial owner in its records.
After receiving intimation from the participant, every depository should register the transfer of security in the
name of the transferee. All securities held by a depository should be dematerialized and be in a fungible form.
The depositories should be deemed to be the registered owner for the purpose of effecting transfer of
ownership of security on behalf of a beneficial owner. The depository as a registered owner should not have
any voting rights or other rights in the securities held by it.
A Beneficial owner, with the prior approval of the depository creates a pledge or hypothecation of securities
owned by him through a depository. The depository is required to maintain a register and an index of
beneficial owners. The depositories are required to furnish information about the transfer of securities in the
name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws.
Topic -20: Current Status of the Market (status is shown in the internet and news papers on daily basis).
Topic -21: Corporate Action: A corporate action is an event initiated by a public company that affects the
securities (equity or debt) issued by the company. Some corporate actions such as a dividend (for equity
securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the
shareholders or bondholders; another example is a call (early redemption) of a debt security. Other corporate
actions such as stock split may have an indirect impact, as the increased liquidity of shares may cause the
price of the stock to rise. Some corporate actions such as name change have no direct financial impact on the
shareholders. Corporate actions are typically agreed upon by a company's board of directors and authorized by
the shareholders. Some examples are stock splits, dividends, mergers and acquisitions, rights issues and spin-
offs.
Reasons: The primary reasons for companies to use corporate actions are:

Return profits to shareholders: Cash dividends are a classic example where a public company declares a
dividend to be paid on each outstanding share. Bonus is another case where the shareholder is rewarded. In a
stricter sense the Bonus issue should not impact the share price but in reality, in rare cases, it does and results
in an overall increase in value.
Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock suffers.
Stocks priced too high will not be affordable to all investors and stocks priced too low may be de-listed.
Corporate actions such as stock splits or reverse stock splits increase or decrease the number of outstanding
shares to decrease or increase the stock price respectively. Buybacks are another example of influencing the
stock price where a corporation buys back shares from the market in an attempt to reduce the number of
outstanding shares thereby increasing the price.
Corporate Restructuring: Corporations re-structure in order to increase their profitability. Mergers are an
example of a corporate action where two companies that is competitive or complementary come together to
increase profitability. Spin-offs are an example of a corporate action where a company breaks itself up in
order to focus on its core competencies.
TYPES: Corporate actions are classified as voluntary, mandatory and mandatory with choice corporate
actions.
Mandatory Corporate Action: A mandatory corporate action is an event initiated by the corporation by the
board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate
actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the
dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of
mandatory corporate actions include stock splits, mergers, pre-refunding, return on capital, bonus issue, asset
ID change, pari-passu and spin-offs. Strictly speaking the word mandatory is not appropriate because the
share holder person doesn't do anything. In all the cases cited above the shareholder is just a passive
beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory Corporate
Action.
Voluntary Corporate Action: A voluntary corporate action is an action where the shareholders elect to
participate in the action. A response is required by the corporation to process the action. An example of a
voluntary corporate action is a tender offer. A corporation may request share holders to tender their shares at a
pre-determined price. The shareholder may or may not participate in the tender offer. Shareholders send their
responses to the corporation's agents, and the corporation will send the proceeds of the action to the
shareholders who elect to participate.
Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For
example in case of a cash or stock dividend option, the shareholder can elect to take the proceeds of the
dividend either as cash or additional shares of the corporation. (These are commonly known as Mandatory
Events with Options, as a dividend is mandatory but a shareholder has the option to elect for the cash or to re-
invest their cash dividend into the shares) Other types of Voluntary actions include rights issue, making
buyback offers to the share holders while delisting the company from the stock exchange etc.
Mandatory with Choice Corporate Action: This corporate action is a mandatory corporate action where
share holders are given a chance to choose among several options. An example is cash or stock dividend
option with one of the options as default. Share holders may or may not submit their elections. In case a share
holder does not submit the election, the default option will be applied.
Topic -22: Buyback of shares: The repurchase of outstanding shares (repurchase) by a company in order to
reduce the number of shares on the market. Companies will buy back shares either to increase the value of
shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a
controlling stake. A buyback allows companies to invest in them-selves. By reducing the number of shares
outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be
carried out in two ways:
1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a
portion or all of their shares within a certain time frame and at a premium to the current market price. This
premium compensates investors for tendering their shares rather than holding on to them.
2. Companies buy back shares on the open market over an extended period of time.
Topic -23: Index: Security market Index measures the behaviour of the security prices and the stock
market. Indicators represent the entire stock market and its segments which measure the movement of
the stock market. The most popular index in India are the Bombay stock exchange sensitivity Index (BSE
Sensex or BSE – 100) and the National Stock Exchange Nifty. The two prominent Indian market indexes are
Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the
BSE, which represent about 45% of the index's free-float market capitalization. It was created in 1986 and
provides time series data from April 1979, onwards. Another index is the S&P CNX Nifty; it includes 50
shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in
1996 and provides time series data from July 1990, onward.
Purpose of Index
Security Index is helpful to show the economic health and analyzing the movement of price of various
securities listed into the stock exchange.
 Helpful to evaluate the Risk – return portfolio analysis.
 Helpful to measure the growth of the secondary market.
 Index can be used to compare a given share prices behaviour with its movement.
 It is helpful to the investor to make their Investment decision.
 Funds can be allocated more rationally between stocks with knowledge of the relationship of
price of individual with the movements in the market.
 Market indices act as sensitive barometer of the changes in trading pattern in the stock market.
Factors that influence the construction of Index numbers

 Selecting the shares for inclusion in the index making.
 Determine the relative importance of each share included in the sample weighting
 Average the included share into single share measure.
Sample List of Indices

BSE- SENSEX
BSE100 Index
BSE200 Dollex
BSE 500 and Sectoral Indices
INDO text
S&P CNX 50
CNX Nifty Junior
OTCEI – Composite Index

Module-III: Banking Basics and New Age Banking
Topic -1: Historical Perspective of Banking, An Overview of development of Banking in India
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank
of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The
oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June
1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the
other two being the Bank of Bombay and the Bank of Madras, all three of which were established under
charters from the British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which,
upon India's independence, became the State Bank of India in 1955.
A bank is a financial institution and a financial intermediary that accepts deposits and channels
those deposits into lending activities, either directly or through capital markets. A bank connects customers
with capital deficits to customers with capital surpluses.
Topic -2: Banking Structure
Banking Regulator
The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the
regulator and supervisor of commercial banks.
Scheduled Banks in India
Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled
commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-
fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having
grown more than four-fold in the last 40 years now number more than 80,500 across the country. Our focus in
this module will be only on the scheduled commercial banks.
Public Sector Banks

Public sector banks are those in which the majority stake is held by the Government of India (GoI). Public
sector banks together make up the largest category in the Indian banking system. There are currently 27 public
sector banks in India. They include the SBI and its 6 associate banks (such as State Bank of Indore, State
Bank of Bikaner and Jaipur etc), 19 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI
Bank Ltd. Public sector banks have taken the lead role in branch expansion, particularly in the rural areas.
Regional Rural Banks

Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy.
Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring public
sector commercial bank. RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural
labourers. Over the years, the Government has introduced a number of measures of improve viability and
profitability of RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a
State. This process of consolidation has resulted in a steep decline in the total number of RRBs to 82 as on
March 31, 2009, as compared to 196 at the end of March 2005.
Private Sector Banks

In this type of banks, the majority of share capital is held by private individuals and corporates. Not all private
sector banks were nationalized in 1969, and 1980. The private banks which were not nationalized are
collectively known as the old private sector banks and include banks such as The Jammu and Kashmir Bank
Ltd., Lord Krishna Bank Ltd etc. Entry of private sector banks was however prohibited during the post-
nationalization period. In July 1993, as part of the banking reform process and as a measure to induce
competition in the banking sector, RBI permitted the private sector to enter into the banking system. This
resulted in the creation of a new set of private sector banks, which are collectively known as the new private

sector banks. As at end March, 2009 there were 7 new private sector banks and 14 old private sector banks
operating in India.
Foreign Banks
Foreign banks have their registered and head offices in a foreign country but operate their branches in India.
The RBI permits these banks to operate either through branches; or through wholly-owned subsidiaries. The
primary activity of most foreign banks in India has been in the corporate segment. However, some of the
larger foreign banks have also made consumer financing a significant part of their portfolios. These banks
offer products such as automobile finance, home loans, credit cards, household consumer finance etc. Foreign
banks in India are required to adhere to all banking regulations, including priority-sector lending norms as
applicable to domestic banks. In addition to the entry of the new private banks in the mid-90s, the increased
presence of foreign banks in India has also contributed to boosting competition in the banking sector.
Co-operative Banks
Co-operative banks cater to the financing needs of agriculture, retail trade, small industry and self-employed
businessmen in urban, semi-urban and rural areas of India. A distinctive feature of the co-operative credit
structure in India is its heterogeneity. The structure differs across urban and rural areas, across states and loan
maturities. Urban areas are served by urban cooperative banks (UCBs), whose operations are either limited to
one state or stretch across states. The rural co-operative banks comprise State co-operative banks, district
central cooperative banks.
The co-operative banking sector is the oldest segment of the Indian banking system. The network of UCBs in
India consisted of 1721 banks as at end-March 2009, while the number of rural co-operative banks was 1119
as at end-March 2008. Owing to their widespread geographical penetration, cooperative banks have the
potential to become an important instrument for large-scale financial inclusion, provided they are financially
strengthened. The RBI and the National Agriculture and Rural Development Bank (NABARD) have taken a
number of measures in recent years to improve financial soundness of co-operative banks.
Topic -3: The Banking Sector:

In the banking sector RBI act as a central bank of the country and bankers bank. Under RBI , the whole
structure of bank in India can be broadly classified in two parts i.e.
I. Commercial Banks
II. Cooperative Banks
Commercial banks can be further classified in to three i.e.
I. Public Sector Banks
II. Private Sector Banks
III. Foreign Banks
I. Public Sector Banks are those where ownership of Govt. is more than 50%. They are also known as
Govt. Banks. These banks can also be divided into following three categories.
i. Nationalized Banks- 14 banks were nationalized in 1969 and 6 more banks were nationalized
subsequently. In all these banks Govt. ownership is more than 51% and hence they are known as
Govt. of India undertakings.
ii. SBI Group i.e. State Bank of India and its subsidiaries – State Bank of India was nationalized
in 1955 which was earlier known as imperial Bank of India. Six more subsidiaries of SBI were
formed subsequently like State Bank of Indore, State Bank of Bikaner & Jaipur, State Bank of
Travankore & Kochin etc.
iii. Regional Rural Banks- These banks were created after passing RRB Act, 1974 to supplement
the efforts of cooperative credit institutions to meet the demand of credit in rural areas and to
provide them banking facilities.

III. Private Sector Banks- In India we have large number of Private Sector Banks. Prominent banks in
this sector are ICICI Bank , HDFC Bank, Kotak Mahindra Bank etc.
IV. Foreign Banks- We have many foreign banks like ABN Amro, American Express, Standard
Chartered Bank etc.
Topic -4: Emergence and Importance of Commercial banking:
The commercial banking industry in India started in 1786 with the establishment of the Bank of Bengal in
Calcutta. The Indian Government at the time established three Presidency banks, viz., the Bank of Bengal
(established in 1809), the Bank of Bombay (established in 1840) and the Bank of Madras (established in
1843). In 1921, the three residency banks were amalgamated to form the Imperial Bank of India, which took
up the role of a commercial bank, a bankers' bank and a banker to the Government. The Imperial Bank of
India was established with mainly European shareholders. It was only with the establishment of Reserve Bank
of India (RBI) as the central bank of the country in 1935, that the quasi-central banking role of the Imperial
Bank of India came to an end.
In 1860, the concept of limited liability was introduced in Indian banking, resulting in the establishment of
joint-stock banks. In 1865, the Allahabad Bank was established with purely Indian shareholders. Punjab
National Bank came into being in 1895. Between 1906 and 1913, other banks like Bank of India, Central
Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
After independence, the Government of India started taking steps to encourage the spread of banking in India.
In order to serve the economy in general and the rural sector in particular, the All India Rural Credit Survey
Committee recommended the creation of a state-partnered and state-sponsored bank taking over the Imperial
Bank of India and integrating with it, the former state-owned and state-associate banks. Accordingly, State
Bank of India (SBI) was constituted in 1955. Subsequently in 1959, the State Bank of India (subsidiary bank)
Act was passed, enabling the SBI to take over eight former state-associate banks as its subsidiaries.
To better align the banking system to the needs of planning and economic policy, it was considered necessary
to have social control over banks. In 1969, 14 of the major private sector banks were nationalized. This was
an important milestone in the history of Indian banking. This was followed by the nationalization of another
six private banks in 1980. With the nationalization of these banks, the major segment of the banking sector
came under the control of the Government. The nationalization of banks imparted major impetus to branch
expansion in un-banked rural and semi-urban areas, which in turn resulted in huge deposit mobilization,
thereby giving boost to the overall savings rate of the economy. It also resulted in scaling up of lending to
agriculture and its allied sectors. However, this arrangement also saw some weaknesses like reduced bank
profitability, weak capital bases, and banks getting burdened with large non-performing assets.
To create a strong and competitive banking system, a number of reform measures were initiated in early
1990s. The thrust of the reforms was on increasing operational efficiency, strengthening supervision over
banks, creating competitive conditions and developing technological and institutional infrastructure. These
measures led to the improvement in the financial health, soundness and efficiency of the banking system. One
important feature of the reforms of the 1990s was that the entry of new private sector banks was permitted.
Following this decision, new banks such as ICICI Bank, HDFC Bank, IDBI Bank and UTI Bank were set up.
Commercial banks in India have traditionally focused on meeting the short-term financial needs of industry,
trade and agriculture. However, given the increasing sophistication and diversification of the Indian economy,
the range of services extended by commercial banks has increased significantly, leading to an overlap with the
functions performed by other financial institutions. Further, the share of long-term financing (in total bank
financing) to meet capital goods and project-financing needs of industry has also increased over the years.
Functions of Commercial Banks

The main functions of a commercial bank can be segregated into three main areas: (i) Payment System (ii)
Financial Intermediation (iii) Financial Services.
(i) Payment System

Banks are at the core of the payments system in an economy. A payment refers to the means by which
financial transactions are settled. A fundamental method by which banks help in settling the financial
transaction process is by issuing and paying cheques issued on behalf of customers. Further, in modern
banking, the payments system also involves electronic banking, wire transfers, settlement of credit card
transactions, etc. In all such transactions, banks play a critical role.
(ii) Financial Intermediation

The second principal function of a bank is to take different types of deposits from customers and then lend
these funds to borrowers, in other words, financial intermediation. In financial terms, bank deposits represent
the banks' liabilities, while loans disbursed, and investments made by banks are their assets. Bank deposits
serve the useful purpose of addressing the needs of depositors, who want to ensure liquidity, safety as well as
returns in the form of interest. On the other hand, bank loans and investments made by banks play an
important function in channeling funds into profitable as well as socially productive uses.
(iii) Financial Services

