Financial Markets and Services Notes

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.
Financial Markets and Services
Financial Markets and Services Chapter One
What is Financial System

Financial System implies a set of complex and closely connected or intermixed institutions, agents, practices, markets, transactions, claims and liabilities in the economy Financial System is a broader term which brings under its fold the financial markets and the financial institutions which support the system The Financial System provides the intermediation between savers and investors The Financial System is concerned about money, Credit and finance Money refers to the current medium of exchange Credit or loan is a sum of money to be returned normally with interest Finance is monetary resources comprising debt and ownership funds of the state.
Financial System- Various Parts and Types of Classification Financial Institutions Financial Instruments Functions of the Financial System Provision of Liquidity. Mobilisation of Savings Financial Concepts

Financial Assets Financial Intermediaries Financial Markets Financial rates of return Financial Instruments
Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________
FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Financial Assets A Financial Asset is one which is used for production or consumption or for further creation of assets. For Examples Shares etc Financial Asset is different From Physical Asset
Classification of Financial Assets Marketable Assets Non Marketable Assets Marketable Assets

Marketable Assets are those which can be easily transferred from one person to another without much hindrance Non-Marketable Assets
Non-Marketable Assets are those assets cannot be transferred easily Classification of Financial Assets Cash Asset Cash Asset Coins/ currency notes Credit Creation by Commercial Banks It is also called as Money asset Debt Asset Debt Asset is issued by a variety of organisations for the purpose of raising their debt capital Debt Capital entails a fixed repayment schedule with regard to interest and principal Examples issue of debentures, raising debt of term loans


Stock Asset Stock is issued by business organisations for the purpose of raising their fixed capital There are two types of stock namely Equity and Preference Equity shareholders are the real owners of the business who enjoys the profits as well as risks Preference shareholders get a fixed rate of dividend and at the same time they retain some characteristics of equity Financial Intermediaries The term financial intermediary includes all kinds of organisations which intermediate and facilitate financial transactions of both individuals and corporate customers. It refers to all kinds of financial institutions and investing institutions which facilitate financial transactions in financial markets The term financial intermediary includes Banks, Investment Companies, Insurance Companies, Development Financial Institutions, Non-Banking Finance Companies, Mutual Funds, etc. All these financial institutions assist in the transfer of savings from economic units/individuals with excess money to those that need capital for investments.
Types of Financial Intermediaries

Capital Market Intermediaries These Financial Intermediaries mainly provide long term funds to individuals and corporate customers. Money Market Intermediaries These Financial Intermediaries supply only short term funds to individuals and corporate customers
Financial Markets
Financial Markets are the centres or arrangement that provide facilities for buying and selling of financial claims and services. The Corporations, Financial institutions, individuals and government trade in financial products on these markets either directly or through brokers and dealers on organized exchanged or off-exchange Financial Markets can be referred to as those centres and arrangements which facilitate buying and selling of financial assets, claims and services. Financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). Classification of Financial Markets Unorganised markets are those whose activities are not controlled by the RBI In the Organised Markets, there are standardised rules and regulations governing their financial dealings. These Markets are subject supervision and control by the RBI or other regulatory bodies Capital Market Capital Market is a market is a market for financial assets which have a long or indefinite maturity. The capital market is the market for securities, where companies and the government can raise long-term funds. The capital market includes the stock market and the bond market. The capital markets consist of the primary market, where new issues are distributed to investors, and the secondary market, where existing securities are traded The market for long term investment funds in the form of stocks, bonds, commercial paper etc.

Gilt-edged /Government Securities Market

The Gilt-edged market refers to the market for Government and semi-government securities, backed by the Reserve Bank of India (RBI). Government securities are tradable debt instruments issued by the Government for meeting its financial requirements.
The Industrial Securities Market The Industrial Securities Market refers to the market which deals in equities and debentures of the corporates. It is further divided into primary market and secondary market. Primary Market Primary market (new issue market):- deals with 'new securities', that is, securities which were not previously available and are offered to the investing public for the first time. It is the market for raising fresh capital in the form of shares and debentures. It provides the issuing company with additional funds for starting a new enterprise or for either expansion or diversification of an existing one, and thus its contribution to company financing is direct. The new offerings by the companies are made either as an initial public offering (IPO) or rights issue.
Secondary market/ stock market (old issues market or stock exchange Is the market for buying and selling securities of the existing companies. Under this, securities are traded after being initially offered to the public in the primary market and/or listed on the stock exchange. Secondary market/ stock market (old issues market or stock exchange The stock exchanges are the exclusive centres for trading of securities. It is a sensitive barometer and reflects the trends in the economy through fluctuations in the prices of various securities. It been defined as, "a body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating and
controlling the business of buying, selling and dealing in securities". Listing on stock exchanges enables the shareholders to monitor the movement of the share prices in an effective manner. This assist them to take prudent decisions on whether to retain their holdings or sell off or even accumulate further. However, to list the securities on a stock exchange, the issuing company has to go through set norms and procedures.

Long Term Loans Market This market supply long-term loans to corporate customers. Long Term Loans Market can be classified into : Term Loans Market Mortgages Market Financial Guarantees Market Term Loans Market When Industrial Financing Institutions supply Long-term and Medium term Loans to Corporate Customers directly or Indirectly intermediate- to long-term (typically, two- to ten-year) business loans with provisions for systematic repayments (amortization during the life of the loan). The repayment or amortization schedule is a particularly important feature of such loans. Amortization protects both the lender and borrower against the possibility that the borrower will not make adequate provisions for retirement of the loan during its life. Mortgages Market

Mortgages Market refers to those centres which supply mortgage loan mainly to individual customers. Mortgage Loan is a loan against the security of immovable property. The transfer of interest in a specific immovable property to secure loan is called Mortgage

Mortgages Market - Types Equitable Mortgage is created by a mere deposit of title deeds to properties as security Legal Mortgage where the title of the property is legally transferred to the lender by the borrower. First Charge Mortgage where the Mortgager transfers his interest in the specific property to the Mortgagee as Security. When the property in question is already mortgaged once to another creditor, it becomes a second charge when it is subsequently mortgaged to somebody else. The Mortgage can also further transfer his interest in the mortgaged property to another it is called a Sub-Mortgage. The Primary Mortgage Market consists of original extension of credit Secondary Mortgage Market has sales and re-sales of existing mortgages at prevailing prices HUDCO, Insurance companies LDBs
Financial Guarantees Market

Financial Guarantees Market is a centre where finance is provided against the guarantee of a reputed person in the financial circle Guarantee is a contract to discharge the liability of a third party in case of his default Guarantee acts as a security from the creditors point of view In case the borrower fails to repay the loan, the liability falls on the shoulders of the guarantor. Hence the guarantor must be known to both the borrower and the lender and he must have the means to discharge his liability There are 2 types of guarantees Performance and Financial Guarantee Performance Guarantees cover the payment of earnest money, retention money, advance payments, non-completion of contracts etc Financial Guarantees cover only financial contracts These Guarantees are provided mainly by commercial banks, Development Banks, ECGC,DICGC


Financial Guarantees in India relate to Deferred Payments for Imports & Exports Medium & Long term loans raised abroad Loans advanced by banks & other financial institutions
Importance of Capital Market

y Capital Market serves as an important source for the productive use of the economys savings It provides incentives to saving and facilitates capital formation by offering suitable rates of interest as the price of capital It provides an avenue for investors A healthy capital market consisting of expert intermediaries promotes stability in values of securities representing capital funds It serves as an important source for technological up gradation in the industrial sector by utilisng the funds invested by the public
y y
FINANCIAL INSTRUMENTS or FINANCIAL SECURITIES

Financial Instruments refers to those documents which represent financial claims on assets. Financial Instruments are real or virtual document representing a legal agreement involving some sort of monetary value. In today's financial marketplace, financial instruments can be classified generally as equity based, representing ownership of the asset, or debt based, representing a loan made by an investor to the owner of the asset. Foreign exchange instruments comprise a third, unique type of instrument. Different subcategories of each instrument type exist, such as preferred share equity and common share equity, for example. Examples Bill of Exchange, Promissory Notes, Treasury Bill, Bond Deposit, Share, Debenture etc.
Financial Instruments can be classified into 1. Primary Securities 2. Secondary Securities Primary Securities
These are securities directly issued by the ultimate investor to the ultimate savers. Eg: Shares and debentures issued directly to the public.
Secondary Securities
These are securities issued by some intermediaries called financial intermediaries to the ultimate savers. These Securities may be classified on the basis of duration 1. Short-term Securities {Bill of Exchange, treasury bill etc}{within one-year} 2. Medium -term securities {Debentures}{5years} 3. Long -term Securities {Government Bonds}{10years}
FEATURES OF FINANCIAL INSTRUMENTS

Most of the instruments can be easily transferred from one hand to another without many cumbersome formalities They possess liquidity Most of the securities possess security value and also enjoy tax status They carry risk in the sense that there is uncertainty with regard to payment of principal or interest or dividend as the case may be These instruments involve less handling costs since expenses involved in buying and selling these securities are generally much less The return on these instruments is directly in proportion to the risk undertaken These instruments may be Short-Term or Medium term or Long Term depending upon the maturity period of these instruments.
DEVELOPMENT OF FINANCIAL SYSTEM IN INDIA

RBI was established as a private institution in 1935 Nationalized in 1948 The Imperial Bank of India was established on 27 January 1921. Later the bank was nationalized in 1956 and named as SBI 245 Life Insurance Companies were nationalized and named as Life Insurance Corporation of India Private Banks with capital turn over of 50 crores were nationalization in 1969 6 Private Banks with capital turn over of 100crores were nationalization in 1981. UTI was established in 1964 Industrial Finance Corporation of India { IFCI} was set up in 1948 State Finance Corporation {SFCs}was set up in 1951 Industrial Credit and Investment Corporation was set up in 1955. Refinance Corporation of India { RCI} was set up in 1958. Industrial Development Bank of India { IDBI} was set up in 1964. In 1971, the IDBI and LIC jointly set up the Industrial Reconstruction Corporation of India {IRCI} with the main objective of reconstruction and rehabilitation of sick industrial undertakings Small Industries Development Bank of India {SIDBI} was set up in 1990. NABARD was set up in 1982 The Export and Import Bank of India {EXIM Bank} was set up in 1982. The National Housing Bank was set up in 1988. Stock Holding Corporation of India Ltd was set up in 1987 Mutual Funds / Ventures Capital Institutions / Credit Rating Agencies
LEGISLATIVE SUPPORT
The Indian Companies Act 1956 The Securities Transactions in India at present are mainly governed by two Acts. The Securities Contracts (Regulation) Act, 1956, The Securities & Exchange Board of India Act, 1992. THE DEPOSITORIES ACT, 1996: The Foreign Exchange Regulations Act, 1973 Arbitration and Conciliation Act, 1996; Debt Recovery Act (Bank and Financial Institutions Recovery of Dues Act, 1993)
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K Banking Regulation Act; Benami Prohibition Act; Indian Penal Code; Indian Evidence Act, 1872 and; Indian Telegraph Act, 1885. The Foreign Exchange Regulation Act of 1973 (FERA)in India was repealed on 1st June, 2000. It was replaced by the Foreign Exchange Management Act (FEMA), which was passed in the winter session of Parliament in 1999.
ROLE OF THE INDIAN FINANCIAL INSTITUTIONS IN DEVELOPMENT OF THE NATION.

Promotional Financing Project Promotion Entrepreneurial Guidance and Development Refinance Facilities Technical Assistance Finance for SSIs / Rural and Agricultural Development. Innovative Financial Services Rendering Advice to the Government
WEAKNESSES OF INDIAN FINANCIAL SYSTEM

Lack of Co-ordination between different Financial Institutions. Monopolistic Market Structure Exists. Dominance of Development Banks in Industrial Financing Inactive and Erratic Capital Market Imprudent Financial Practice
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Chapter -3
Money Market

Money market refers to the market for short term assets that are close substitutes of money, usually with maturities of less than a year. G.Crowther in his treatise "An Outline of Money defines money market as "the collective name given to the various firms and institutions that deal in the various grades of near-money".
Features of a Money Market

It is a market purely for short-term funds or financial assets called near
money.
It deals with financial assets having a maturity period upto one year only. It deals with only those assets which can be converted into cash readily
without loss & With minimum transaction cost Generally transactions take place through phone i.e., oral communication. Relevant documents & written communications can be exchanged subsequently. There is no formal place like stock exchange as in the case of a capital market. Transactions have to be conducted without the help of brokers. It is not a single homogeneous market. It comprises of several submarkets, each specialising in a particular type of financing like Call Money Market/Acceptance Market/ Bill Market etc
The components of a Money Market are Central Bank
Commercial Bank NBFCs Discount Houses Acceptance Houses
Objectives
To provide a parking place to employ short-term surplus funds. To provide room for overcoming short-term deficits To enable the Central Bank to influence & regulate liquidity in the
economy through its intervention in this market
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Characteristic Features of a Developed Money Market

Highly organised Banking System Presence of a Central Bank Availability of Proper Credit Instrument. Existence of Sub-markets Ample Resources Existence of Secondary Market Demand & Supply of Funds
Development of Trade & Industry Development of Capital Market Smooth Functioning of Commercial Banks Effective Central Bank Control Formulation of suitable Monetary Policy. Non inflationary source of finance to government.
Importance of Money Market
Composition /Main Segments of the Money Market

Call/notice money Term money, Commercial Bills, Treasury Bills, Commercial paper Certificate deposits Acceptance Market
Call / Notice Money

The most active segment of the money market has been the call money market, where the day to day imbalances in the funds position of scheduled commercial banks are eased out. Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money".
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When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions. The entry into this field is restricted by RBI. Commercial Banks, Cooperative Banks and Primary Dealers are allowed to borrow and lend in this market. Specified All-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to Call/Notice money market only as lenders. Reserve Bank of India has recently taken steps to make the call/notice money market completely inter-bank market.
Operations in Call / Notice Money

Borrowers & Lenders in a call market contact each other over Telephone. After negotiations over the phone, the borrowers & lenders arrive at a deal specifying the amount of loan & the rate of interest After the deal is over, the lender issues FBL cheque in the favour of the borrower The borrower in turn issues call money borrowing receipt. When the loan is repaid with interest, the lender the duly discharged receipt

Certificate of Deposit (CD)