In addition to acting as financial intermediaries, banks today are increasingly involved with offering
customers a wide variety of financial services including investment banking, insurance-related services,
government-related business, foreign exchange businesses, wealth management services, etc. Income from
providing such services improves a bank's profitability.
Topic -5: Banker & Customer relationship-General and Special;
A banker is the one who gets into debts and creates debts. H.L. HART – the banker is one who receives
money, collects cheques and drafts, for customers, with an obligation to honour the cheques drawn by
customers from time to time subject to availability of amounts in the account.
Section 3 of NI ACT 1881, and Section 2 of BILL OF EXCHANGE ACT 1882 states that the term banker
includes person or corporation or a company acting as banker. Under Section 5 (1) of Banking
Regulations of 1949, a banking company is defined as any company which transacts banking business.
Under Section 5 (1) B , banking business means accepting for the purpose of landing or investment,
deposits of money from the public, repayable on demand or otherwise with drawable by cheque , draft or
otherwise.
CUSTOMER: A person who buys goods or services from a shop or a business entity. A person you deal
with as a business entity. There is no statutory definition. A person/ company/entity who has an account
with a bank is a customer. There is no unanimity as regards to the time period of the dealings. A casual
transaction like encashment of a cheque does not entail a person to be customer. The duration of
association of the customer with the bank is of no essence. A customer is one who has an account with the
bank and to whom the banks undertakes to extend business of banking.
RELATIONSHIP CREDITOR-DEBTOR: Relationship between the customer having a deposit account

and the banker. Depositor is the lender and the banker is the borrower. Depositor is the creditor and the
banker is the debtor. The money handed over to the bank is a debt. The money once deposited in the bank
becomes the money of the bank and it is prerogative of the bank to use that money as it deems fit. The
depositor remains a creditor that too an unsecured creditor
RELATIONSHIP DEBTOR-CREDITOR: When the customer avails a loan or an advance then his
relationship with the banker undergoes a change to what it is when he is a deposit holder. Since the funds

are lent to the customer, he becomes the borrower and the banker becomes the lender. The relation is the
debtor- creditor relation, the customer being a debtor and the banker a creditor.
RELATIONSHIP BENEFICIARY-TRUSTEE: If a customer keeps certain valuables or securities with the

bank for safe-keeping or deposits a certain amount of money for a specific purpose, the banker, besides
becoming a bailee, is also a trustee. The money or the securities so kept are not at the disposal of the bank.
The banker cannot utilize those moneys or securities as he desires since the money does not belong to him.
Here there is delivery of goods or securities from one person to the other which amounts to the bailment.
As per section 148 of Indian Contract Act 1872, the delivery of goods from one person to the other for
some purpose upon the contract that the goods will be returned when the purpose is accomplished. The
customer is the bailer and the banker is the bailee.
RELATIONSHIP PRINCIPAL-AGENT: Banks provide ancillary services such as collection of cheques,

bills etc. They also undertake to pay regularly the electricity bills, phone bills etc. The relationship arising
out of these ancillary services is of principal-agent between the customer and the bank. The relationship
seizes once the customer dies, becomes insane or becomes insolvent. The proceeds of the cheques sent for
collection, which are in transit, not created to the customer account are not the moneys of the banker till
such time as they are credited into the customer account.
RELATIONSHIP LESSEE-LESSOR: The banks provide safe deposit lockers to the customers who hire
them on lease basis. The relationship therefore, is that of lessee and lessor. In certain banks, this
relationship is termed as licensee and licensor. The bank leases out the space for the use of clients. The
bank is not responsible for any loss that arises to the lessee in this form of transaction except due to
negligence of that bank.
RELATIONSHIP INDEMNIFIER- INDEMNIFIED: The customer is indemnifier and the bank is

indemnified. A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself or the conduct of any other person is called a contract of indemnity –
section 124 ( Indian Contract Act, 1872). In the case of banking, this relationship happens in transactions
of issue of duplicate demand draft, fixed deposit receipt etc. The underlying point in these cases is that
either party will compensate the other of any loss arising from the wrong/excess payment.
Topic -6: Special types of customers
The term ‘customer’ of a bank is not defined by law. Ordinarily a person who has an account in a bank is considered its
customer. There is no statutory definition of “customer”, and so one has to refer the decisions of the courts in order to
discover the principle which determines whether or not a person is a customer. In the United States, customer means,
‘any person having an account with a banker or from whom a bank has agreed to collect items and includes a bank
carrying an account with another bank’. The statutory protection under section 131 and 131A of the Negotiable
Instruments Act, 1881, is available to a collecting banker only if the banker inter alia receives payment of a cheque or
a draft for a customer. Though a customer is a very important person for a bank, he appears only once in law of
Negotiable Instrument (i.e., in section 131 of the Negotiable Instruments Act) and even there only casually; he is neither
defined nor explained. A customer of a banker need not necessarily be a person. A firm, joint stock Company, a society
or any separate legal entity may be a customer. According to section 45-Z of the Banking Regulation Act,
1949, “Customer” includes a government department and a corporation incorporated by or under any law. The
following are some examples of special types of customers:
 Married women
 Lunatics
 Minors
 Illiterate Persons
 Joint Hindu Family
 Co-operative Societies
 Partnership
 Trustees
1. MINOR: A person under the age of 18 years is years is a minor; if a guardian of his person or property or both has
been appointed by a court or if the superintendence of his property or both has been assumed the age of 18 years, he
remains minor till he completes the age of 21 years. According to the Indian Contract Act, 1872, a minor is not
capable of entering into by a minor is void. The banker should, therefore, be very careful in dealing with a minor and
take the following precautions:
OPENING THE ACCOUNT: The banker may open a savings bank account, not a current account in the name of a
minor since; in case of an overdraft the minor does not have any personal liability. The savings bank account may be
opened in any of the following ways:
 In the name of the minor himself.

 In the joint names of the minor and his/her guardian.
 In the name of guardian in the following way “ABC, natural guardian of XYZ”.
Section 26 of Negotiable Instruments Act provides that a minor may draw, endorse, deliver and negotiate a
negotiable instrument. In case of the minor can operate the account only jointly with his or her guardian while in case of
the account is to be operated by the guardian on behalf of the minor. In cases the minor must have at least attained the
age of 12 years and should be in a position to read or write English, Hindi or Regional language.
DATE OF BIRTH: At the time of opening of the account of minor, the bank should record the date of birth of the
minor as disclosed by his or her guardian.
DEATH OF THE MINOR GUARDIAN: In the event of death of a minor the money will be payable to the guardian.
In case the guardian dies before the minor attains majority and the account is a joint account or to be operated by the
guardian only, the money should be paid by the bank to the minor or attaining majority or to some person appointed by
the court as his guardian.
PROVISIONS REGARDING LGAL GUARDIANSHIP OF A MINOR:
 Natural guardian
 Testamentary guardian
 Guardian appointed by the Court
The first two types of guardians are governed by the provisions of the Hindu Minority and Guardianship Act, 1956,
whereas a guardian is appointed by a court under the Guardians and Wards Act, 1890.
RESERVE BANK’S DIRECTIVES: Reserve bank of India has advised the banks to allow opening of minors
accounts with mother as guardian. Thus, banks are now permitted to open account of minor in the guardianship of the
mother, even if the father of the minor is alive.
2. MARRIED WOMAN: A married woman is competent to enter into a valid contract. The banker may, therefore,
open an account in the name of a married woman. In case of a debt taken by a married woman, her husband shall not be
liable except in the following circumstances:
 If the loan is taken with his consent or authority; and

 If the debt is taken for the supply of necessaries of life to the wife, n case the husband defaults in supplying the
same to her.

The husband shall not be liable for the debts taken by his wife in any other circumstances. The creditor may in that case
recover his debt out of the personal assets of the married woman. While granting a loan to a married woman, the banker
should, therefore, examine her own assets and ensure that the same are sufficient to cover the amount of the loan.
3. PARADANASHIN WOMAN: A paradanashin woman observes complete seclusion in accordance with the custom
of her own community. She does not deal with the people, other than the members of her own family. As she remains
completely secluded, a presumption in law exists that:
 Any contract entered into by her might have been made with her free will and with full understanding of what the
contract actually means.
 The same might not have been made with her free will and with full understanding of what the contract actually
means.
The banker should, therefore take due precaution in opening an account in the name of a paradanashin woman. As the
identity of such a woman cannot be ascertained, the banker generally refuses to open an account in her name.
4. ILLITERATE PERSONS: Illiterate persons cannot sign their names and hence the bankers taken their thumb
impressions as a substitute for signature, and also a copy of their recent photograph. The application from and the
photograph should be attested by an approved witness. For withdrawing money, he must attend personally and affix his
thumb impression in the presence of an official of the bank, for the purpose of identification.
5. LUNATICS: The banker should, therefore, not open an account in the name of a person who is of unsound mind.
But if a banker has discounted a bill duly written, accepted or endorsed by a lunatic he can realize the money due on the
same from such person except in the circumstances where it is proved that the banker was aware of the lunacy of the
person concerned at the time he discounted the bill. The banker should suspend all operations on the account of a
customer as soon as he receives the news of his lunacy till he gets the proof of his sanity or is served with an order of
the court.
6. JOINT HINDU FAMILIES: The concept of joint Hindu Family is recognized by law. A business, according to law
is a distinct heritable asset. Where a Hindu dies, leaving a business it passes on the heirs. If he leaves male issues it
descends to them and the property becomes joint Hindu Family property. The members of the family are called co-
parceners and the eldest male member is the manager or the karta. When an account in the name of the JHF is opened
all the adult co- parceners are to sign the account opening form, even though the karta would operate on the account. In
addition, the bankers also obtain a letter of undertaking signed by all the adult co- parceners stating that the business
carried on by the family through births and deaths will be advised to the banker. If the business is ancestral, the co-
parceners are liable to the extent of their share in the family property, whereas if the business is not ancestral, co-
parceners will be personally liable for the family from the bank.
The main problem in dealing with a JHF arises in respect of loans. In the JHF governed by mithakshara law, all the
members acquires a right in the property by birth and this right starts from the date of conception in the womb and so
there is always the danger of a loan being repudiated by a member who was not even born on the date of the
transactions. The burden of proving this necessity lies on the banker and the banker has to not only prove the legal
necessity, but also prove that he made reasonable inquiries and was satisfied as to the existence of the legal necessity.
To avoid these and several other difficulties, some banks requires a Hindu customer opening an account, to furnish a
statement to this effect that the money deposited is his self acquired property and not that of JHF.
 The account should clearly indicate that it is a JHF.

 The JHF letter should be signed by all the co- parceners.
 The letter should clearly indicates the powers of the karta.
 All co- perceners should sign the documents for loans.
 Death/Lunacy/Insolvency of co- perceners does not dissolve the JHF. It continues till partition of property.

7. TRUSTEES: According to the Indian Trusts Act, 1882, a ‘trust’ is an obligation annexed to the ownership of
property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the
benefit of another, or of another and the owner Section 3. The person who reposes the confidence is called the author of
the trust. A trustee is the person in whom the confidence is reposed. The person for whose benefit the trust is formed is
called beneficiary.
8. PARTNERSHIP: A bank should take the following precautions in the course of having business dealing with the
firm:
 The banker should open an account in the name of partnership firm only when one or more partners make an
application to the effect.
 The bank should ask for a copy of the partnership agreement and thoroughly acquaint itself with its clauses.
 The banker should take a letter signed by all the partners containing the following:
 The name and address of all partners
 The nature of the firms business
 The names of the partners authorized to operate the account in the name of the firm.
 The banker should not credit a cheque in the firms name to the personal account of a partner without enquiring from
other partners.
In the absence of any contract to the contrary, a partnership firm stands dissolved on the death of a partner. In case the
firm continues to carry on the business, the estate of the deceased is not liable for any act of the firms after his death.
9. ACCOUNTS IN THE NAME OF LIQUIDATORS: A liquidator is a person appointed by the court to wind up the
affairs of a company. His business is to realize the company’s assets and apply funds thus collected in repayment of
debts and distribute the balance among shareholders. He has power to borrow money on the security of the company’s
assets and to draw, endorse and accept instruments on behalf of the company. While exercising such powers, the
liquidator is free personal liability. Every official liquidator is required to maintain a personal ledger account with RBI
or SBI or any Nationalized Bank in terms of the court order.
10. CO – OPERATIVE SOCIETIES: These are established under Co – operative societies act in force in various
states. They are governed by their respective rules and by – laws. Before opening the accounts, these have to be
scrutinized to see if there are any restrictions on opening bank accounts. In some states, the co- operative societies
cannot open accounts with commercial banks without permission from the registrar of co- operative societies and the
registrar may also impose certain conditions like maximum balances. All such conditions should be observed while
opening and operating the accounts.
Topic -7: Banking- A Business of Trust:

Most of the loans provided by banks to individuals, business community and companies are given for
productive purposes with a view to increase business turn over, improve profitability and thereby
improve their overall image in market and finally improve their credit worthiness and turn them with
people of means. Some of the loans are also provided to improve their efficiency and living standard.
For example loan for housing and two/four wheelers, consumer durables are provided to improve the
image of borrower in the society. A person with his own house is seen with prestige, dignity in the
society. Education loan is given by the banks to students for perusing higher education in the field of
engineering, medical, management etc. to enable the students to acquire special knowledge which
would help them in seeking good employment. They repay this loan out of their earnings when they get
employed or start their own business. Hence all bank loans aims at making the borrower more credit
worthy and make him capable of acquiring means of earning. There are four basis principle of lending
which a banker keeps in mind while lending. These four principles are:
Safety : The first and foremost aspect seen a before loaning is safety of funds in the hands of borrower.
In also depends upon the type of security offered for loan. For example loan granted against mortgage

of house is safe as security for loan is house it self which has been mortgaged with the bank. However at
the time of analyzing credit worthy ness of the borrower, five C‟s are normally seen by the bank. These
5 C’s are:
Character
Capital
Capacity to repay
Collateral
Conditions
Liquidity : It means that loan is likely to come back after the specified period for which loan has been
granted.
Profitability : Loan granted will provide reasonable earning to the bank which would help the bank in
improving its profit.
Yield : Return on the loan in the form of interest income would provide reasonable yield on investment
in loans. Here, it may be mentioned that banks are required to invest funds in govt. and govt. approved
securities but yield on such investment is not attractive. This investment under statutory liquid ratio is
Statutory / mandatory as per Banking Regulation Act and hence banks are required to compromise on
yield. However in case of loans, banks would like to increase their yield by charging higher interest
rates.
Topic -8: Banking Services and the products there-under:

Various products offered by banks can be classified as retail banking product and corporate banking
products.
Retail Banking Products- can be further classified as-

1. Liability products- Such as Savings, Current, Recurring Fixed Deposit Account and no-frill account
2. Asset Products- loan like Housing, Personal, Education, Gold loan, Mortgage loan, Vehicle loan,
Agricultural loans etc.
3. Credit & Debit Cards-
4. Investment Products-Such as insurance plans, pension plans, mutual fund etc.
Corporate Banking Products-

1. Liability Products- Such as salary accounts of employees, current account, fixed deposit account,
payment cards etc.
2. Asset Products-Such as trade finance in the form of cash credit (clear, pledge, hypothecation) short
term loans, capital loans, letter of credit, guarantee, corporate finance, project finance etc
Various services provided by banks-