Certificates of Deposit (CDs) - introduced since June 1989 - are
negotiable term deposit certificates issued by a commercial banks/Financial Institutions at discount to face value at market rates, with maturity ranging from 15 days to one year. Being securities in the form of promissory notes, transfer of title is easy, by endorsement and delivery. Further, they are governed by the Negotiable Instruments Act. As these certificates are the liabilities of commercial banks/financial institutions, they make sound investments.
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DFHI trades in these instruments in the secondary market. The

market for these instruments, is not very deep, but quite often CDs are available in the secondary market. DFHI is always willing to buy these instruments thereby lending liquidity to the market.
Certificate of Deposit (CD)-Salient features CDs can be issued to individuals, corporations, companies, trusts, funds, associates, etc. NRIs can subscribe to CDs on non-repatriable basis. CDs attract stamp duty as applicable to negotiable instruments. Banks have to maintain SLR and CRR on the issue price of CDs. No ceiling on the amount to be issued. The minimum issue size of CDs is Rs.5 lakhs and multiples thereof. CDs are transferable by endorsement and delivery. The minimum lock-in-period for CDs is 15 days. CDs are issued by Banks, when the deposit growth is sluggish and credit demand is high and a tightening trend in call rate is evident. CDs are generally considered high cost liabilities and banks have recourse to them only under tight liquidity conditions.
Certificate of Deposit (CD)- Advantages Convenient Instruments to depositors as they enable their short term
surpluses to earn higher return CDs also offer maximum liquidity as they are transferable by endorsement & delivery. The holder can resell his certificate to another. From the point of view of issuing bank, it is a vehicle to raise resources in times of need & improve their lending capacity. The CDs are fixed term deposits which cannot be withdrawn until the redemption date. This is an ideal instrument for banks with short term surplus funds to invest at attractive tates Certificate of Deposit (CD)- Disadvantages Stamp Duty Development of Secondary Market Lock in Period 45 Days
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Commercial Paper What is Commercial Paper

A Commercial paper is an unsecured promissory note issued with a
fixed maturity by a company approved by RBI, negotiable by endorsement& delivery, issued in bearer form & issued at such discount on the face value as may be determined by the issuing company Features of Commercial Paper Commercial Paper is a short-term money market instrument comprising Usance promissory note with a fixed maturity. Commercial Paper is a certificate evidencing un secured corporate debt of short term maturity Commercial Paper is issued at a discount to face value basis but it can also be issued in interest bearing form. The issuer promises to pay the buyer some fixed amount on some future period but pledges no assets, only his liquidity & established earning power, to guarantee that promise Commercial Paper can be issued directly by a company to investors or through banks/ merchant bankers Commercial Paper Advantages of Commercial Paper
Simplicity Flexibility Diversification Easy to raise Long Term Capital High Returns Movement of Funds Whether CP is always issued at a discount? Yes. CP will be issued at a discount to face value as may be determined by the issuer. Whether CP can be underwritten? No issuer shall have the issue of Commercial Paper underwritten or co-accepted.
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Treasury Bill Market Treasury Bill

Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.
Treasury bills (T-bills) offer short-term investment opportunities,

generally up to one year. They are thus useful in managing short-term liquidity. At present, the Government of India issues three types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no treasury bills issued by State Governments. Amount Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000. Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued under the Market Stabilization Scheme (MSS). Payment Payment by allottees at the auction is required to be made by debit to their/ custodians current account Operations And Participants The RBI holds 91 days Treasury bills & they are issued throughout the week. 364days T.B. are sold through auction which is conducted once in a fortnight. The date of auction & the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also. On the next working day of the date of auction, the accepted bids with the prices are displayed.
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The successful bidders have to collect letters of acceptance from the RBI & deposit the same along with a cheque for the amount due on RBI within 24 hours of the announcement of auction results Participants
RBI SBI / Commercial Banks State Governments DFHI / STCI Financial institutions like LIC,GIC, UTI, IDBI, ICICI, IFCI, NABARD etc. Corporate customers Public
Types of Treasury Bills There are different types of Treasury bills based on the maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 12months Treasury bills Types Of Treasury Bills etc. In India, at present, the Treasury Bills are the 91-days and 364-days Treasury bills. Ordinary/ Regular Bills
Ordinary/ Regular Bills are issued to the public & other financial
institutions for meeting the short-term financial requirements of the central government. These bills are freely marketable & they can be bought & sold at any time & they have secondary market also Ad hocs/ Ad hoc Bills
Ad hocs/ Ad hoc Bills are always issued in favour of the RBI only They are not sold through tender or auction. They are purchased by
the RBI On tap & the RBI is authorized to issue currency notes against them. They are not marketable in India. However, the holders of these bills can always sell them back to the RBI Ad hocs serve the government in the following ways They replenish cash balances of the Central Government.
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They provide an investment medium for investing the temporary

surpluses of State Governments, Semi-Governments departments and foreign Central Banks Treasury bills- Merits Safety Liquidity Ideal Short-Term Investment Ideal Fund Management Statutory Liquidity Requirement Source of Short-Term Funds Non Inflationary Monetary Tool Treasury bills-Defects
Poor Yield Absence of Competitive Bids Absence of Active Trading
BILL OF EXCHANGE
Introduction A Bill of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain person to pay a certain sum of money to,or to the order of,a certain person or to the bearer of the instrument. COMMERICAL BILLS MARKET Bills of exchange are negotiable instruments drawn by the seller (drawer) on the buyer (drawee) for the value of the goods delivered to him. Such bills are called trade bills. When trade bills are accepted by commercial banks, they are called commercial bills. If the seller wishes to give some period for payment, the bill would be payable at a future date (usance bill). During the currency of the bill, if the seller is in need of funds, he may approach his bank for discounting the bill. One of the methods of providing credit to customers by bank is by discounting commercial bills at a prescribed discount rate. The bank
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will receive the maturity proceeds (face value) of discounted bill from the drawee. In the meanwhile, if the bank is in need of funds, it can rediscount the bill already discounted by it in the commercial bill rediscount market at the market related rediscount rate. (The RBI introduced the Bill Market Scheme in 1952 and a new scheme called the Bill Rediscounting Scheme in November 1970). Features A bill of exchange must be in writing. It must be dated. It must contain an order to pay a certain sum of money. The order must be unconditional. The money must be payable to a deinite person or to his order or to the bearer. It must be for a specified amount and specified period. The bill must be accepted by the party on whom the order is made. . . Types of Commercial Bills y DEMAND & Usance Bills y Clean &Documentary Bills y Inland & Foreign Bills y Export & Import Bills y Indigenous Bills y Accommodation & Supply Bills Demand Bills& Usance Bills
DEMAND Bills or Sight Bills are payable immediately as soon as they

are presented to the drawee. No time of payment is specified & hence they are payable at sight. USANCE Bills or Time bills are payable immediately after the expiry of time period mentioned in the bills. The period varies according to the established trade custom or usage prevailing in the country
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Clean &Documentary Bills When bills have to be accompanied by documents of title to goods like Railway receipt, Lorry Receipt, Bill of Lading etc., the bills are called Documentary Bills.
These Bills can be further Classified into D/A BILLS & D/P BILLS IN the case of D/A bills, the documents accompanying bills have to be
delivered to drawee immediately after his acceptance of the bill. Thus, a D/A bill become a a clean bill immediately after acceptance. Generally, D/A bills are drawn on parties who have a good financial standing On the other hand, the documents have to be handed over to the drawee only against payment in the case of D/P Bills. The documents will be retained by the banker till the payment of such ills. When bills are drawn without accompanying any document they are called Clean Bills. In such a case, documents will be directly sent to the drawee. Inland & Foreign Bills INLAND BILLS are those drawn upon a person resident in India & are payable in India. FOREIGN BILLS are drawn outside India & they may be payable either India or outside India. They may be drawn upon a person resident in India also Foreign Bills have their origin outside India They also include bills drawn in India, But made payable outside India Export & Import Bills
Export Bills are those drawn by Indian Exporters on Importers outside India
Import Bills are drawn on Indian importers in India by exporters outside India Indigenous Bills Indigenous Bills are those drawn & accepted according to native custom or usage of trade. These bills are popular among indigenous bankers only. In India they are called hundis
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Accommodation Bills If bills do not arise out of genuine trade transactions , they are called Accommodation Bills/Kite/Wind Bills. Two parties draw bills on each other purely for the purpose of mutual financial accommodation. These bills are discounted with bankers & the proceeds are shared among themselves. On the due dates, they are paid. Supply Bills Supply Bills are those drawn by suppliers or contractors on the Government departments for the goods supplied to them. These bills are neither accepted by the departments nor accompanied by documents of title to goods. So, they are not considered as negotiable instruments. These bills are useful only for the purpose of getting advances from commercial banks by creating a charge on these bills
Operations in Bill Market

Discount Market refers to the market where short-term genuine trade
bills are discounted by financial intermediaries like commercial banks. When credit sales are effected, the seller draws a bill on the buyer who accepts it promising to pay the specified sum at the specified period.
The seller has to wait until the maturity of the bill for getting
payment. But, the presence of the bill market enables him to get payment immediately. The seller can ensure payment immediately by discounting the bill with some financial intermediary by paying a small amount of money called Discount Rate
On the date of maturity, the intermediary claims the amount of the

bill from the person who has accepted the bill. DFHI in India
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Acceptance Market
The Acceptance Market refers to market where short-term genuine trade bills are accepted by financial intermediaries. All trade bills cannot be discounted easily because the parties to the bills may not be financially sound. In such cases bills are accepted by financial intermediaries like banks, the bills earn a good name & reputation & such bills can be readily discounted anywhere. Acceptance Houses in England Commercial Banks in India
COMMERICAL BILLS -Advantages Liquidity Self-Liquidating and negotiable Asset Certainty of Payment Ideal Investment Simple Legal Remedy High & Quick Yield Central Bank Control
COMMERICAL BILLS -Disadvantages Absence of Bill culture Absence of Rediscounting among Banks Stamp Duty Absence of Secondary Market Difficulty in Ascertaining Genuine Trade Bills Limited Foreign Trade Absence of Acceptance Services Attitude of Banks
Bill Market Scheme

A well organised bill market is essential for the smooth working of the credit system, progress of commercial banking as well as linking up the various credit agencies effectively to the central bank of a country. Realising its importance, the Central Banking Enquiry Committee emphasised the need for developing a bill market in India as early as 1931. But, it did not develop even after the establishment of the Reserve Bank due to several reasons.
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In January 1952, for the first time, the Reserve Bank introduced a Bill Market Scheme. Under Section 17(4) of the Reserve Bank of India Act, the Bank undertook to make advances to scheduled banks against the security of Usance promissory notes or trade bills having a maturity of 90 days and bearing two signatures, of which one will be that of a scheduled bank. This facility was originally restricted to banks having deposits of more than Rs. 10 crore. The minimum value of each bill was fixed at Rs. 1 lakh and the minimum amount of advance was Rs. 25 lakhs for a bank. The scheme was introduced on an experimental basis for a period of 4 years. Later, on the recommendations of the Shroff Committee, the scheme was extended to all scheduled banks. The minimum amount of each bill was reduced to Rs. 50,000 and the minimum limit of advance for a bank was reduced to Rs. 10 lakhs. In 1957, on the recommendations of the Export Promotion Committee, the Reserve Bank of India, extended the scheme to include export bills in order to enable scheduled banks to provide finance to exports on a liberal scale. The extension of the bill market scheme to export bills has been continued further year after year

Bill Market Scheme 1970 The 1952 Bill Market Scheme remained a partial success. It was criticised it did not develop a good bill market in India. The scheme appears to be a device for extending credit for banks during busy seasons. It is not based on trade bills but on the conversion of loans and advances by scheduled tanks into Usance bills. The Deheja Committee set in motion the introduction of a new bill market. The report brought out the abuses of cash credit system and suggested the use ,of bill financing and for the supervision of the end use of funds lent by commercial banks. A study group was appointed by the Reserve Bank in February 1970, under the chairmanship of Shri. M. Narasimhan to go into the question of enlarging the use of the bill of exchange as an instrument for providing credit and creation of a bill market in India. The group submitted the report in June 1970. Following its recommendations,
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the Reserve Bank announced a new bill market scheme under Section 17(2)(a) of the Reserve Bank of India Act in November 1970. (i) All eligible scheduled banks are eligible to offer bills of exchange for rediscount. (ii) The bills of exchange should be a genuine trade bill and should have arisen out of the sale of goods. Accommodation bills are not eligible for this purpose. (iii) The bill should not have a maturity time of more than 120 days and when it is offered to the Reserve Bank for rediscount its maturity should not exceed 90 days. (iv) The bill should have at least two good signatures, one of which should be that of a licensed scheduled bank. (v) The minimum amount of bill should be Rs. 5,000 and on one occasion, the value of bill offered for rediscount should not be less than Rs.50,000. In 1971, the Reserve Bank simplified the procedure for rediscounting the bills. To avoid delays and reduce the work involved in physically delivering and redelivering the bills to and from the bank, it was decided to dispense with the actual lodgement of bills, each of the face value of Rs. 2 lakhs and below. The minimum amount of a bill eligible for rediscount with the Bank was reduced to Rs. 1,000. The facility which was available only in Mumbai, Kolkata, Chennai and New Delhi, was extended to Kanpur and Bangalore. In 1971, the Reserve Bank simplified the procedure for rediscounting the bills. To avoid delays and reduce the work involved in physically delivering and redelivering the bills to and from the bank, it was decided to dispense with the actual lodgement of bills, each of the face value of Rs. 2 lakhs and below. The minimum amount of a bill eligible for rediscount with the Bank was reduced to Rs. 1,000. The facility which was available only in Mumbai, Kolkata, Chennai and New Delhi, was extended to Kanpur and Bangalore. The New Bill Market Scheme has opened vistas of development of a full- fledged bill market in India. Certain criticisms are leveled against the working of the scheme. The unorganised money market has not been drawn within its fold. Most of the bills presented for rediscount relate to trade and not agriculture. The period of the bill admitted under the scheme is inadequate. The procedure followed for
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determining the eligibility of the bank for the purpose of rediscounting is far from satisfactory.
INTER BANK PARTICIPATION CERTIFICATE