 Trusteeship services- Such as safe deposit, locker facilities
 Money transfer facilities like Demand Draft EFT, RTGS, etc.
 ATM facilities (debit card)
 Project Guidance through project preparation and project finance
 De mat account facilities
 On-line banking
 Consultancy & advisory services such as portfolio management etc.
 E-banking/E-Commerce
 Tele Banking
 Foreign exchange services by authorized banks
Topic -9: Banking Regulations:
The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into force w.e.f 16.3.49.
Subsequently it was changed to Banking Regulations Act 1949 w.e.f 01.03.66. Summary of some important sections is
provided hereunder. The section no. is given at the end of each item.
 Banking means accepting for the purpose of lending or investment of deposits of money from public repayable
on demand or otherwise and withdrawable by cheque, drafts order or otherwise (5 (i) (b)).
 Banking company means any company which transacts the business of banking (5(i)(c)
 Transact banking business in India (5 (i) (e).
 Demand liabilities are the liabilities which must be met on demand and time liabilities means liabilities which are
not demand liabilities (5(i)(f)
 Secured loan or advances means a loan or advance made on the security of asset the market value of which is
not at any time less than the amount of such loan or advances and unsecured loan or advances means a loan
or advance not secured (5(i)(h).
 Defines business a banking company may be engaged in like borrowing, lockers, letter of credit, traveller
cheques, mortgages etc (6(1).
 States that no company shall engage in any form of business other than those referred in Section 6(1) (6(2).
 For banking companies carrying on banking business in India to use at least one word bank, banking, banking
company in its name (7).
 Restrictions on business of certain kinds such as trading of goods etc. (8)
 Prohibits banks from holding any immovable property howsoever acquired except as acquired for its own use
for a period exceeding 7 years from acquisition of the property. RBI may extend this period by five years (9)
 Prohibitions on employments like Chairman, Directors etc (10)
 Paid up capital, reserves and rules relating to these (11 & 12)
 Banks not to pay any commission, brokerage, discount etc. more than 2.5% of paid up value of one share (13)
 Prohibits a banking company from creating a charge upon any unpaid capital of the company. (14) Section
14(A) prohibits a banking company from creating a floating charge on the undertaking or any property of the
company without the RBI permission.
 Prohibits payment of dividend by any bank until all of its capitalized expenses have been completely written off
(15)
 To create reserve fund and 20% of the profits should be transferred to this fund before any dividend is declared
(17 (1))
 Cash reserve - Non-scheduled banks to maintain 3% of the demand and time liabilities by way of cash reserves
with itself or by way of balance in a current account with RBI (18)
 Permits banks to form subsidiary company for certain purposes (19)
 No banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owners of
any amount exceeding 30% of its own paid up share capital + reserves or 30% of the paid up share capital of
that company whichever is less. (19(2).
 Restrictions on banks to grant loan to person interested in management of the bank (20)
 Power to Reserve Bank to issue directive to banks to determine policy for advances (21)
 Every bank to maintain a percentage of its demand and time liabilities by way of cash, gold, unencumbered
securities 25%-40% as on last Friday of 2nd preceding fortnight (24).
 Return of unclaimed deposits (10 years and above) (26)
 Every bank has to publish its balance sheet as on March 31st (29).
 Balance sheet is to be got audited from qualified auditors (30 (i))
 Publish balance sheet and auditors report within 3 months from the end of period to which they refer. RBI may
extend the period by further three month (31)
 Prevents banks from producing any confidential information to any authority under Indian Disputes Act. (34A)
 RBI authorized to undertake inspection of banks (35).
 Amendment carried in the Act during 1983 empowers Central Govt to frame rules specifying the period for
which a bank shall preserve its books (45-y), nomination facilities (45ZA to ZF) and return a paid instrument to a
customer by keeping a true copy (45Z).
 Certain returns are also required to be sent to RBI by banks such as monthly return of liquid assets and
liabilities (24-3), quarterly return of assets and liabilities in India (25), return of unclaimed deposits i.e. 10 years
and above (26) and monthly return of assets and liabilities (27-1).

Topic -10: Retail credit-An overview:
It a financing method which provides loan services to retail consumers for goods and services. Retail credit
facilities lend funds to consumers wishing to purchase high ticket items but are short on capital. Thus, retail
credit facilities may enable a greater number of consumers access to a retailer's goods. Retail credit facilities
can take the form of point of sale finance options in retail outlets. For example a Rs. 70,000 motorcycle might
be a lot for a consumer to pay up front. Retail credit facilities will loan the Rs. 70,000 to the consumer, who
will then pay it back with interest in monthly installments over several years. Some offer low or even no
payments over an initial time period, but then charge above average interest. Retail credit facilities give the
option of consuming now or consuming in the future. Higher interest rates may be acceptable to some
consumers, depending on the consumers' unique consumption utilities. The risk of default is a factor that
determines the interest rate that retail credit facilities charge.
Retail credit products:

 Housing & Furnishing Loan: For construction/ purchase/ repair of house / flat etc.
 Dream Car Loan: For purchase of new / old vehicle for personal / official use.
 Commercial Vehicle Finance Scheme: For purchase of vehicle for commercial use.
 Trade Loan: Working Capital Requirement & Term Loan facility for Traders.
 Property Loan: Loan against property for business / personal need.
 Rent Loan: Loan against future Rental receivable for business / personal need.
 Home Appliances Finance Scheme: For purchase of consumer household items.
 Education Loan: The Educational Loan Scheme outlined below aims at providing financial support.
 Saral Loan: For personal need of employees of Govt / PSU/ Reputed Organization.
 Mobile Loan: For purchasing new two-wheeler.
 Personal Loan to Pensioners: For personal need of Pensioners.
 Personal Loan to Doctors: For personal / business need of Doctors.
 OD facility in Savings Bank Account: For corporate clients having Salary Accounts.
 Loans against NSC/KVP: Loan against NSC/KVP for personal / business need.
 Gold Loan: Loan against Gold Jewellery for personal/ business/agriculture purpose.
 Reverse Mortgage Scheme: For personal needs of Senior Citizens owning self occupied residential
property.
Topic -11: Micro Finance:

Micro-Finance has been defined by RBI “as provision of thrift and credit and other financial services of very small
amount to the poor in rural, semi urban and urban areas to improve their income and living standard”. Micro-credit
institutions are those which are engaged in providing credit and other facilities to these poor strata of the society.
RBI has asked banks and financial institutions to formulate their own schemes, models, prescribe suitable
criterions, choose suitable branches, credit norms and interest rates etc for this purpose. Accordingly, banks have
to prepare micro-credit plans for blocks, districts and the whole state for this purpose and these plans are reviewed
at State and National level. The non-governmental organizations (NGOs), voluntary organization and self help
groups are playing critical role in providing micro-finance facilities. Even NABARD is playing active role in
supporting these organizations and even arranging financial assistance to them. Many states have also launched
various schemes of micro-finance for increasing income of poorest of the poor in rural, semi urban and urban
areas.
Micro-Finance products:
1. Micro credit: Allowing small amount loans and advances to poor people.
2. Micro savings: creating habit to save and use this saving for future contingencies as wells using the
savings for small business activities.
3. Micro insurance: various types of insurance products like life insurance, property insurance, health
insurance etc. at nominal rates/premiums to poor people.

4. Micro leasing: Allowing poor entrepreneurs to take on lease equipments, machinery which they can
afford.
5. Micro Money transfer: A service of transferring money from one place to other by poor families to
their friends, relatives in India & abroad.
Participants in Micro finance are-

- Financial institutions
- Donors
- Private equity
- Micro-finance institutions
- Self help groups
- Non-Government organizations (NGO‟s)
In India SHG‟s are playing key role in the field of Micro-finance with key objective like-
- To create habit of savings

- To secure financial technical and moral strength
- To avail loan from financial institutions
- To gain economic prosperity through loan/credit
- To save them from exploitation by money lenders.
Millennium Development Goals of Micro-finance are-

- Eradiate extreme poverty and hunger
- Universal primary education
- Women empowerment
- Reduce child mortality
- Control HIV/AIDS, Malaria etc.

Module-IV Basics of Insurance and Risk Management
Topic -1: INSURANCE: MEANING AND NATURE
The term insurance can be defined in financial as well as in legal terms. The financial definition deals
with the funding or financial arrangement of the losses whereas the legal definition deals with
provisions relating to legally enforceable contract.
DEFINITION IN FINANCIAL SENSE

Insurance is a financial arrangement, which redistributes the costs of unexpected losses among the
members of the pool. The pool is a collection of people facing common risks. All members contribute
a fixed amount towards a pool called premium. In exchange for the premium payment, the person
gets an assurance that a certain sum of money is to be paid to him on the happening of the event
insured against. The assurance is that his loss will be made good. Thus, insurance involves the
transfer of loss exposures to an insurance pool and the redistribution of losses among the members of
the pool.
DEFINITION IN LEGAL SENSE

Insurance can be defined as a contract between two parties by which one party undertakes to make
good or indemnify any financial loss suffered by other party, in consideration of a sum of money, on
the happening of a specified event e.g. fire, accident or death. We call the party agreeing to pay for
the losses the insurer. We call the party whose loss makes the ‘insurer’ pay the claim the insured. We
call the payment insured pays to the insurer the premium. We call the insurance contract a policy. In
the end we can sum up that insurance is a transfer of risk from the individual to the group and there is
a sharing (pooling) of losses on some equitable basis such that fortuitous losses can be indemnified
(paid).
NATURE OF INSURANCE
The insurance has the following characteristics, which are observed in case of life, marine, fire and
general insurance.
Sharing of risk - Insurance is a device to share the financial losses which might befall on an
individual or his family on the happening of a specified event. The event may be death in case of life
insurance, fire in fire insurance etc. If insured the loss arising from these events will be shared by all
insured in the form of premium.
(1) Co-operative device - The most important feature of every insurance plan is the cooperation of
large number of persons who, in effect, agree to share the financial loss arising due to a particular risk
which is insured. An insurer would be unable to compensate all losses from his capital. So, by
insuring a large number of persons, he is able to pay the amount of loss.
(2) Value of risk - The risk is evaluated before insuring to charge the amount of share of an insured,
premium. There are several methods of evaluation of risks. If there is expectation of more risk, higher
premium may be charged. So, the probability of loss is calculated at the time of insurance.
(3) Payment at contingency - The payment is made at a certain contingency insured. If the
contingency occurs, payment is made. Since the life insurance contract is a contract of certainty,
because the contingency, the death or the expiry of term, will certainly occur, the payment is certain.
In other insurance contracts, the contingency is the fire or the marine perils etc., may or may not
occur. So, if the contingency occurs, payment is made, otherwise no amount is given to the policy-
holder.
(4) Amount of payment - The amount of payment depends upon the value of loss occurred due to
the particular insured risk provided insurance is there up to that amount. In life insurance, the purpose
is not to make good the financial loss suffered. The insurer promises to pay a fixed sum on the
happening of an event. If the event or the contingency takes place, the payment falls due if the policy
is valid and in force at the time of the event.
(5) Large number of insured persons - To spread the loss immediately, smoothly and cheaply, large
number of persons should be insured. Large number of persons or property is insured to lower the
cost of insurance and the amount of premium.
(6) Insurance is not a gambling - The insurance serves indirectly to increase the productivity of the
community by eliminating worry and increasing initiative. The uncertainty is changed into certainty
by insuring property and life because the insurer promises to pay a definite sum at damage or death.
From the company’s point of view, the life insurance is essentially non-speculative; in fact, no other
business operates with greater certainties. From the insured point of view, too, insurance is also the
antithesis of gambling. Nothing is more uncertain than life and life insurance offers the only sure
method of changing that uncertainty into certainty.
(7) Insurance is not charity - Charity is given without consideration but insurance is not possible
without premium. It provides security and safety to an individual and to the security although it is a
kind of business because in consideration of premium it guarantees the payment of loss. It is a
profession because it provides adequate sources at the time of disasters only by charging a nominal
premium for the service.
PURPOSE AND NEED

Beside things mentioned by you, let’s discuss in detail the purpose and need of insurance. As we all
know life is full of uncertainties and insurance is based on uncertainties and if there are no
uncertainties about the occurrence of a disaster, the concept of insurance will cease to exist. If we all
are able to predict the future dangers correctly then we can take a safeguard action to move out of the
danger but problem is that we cannot predict death, disaster and danger. All individuals as well as
their tangible and intangible assets are exposed to all types of unforeseen risks. Thus insurance is
done against such possible contingencies to save the owner and his family from all sorts of sufferings
by making good the losses of the unfortunate few, through the help of the fortunate many, who were
exposed to the same risk, but saved from the misfortune.
As insurance is a system of sharing risk that seems to be too great to be borne by one individual we
can list out the benefits derived by individual and society from the insurance.
(1) Indemnifies loss - Insurance restores people to their former financial position as if no loss had
occurred. It helps them to remain financially secure without running into debt after a loss. It also
helps business firms to carry on their normal business operations without interruption even after the
loss occurs.
(2) Reduces worry and fear - Insurance helps in reducing anxiety and fear before and after the loss
occurs, as it is known that the insurance company will compensate the loss.
(3) Makes available funds for investment - Investments are the base of an economic development
and mostly these investments are the result of savings. An insurance company is a major instrument
for the mobilization of the savings of people, which are thereafter canalized into investment for
economic growth. Insurance provides the continuity in trade and commerce, by covering the risks that
could retard the economy and thereby indirectly helps the economy to grow.
(4) Provides employment to a large number of people – Insurance industry offers regular full time
employment to a large number of people in the country. Besides them a number of agents,
professionals etc. are also engaged by the industry to render professional services.
(5) Educates people about loss prevention - Insurance companies also engage themselves in
educating people about loss prevention. In our country the GIC has created the loss prevention
association of India to promote and propagate loss prevention.
(6) Insurance enhances credit worthiness - Insurance policies are often offered as collateral
security for credit as well.
(7) Social benefits - Above all we derive social benefits when people with peaceful minds carry on
their operations properly and in a better way. Thus insurance’s contribution to the economy as a
whole is valuable as it avoids economic hardships to people.
Topic -2: Historical perspectives (HISTORICAL BACKGROUND OF INSURANCE)
Life Insurance Corporation of India -The insurance sector in India dates back to 1818 when first
insurance company, The Oriental Life Insurance Company, was established, at Calcutta. Thereafter,
Bombay Life Assurance Company in 1823 and Madras Equitable Life Assurance Society in 1829,
were established. In 1912, the Indian Life Assurance Companies Act was enacted as the first statute
to regulate the life insurance business. In 1928, the Indian Insurance Companies Act was enacted to
enable the Government to collect statistical information about both life and non-life insurance
businesses. The Insurance Act was subsequently reviewed and a comprehensive legislation was
enacted called the Insurance Act, 1938. The nationalization of life insurance business took place in
1956 when 245 Indian and foreign insurance and provident societies were first amalgamated and then
nationalized. The Life Insurance Corporation of India (LIC) came into existence by an Act of
Parliament, viz. LIC act, 1956, with a capital contribution of Rs.5 Crores from the Government of
India
General Insurance Corporation Of India- The General insurance business in India started with the
establishment of Triton Insurance Company Limited in 1850 at Calcutta .In 1907, the first company,
The Mercantile Insurance Ltd. Was set up to transact all classes of general insurance business.
General Insurance Council, a wing of the Insurance Association of India in 1957, framed a code of
conduct for ensuring fair conduct and sound business practices. In 1968 the Insurance Act was
amended to regulate investments and to set minimum solvency margins. In the same year the Tariff
Advisory Committee was also set up. In 1972, The General Insurance Business (Nationalization) Act
was passed to nationalize the general insurance business in India with effect from 1st January 1973.
For these 107 insurers was amalgamated and grouped into four company’s viz., the National
Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company
Ltd. And the United India Insurance Company Ltd. General Insurance Corporation of India was
incorporated as a company.
CURRENT SCENARIO
In new economic policies formulated since 1991, globalization, privatization and liberalization have
become new buzzwords. Under new economic policies, many economic and financial reforms took
place. Like liberalizing licensing policy, attracting FDI, allowing foreign equity in public sector
undertakings. The financial reforms restructured banking sector by allowing entry of new private and
foreign banks. They also allowed private sector and commercial banks in mutual funds investment
business, rationalizing the EXIM policy and so on.
Topic -3: Types of insurance

Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to
claims are known as "perils". An insurance policy will set out in details which perils are covered by
the policy and which are not. Below are (non-exhaustive) lists of the many different types of
insurance that exist. A single policy may cover risks in one or more of the categories set out below.
For example, auto insurance would typically cover both property risk (covering the risk of theft or
damage to the car) and liability risk (covering legal claims from causing an accident).
A homeowner's insurance policy in the U.S. typically includes property insurance covering damage to
the home and the owner's belongings, liability insurance covering certain legal claims against the
owner, and even a small amount of coverage for medical expenses of guests who are injured on the
owner's property.
Business insurance can be any kind of insurance that protects businesses against risks. Some principal
subtypes of business insurance are (a) the various kinds of professional liability insurance, also called
professional indemnity insurance, which are discussed below under that name; and (b) the business
owner's policy (BOP), which bundles into one policy many of the kinds of coverage that a business
owner needs, in a way analogous to how homeowners insurance bundles the coverage that a
homeowner needs.
1. Life insurance
Life insurance or life assurance is a contract between the policy owner and the insurer, where the
insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the insured
individual's or individuals' death or other event, such as terminal illness or critical illness. In return,
the policy owner agrees to pay a stipulated amount at regular intervals or in lump sums. There may be
designs in some countries where bills and death expenses plus catering for after funeral expenses
should be included in Policy Premium. In the United States, the predominant form simply specifies a
lump sum to be paid on the insured's demise.
As with most insurance policies, life insurance is a contract between the insurer and the policy owner
whereby a benefit is paid to the designated beneficiaries if an insured event occurs which is covered
by the policy. The value for the policyholder is derived, not from an actual claim event, rather it is the
value derived from the 'peace of mind' experienced by the policyholder, due to the negating of
adverse financial consequences caused by the death of the Life Assured. To be a life policy the
insured event must be based upon the lives of the people named in the policy. Insured events that may
be covered include: Serious illness. Life policies are legal contracts and the terms of the contract
describe the limitations of the insured events. Specific exclusions are often written into the contract to
limit the liability of the insurer; for example claims relating to suicide, fraud, war, riot and civil
commotion.
Life-based contracts tend to fall into two major categories:

Protection policies - designed to provide a benefit in the event of specified event, typically a lump
sum payment. A common form of this design is term insurance.
Investment policies - where the main objective is to facilitate the growth of capital by regular or
single premiums. Common forms (in the US anyway) are whole life, universal life and variable life
policies.
Types of life insurance

Life insurance may be divided into two basic classes – temporary and permanent or following
subclasses - term, universal, whole life and endowment life insurance.
Term Insurance
Term assurance provides life insurance coverage for a specified term of years in exchange for a
specified premium. The policy does not accumulate cash value. Term is generally considered "pure"
insurance, where the premium buys protection in the event of death and nothing else.
There are three key factors to be considered in term insurance:
Face amount (protection or death benefit), Premium to be paid (cost to the insured), and Length of
coverage (term).
Permanent Life Insurance

Permanent life insurance is life insurance that remains in force (in-line) until the policy matures (pays
out), unless the owner fails to pay the premium when due (the policy expires OR policies lapse). The
policy cannot be canceled by the insurer for any reason except fraud in the application, and that
cancellation must occur within a period of time defined by law (usually two years). Permanent
insurance builds a cash value that reduces the amount at risk to the insurance company and thus the
insurance expense over time. This means that a policy with a million dollar face value can be
relatively expensive to a 70 year old. The owner can access the money in the cash value by
withdrawing money, borrowing the cash value, or surrendering the policy and receiving the surrender
value. The four basic types of permanent insurance are whole life, universal life, limited pay and
endowment.
Whole life coverage

Whole life insurance provides for a level premium, and a cash value table included in the policy
guaranteed by the company. The primary advantages of whole life are guaranteed death benefits;
guaranteed cash values, fixed and known annual premiums, and mortality and expense charges will
not reduce the cash value shown in the policy. The primary disadvantages of whole life are premium
inflexibility, and the internal rate of return in the policy may not be competitive with other savings
alternatives. Also, the cash values are generally kept by the insurance company at the time of death,
the death benefit only to the beneficiaries. Riders are available that can allow one to increase the
death benefit by paying additional premium. The death benefit can also be increased through the use
of policy dividends. Dividends cannot be guaranteed and may be higher or lower than historical rates
over time. Premiums are much higher than term insurance in the short-term, but cumulative
premiums are roughly equal if policies are kept in force until average life expectancy.
Universal life coverage:

Universal life insurance (UL) is a relatively new insurance product intended to provide permanent
insurance coverage with greater flexibility in premium payment and the potential for a higher internal
rate of return. There are several types of universal life insurance policies which include "interest
sensitive" (also known as "traditional fixed universal life insurance"), variable universal life
insurance, and equity indexed universal life insurance.
Limited-pay
Another type of permanent insurance is Limited-pay life insurance, in which all the premiums are
paid over a specified period after which no additional premiums are due to keep the policy in force.
Common limited pay periods include 10-year, 20-year, and paid-up at age 65.
Endowments
Endowments are policies in which the cash value built up inside the policy, equals the death benefit
(face amount) at a certain age. The age this commences is known as the endowment age.
Endowments are considerably more expensive (in terms of annual premiums) than either whole life
or universal life because the premium paying period is shortened and the endowment date is earlier.
In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters
(creating modified endowments). These follow tax rules as annuities and IRAs do. Endowment
Insurance is paid out whether the insured lives or dies, after a specific period (e.g. 15 years) or a
specific age (e.g. 65).
Accidental Death
Accidental death is a limited life insurance that is designed to cover the insured when they pass away
due to an accident. Accidents include anything from an injury, but do not typically cover any deaths
resulting from health problems or suicide. Because they only cover accidents, these policies are much
less expensive than other life insurances. It is also very commonly offered as "accidental death and
dismemberment insurance", also known as an AD&D policy. In an AD&D policy, benefits are
available not only for accidental death, but also for loss of limbs or bodily functions such as sight and
hearing, etc.
Related Life Insurance Products

Riders are modifications to the insurance policy added at the same time the policy is issued. These
riders change the basic policy to provide some feature desired by the policy owner. A common rider
is accidental death, which used to be commonly referred to as "double indemnity", which pays twice
the amount of the policy face value if death results from accidental causes, as if both a full coverage
policy and an accidental death policy were in effect on the insured. Another common rider is
premium waiver, which waives future premiums if the insured becomes disabled.
1. Joint life insurance is either a term or permanent policy insuring two or more lives with the
proceeds payable on the first death or second death.
2. Survivorship life: is a whole life policy insuring two lives with the proceeds payable on the
second (later) death.
3. Single premium whole life: is a policy with only one premium which is payable at the time
the policy is issued.
4. Modified whole life: is a whole life policy that charges smaller premiums for a specified
period of time after which the premiums increase for the remainder of the policy.
5. Group life insurance: is term insurance covering a group of people, usually employees of a
company or members of a union or association. Individual proof of insurability is not normally
a consideration in the underwriting. Rather, the underwriter considers the size and turnover of
the group, and the financial strength of the group. Contract provisions will attempt to exclude
the possibility of adverse selection. Group life insurance often has a provision that a member
exiting the group has the right to buy individual insurance coverage.
6. Senior and pre-need products: Insurance companies have in recent years developed products
to offer to niche markets, most notably targeting the senior market to address needs of an aging
population. Many companies offer policies tailored to the needs of senior applicants. These are
often low to moderate face value whole life insurance policies, to allow a senior citizen
purchasing insurance at an older issue age an opportunity to buy affordable insurance. This
may also be marketed as final expense insurance, and an agent or company may suggest (but
not require) that the policy proceeds could be used for end-of-life expenses.
7. Pre-need (or prepaid) insurance policies: are whole life policies that, although available at
any age, are usually offered to older applicants as well. This type of insurance is designed
specifically to cover funeral expenses when the insured person dies. In many cases, the
applicant signs a pre-funded funeral arrangement with a funeral home at the time the policy is
applied for. The death proceeds are then guaranteed to be directed first to the funeral services
provider for payment of services rendered. Most contracts dictate that any excess proceeds will
go either to the insured's estate or a designated beneficiary.
2. General insurance
General insurance or non-life insurance policies, including automobile and homeowners policies,
provide payments depending on the loss from a particular financial event. General insurance typically
comprises any insurance that is not determined to be life insurance. It is called property and casualty
insurance in the U.S. and Non-Life Insurance in Continental Europe.
3. Health and medical insurance

Health insurance, like other forms of insurance, is a form of collectivism by means of which people
collectively pool their risk, in this case the risk of incurring medical expenses. The collective is
usually publicly owned or else is organized on a non-profit basis for the members of the pool, though
in some countries health insurance pools may also be managed by for-profit companies. It is
sometimes used more broadly to include insurance covering disability or long-term nursing or
custodial care needs. It may be provided through a government-sponsored social insurance program,
or from private insurance companies. It may be purchased on a group basis (e.g., by a firm to cover
its employees) or purchased by an individual. In each case, the covered groups or individuals pay
premiums or taxes to help protect themselves from unexpected healthcare expenses. Similar benefits
paying for medical expenses may also be provided through social welfare programs funded by the
government.
4. Critical illness or Dread disease insurance

Critical illness insurance is an insurance product, where the insurer is contracted to typically make a
lump sum cash payment if the policyholder is diagnosed with one of the critical illnesses listed in the
insurance policy. The policy may also be structured to pay out regular income and the payout may
also be on the policyholder undergoing a surgical procedure, for example, having a heart bypass
operation.
5. Property related insurance

Property insurance provides protection against most risks to property, such as fire, theft and some
weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance,
earthquake insurance, home insurance or boiler insurance. Property is insured in two main ways -
open perils and named perils. Open perils cover all the causes of loss not specifically excluded in the
policy. Common exclusions on open peril policies include damage resulting from earthquakes,
floods, nuclear incidents, acts of terrorism and war. Named perils require the actual cause of loss to
be listed in the policy for insurance to be provided. The more common named perils include such
damage-causing events as fire, lightning, explosion and theft.
6. Liability insurance
Liability insurance is a part of the general insurance system of risk financing to protect the purchaser
(the "insured") from the risks of liabilities imposed by lawsuits and similar claims. It protects the
insured in the event he or she is sued for claims that come within the coverage of the insurance
policy. Originally, individuals or companies that faced a common peril formed a group and created a
self-help fund out of which to pay compensation should any member incur loss (in other words, a
mutual insurance arrangement). The modern system relies on dedicated carriers, usually for-profit; to
offer protection against specified perils in consideration of a premium. Liability insurance is designed
to offer specific protection against third party claims, i.e., payment is not typically made to the
insured, but rather to someone suffering loss who is not a party to the insurance contract. In general,
damage caused intentionally as well as contractual liability is not covered under liability insurance
policies. When a claim is made, the insurance carrier has the duty (and right) to defend the insured.
The legal costs of a defense normally do not affect policy limits unless the policy expressly states
otherwise; this default rule is useful because defense costs tend to soar when cases go to trial.
7. Reinsurance
Reinsurance is insurance that is purchased by an insurance company (insurer) from a reinsurer as a
means of risk management, to transfer risk from the insurer to the reinsurer. The reinsurer and the
insurer enter into a reinsurance agreement which details the conditions upon which the reinsurer
would pay the insurer's losses (in terms of excess of loss or proportional to loss). The reinsurer is
paid a reinsurance premium by the insurer, and the insurer issues thousands of policies.
Topic -4: Rural and social sector obligations
These regulations may be called the Insurance Regulatory and Development Authority (Obligations
of Insurers to Rural or Social Sectors) Regulations, 2002. They shall come into force from the date of
their publication in the Official Gazette.
Definitions. — In these regulations, unless the context otherwise requires -

“Act” means the Insurance Act, 1938 (4 of 1938);
“Authority” means the Insurance Regulatory and Development Authority established under the
provisions of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of
1999);
“Rural sector” shall mean any place as per the latest census which meets the following criteria--
A population of less than five thousand;
A density of population of less than four hundred per square kilometre; and
More than twenty five per cent of the male working population is engaged in agricultural pursuits.
Explanation: - The categories of workers falling under agricultural pursuits are as under:
(i) Cultivators;
(ii) Agricultural labourers
(iii) Workers in livestock, forestry, fishing, hunting and plantations, orchards and allied activities.
“Social sector” includes unorganised sector, informal sector, economically vulnerable or backward
classes and other categories of persons, both in rural and urban areas;

“Unorganised sector” includes self-employed workers such as agricultural labourers, bidi workers,
brick kiln workers, carpenters, cobblers, construction workers, fishermen, hamals, handicraft artisans,
handloom and khadi workers, lady tailors, leather and tannery workers, papad makers, powerloom
workers, physically handicapped self-employed persons, primary milk producers, rickshaw pullers,
safai karmacharis, salt growers, seri culture workers, sugarcane cutters, tendu leaf collectors, toddy
tappers, vegetable vendors, washerwomen, working women in hills, or such other categories of
persons.,
“Economically vulnerable or backward classes” mean persons who live below the poverty line;
“Other categories of persons” includes persons with disability as defined in the Persons with
Disabilities (Equal Opportunities, Protection of Rights, and Full Participation) Act, 1995 and who
may not be gainfully employed; and also includes guardians who need insurance to protect spastic
persons or persons with disability;
(h) “informal sector” includes small scale, self-employed workers typically at a low level of
organisation and technology, with the primary objective of generating employment and income, with
heterogeneous activities like retail trade, transport, repair and maintenance, construction, personal
and domestic services and manufacturing, with the work mostly labour intensive, having often
unwritten and informal employer-employee relationship;
(i) All words and expressions used herein and not defined herein but defined in the Insurance Act,
1938 (4 of 1938), or in the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999),
shall have the meanings respectively assigned to them in those Acts.
Obligations.--- Every insurer, who begins to carry on insurance business after the commencement of
the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999), shall, for the purposes
of sections 32B and 32C of the Act, ensure that he undertakes the following obligations, during the
first five financial years, pertaining to the persons in---
(a) Rural sector:

(i) in respect of a life insurer, --
 seven per cent in the first financial year;
 nine per cent in the second financial year;
 Twelve per cent in the third financial year;
 Fourteen per cent in the fourth financial year;
 Sixteen per cent in the fifth year; of total policies written direct in that year;
(ii) in respect of a general insurer,--