The Governor of the Reserve Bank of India while dealing with credit policy measures in October 1988, had informed the bank Chiefs about a proposal to authorise banks to fund their short-term needs from within the system through Issuance of Inter-Bank Participations. This announcement by the RBI was in line with the recommendations made by the Working Group on the Money Market. Inter-Bank Participation Certificate provides them an additional instrument for even out short-term liquidity within the perimeter of the banking system, particularly at times when there are imbalances affecting the maturity mix of assets in bankers books. Since then the regular guidelines applicable to Inter-Bank Participations have been brought out by the RBI, the salient features there of may be briefly set out as given hereafter: The objective is to provide a certain element of liquidity to the portfolio of banks particularly in the credit segment as the banks having long books may be put to the necessity of finding temporary support of funds to tide over, situations arising from lags in the funds flow of the borrowers The scheme is confined to scheduled commercial banks only and the period of participation is restricted to minimum 91 days and maximum 180 days. Participations permitted are of two types namely with and without risk to the lender. The without risk type of participation is confined to a tenure of 90 days only. Originally a ceiling interest rate of 12.5 per cent per annum was prescribed for the lent funds under without risk participation and this was removed later on along with removal of ceilings of inter-bank call rate and the interest rate for rediscounting of bills issue. The distinction between with and without risk sharing arrangements in so far as the borrower bank is concerned, is that under with risk participation the issuing bank will reduce the at of the participation from the advances outstanding while the participating bank will show the participation as part of its advances whereas under the without risk sharing arrangement the issuing
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bank will show the participation as a borrowing while the participating bank will show it as advances to banks. In the latter case, the participation is treated as part of the net demand and time liabilities and net bank balances for purposes of statutory reserve requirements INTER BANK PARTICIPATION CERTIFICATE- Advantages The scheme benefits the issuing and participating banks to the extent that it provides access to funds against advances comparatively with les cumbersome procedure than through regular consortium tie-up. It also facilitates banks having surplus funds on their hands to build up and earn more on their assets over a certain period than with the earlier time consuming and procedurally complicated tie-ups with other banks. At the same time, those banks who are in need of funds can take advantage of the market if they have an over lent position for a short while. INTER BANK PARTICIPATION CERTIFICATE- Suggestions
The scheme may be enlarged so as to admit term lending Financial Institutions and Organisations like LIC, UTI and GIC as participants. In that case, the market may turn out to be more broadbased and competitive. The scheme may incorporate provisions for redemption earlier than due date It may be stipulated that the rate of interest on lending to the issuing bank should not exceed 0.5 per cent the interest rate at which the issuing bank has lent to its borrower. INTER BANK PARTICIPATION CERTIFICATE A second tier transferability may be permitted to create more appeal for the scheme. There can be also a provision to extend the tenure of participation beyond the present permitted time limits by another 30 days if the lender and borrower banks so agree. Structure of Indian Money Market Features or Deficiencies of Indian Money Market Features or Deficiencies of Indian Money Market
Existence of Unorganised Sector Absence of Intergration Diversity in Money Rates of Interest

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________ 27
Seasonal Stringency of Funds Absence of Bill Market

Features or Deficiencies of Indian Money Market
Limited instruments Limited Secondary Market Limited Participants

Recent Developments Intergration of Unorganised Sector with the Organised Sector Widening of Call Money Market Introduction of Innovative Instruments Offering of Market Rates of Interest Promotion of Bill Culture Recent Developments Entry of Money Market Mutual Funds Setting up of Credit Rating Agencies Adoption of suitable Monetary Policy Establishment of DFHI Setting up OF STCI
Chapter -2
Housing Finance
Housing finance being one of the safest lending avenues has also
contributed to the emergence of new players in the market. The unique place that a house has in an individual's life plus the high proportion of the customer's own money in the house provides considerable comfort for home loan companies. Moreover, people are increasingly taking to credit because of rising annual incomes and the series of tax sops that have become an annual ritual in the Union Budget.
Housing Finance Reasons for the popularity of Housing Finance

Availability of surplus cash by Banks.
28

Growth of Indian Stock Markets Greater Risks of Industrial Loans Entry of Foreign Players with innovative retail financial products has
compelled the Indian players foray into the field
Housing Finance Reasons for the popularity of Housing Finance

Competition in the Sector Increase in the middle income group Change in attitude from save and buy to buy and repay Low Cost construction techniques. Reduction in interest rates {18% to 10%} Extension of loan period {7yrs to 30 yrs} Government giving Tax relief for housing loans Repealing of Land Ceiling Act in 1999 to provide houses to weak and low income groups
RBI Measures to make housing loans popular

Bringing housing loans under priority sector advances Reducing the risk weight age from 1000% to 50 % for loans granted for
acquiring residential houses. De-regulating the interest rates giving much freedom to lending institutions to price their housing loan products according to their discretion Diversification of risk Evaluation of SLR and CRR rates
Risks in Housing Finance

Large Investment Long Term Advance High Inflation Rate High Stamp Duty Defective Title High Delinquency Rate Severe competition

Housing Loan for Purchase of Homes. House Construction Loan. Home Extension Loan. Home Improvement Loan Flexible Repayment Plan
Housing Financial Products
29

Flexible Loan Installment Plan Home Transfer of conversion Loan. Home Furnishing Loan Housing Repayment or Refinance Loan Housing Loan Transfer Plan Bridge Loan For Housing
Housing Financial Products
National Housing Bank Commercial Banks Co-operative Banks Housing and Urban Development Corporation Ltd. (HUDCO). Housing Development Finance Corporation (HDFC). Insurance Companies Private Finance Companies
Housing Finance Institutions
National Housing Bank

The National Housing Bank (NHB) was established on
PROFILE OF THE NATIONAL HOUSING BANK

9th July 1988 under an Act of the Parliament viz. the National Housing Bank Act, 1987 to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions.
Functions of National Housing Bank

Issue directions to housing finance institutions to ensure their growth on
sound lines
Make loans and advances and render any other form of financial
assistance to scheduled banks and housing finance institutions or to any authority established by or under any Central, State or Provincial Act and engaged in slum improvement and Formulate schemes for the purpose of Mobilisation of resources and extension of credit for housing
Objectives

To promote a sound, healthy, viable and cost effective housing finance

system to cater to all segments of the population and to integrate the housing finance system with the overall financial system. To promote a network of dedicated housing finance institutions to adequately serve various regions and different income groups. To augment resources for the sector and channelise them for housing. To make housing credit more affordable. To regulate the activities of housing finance companies based on regulatory and supervisory authority derived under the Act .To encourage augmentation of supply of buildable land and also building materials for housing and to upgrade the housing stock in the country. .To encourage public agencies to emerge as facilitators and suppliers of serviced land, for housing.
Resources of National Housing Bank

The Bank is authorized to raise funds by : The issue of Bonds and Debentures. Borrowings from the Central Government and other institutions approved by the Central Government . Acceptance of long-term deposits Short-term accommodation from the RBI Borrowings in foreign currencies from Banks or financial institutions in India or abroad

Housing and Urban Development Corporation Ltd. (HUDCO).

Housing and Urban Development Corporation Ltd. (HUDCO).
The Housing and Urban Development Corporation Ltd. (HUDCO) was incorporated on April 25, 1970 under the Companies Act 1956, as a fully owned enterprise of the Government of India. HUDCO focus on the social aspect of housing and utility infrastructure provision. Preferential allocation of resources to the socially disadvantaged.

31
Housing and Urban Development Corporation Ltd. (HUDCO)Objectives

To provide long term finance for construction of houses for residential
purposes or finance or undertake housing and urban development programmes in the country. To finance or undertake, wholly or partly, the setting up of new or satellite town. To subscribe to the debentures and bonds to be issued by the State Housing (and or Urban Development) Boards, Improvement Trusts, Development Authorities etc., specifically for the purpose of financing housing and urban development programmes. To finance or undertake the setting up of industrial enterprises of building material.
Housing Development Finance Corporation (HDFC). Background

HDFC was incorporated in 1977 with the primary
objective of meeting a social need that of promoting home ownership by providing long-term finance to households for their housing needs. HDFC was promoted with an initial share capital of Rs. 100 million.
Business Objectives

The primary objective of HDFC is to enhance residential housing stock in the country through the provision of housing finance in a systematic and professional manner, and to promote home ownership. Another objective is to increase the flow of resources to the housing sector by integrating the housing finance sector with the overall domestic financial markets..
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Other Companies Co-Promoted by HDFC

HDFC Trustee Company Ltd. GRUH Finance Ltd. HDFC Developers Ltd. HDFC Property Ventures Ltd. HDFC Ventures Trustee Company Ltd. HDFC Investments Ltd. HDFC Holdings Ltd. Credit Information Bureau (India) Ltd
Commercial Banks and Housing Finance

Reasons for the Popularity of Housing Finance by Banks

Safety Advances / Refinance Facility Asset-Liability Management (ALB) Priority Sector Advance Low Default / Reduction in Risk weight age Establishment of Asset Reconstruction Company (ARC) Passing of SRESI Act { Securitisation & Reconstruction of Financial Assets & Enforcement of Security Interest Act} Mortgaged Credit Guarantee Scheme
33

Cooperative housing Societies The State level Apex Co-operative Housing Finance Society {ACHFS} LIC- LIC housing Finance Ltd in 1989 The General Insurance Corporation GIC housing Finance Ltd
Housing Finance and Cooperative Banks/ Insurance Companies

Birla Home Finance Ltd {BHFL} Sundaram Home Finance Ltd {SHFL} Global Housing Finance Corporation {GHFCL} Dewan Housing Finance Corporation {DHFCL} Maharishi Housing Finance Corporation {MHFCL} Hometrust Housing Finance Corporation {HHFCL}
Private Housing Finance Companies
Leasing
Leasing is an arrangement between 2 parties, the leasing company or lessor and the user or lessee, whereby the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent.
Leasing
The rentals are predetermined and payable at fixed intervals of time, according to the mutual convenience of both the parties. However , the lessor remains the owner of the equipment over the primary period Lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right
to use the asset usually for an agreed period of time in return for the payment of rent -James C. Van Horne
Leasing as a Source of Finance

Leasing companies finance of Modernisation of Business Balancing Equipment Cars, Scooters and other vehicles and durables Items entitled to 100% or 50% depreciation Assets which are not being financed by banks / institutions
Step Involved in Leasing Transaction

The lessee has to decide the asset required and select the supplier. Lessee has to decide about the design specifications, the price warranties, terms of delivery, servicing etc The lessee, then enters into a lease agreement with the lessor
The Basic lease period during which the lease is irrecoverable The timing and amount of periodical rental payments during the lease period Details of any option to renew the lease or to purchase the asset at the end of the period Details regarding payment of cost of maintenance and repairs, taxes, insurance and other expenses
After the lease agreement is signed the lessor contacts the manufacturer and requests him to supply the asset to the lessee. The lessor makes payment to the manufacturer after the asset has been delivered and accepted by the lessee
Types of Lease
Financial Lease Operating Lease
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Leverage Lease Sale and Lease Back Cross Border Lease Installment Buying , Hire Purchase and leasing
What is financial lease?

Financial Lease is a means of financing capital equipments. It is a contract between the Bank (Lessor) and the Customer (Lessee) for the hire of a specific asset, selected from a manufacturer / Supplier of lessee's choice and to suit the lessee's requirements. The lessee has possession of the asset and uses the same on payment of specified rentals and other usual charges / fees, while the lessor retains ownership of the asset. All the risks (major or minor) and rewards of ownership are normally transferred to the lessee and the obligations are noncancellable. The lessee is to bear the costs of insurance, maintenance and other related costs and expenses for the leased equipment
Under this could also be with purchase option, where at the end of the predetermined period, the lessee has the option to buy the equipment at a predetermined value or at a nominal value or at fair market price. The financial lease may also contain a noncancellable clause which means that the lessor transfers the title to the lessee at the end of the lease period
Operating Lease/Service Lease

"operating" lease mean the it is the lessor who operates the leased asset? An operating lease is a lease whose term is short compared to the useful life of the asset or piece of equipment (an airliner, a ship etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease. Operating leases do not put the lessee in the position of a virtual owner: in full service rentals, the lessee is merely using the asset.
36
The lease is either fully cancellable or partly non-cancellable and partly cancellable, meaning the lessee can return the asset and not pay the whole of the lessor's investment. Operating leases may not allow the asset to be virtually exhausted by the same lessee: a rental transaction, for example, allows an asset to be used by a series of users.
The lease is terminable by giving stipulated notice as per the agreement Lease rentals will be higher The risk of obsolescence is enforced on the lessor who will also bear the cost of maintenance and other relevant expenditure
Leverage Lease
A lease arrangement under which the lessor borrows a large proportion of the funds needed to purchase the asset. A long-term lease in which a major part of the purchase price of the to-be-leased asset is financed by a third party. Thus, the lessor uses a combination of its own funds and borrowed money in order to purchase the asset that is then leased to another party. Here 3 parties are involved Lessee, the Lessor and the Lender The Lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment. The balance is provided by a person or a group in the form of loan to the Lessor The loan is generally secured by mortgage of the asset besides assignment of the leased rental payments
Here the lessor is entitled to 100% allowance for depreciation plus the investment allowance if he make a investment of 20% to 25% Interest expenses related to his borrowings are also deductible Leveraged Lease- Rail Road, Coal Mining, Electricity generating plants, pipelines etc
37
Sale and leaseback

Sale and leaseback is an arrangement in which one party sells a property to a buyer and the buyer immediately leases the property back to the seller. The firm receives the sale price in cash and gets the right to use the asset during the lease period The firm makes periodical rental payments to the lessor The title to the asset vests with the lessor Sometimes the lease agreement allows the lease to repurchase the property at the termination of lease
sale/leaseback or sale and leaseback, it is a transaction wherein the owner of a property sells that property and then leases it back from the buyer. The purpose of the leaseback is to free up the original owner's capital while allowing the owner to retain possession and use of the property. The type of property involved can be anything from residential or commercial real estate to equipment or vehicles. A leaseback can be beneficial for the buyer and seller alike. The seller attains a lump sum of cash quickly and the buyer acquires a lower than market value purchase price, along with a long-term lease at a premium rate. The lease amount provides periodic income and may even be enough to pay the buyer's mortgage, if he or she borrowed money to obtain the property. A leaseback can be a great investment tool, one that yields a high return. As with any investment, however, there are associated risks.
Cross Border Lease/Transnational Leasing

It relates to a lease transaction between a lessor and lessee domiciled in different countries and includes exports leasing. Lessor may be of one country and the lessee may be of another country. Cross-border lease transactions are generally restricted to aircraft leasing, where this is the most popular means of financing, marine equipment and railroad rolling stock to some extent
38
FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K Cross-border leases have been traditionally used to maximize tax benefits taking advantage of international disparity of laws. Tax legislation in most developed countries becoming mature enough to ignore the form of a financial lease, cross-border leasing only helps to shift the jurisdiction of a lease to a country which honours the legal form of a transaction. Cross-border operating leases should have been the best way of technology transfers. The importer taking risk in a new technology would like to keep open the option to walk-out, for which a cancellable lease agreement would be ideal.
Hire Purchase is an agreement under which the owner delivers the goods to the buyer who agrees to make periodical payment as hire charges The possession of goods vests with the hirer but the ownership remains with the seller Installment Buying, the property passes on to the buyer immediately as soon as the first installment is made The balance amount is payable in installments Under the contract of installment the buyer has no right to return the goods In case of default, the seller has the right to file a suit in the court of law to recover his dues
Hire Purchase
Installment Buying
Leasing
Leasing, the entire lease rentals represents a hire charge and it is treated as expense and hence tax deductible.
Advantages of lease
Permit Alternative use of funds Faster and cheaper credit Flexibility Facilitates additional borrowings Protection against obsolescence
39
No restrictive covenants Hundred percent financing
Disadvantages of lease
Not suitable mode of project finance Certain tax benefits/ incentives such as subsidy may not be available on leased equipment Cost of financing is generally higher than that of debt financing
Hire Purchase Finance Company means any company which is carrying on as its principal business the hire purchase transactions or the financing such transactions. Hire Purchase is a method of selling goods In a hire purchase transactions the goods are let out on hire by a finance company (creditor) to the hire purchase customer (hirer). The buyer is required to pay an agreed amount in periodical installments during a given period. The ownership of the property remains with the creditor and passes on to hirer on the payment of last installment
HIRE PURCHASE FINANCE COMPANY
FEATURES OF HIRE PURCHASE AGREEMENT