(I) two per cent in the first financial year;
(II) three per cent in the second financial year;
(III) five per cent there after, of total gross premium income written direct in that year.
(b) Social sector, in respect of all insurers, --

 five thousand lives in the first financial year;
 seven thousand five hundred lives in the second financial year;
 ten thousand lives in the third financial year;
 fifteen thousand lives in the fourth financial year;
 twenty thousand lives in the fifth year;
 Provided that in the first financial year, where the period of operation is less than twelve months,
proportionate percentage or number of lives, as the case may be, shall be undertaken.
 Provided further that, in case of a general insurer, the obligations specified shall include insurance
for crops.
 Provided further that the Authority may normally, once in every five years, prescribe or revise the
obligations as specified in this Regulation.
Obligations of existing insurers: (1) The obligations of existing insurers as on the date of
commencement of IRDA Act shall be decided by the Authority after consultation with them and the
quantum of insurance business to be done shall not be less than what has been recorded by them for
the accounting year ended 31st March, 2002. (2) The Authority shall review such quantum of
insurance business periodically and give directions to the insurers for achieving the specified targets.
Topic -5: Policy conditions
This section will guide you through the various intricacies of a life insurance contract and the facts
that you must know to make the best out of your life insurance policy. Please read our guidelines
immediately.
Payment of Premiums: A grace period of one month but not less than 30 days is allowed where the
mode of payment is yearly, half-yearly or quarterly and 15 days for monthly payments. If death
occurs within this period, the life assured is covered for full sum assured.
Non-forfeiture regulations: If the policy has run for at least 3 full years and subsequent premiums
have not been paid the policy shall not be void but the sum assured will be reduced to a sum which
will bear the same ratio as to the number of premiums paid bear to the total number of premiums
payable. The concessions regarding claim in the above case is explained in the appropriate section.
Forfeiture in certain events: In case of untrue or incorrect statement contained in the proposal,
personal statement, declaration and connected documents or any material information with held,
subject to the provision of Section 45 of the Insurance Act 1938, wherever applicable, the policy shall
be declared void and all claims to any benefits in virtue thereof shall cease.
Suicide: The policy shall be void, if the Life Assured commits suicide (whether sane or insane at the
time) at any time or after the date on which the risk under the policy has commenced but before the
expiry of one year from the date of commencement of the policy.
Guaranteed Surrender Value: After payment of premiums for at least three years, the Surrender
Value allowed under the policy is equal to 30% of the total premiums paid excluding premiums for
the 1st year and all extra premiums.
Salary Saving Scheme: The rate of installment premium shown in the schedule of the policy will
remain constant as long as the employee continues with the employer given in the proposal. On
leaving the employment of said employer the policyholder should intimate the Corporation. In case of
the Salary Saving Scheme being withdrawn by the said employer, the Corporation will intimate the
same to the policyholder. Thereafter the 5% rebate given under Salary Saving Scheme will be
withdrawn.
Alterations: After the policy is issued, the policyholder in a number of cases finds the terms not
suitable to him and desires to change them. LIC allows certain types of alterations during the lifetime
of the policy. However, no alteration is permitted within one year of the commencement of the policy
with some exceptions. The following alterations are allowed.
 Alteration in class or term.
 Reduction in the Sum Assured
 Alteration in the mode of payment of premiums
 Removal of an extra premium
 Alteration from without profit plan to with profit plan
 Alternation in name
 Correction in policies
 Settlement option of payment of sum assured by installments
 Grant of accident benefit
 Grant of premium waiver benefit under CDA policies
 Alteration in currency and place of payment of policy monies
A fee for the change or alteration in the policy is charged by the Corporation called quotation fee and
no additional fee is charged for giving effect to the alteration.
Duplicate Policy: A duplicate policy confers on its owner the same rights and privileges as the
original policy. The following are the requirements for issuing a duplicate policy:
1. Insertion of an advertisement at the policyholder’s cost in one English daily newspaper having
wide circulation in the State where the loss is reported to have occurred. A copy of the Newspaper in
which the advertisement appeared should be sent to the servicing office one month after its
appearance. If no objection has been lodged with LIC regarding the policy in question, a duplicate
policy will be issued after complying further requirements, i.e., Indemnity Bond and payment of
charges for preparing duplicate policy and stamp fee.
2. However, the requirement of advertisement and Indemnity Bond may be dispensed with or
modified in certain circumstances as given below:
 loss of policy by theft
 destruction of policy by fire
 loss of policy while in custody of an office of government
 mutilated or damaged policy
 policy in torn and a part of it is missing
 policy partially destroyed by white ants
Age Proof accepted by LIC:
The Proofs of age, which are generally acceptable to the Corporation, are as under:
 Certified extract from Municipal or other records made at the time of birth.
 Certificate of Baptism or certified extract from family Bible if it contains age or date of birth.
 Certified extract from School or College if age or date of birth is stated therein.
 Certified extract from Service Register in case of Govt. employees and employees of Quasi-
Govt. institutions including Public Limited Companies and Pass port issued by the Pass port
Authorities in India.
Alternative Age Proofs which are accepted:
 Marriage certificate in the case of Roman Catholics issued by Roman Catholic Church.
 Certified extracts from the Service Registers of Commercial Institutions or Industrial
Undertakings provided it is specifically mentioned in such extracts that conclusive evidence of
age was produced at the time of recruitment of the employee.
 Certificate of Birth
 Identity Cards issued by Defence Department.
 A true copy of the University Certificate or of Matriculation/Higher Secondary Education,
S.S.L. Certificate issued by a Board set up by a State/Central Government.
 Non- standard age proof like Horoscope, Service Record where age is not verified at the time
of entry, E.S.I.S. Card, Marriage Certificate in case of Muslim Proposer, Elder’s Declaration,
Self-declaration and Certificate by Village Panchayats are accepted subject to certain rules.
Nomination: The nominee is statutorily recognized as a payee who can give a valid discharge to the
Corporation for the payment of policy monies.
Nomination will be incorporated in the text of the policy at the time of its issue. After the policy is
prepared and issued and if no Nomination has been incorporated the assured can ordinarily affect the
nomination only by an endorsement on the policy itself. A nomination made in this manner is
required to be notified to the Corporation and registered by it in its records. A nomination is not
required to be stamped. Any change or cancellation of nomination should be given in writing only by
the Life Assured.
Nomination under Joint Life Policy can only be a joint nomination. Nomination in favour of a
stranger cannot be made as there is no insurable interest and moral hazard may be involved.
Nomination in favour of wife and children as a class is not valid. Specific names of the existing wife
and children should be mentioned. Where nomination is made in favour of successive nominees, i.e.,
nominee “A” failing him to nominee “B” failing whom nominee “C”, the nomination in favour of one
individual in the order mentioned will be considered. Where the nominee is a minor, an appointee has
to be appointed to receive the monies in the event of the assured’s death during the minority of the
nominee. No nomination can be made under a policy financed from HUF funds.
In the case of first endorsement of nomination the date of registration of nomination will be the date
of receipt of the policy by the servicing office and in case of any other nomination or cancellation or
change thereof, the date of receipt of the policy and/or of notice whichever is later, will be the date of
registration.
Assignment: An assignment has an effect of directly transferring the rights of the transferor in
respect of the property transferred. Immediately on execution of an assignment of the Policy of life
assurance the assignor forgoes all his rights, title and interest in the Policy to the assignee. The
premium/loan interest notices etc. in such cases will be sent to the assignee. In case the assignment is
made in favor of public bodies, institutions, trust etc., premium notices/receipts will be addressed to
the official who has been designated by the institutions as a person to receive such notice. An
assignment of a life insurance policy once validly executed, cannot be cancelled or rendered in
effectual by the assignor. Scoring of such assignments or super scribing words like 'cancelled' on
such assignment does not annul the assignment. And the only way to cancel such assignment would
be to get it re-assigned by the assignee in favor of the assignor.
There are two types of assignments:

1. Conditional Assignment whereby the assignor and the assignee may agree that on the happening
of a specified event which does not depend on the will of the assignor, the assignment will be
suspended or revoked wholly or in part.
2. Absolute Assignment whereby all the rights, title and interest which the assignor has in the policy
passes on to the assignee without reversion to the assignor or his estate in any event.
Re-assignment: Status of your policy indicates if your policy is in force or has lapsed due to non-
payment of premium. It also provides other important information with respect to your policy, for
your reference.
Concessions for claims during the lapsed period: 1. If the policyholder has paid premiums for at
least 3 full years and subsequently discontinued paying premiums, and in the event of death of the life
assured within six months from the due date of the first unpaid premium, the policy money will be
paid in full after deduction of the unpaid premiums, with interest upto date of the death.
2. If the policyholder has paid premiums for at least 5 full years and subsequently discontinued
paying premiums and in the event of death of the life assured within 12 months from the due date of
first unpaid premium, the policy money will be paid in full after deducting the unpaid premiums, with
interest upto date of the death.
Revivals: If the premium under a policy is not paid within the days of grace the policy lapses.
Revival is a fresh contract wherein the insurer can impose fresh terms and conditions. A policy can be
revived under the following types of revival:
1. Ordinary Revival: If a revival of the policy is effected within 6 months from the due of first
unpaid premium no personal statement regarding health is required and the policy is revived on
collection of delayed premium plus interest. The rate of interest to be charged for such delayed
premium will depend on the date of commencement of the policy.
2. Revival on non-medical basis: For revival of the policy on non-medical basis the amount to be
revived should not exceed the prescribed limit for non-medical assurance taken by the life assured.
3. Revival on medical basis: If a policy cannot be revived under ordinary revival or revival on non-
medical basis it can be revived with medical requirements. The medical requirements will depend
upon the amount to be revived.
4. The other schemes for revival are:
A. Special Revival Scheme

B. Revival by installment
C. Loan- cum- revival
D. Survival Benefit- cum- revival
Policy Loans: The Corporation can grant a loan to the policyholder against his policy as per the
terms and conditions applicable to the policy. The requirements for granting a loan are as under :

a) Application for loan with an endorsement of terms and conditions of the loan being placed on the
policy.
b) Policy to be assigned absolutely in favour of the Corporation
c) A receipt for the loan amount.
The maximum loan amount available under the policy is 90% of the Surrender Value of the policy
(85% in case of paid up policies) including cash value of bonus. The rate of interest charged on loans
is at 9% to be paid half-yearly. The minimum period for which a loan can be granted is six months
from the date of its payment. If repayment of loan is desired within this period the interest for the
minimum period of six months will have to be paid. In case the policy becomes a claim either by
maturity or death within six months from the date of loan interest will be charged only upto the date
of maturity/death.
Claims settlement procedure: The settlement of claims is a very important aspect of service to the
policyholders. Hence, the Corporation has laid great emphasis on expeditious settlement of Maturity
as well as Death Claims.
The procedure for settlement of maturity and death claims is detailed below:
Maturity Claims:
1) In case of Endowment type of Policies, amount is payable at the end of the policy period. The
Branch Office which services the policy sends out a letter informing the date on which the policy
monies are payable to the policyholder at least two months before the due date of payment. The
policyholder is requested to return the Discharge Form duly completed along with the Policy
Document. On receipt of these two documents post dated cheque is sent by post so as to reach the
policyholder before the due date.
2) Some Plans like Money Back Policies provide for periodical payments to the policyholders
provided premium due under the policies are paid up to the anniversary due for Survival Benefit. In
these cases where amount payable is less than up to Rs.60,000/-, cheques are released without calling
for the Discharge Receipt or Policy Document. However, in case of higher amounts these two
requirements are insisted upon.
Death Claims:
The death claim amount is payable in case of policies where premiums are paid up-to-date or where
the death occurs within the days of grace. On receipt of intimation of death of the Life Assured the
Branch Office calls for the following requirements:
a) Claim form A – Claimant’s Statement giving details of the deceased and the claimant.
b) Certified extract from Death Register
c) Documentary proof of age, if age is not admitted
d) Evidence of title to the deceased’s estate if the policy is not nominated, assigned or
issued under M.W.P. Act.
e) Original Policy Document
The following additional forms are called for if death occurs within three years from the date of risk
or from date of revival/reinstatement.
a) Claim Form B – Medical Attendant’s Certificate to be completed by the Medical Attendant of
the deceased during his/her last illness
b) Claim Form B1 – if the life assured received treatment in a hospital
c) Claim form B2 – to be completed by the Medical Attendant who treated the deceased life
assured prior to his last illness.
d) Claim Form C – Certificate of Identity and burial or cremation to be completed and signed by
a person of known character and responsibility
e) Claim form E – Certificate by Employer if the assured was employed person.
f) Certified copies of the First Information Report, the Post-mortem report and Police
Investigation Report if death was due to accident or unnatural cause.
These additional forms are required to satisfy ourselves on the genuineness of the claim, i.e.,
no material information that would have affected our acceptance of proposal has been withheld
by the deceased at the time of proposal. Further, these forms also help us at the time of
investigation by the officials of the Corporation.
Double Accident Benefit Claims: Double Accident Benefit is provided as an inject to the life
insurance cover. For this purpose an extra premium of Rs.1/- per Rs.1000/- S.A is charged. For
claiming the benefits under the Accident Benefit the claimant has to produce the proof to the
satisfaction of the Corporation that the accident is defined as per the policy conditions. Normally for
claiming this benefit documents like FIR, Post-mortem Report are insisted upon.
Disability Benefit Claims: Disability benefit claims consist of waiver of future premiums under the
policy and extended disability benefit consisting in addition of a monthly benefit payment as per
policy conditions. The essential condition for claiming this benefit is that the disability is total and
permanent so as to preclude him from earning any wage/compensation or profit as a result of the
accident
Claims Review Committees: The Corporation settles a large number of Death Claims every year.
Only in case of fraudulent suppression of material information is the liability repudiated. This is to
ensure that claims are not paid to fraudulent persons at the cost of honest policyholders. The number
of Death Claims repudiated is, however, very small. Even in these cases, an opportunity is given to
the claimant to make a representation for consideration by the Review Committees of the Zonal
office and the Central Office. As a result of such review, depending on the merits of each case,
appropriate decisions are taken. The Claims Review Committees of the Central and Zonal Offices
have among their Members, a retired High Court/District Court Judge. This has helped providing
transparency and confidence in our operations and has resulted in greater satisfaction among
claimants, policyholders and public.
Insurance Ombudsman: The Grievance Redressal Machinery has been further expanded with the
appointment of Insurance Ombudsman at different centers by the Government of India. At present
there are 12 centres operating all over the country.
Following type of complaints fall within the purview of the Ombudsman
a) any partial or total repudiation of claims by an insurer;
b) any dispute in regard to premiums paid if payable in terms of the policy;
c) any dispute on the legal construction of the policies in so far as such disputes relate to claims;
d) delay in settlement of claims;
e) Non-issue of any insurance document to customers after receipt of premium.
Policyholder can approach the Insurance Ombudsman for the redressal of their complaints free of
cost.
Topic -6: PRINCIPLES GOVERNING INSURANCE BUSINESS