The buyer takes possession of goods immediately and agrees to pay the total hire purchase price in installments. Each installment is treated as hire charge
40
The ownership of the goods passes from the buyer to seller on the payment of the last installment In case the buyer makes any default in the payment of any installment the seller has right to reposes the goods from the buyer and forfeit the amount already received treating it as hire charge. The hirer has the right to terminate the agreement at any time before the property passes
LEGAL POSITION OF HIRE PURCHASE AGREEMENT

The Hire Purchase Act, 1972 defines a hire purchase agreement as an agreement under which goods are let hire and under which the hirer has an option to purchase them in accordance with the terms of agreement under which :
Payment is to made in installments over a specified period. The possession is delivered to the purchaser at the time of entering into a contract. The property in goods passes to the purchaser on payment of the last installment Each installment is treated as hire charge so that if default is made in payment of any one installment, the seller is entitled to take away the goods The hirer/Purchaser is free to return the goods without being required to pay any further installments falling due after the return
Hire Purchase Agreement- Particulars

The description of goods in a manner sufficient to identify them The hire purchase price of the goods. The date of commencement of the agreement The numbers of installments /Amount and due date.
Hire Purchase is different from Credit Sale and Installment Sale

In Credit Sale, the title in the property is transferred to the purchaser simultaneously. The seller remains the owner until the last installment is paid Installment Sale the ownership is transferred immediately. Here the seller only right to sue the buyer on non-payment of rent but he cannot dispose the property
An investment company is a company whose main business is holding securities of other companies purely for investment purposes. The investment company invests money on behalf of its shareholders who in turn share in the profits and losses. Investment Company means any company, which is carrying on as its principal business the acquisition of securities.
Investment Company
Generally, an "investment company" is a company (corporation, business trust, partnership, or limited liability company) that issues securities and is primarily engaged in the business of investing in securities. An investment company invests the money it receives from investors on a collective basis, and each investor shares in the profits and losses in proportion to the investors interest in the investment company. The performance of the investment company will be based on (but it wont be identical to) the performance of the securities and other assets that the investment company owns.
42
The principal aim of an investment company is to protect the small investors by collecting their small savings and investing them on diversified securities so that the risk may be spread Investment Counsel Company engages itself purely the business of giving investment advice alone Holding Company which essentially buys shares and stocks mainly for the purpose of exercising control over another institution
Merchant Banks
Merchant banks, now so called, are in fact the original "banks". These were invented in the Middle Ages by Italian grain merchants.
Merchant Banks and Commercial Banks
Services of Merchant Banks

Corporate Counselling. Project Counselling Loan Syndication Advisory Service relating to Mergers & Takeovers Off Shore Finance Non- Resident Investment Issue Management
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Services of Merchant Banks/ Issue Management- Post- Issue Management

Underwriting of Public Issue Managers, Consultants or Advisers to the issue Portfolio Management
The Bank is registered with SEBI as Category I Merchant Banker for providing all the major Merchant Banking services.
Issue Management Services to act as Book Running Lead Manager/Lead Manager for the IPOs/FPOs/Right issues/Debt issues Project appraisal Corporate Advisory Services Underwriting of equity issues Banker to the Issue/Paying Banker Refund Banker Monitoring Agency Debenture Trustee Marketing of the issue through a strong network of QIBs/HNIEs/Corporates and Retail investor.
VENTURE CAPITAL
VENTURE CAPITAL
FEATURES OF VENTURE CAPITAL
44

Venture Capital is usually in the form of an equity participation. It may also take the form of convertible debt or long term loan Investment is made only in high risk but high growth potential projects. Venture Capital is available only for commercialization of new ideas or new technologies and not for enterprises which are engaged in trading, booking , financial services, agency, liaison work or research and development Venture Capitalist joins the entrepreneur as a copromoter in projects and shares the risks and rewards of the enterprise Once the Venture Capital has reached the full potential the venture capitalist disinvests his holdings either to the promoters or in the market. The basic objective of investment is not profit but capital appreciation at the time of disinvestment Venture Capital is not just injection of money but also an input needed to set up the firm, design its marketing strategy and organize and mange it. There is continuous involvement in business after making an investment by the Venture Capitalist.
SCOPE OF VENTURE CAPITAL

Development of an Idea- Seed Finance Implementation Stage Start up Finance Fledging Stage Additional Finance Establishment Stage Establishment Finance.
Importance of Venture Capital Advantages to Investing Public.

to Promoters. General Advantages Factoring

The word Factor has been derived from the Latin word Facere which means to make or to do
Advantages
Factoring
N Factor
is an agent, as a banking or insurance company, engaged in financing the operations of certain of certain companies or in financing wholesale or retail trade sales, through the purchase of account receivables. - Webster Dictionary
Factoring
N
Factoring is a method of financing whereby a company sells its trade debts at a discount to financial institution. Factoring is a continuous arrangement between a financial institution , (namely the factor) and a company (namely the client) which sells goods and services to trade customers on credit
N As
per this arrangement , the factor purchases the clients trade debts including accounts receivebles either with or without recourse to the client and thus exercises control over the credit extended to the customers and administers the sales ledger of his client
Factoring
N
Factoring is a fund-based financial product.

46

N N N N
It involves three parties: the seller of goods the buyer of goods the factoring agent.
MODUS OPERANDI OF FACTORING

should be a factoring arrangement (Invoice purchase arrangement) between the client (which sells goods and services to trade customers on credit) and the factor, which is the financing organisation N Whenever the client sells goods to trade customers on credit , he prepares invoices in the usual way
N The N There
goods are sent to the buyers without raising a bill of exchange but accompanied by an invoice. N The debt due by the purchaser to the client is assigned to the factor by advising the trade customers, to pay the amount due to the client to the factor
N The
client hands over the invoices to the factor under cover of a schedule of offer along with the copies of invoices and receipted delivery challans N The factor makes an immediate payment upto 80% of the assigned invoices and balance 20% will be paid on realization of the debt
TERMS & CONDITIONS OF
FACTORING
47
The existence of an agreement between the factor and the client is central to the function of factoring
N
of debt in favour of the factor N Selling limits for the client N Conditions within which the factor will have recourse to the client in case of non-payment by the trade customer. N Circumstances under which the factor will have recourse in case of non-payment N Details regarding the payment to the factor for his services, say for instance as a certain percentage on turnover. N Interest to be allowed to the factor on the account where credit has been sanctioned to the supplier N Limit of any overdraft facility and rate of interest to be charged by the factor
N Assignment
FUNCTIONS OF FACTORING NPurchase and Collection of Debts NSales Ledger Management NCredit Investigation and Undertaking of Credit Risk NProvision of Finance against Debts NRendering Consultancy Services
Characteristics of Factoring
N N N
Usually the period for factoring is 90 to 150 days. Some factoring companies allow even more than 150 days. Factoring is considered to be a costly source of finance compared to other sources of short term borrowings. Factoring receivables is an ideal financial solution for new and emerging firms without strong financials. This is because credit worthiness is evaluated based on the financial strength of the customer (debtor). Hence these
48
companies can leverage on the financial strength of their customers. N Bad debts will not be considered for factoring. N Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement. N For delayed payments beyond the approved credit period, penal charge of around 1-2% per month over and above the normal cost is charged (it varies like 1% for the first month and 2% afterwards).
N N
Bad debts will not be considered for factoring. Credit rating is not mandatory. But the factoring companies usually carry out credit risk analysis before entering into the agreement. Indian firms offer factoring for invoices as low as 1000Rs
TYPES OF FACTORING
FULL SERVICE FACTORING or WITHOUT RECOURSE FACTORING WITH RECOURSE FACTORING MATURITY FACTORING BULK FACTORING INVOICE FACTORING AGENCY FACTORING INTERNATIONAL FACTORING SUPPLIERS GUARANTEE FACTORING LIMITED FACTORING BUYER BASED FACTORING SELLER BASED FACTORING
FULL SERVICE FACTORING OR WITHOUT RECOURSE FACTORING
49