Corporate Governance is understood as a system of financial and other controls in a corporate entity
and broadly defines the relationship between the Board of Directors, senior management and
shareholders. In case of the financial sector, where the entities accept public liabilities for fulfillment
of certain contracts, the relationship is fiduciary with enhanced responsibility to protect the interests
of all stakeholders. The Corporate Governance framework should clearly define the roles and
responsibilities and accountability within an organization with built-in checks and balances. The
importance of Corporate Governance has received emphasis in recent times since poor governance
and weak internal controls have been associated with major corporate failures. It has also been
appreciated that the financial sector needs to have a more intensive governance structure in view of
its role in the economic development and since the safety and financial strength of the institutions are
critical for the overall strength of the financial sector on which the economic growth is built upon.
As regards the insurance sector, the regulatory responsibility to protect the interests of the
policyholders demands that the insurers have in place, good governance practices for maintenance of
solvency, sound long term investment policy and assumption of underwriting risks on a prudential
basis. The emergence of insurance companies as a part of financial conglomerates has added a further
dimension to sound Corporate Governance in the insurance sector with emphasis on overall risk
management across the structure and to prevent any contagion.
The Insurance Regulatory and Development Authority (IRDA) has outlined in general terms,
governance responsibilities of the Board in the management of the insurance functions under various
Regulations notified by it covering different operational areas. It has now been decided to put them
together and to issue the following comprehensive guidelines for adoption by Indian insurance
companies. These guidelines are in addition to provisions of the Companies Act, 1956, Insurance Act,
1938 and requirement of any other laws or regulations framed there under. Where any provisions of
these guidelines appear to be in conflict with the provisions contained in any law or regulations, the
legal provisions will prevail. However, where the requirements of these guidelines are more rigorous
than the provisions of any law, these guidelines shall be followed.
Objectives
The objective of the guidelines is to ensure that the structure, responsibilities and functions of Board
of Directors and the senior management of the company fully recognize the expectations of all
stakeholders as well as those of the regulator. The structure should take steps required to adopt sound
and prudent principles and practices for the governance of the company and should have the ability to
quickly address issues of non-compliance or weak oversight and controls. These guidelines therefore
amplify on certain issues which are covered in the Insurance Act, 1938 and the regulations framed
there under and include measures which are additionally considered essential by IRDA for adoption
by insurance companies.
The guidelines accordingly address the various requirements broadly covering the following major
structural elements of Corporate Governance in insurance companies:-
• Governance structure
• Board of Directors
• Control functions
• Control functions
• Senior management:
• Disclosures
• Outsourcing
• Relationship with stakeholders
• Interaction with the Supervisor
• Whistle blowing policy
In these guidelines, the reference to the “Board” would apply to the “Board of Directors” and “Senior
Management” to the team of personnel of the company with core management functions. Normally,
this would include officials at one level below Executive Director including Functional Heads. In
regards to insurers, the Appointed Actuary has a special executive and statutory role.
Control Functions
Given the risks that an insurer takes in carrying out its operations, and the potential impact it has on
its business, it is important that the Board has in place:
• robust and efficient mechanisms for the identification, assessment, quantification, control,
mitigation and monitoring of the risks;
• Appropriate processes for ensuring compliance with the Board approved policy, and applicable laws
and regulations;
• Appropriate internal controls to ensure that the risk management and compliance policies are
observed;
• an internal audit function capable of reviewing and assessing the adequacy and effectiveness of, and
the insurer’s adherence to its internal controls as well as reporting on its strategies, policies and
procedures; and
• Independence of the control functions, including the risk management function, from business
operations demonstrated by a credible reporting arrangement.
The responsibility for the oversight of control functions of an insurer should be entrusted to Directors
possessing the appropriate integrity, competence, experience and qualifications, and they should meet
the fit and proper criteria initially and on an on-going basis.
For insurers within a group, appropriate and effective group-wide risk control systems should be in
place in addition to the control systems at the level of the insurer. It is essential to manage risks
appropriately on a group-wide basis as well as at the level of the insurer.
 Seven Principles of Insurance With Examples

1. Principle of Uberrimae fidei (Utmost Good Faith)
Principle of Uberrimae fidei (a Latin phrase), or in simple english words, the Principle of Utmost Good
Faith, is a very basic and first primary principle of insurance. According to this principle, the insurance
contract must be signed by both parties (i.e insurer and insured) in an absolute good faith or belief or trust.
The person getting insured must willingly disclose and surrender to the insurer his complete true
information regarding the subject matter of insurance. The insurer's liability gets void (i.e legally revoked
or cancelled) if any facts, about the subject matter of insurance are either omitted, hidden, falsified or
presented in a wrong manner by the insured.
The principle of Uberrimae fidei applies to all types of insurance contracts.
2. Principle of Insurable Interest
The principle of insurable interest states that the person getting insured must have insurable interest in the
object of insurance. A person has an insurable interest when the physical existence of the insured object
gives him some gain but its non-existence will give him a loss. In simple words, the insured person must
suffer some financial loss by the damage of the insured object.

For example :- The owner of a taxicab has insurable interest in the taxicab because he is getting income
from it. But, if he sells it, he will not have an insurable interest left in that taxicab.
From above example, we can conclude that, ownership plays a very crucial role in evaluating insurable
interest. Every person has an insurable interest in his own life. A merchant has insurable interest in his
business of trading. Similarly, a creditor has insurable interest in his debtor.
3. Principle of Indemnity
Indemnity means security, protection and compensation given against damage, loss or injury.
According to the principle of indemnity, an insurance contract is signed only for getting protection against
unpredicted financial losses arising due to future uncertainties. Insurance contract is not made for making
profit else its sole purpose is to give compensation in case of any damage or loss.
In an insurance contract, the amount of compensations paid is in proportion to the incurred losses. The
amount of compensations is limited to the amount assured or the actual losses, whichever is less. The
compensation must not be less or more than the actual damage. Compensation is not paid if the specified
loss does not happen due to a particular reason during a specific time period. Thus, insurance is only for
giving protection against losses and not for making profit.
However, in case of life insurance, the principle of indemnity does not apply because the value of human
life cannot be measured in terms of money.
4. Principle of Contribution
Principle of Contribution is a corollary of the principle of indemnity. It applies to all contracts of

indemnity, if the insured has taken out more than one policy on the same subject matter. According to this
principle, the insured can claim the compensation only to the extent of actual loss either from all insurers

or from any one insurer. If one insurer pays full compensation then that insurer can claim proportionate
claim from the other insurers.
For example :- Mr. John insures his property worth $ 100,000 with two insurers "AIG Ltd." for $ 90,000
and "MetLife Ltd." for $ 60,000. John's actual property destroyed is worth $ 60,000, then Mr. John can
claim the full loss of $ 60,000 either from AIG Ltd. or MetLife Ltd., or he can claim $ 36,000 from AIG
Ltd. and $ 24,000 from Metlife Ltd.
So, if the insured claims full amount of compensation from one insurer then he cannot claim the same
compensation from other insurer and make a profit. Secondly, if one insurance company pays the full
compensation then it can recover the proportionate contribution from the other insurance company.
5. Principle of Subrogation
Subrogation means substituting one creditor for another.
Principle of Subrogation is an extension and another corollary of the principle of indemnity. It also applies
to all contracts of indemnity.
According to the principle of subrogation, when the insured is compensated for the losses due to damage
to his insured property, then the ownership right of such property shifts to the insurer.
This principle is applicable only when the damaged property has any value after the event causing the
damage. The insurer can benefit out of subrogation rights only to the extent of the amount he has paid to
the insured as compensation.
For example :- Mr. John insures his house for $ 1 million. The house is totally destroyed by the
negligence of his neighbour Mr.Tom. The insurance company shall settle the claim of Mr. John for $ 1
million. At the same time, it can file a law suit against Mr.Tom for $ 1.2 million, the market value of the
house. If insurance company wins the case and collects $ 1.2 million from Mr. Tom, then the insurance
company will retain $ 1 million (which it has already paid to Mr. John) plus other expenses such as court
fees. The balance amount, if any will be given to Mr. John, the insured.
6. Principle of Loss Minimization

According to the Principle of Loss Minimization, insured must always try his level best to minimize the
loss of his insured property, in case of uncertain events like a fire outbreak or blast, etc. The insured must
take all possible measures and necessary steps to control and reduce the losses in such a scenario. The
insured must not neglect and behave irresponsibly during such events just because the property is insured.
Hence it is a responsibility of the insured to protect his insured property and avoid further losses.
For example :- Assume, Mr. John's house is set on fire due to an electric short-circuit. In this tragic
scenario, Mr. John must try his level best to stop fire by all possible means, like first calling nearest fire
department office, asking neighbours for emergency fire extinguishers, etc. He must not remain inactive
and watch his house burning hoping, "Why should I worry? I've insured my house."
7. Principle of Causa Proxima (Nearest Cause)
Principle of Causa Proxima (a Latin phrase), or in simple english words, the Principle of Proximate (i.e
Nearest) Cause, means when a loss is caused by more than one causes, the proximate or the nearest or the
closest cause should be taken into consideration to decide the liability of the insurer.
The principle states that to find out whether the insurer is liable for the loss or not, the proximate (closest)
and not the remote (farest) must be looked into.
For example :- A cargo ship's base was punctured due to rats and so sea water entered and cargo was
damaged. Here there are two causes for the damage of the cargo ship - (i) The cargo ship getting
punctured beacuse of rats, and (ii) The sea water entering ship through puncture. The risk of sea water is
insured but the first cause is not. The nearest cause of damage is sea water which is insured and therefore
the insurer must pay the compensation.
However, in case of life insurance, the principle of Causa Proxima does not apply. Whatever may be the
reason of death (whether a natural death or an unnatural death) the insurer is liable to pay the amount of
insurance.
Topic -7: Insurance Agency:
Insurance agency is a contract between the insurance company and an individual to procure business for the
insurance company, for a predefined compensation and incentives. An insurance agent, also called an
insurance broker in some instances, is the local representative of any number of insurance companies. A

legitimate insurance agency must be licensed by a state board before he or she can legally sell insurance
policies to customers. Generally, an agent works as the local face of a single insurance company, but
occasionally an independent agent may work with different companies depending on their areas of expertise
and coverage.
Most consumers interested in purchasing insurance coverage will only deal with a local insurance agent
directly. He or she is authorized to present all of the coverage options available through the larger insurance
company. Since part of an agent's salary is based on commissioned sales, he or she will often offer one stop
shopping for all of the customer's insurance needs. He or she may sell individual policies for car, home, life
and medical insurance, or offer a package plan which incorporates a combination of these needs.
Insurance customers are required to make regular payments called premiums to the insurance company, so
part of an insurance agent's job is to ensure compliance. He or she may send out reminders of an impending
premium payment, or notify customers of any proposed rate changes.
Licensing of Insurance Agents

All persons who desire to act as an insurance agent for any insurer would have to be registered as such
under the provisions of the Insurance Act and the IRDA (Licensing of Agents) Regulations, 2000. A license
issued under the provisions of the Insurance Act entitles the holder to act as an insurance agent for any
insurer.
Eligibility criteria for an insurance agent
Any person (“applicant”), desirous of being an insurance agent or a composite insurance agent, may
make an application for a license to act as an insurance agent to the Authority. The applicant should possess
the minimum qualifications of twelfth standard or equivalent examination conducted by any recognized Board
or institution, in cases w here the applicant resides in a place with a population of five thousand or more as per
the last census; and passed the tenth standard or equivalent examination from a recognized Board or
institution if the applicant resides in any other place. Such an applicant should also not suffer from any of the
following disqualifications:
 that the person is a minor;
 that he is found to be of unsound mind by a Court of competent jurisdiction;
 that he is found guilty of criminal misappropriation or criminal breach of trust or cheating or forgery
or an abetment of or attempt to commit any such offence by a Court of competent jurisdiction.
Provided that where at least five years have elapsed since the completion of the sentence imposed on
any person in respect of such person that his conviction shall cease to operate as a disqualification;
 that in the course of any judicial proceeding relating t o any policy of insurance or the winding up of
an insurance company or in the course of an investigation of the affairs of an insurer it has been found
that he has been guilty of or has knowingly participated in or connived at any fraud, dishonesty or
misrepresentation against an insurer or an insured;
 that he does not possess the requisite qualifications and practical training for a period not exceeding
twelve months;
 that he has not passed the examination;
 That he violates the code of conduct.
However, any license that had been issued prior to the commencement of the IRDA Act, 1999 shall be
deemed to have been issued in accordance with the IRDA (Licensing of Agents) Regulations, 2000 and the
provisions of the regulation in relation to the practical training, qualifications and examination shall not be
applicable to such existing insurance agents.
Payment of commission:

No insurance agent can be paid by way of commission or as remuneration, in any form, an amount
exceeding, -
In case of life insurance business, fort y per cent of the first year's premium payable on any policy or
policies effected through him and five per cent of a renewal premium payable on such a policy. However, the
insurer may, during the first ten years of their business, pay fifty-five per cent of the first years' premium
payable on any policy or policies affected through them and six per cent of the renewal premiums payable on
such policies. In case of business of any other class; fifteen per cent of the premium.
Topic -8: Extension of Insurance to Niche Areas:-
8.1. Health Insurance: (Health and medical insurance)

Health insurance, like other forms of insurance, is a form of collectivism by means of which people
collectively pool their risk, in this case the risk of incurring medical expenses. The collective is
usually publicly owned or else is organized on a non-profit basis for the members of the pool, though
in some countries health insurance pools may also be managed by for-profit companies. It is
sometimes used more broadly to include insurance covering disability or long-term nursing or
custodial care needs. It may be provided through a government-sponsored social insurance program,
or from private insurance companies. It may be purchased on a group basis (e.g., by a firm to cover
its employees) or purchased by an individual. In each case, the covered groups or individuals pay
premiums or taxes to help protect themselves from unexpected healthcare expenses. Similar benefits
paying for medical expenses may also be provided through social welfare programs funded by the
government.
Critical illness insurance or critical illness cover is an insurance product, where the insurer is
contracted to typically make a lump sum cash payment if the policyholder is diagnosed with one of
the critical illnesses listed in the insurance policy. The policy may also be structured to pay out
regular income and the payout may also be on the policyholder undergoing a surgical procedure, for
example, having a heart bypass operation.
8.2. Third Part y Administrators
Under the provisions of the IRDA (Third Party Administrators Health services) Regulations,
2001, (“TPA Regulations”), the Third Party Administrator (“TPA”) means a third part y
administrator, who has obtained a license from the Authority, and is engaged for a fee or
remuneration, as specified in the 24 agreement with the insurance company, for the provision of
health services. An insurance company may engage more than one TPA and similarly, one TPA may
serve more than one insurance company. The TPA is required to maintain professional confidentiality
of records, books, evidence etc. of all transactions that it carries out. In addition, the TPA is required
to furnish t o the insurance company and the Authority, an annual report and any other return as may
be required by the Authority. The TPA is prohibited from charging the policyholders with any
separate fees.
Conditions for grant of License

Only a company, with a share capital and registered under the Companies Act, 1956, can function
as a TPA. In addition, the company is also required to fulfill the following conditions to be eligible t
o act as a TPA:

 The main or primary object of the company should be to carry on business in India as a TPA in
the health services, and on being licensed by the Authority.
 The minimum paid up capital of the company shall be in equity shares amounting to rupees ten
million.
 The TPA should, at no point of time, have a working capital of less than rupees ten million.
 At least one of the directors of the TPA should be qualified medical doctor registered with the
Medical Council of India;
 The aggregate holdings of equity shares by a foreign company shall not at any time exceed
twenty-six per cent of the paid-up capital of a third party administrator.
 Any transfer of shares exceeding five per cent of the paid up capital shall be intimated by the
TPA to the Authority within 15 days of the transfer indicating the names and particulars of the
transferor and transferee.
Every license granted by the Authority shall remain in force for three years.
Revocation or cancellation of a License

The Authority may revoke or cancel a license granted to a TPA for any of the following reasons:
 The TPA is functioning improperly and or against the interests of the policyholders or
insurance company.
 The financial condition of the TPA has deteriorated and that the TPA cannot function
effectively or that the TPA has breached any of the conditions of the TPA Regulation.
 The character and ownership of the TPA has changed significantly since the grant of license.
 The grant or renewal of license was on the basis of fraud or misrepresentation of facts and that
there is a breach on the par t of the TPA in following the procedure or acquiring the
qualifications under the TPA Regulation.
 The TPA is subject to winding up proceedings under the Companies Act, 1956.
 There is a breach of code of conduct.
 There is violation of any direct ions issued by the Authority under the Insurance Act or the
TPA Regulations.
8.3. ULIP and Pension plans:

A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that unlike a pure
insurance policy gives investors the benefits of both insurance and investment under a single
integrated plan. The first ULIP was launched in India in 1971 by Unit Trust of India (UTI). With the
Government of India opening up the insurance sector to foreign investors in 2001 and the subsequent
issue of major guidelines for ULIPs by the Insurance Regulatory and Development Authority (IRDA)
in 2005, several insurance companies forayed into the ULIP business leading to an over abundance of
ULIP schemes being launched to serve the investment needs of those looking to invest in an
investment cum insurance product.
A ULIP is basically a combination of insurance as well as investment. A part of the premium paid is
utilized to provide insurance cover to the policy holder while the remaining portion is invested in
various equity and debt schemes. The money collected by the insurance provider is utilized to form a
pool of fund that is used to invest in various markets instruments (debt and equity) in varying
proportions just the way it is done for mutual funds. Policy holders have the option of selecting the
type of funds (debt or equity) or a mix of both based on their investment need and appetite. Just the
way it is for mutual funds, ULIP policy holders are also allotted units and each unit has a net asset
value (NAV) that is declared on a daily basis. The NAV is the value based on which the net rate of
returns on ULIPs are determined. The NAV varies from one ULIP to another based on market
conditions and the fund’s performance.
ULIP policy holders can make use of features such as top-up facilities, switching between various
funds during the tenure of the policy, reduce or increase the level of protection, options to surrender,
additional riders to enhance coverage and returns as well as tax benefits.
There are a variety of ULIP plans to choose from based on the investment objectives of the investor,
his risk appetite as well as the investment horizon. Some ULIPs play it safe by allocating a larger
portion of the invested capital in debt instruments while others purely invest in equity. Again, all this
is totally based on the type of ULIP chosen for investment and the investor preference and risk
appetite.
Unlike traditional insurance policies, ULIP schemes have a list of applicable charges that are
deducted from the payable premium. The notable ones include policy administration charges,
premium allocation charges, fund switching charges, mortality charges, and a policy surrender or
withdrawal charge. Some Insurer also charge "Guarantee Charge" as a percentage of Fund Value for
built in minimum guarantee under the policy.
Since ULIP returns are directly linked to market performance and the investment risk in investment
portfolio is borne entirely by the policy holder, one need to thoroughly understand the risks involved
and one’s own risk absorption capacity before deciding to invest in ULIPs.
There are several public and private sector insurance providers that either operate solo or have
partnered with foreign insurance companies to sell unit linked insurance plans in India. The public
insurance providers include LIC of India, SBI Life and Canara while and some of the private
insurance providers include Reliance Life, ICICI Prudential, HDFC Life, Bajaj Allianz, Aviva Life
Insurance and the excellent Kotak Mahindra Life.
Pension plans: A type of retirement plan, usually tax exempt, wherein an employer makes
contributions toward a pool of funds set aside for an employee's future benefit. The pool of funds is
then invested on the employee's behalf, allowing the employee to receive benefits upon retirement.
In many ways, a pension plan is a method in which an employee transfers part of his or her current
income stream toward retirement income. There are two main types of pension plans: defined-benefit
plans and defined-contribution plans. In a defined-benefit plan, the employer guarantees that the
employee will receive a definite amount of benefit upon retirement, regardless of the performance of
the underlying investment pool. In a defined-contribution plan the employer makes predefined
contributions for the employee, but the final amount of benefit received by the employee depends on
the investment's performance.
Topic -9: Bancassurance

Bancassurance simply means selling of insurance products by banks. In this arrangement, insurance
companies and banks undergo a tie-up, thereby allowing banks to sell the insurance products to its
customers. This is a system in which a bank has a corporate agency with one insurance company to
sell its products. By selling insurance policies bank earns a revenue stream apart from interest. It is
called as fee-based income. This income is purely risk free for the bank since the bank simply plays
the role of an intermediary for sourcing business to the insurance company. The Bank Insurance
Model ('BIM'), also sometimes known as 'Bancassurance', is the term used to describe the partnership
or relationship between a bank and an insurance company whereby the insurance company uses the
bank sales channel in order to sell insurance products.
BIM allows the insurance company to maintain smaller direct sales teams as their products are sold
through the bank to bank customers by bank staff.
Bank staff and tellers, rather than an insurance salesperson, become the point of sale/point of contact
for the customer. Bank staff are advised and supported by the insurance company through product
information, marketing campaigns and sales training.
Both the bank and insurance company share the commission. Insurance policies are processed and
administered by the insurance company.
BIM differs from 'Classic' or Traditional Insurance Model (TIM) in that TIM insurance companies
tend to have larger insurance sales teams and generally work with brokers and third party agents such
as MAIC.
An additional approach, the Hybrid Insurance Model (HIM), is a mix between BIM and TIM. HIM
insurance companies may have a sales force, may use brokers and agents and may have a partnership
with a bank.
The motives behind Bancassurance

For a Bank are:
- product diversification
- generating additional income
For Insurance Company are:

- Increasing their market penetration
- Increasing premium turnover
- Reducing initial costs of selling
- Making use of wide network of banks for selling their products.
For a Customer:
- Product at a reduced price
- Product of high quality
- Product at a single point/doorstep.
Some challenges/Problems
1. The Rules of IRDA requires a mandatory 4 weeks training for selling insurance products which the
bank employees find it difficult to undergo.
2. Most of the bank branches particularly in rural areas are not fully computerized and there are
problems when work of insurance is handled manually.
3. There is a cultural conflict between the products of banks and insurance. While the bank products
are “demand” products and insurance products are “push” products. The selling of insurance
products, cause lot of pressure for the person selling/bank employee.
4. At times performance recognition becomes problem as to whom the commission on selling
insurance product in a bank is to be given.

Inspite of these problems, insurance companies are collaborating with banks for selling their products
through banks and generating additional income.
Topic -10: Underwriting

Underwriting is the process of choosing who and what the insurance company decides to insure. This
is based on a risk assessment. It is pretty much the "behind the scenes" work in an insurance company
where they determine who is insured and how much in insurance premiums they will charge the
insured person. Insurance underwriting also involves choosing who the insurance company will not
insure.
Underwriter
An underwriter determines the acceptability of insurance risks, based on the insurance company’s
guidelines and marketing strategy. The Underwriter reviews an agent’s application submitted on
behalf of a client, evaluates the information given, asks for additional information if necessary, and
determines a price. In addition, the Underwriter determines that the risk is properly classified and
evaluates the company’s risk portfolio to determine that it is performing correctly. Underwriters
determine the cost of insurance (the insurance premium) by analyzing the claims experience of the
policyholder and the “book rates” as computed by an insurance actuary.
Underwriting is moving away from assessment of individual risk toward portfolio analysis, or
looking at the entire book of business in a given town or geographic area and determining what works
and what needs to be fixed to bring actual experience in line with company guidelines. This in turn
has an impact on insurance rates and pricing of individual insurance policies. Underwriting is
ultimately responsible for the growth and profitability of the insurance company.
Their duties include:

 reviewing applications for insurance and comparing applications to loss experience and
actuarial studies to determine if the applicant is an acceptable risk
 evaluating future loss potential, e.g., catastrophic loss
 insuring adequate pricing of insurable risks
 preparing insurance quotation for insurance agents
 assisting agents in responding to questions about the proposed coverage and rates
 recommending declining an application if the proposed insurance cannot be underwritten as an
acceptable rate or does not meet underwriting guidelines
There are many different types of underwriters:
 A corporate underwriter works from the insurer’s home office and evaluates a portfolio of
business based on known probabilities and statistics, and an evaluation of the human element.
 A field underwriter accepts, declines, or modifies applications for personal lines coverage
submitted by insurance agents or brokers.
 A commercial lines underwriter does the same for commercial lines coverage. A specialist
commercial lines Underwriter has a job outside the normal underwriter career path, and must
have extensive experience in certain technical fields.
 A fidelity and surety bond underwriter analyzes situations that could lead to accidental loss
and the obligations to be guaranteed by fidelity or surety bonds.
Topic -11: Understanding Risk & Risk Management in Insurance:-
11.1. DEFINITION OF RISK:

Different people have defined risks, differently. However, in most of the definitions the term
risk includes exposure to adverse situations.
Macmillan dictionary: it defines risk as: the possibility that something unpleasant or dangerous
might happen.
E.J. Vaughan: refers to the risk as: a condition in which there is a possibility of an adverse deviation
from a desired outcome that is expected or hoped for.
Life Insurance Corporation of India: it defines risk as a condition where is a possibility of an

adverse deviation from a desired outcome that is expected or hoped for; there is no requirement that
the possibility be immeasurable, only that it must exist.
11.2. Causes of loss: Insurance Services Office, Inc. (ISO), commercial property insurance forms that
establish and define the causes of loss (or perils) for which coverage is provided. There causes of loss are of
two types namely the basic and broad. The basic and broad causes of loss forms are named perils.
Basic causes of loss are: fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft,
vehicles, vandalism, sprinkler leakage, sinkhole collapse, and volcanic action.
Broad causes of loss includes named insured against in the basic causes of loss (fire, lightning, explosion,
smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole
collapse, volcanic action), plus the following additional perils: falling objects; weight of snow, ice, or sleet;
water damage (in the form of leakage from appliances); and collapse from specified causes.
11.3. Categories of Risk

The concept of risk may also be explained as the possibility of unfavorable results following any
occurrence. Risks arise due to uncertainties, although many a times, the term uncertainty is confused
with risk. Uncertainty refers to a situation where the outcome or result can only be estimated but not
predicted with precision. Uncertainty is a subjective phenomenon, a concept based on an individual’s
own perception, thereby implying different degrees to different individuals.
Pure risks:
A pure risk refers to a chance of loss without any possibility of gain to the individuals. For
example, when a fire breaks out, it can only cause losses and no gain. Similarly, where a car is
insured against the contingency of an accident, the insurance company is liable to compensate the
loss, if the accident does not occur, the insured obviously does not get any benefit or gain. Pure risks
are inherent in business. They cannot be avoided. One can at best try to minimize their adverse
impact. Pure risks may or may not cause losses but they never cause gains. Pure risks are generally
insured for i.e. can be insured. An entrepreneur may avoid insuring or simply assuming the pure risk.
Classification of pure risks:

Pure risks may further be classified into following categories:
Pure risks

Personal Property Liability
risks risks risks
Personal Risks: They incur losses like loss of income, additional expenses and devaluation of
property. There are 4 risk factors affecting this:
 Premature death. This is death of a breadwinner who leaves behind financial responsibilities.
 Old age / retirement. The risk of being retired is not sufficient savings to support retirement
years.
 Health crisis. Individual with health problem may face potential loss of income and increase in
medical expenditures.
 Unemployment. Jobless individual may have to live on their savings. If his savings is depleted,
the bigger crisis is awaiting.
Property Risks: It means the possibility of damage or loss to the property owned due to some
causes. There are two types of losses involved.
1. Direct loss which means financial loss as a result of property damage.
2. Consequential loss which means financial loss due to the happenings of direct loss of the property.
For instance, a shop lot which is burnt down may incur repair costs as the direct loss. The
consequential loss is being unable to run the business to generate income.
Liability Risks: A person is legally liable to his wrong doings which cause damages to third party's
body, reputation or property. He can be legally sued and the most horrible thing is there is no
maximum in the compensation amount if you are found guilty. Knowing how the risks are classified
and the types of pure risks an individual is exposed to will surely give you a fundamental on the risk
topics and prepare yourself to further acquire the knowledge of how to manage risk.
Topic -12: Burden of Risk on Society
Topic -13: Risk Management and its importance in the field of Insurance
RISK MANAGEMENT: RISK MANAGEMENT is a systematic approach to minimizing an
organization's exposure to risk. A risk management system includes various policies, procedures and
practices that work in unison to identify, analyze, evaluate, address and monitor risk. Risk
management information is used along with other corporate information, such as feasibility, to arrive
at a risk management decision. Transferring risk to another party, lessening the negative affect of risk
and avoiding risk altogether are considered risk management strategies. Examples of risk
management practices include purchasing insurance, installing security systems, maintaining cash
reserves and diversification. Traditional risk management works to reduce vulnerabilities that are
associated with accidents, deaths and lawsuits, among others. Financial risk management focuses on
minimizing risks through the use of financial tools and instruments including various trading
techniques and financial analysis. Many large corporations employ teams of risk management
personnel.
Insurance Risk Management

Risk management is very important for insurance industry. Insurance means that insurance
companies take over risks from customers. Insurers consider every available quantifiable factor to
develop profiles of high and low insurance risk. Level of risk determines insurance premiums.
Generally, insurance policies involving factors with greater risk of claims are charged at a higher rate.
With much information at hand, insurers can evaluate risk of insurance policies at much higher
accuracy. To this end, insurers collect a vast amount of information about policy holders and insured
objects. Statistical methods and tools based on data mining techniques can be used to analyze or to
determine insurance policy risk levels.
Rules of Risk Management

 There is no return without risk; Rewards go to those who take risks.
 Be transparent; Risk should be fully understood.
 Seek experience; Risk is measured and managed by people, not mathematical models.
 Know what you don't know; Question the assumptions you make.
 Communicate; Risk should be discussed openly.
 Diversify; multiple risks will produce more consistent rewards.
 Show discipline, a consistent and rigorous approach will beat a constantly changing strategy.
 Use common sense; It is better to be approximately right, than to be precisely wrong.
 Return is only half the equation; Decisions should be made only by considering the risk and
return of the possibilities.
Topic -14: Risk Management objectives

Risk management objectives include the following:
 To use best practice to manage risks;
 To create an environment that allows the partnership to anticipate and respond to change;
 To prevent damage and loss, and reduce the cost of risk to all parties; and
 To raise awareness in managing risks throughout the Council and its partners.
 Additionally, it is suggested that a risk management strategy is agreed, and documented, and
that the document that is regularly reviewed and updated by the partnership. The importance of
adopting a risk management approach from the outset of defining the strategic partnering
vision is that it:
o Improves the likelihood of success for turning vision into reality as it encourages
forward thinking and thus minimizes unwelcome surprises;
o Increases visibility - Involving all stakeholders raises risk awareness and enhances
accountability;
o Enhances communication which in turn improves the basis for strategy setting,
performance management and decision making;
o Adds realism from the outset, which gives a better basis for the allocation of resources
and timetabling of the project.
Risk management involves identifying, analyzing, and responding to risk factors that impact on a
project or its objectives. In particular, the system must quantify the risk and predict the impact to the
project.
The two main objectives of risk management are to:
 Focus attention on minimizing threats in order to achieve the project objectives by performing
a high-level assessment of risks with all project stakeholders, and
 Provide a systematic approach for detail risk analysis and appraisal by:
o Identifying and assessing risks.
o Determining effective risk reduction actions.
o Monitoring and reporting progress in reducing risk.
Topic -15: Risk Management Process:

Just as the finance and marketing functions are applications of management processes and techniques
to specialized problems and in fact grew out of the general field of management, risk management
also involves the application of general management processes and techniques to the specialized
problems of risk control and risk finance. There is general agreement that the risk management
function involves four interrelated processes:
(1) Systematic and continuous investigation of risk loss exposures,
(2) Evaluation of their nature, frequency, severity, and the potential impact on the organization,
(3) Planning and organizing of appropriate risk control and risk financing techniques to efficiently
minimize loss impacts on the organization,
(4) Implementation of such techniques both internally at the department and top management levels,
and externally with loss control organizations, insurers, and other risk finance specialists.
The risk manager is mostly a planner, promoter, and coordinator of the above processes.
Responsibility for implementation resides at the departmental level. Accidents, injuries, fires, thefts,
defective products, violations of employee rights, and environmental pollution occur at the worksite
and can best be prevented or reduced at that level. Such prevention will not occur, however, without
guidance by knowledgeable experts like risk managers and loss control specialists.
Risk management should involve five basic steps shown below:
STEP 1 – IDENTIFY THE RISKS

Before being able to plan to mange a risk you need to identify and understand what the risks are.
The identification stage is the activity to find, list and characterize elements of risk. Identifying risks
is an ongoing task, and should not be completed only at the beginning of the project, but should be
done throughout the life. Identification of risks cannot be undertaken unless a project or partnership’s
objectives, strategies and plans are clearly understood, documented and communicated to all relevant
stakeholders. Therefore all stakeholders of the Risk Management Group should have this
understanding.
In order to help clarify this understanding the group will need to review business cases and planning
documents that specify the project. As a minimum this is likely to include reviewing:
 The vision and business;
 The specific deliverable and work processes that may be affected by the organizational
change;
 Any milestones and scheduled dates;
 The resources impact from a value and sources perspective; and
 Performance requirements of all.
Once an appropriate group has been formed and objectives, plans and strategies are understood, the
group will be in a position to identify risks. When identifying risks there is sometimes a danger of
focusing solely on risks those are internal as opposed to threats and opportunities from external
sources. It is useful to check that the risks identified relate to internal and external factors.
There are a number of techniques that can be used, where possible, to involve stakeholders and
generate ideas in risk identification. These are summarized below:
_ Brainstorming – Use a facilitator. Involve a good range of stakeholders. Ensure that the forum
allows open and honest discussions.
_ Interviewing – Can be one-to-one with project team members and/or key stakeholders to talk about
risks they believe may impact on the project;
_ Learning from experience – Compare with similar projects where possible.
In order to aid risk identification you can also use a generic prompt list to generate initial thoughts
and to act as a stimulus to identify risks.
STEP 2 – ASSESS THE RISK

Once the risks have been identified, it is now important to assess those risks in a consistent way
against agreed project and partnership criteria and to systematically: Risk assessment explores the
impact risk events have on a project. Cost is the obvious impact, but this is not the only issue. Risk
assessment can include both qualitative and quantitative assessments of the probability of identified
risks occurring and the impact of these in terms of:
 Time;
 Cost; and
 Performance.
The decision on which qualitative and/or quantitative risk assessment model is most appropriate for
an authority will depend on how sophisticated the risk management skills are within the authority and
the nature of the risk. The remainder of this section sets out a framework of both qualitative and
quantitative approaches.
Qualitative Analysis
Qualitative analysis involves describing the risk, why it may happen, and possible ways of controlling
it. The analysis of probability and impact is carried out primarily by the Risk Owner, as they should
be the person best able to analyze, plan and manage the risk. The analysis should, however, involve
any relevant stakeholders, such as subject matter experts that may be able to provide informed views
on levels of probability and impact.
Probability of Occurrence
The first stage of assessing the likelihood of occurrence is to review the long list of risks identified
and eliminate the risks, which, on reflection, the Risk Management Group believes will not occur.
The remaining risks then need to be classified in terms of their probability of occurrence.
To ensure consistent assessment of risks it is necessary to have an agreed set of project criteria.
A generic set of criteria has been defined below but these need to be tailored for specific projects. It is
recommended that the Risk Management Group define and agree the appropriate criteria:
 High Risk: Likely to cause significant disruption to schedule, cost and performance.
Probability of occurrence >50%;
 Medium Risk: Has the potential to cause some disruption, however, potential problems may be
overcome. Probability of occurrence 20-50%;
 Low Risk: Has little potential to cause disruption to schedule, cost and performance. Normal
effort by the project team members will probably overcome most difficulties. Probability of
occurrence <20%. The outcome from this exercise should be recorded on a risk register.
Severity of Impact
This stage is about evaluating each risk in terms of its possible impact on the project baselines of
time, cost and performance. As with the likelihood of occurrence the first stage is to eliminate any
risks that the Risk Management Group believes have no or only trivial impact on the baseline
requirements.
As stated under likelihood of occurrence, to ensure consistent assessment of risks it is necessary to
have an agreed set of project criteria.

A generic set of criteria has been defined below but these need to be tailored for specific projects and
it is again recommended that the Risk Management Group define and agree the appropriate criteria:
Impact Rating
LOW MEDIUM HIGH
TIME Effect of risk delays Effect of risk delays Effect of risk delays
schedule or partnership schedule or partnership schedule or partnership
implementation for: implementation for: implementation for:
<3 months 3-6 months >6 months
COST Effect of risk increases Effect of risk increases Effect of risk increases
cost by: <10% of total cost by: cost by: >30% of total or
or budgeted cost 10-30% of total or budgeted cost
budgeted cost
PERFORMANCE A few shortfalls in Some shortfalls in one Major shortfalls in key
performance or two areas of scope parameters of scope
parameters of scope requirements, requirements, acceptance
requirements, acceptance and quality. and quality.
acceptance and quality
As part of the qualitative analysis it is important to consider and balance the negative risks with the
potential opportunities an SSP will generate. This part of the risk assessment is a good time to include
this by assessing opportunities against the same agreed criteria, although the impact definitions would
be beneficial (for example, medium time impact would be a potential saving of 3-6 months rather
than a delay).
Once the probability of occurrence and the level of impact a risk will have are assessed in this manner
the risks need to be grouped into an order of priority for dealing with the risks. An easy way to
present this information is on a chart similar to the one shown in figure.
Risk categories
High impact and high probability of occurrence risks clearly need to be the ones that are focused on
in more detail (i.e. categories A to E shown on the diagram).
Quantitative Analysis
Quantitative analysis involves attempting to describe risk in numerical terms. To do this requires a
number of steps to be followed, namely:
 _ Defining the consequence;
 _ Constructing the pathway; and
 _ Building a model.
Defining the Consequence
Initially, it is necessary to define the numerical estimate of impact the risk will have.
Examples of this will include:
_ The number of staff to be affected by the new arrangements; or
_ The total cost of failure of the partnership.
Within the definition consideration and parameters need to be set for the time frame over which risk
is to be measured.
Construct a Pathway
Constructing a pathway involves consideration of all the sequential events that must occur for the
adverse event to occur. This will involve considering “what if” scenarios.
Building a Model

Given the risk pathway, mathematical model then needs to be constructed that allows risk to be
estimated. To do this, each step in the pathway and the corresponding variables for those steps need
to be considered.
Scores can then be assigned to each of the input variables. These are sometimes referred to as point-
values. The relationship between the variables is then used to generate a point-value estimate of risk.
To test the sensitivity of the model three point values are used that relate to a minimum, maximum
and most likely estimate of impact.
The two main limitations of this type of modeling are that only three values are used where in reality
a larger number of values may be appropriate and that this model does not make any use of the fact
that the most likely estimate will occur more frequently.
 A more refined financial model considers probability of occurrence for each of the input
variables. Using probability distributions, all possible combinations are accounted for.
 A common approach used for this type of modeling is called the Monte-Carlo simulation. This
is a computer intensive technique that involves random sampling for each probability
distribution within the model to produce a large number of scenarios. Specialist software
packages are available to run.
Monte-Carlo simulations.
As stated earlier, the decision on which qualitative and/or quantitative risk assessment model is most
appropriate for an authority to use as part of their risk management will depend on how sophisticated
the risk management skills are within the authority, what the risks are and what software packages
they have access to.
STEP 3 – PLAN THE RISK RESPONSE
The planning stage is the activity within the risk management process of selecting and implementing
the most appropriate way of dealing with the risk.
The first stage in the planning phase is to classify the identified and analyzed risks as either:
Accepted risks: Currently acceptable to the project/partnership and therefore no action will be taken
to mitigate or prevent these risks at this stage. They should however be regularly reviewed and
assessed.
Rejected risks: Currently not considered to be a valid or real threat to the project/partnership at this
stage.
Risks to be handled: These are the risks that require action to reduce or eliminate them. For those
that fall into the third classification mitigation plans need to be prepared. These are the risk control
options that set in place actions to reduce the probability and or the impact of a risk prior to its
occurrence. Within the mitigation plan all actions must be aligned to the single, most appropriate
overall mitigation strategy. Mitigation options are:
 Eliminate or avoid the risk;
 Reduce the risk;
 Transfer the risk; or
 Accept the risk.
Eliminate or Avoid the Risk
This can be done by:
 _ Changing the direction or strategy and revisiting objectives;
 _ Improving channels of communication;
 _ Obtaining further information from external sources;
 _ Acquiring expertise;
 _ Reducing the scope of the activity;
 _ Adopting a familiar proven approach.
Reduce the Risk: This is most common option for risk treatment. Risk actions should aim to reduce
the probability of occurrence by targeting the cause and/or reduce the level of impact.
Transfer the Risk: It may be appropriate to transfer ownership and responsibility for the risk to
another party outside the council. However, it may not be possible to transfer all aspects of a risk. For
example, where there is a statutory duty of care related to health and safety risk.
Methods of risk transfer include:
 Financial instruments such as insurance, performance bonds, warranties or guarantees;
 Renegotiation of contract conditions for the risk to be retained by the other party;
 Seeking agreement on sharing risk with the other party;
 Sub-contracting risks to consultants or suppliers.
(Note: For this to be an effective transfer of risk, the sub-contractor must be in a position to own and
manage the risk appropriately and have sufficient financial standing to bear the consequences of the
risk materializing. Levels of insurance carried for insurable risk should also be checked).
Accept the Risk: It will not be possible to remove some risks entirely. Where risks cannot be
transferred, reduced or avoided/eliminated the simplest control is to ensure that they are regularly
reviewed and monitored.
To help stimulate ideas and discussion around selecting the best option the following questions can
be posed to the Risk Management Group when considering each of the risks in turn:
 Eliminate or avoid the risk: Can action be taken to prevent the risk from occurring?
 Reduce the risk: Can action be taken to affect the risk’s impact/probability?
 Transfer the risk: Is another stakeholder or organisation better placed to manage the risk?
 Accept the risk: Should project/partnership resources be expended on this risk?
When evaluating the most appropriate option it is important to:

 Consider the cost versus benefit of different options;
 Assess all possible mitigation strategies;
 Take action at the earliest possible point in time.
Additionally, to be effective, risk responses must meet a number of important criteria. Use the
checklist below to ensure all response are:
 Appropriate (i.e. do nothing for small, minor risks)
 Cost effective
 Actionable – defining the time within which responses need to be completed
 Achievable – responses must be realistic
 Effective – responses must have a high chance of working
 Agreed upon – by all partnership stakeholders
 Allocated and accepted – each response should be assigned to ensure the most appropriate
point of contact.
It is also suggested that despite choosing an option for how you will handle risk that a
fallback/contingency plan is discussed for the cases where a mitigation plan fails to achieve the
intended effect.
As with the assessment of risks it is important to consider the opportunities the SSP will generate and
to apply the same planning approach to them. The difference, however, will be, instead of trying to
reduce or eliminate the impact with an opportunity, the options for handing them should attempt to
make them more likely to occur or enhance their beneficial impact. As an output from this stage all
agreed actions should be recorded within a project/partnership risk register.
STEP 4 – MONITOR THE RISKS

The risk monitoring stage includes implementing, monitoring, reporting and reviewing risk
management actions against objectives. Once the risk register has been populated it is important to
review the register either at a specific risk review meeting or as an element of other
project/partnership meetings. At these meetings it is an opportunity to report new risks as well as
reviewing changes to current risks. Sufficient historical information should be kept to provide a good
audit trail of reasons for decision. From these meetings it is important to routinely update the risk
register or database after each review to reduce duplication of effort in the future.
STEP 5 – DOCUMENT LESSONS LEARNT

Whenever possible review the risks identified and assess how the partnerships’ efforts impacted on
the outcome. Experience is an excellent teacher in risk identification and risk reduction, so sharing
the experience within the authority and the partnership will help improve risk management skills.
Lessons learnt should be documented so that future Risk and Project Managers within the authority
can learn from past mistakes or issues.

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FINANCIAL MARKETS AND INSTITUTIONS

Module – I: Financial Market and Financial Institutions

Structure of Financial Market:

Asst. Prof. Sandeep Kumar Mishra

Topic -3: Capital Market

Topic -4: FOREIGN EXCHANGE MARKET

The most important functions of this market are:

1. Trading between banks and their commercial customers.

Asst. Prof. Sandeep Kumar Mishra

CHARACTERISTICS: Some of the important features of foreign exchange market are:

Asst. Prof. Sandeep Kumar Mishra

Asst. Prof. Sandeep Kumar Mishra

Asst. Prof. Sandeep Kumar Mishra

Topic -7: Classification of Financial Institutions in India:

3. Banking Institutions and Non Banking Institutions

 All India Institutions

 State level Institutions

Topic -8: All India Developmental Financial institutions:

Asst. Prof. Sandeep Kumar Mishra

Asst. Prof. Sandeep Kumar Mishra

Asst. Prof. Sandeep Kumar Mishra

1. Assam Industrial Development Corporation Ltd (AIDC)

Asst. Prof. Sandeep Kumar Mishra

Asst. Prof. Sandeep Kumar Mishra

Topic -2: Primary Market, Role of the Primary market

Asst. Prof. Sandeep Kumar Mishra

2. Need for Companies to issue shares to the public:

Asst. Prof. Sandeep Kumar Mishra

Asst. Prof. Sandeep Kumar Mishra

Asst. Prof. Sandeep Kumar Mishra

Topic -6: Price discovery through Book building process:

Asst. Prof. Sandeep Kumar Mishra

Topic -7: Registrar to an Issue:

Asst. Prof. Sandeep Kumar Mishra

Minimum Listing Requirements for new companies

ELIGIBILITY CRITERIA FOR IPOs/FPOs

I. In respect of Large Cap Companies

II. In respect of Small Cap Companies

III. For all companies:

Minimum Listing Requirements for companies listed on other stock exchanges

Asst. Prof. Sandeep Kumar Mishra

Topic -11: The Secondary Market/ Stock Exchanges:

Control over Secondary Market

Asst. Prof. Sandeep Kumar Mishra

(a) He must be an Indian citizen with 21 years of age.

Asst. Prof. Sandeep Kumar Mishra

 In Secondary market share are traded between two investors.

Asst. Prof. Sandeep Kumar Mishra

Storage of Dematerialized Shares – Depository

Who is a Depository Participant?

• Demat format reduces the risk of bad deliveries

Asst. Prof. Sandeep Kumar Mishra

Topic -18: Trading Rules:

How to do Buying and Selling of Stocks

1. You place order (buy or sell) online -

Topic -19: Regulatory Framework:

Capital issue (control) act ,1947

Securities contract (regulation) act, 1956

Asst. Prof. Sandeep Kumar Mishra

SEBI Act, 1992

Asst. Prof. Sandeep Kumar Mishra

Depositories Act, 1996

Asst. Prof. Sandeep Kumar Mishra

Factors that influence the construction of Index numbers