N
Here a factor provides finance, administers the sales ledger, collects the debts at his risk and renders consultancy service. N If the debtors fail to repay the debts, the entire responsibility falls on the shoulders of the factor since he assumes the credit risk also. N He cannot pass this responsibility to his client and hence this type of Factoring is also called as WITHOUT RECOURSE FACTORING
WITH RECOURSE FACTORING

N Under
this type , the factor does not assume the credit
risk. N If the debtors do not repay their dues in time & if their debts are outstanding beyond a fixed period, say 60 to 90 Days fro the due date are automatically assigned back to the client N The client has to take up the work of collection of overdue account by himself. If the client wants the factor to go with the collection work of overdue accounts the client has to pay extra charges called REFACTORING CHARGES
MATURITY FACTORING
the factor does not provide immediate cash payment to the client at the time of assignment of debts. N He undertakes to pay cash as & when collections are made fro the debtors. The entire amount collected less factoring fees is paid to the client immediately. Hence, it is also called Collection Factoring N Here no financing is involved. But all other services are available
N Here,
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BULK FACTORING
the factor provides finance after disclosing the fact of assignment of debts to the debtors concerned. This type of factoring is resorted to when the factor is not fully satisfied with the financial condition of the client. N The work relating to sales ledger administration, Credit Control, Collection work etc., has to be done by the client himself
N Here
Since the notification has been made, the factor simply collects the debts on behalf of the client. This is otherwise called as Disclosed Factoring or Notified Factoring
INVOICE FACTORING
N Here
, the factor simply provides finance against invoices without undertaking any other functions N All works connected with sales administration, collection of dues etc. Have to be done by the client himself.
N The
debtors are not at all notified & hence they are not aware of the financing arrangement. This type of factoring is confidential in nature and hence it is called as Disclosed Factoring or Notified Factoring .
AGENCY FACTORING

N N N
Here, the factor & the client share the work between themselves as follows : The client has to look after the sales ledger administration & collection work The factor has to provide finance & assume the credit risk
INTERNATIONAL FACTORING
the services of a factor in a domestic business are simply extended to international business. N Factoring is done purely on the basis of the invoice prepared by the exporter. Thus, the exporter is able to get immediate cash to the extent of 80% of the export invoice under international factoring N International Factoring is facilitated with the help of export & import factors
N Here
SUPPLIERS GUARANTEE FACTORING

N It
is suitable for business establishment which sell goods through middlemen. N In such cases, the factor guarantees the supplier of the goods against invoices raised by the supplier upon another supplier. The bills are assigned in favour of the factor whom guarantees payment of those bills. This enables the supplier to earn profits without much financial involvement
LIMITED FACTORING
52
N Here,
the factor does not take up all the invoices of a client. He discounts only selected invoices on merit basis & converts credit bills into cash in respect of those bills only
BUYER BASED FACTORING

most case, the factor is acting as an agent of the seller. But under this type, the buyer approaches a factor to discount his bills. Thus the initiative for factoring comes from the buyers end. N The approved buyers of a company approach a factor for discounting their bills to the company in question. N In such a case, the claims on such buyers are paid by discounting the bills without recourse to the seller & the seller also gets ready cash. N This facility is available only reputed credit worthy buyers & hence it is called Selected BUYER BASED FACTORING
N In
SELLER BASED FACTORING

Here, the seller, instead of discounting his bills, sells all his accounts receivables to the factor, after invoicing the customers. N The sellers job is over as soon as he prepares the invoices. N Thereafter, all the documents connected with the sale are handle over to the factor who takes over the remaining function. N This facility is extended to reputed & credit worthy sellers & hence it is also called SELLER BASED FACTORING
N
Factoring Vs Discounting
covers the entire trade debts of a client. Whereas discounting covers only those trade debts which are backed by accounts receivables N Under Factoring, the factor purchases the trade debt & thus becomes a holder for value. Under discounting the financier acts simply as an agent of his customer & he does not become the owner N The Factors may extend credit without any recourse to the client in the event of non-payment by customers. But, discounting is always made with recourse to the client N Account receivables under discount are subject to rediscounting whereas it is not possible under Factoring
N Factoring
N Factoring
involves purchase and collection of debts, management of sales ledger, assumption of credit risk, provision of finance & rendering of consultancy services N But under undisclosed Factoring everything is kept highly confidental N Bill financing through discounting requires registration of charges with the registrar of Companies. In fact , Factoring does not require such registration. N Discounting is always a kind of in-Balance sheet financing that is both the amount of receivables & bank credit are shown in the balance sheet itself due to its with recourse nature But, Factoring is always Off-Balance Sheet Financing
Benefits of Factoring
N Financial
Service N Collection Service N Credit Risk Service

54
FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K N Provision
of Expertised Sales Ledger Management Service N Consultancy Service
Benefits of Factoring
N Economy
in Servicing N Off Balance Sheet Financing N Trade Benefits N Miscellaneous Service
Factoring companies in India

Can bank Factors Limited: N SBI Factors and Commercial Services Pvt. Ltd: N The Hong Kong and Shanghai Banking Corporation Ltd N Foremost Factors Limited: N Global Trade Finance Limited: N Export Credit Guarantee Corporation of India Ltd: N Citibank NA, India N Small Industries Development Bank of India (SIDBI)
N
International Financial Markets

CHAPTER 5
PART I. INTRODUCTION
Foreign Exchange Market- Features

Market where foreign currencies are traded Round the clock market Global market Large volume of transactions
Foreign Exchange
Foreign Exchange
Foreign money, including paper money and bank deposits that are denominated in foreign currency A global market in which people trade one currency for another
Foreign Exchange Market Exchange Rate
The price of one countrys currency in terms of another countrys currency
Individuals: tourists, migrants Firms: importers and exporters Banks: short position, long position, square position Governments/ monetary authorities: market intervention International agencies: lending Two tier market:
First tier: ultimate customer and banker Second tier: between banks
Participants
Classification of participants
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Non-banking entitities: business transactions and hedging Banks: foreign exchange dealers Arbitrageurs: profit seeking from variations in rates in different markets Speculators: profit seeking from movements in exchange rates
Nature of Transactions
Spot Transactions : Here delivery or Exchange of Currencies take place on the spot immediately. However, in actual practice, the settlement takes place within 2days of the transaction. Forward Transactions- there is an agreement between 2 parties requiring the delivery of a specified amount of foreign currency at some specified future date by one of the parties against payment in domestic currency by the other party at the price agreed upon in the contract Swap Transactions Swap operations may be carried out by commercial banks to adjust their fund position. Swap refers to the simultaneous sale of spot currency for the forward purchase of the same currency or the purchase of spot for the forward sale of the same currency Arbitrage Transactions refers to the simultaneous buying and selling of foreign currencies with an intention of making profits from the differences between the exchange rates prevailing at the same time in different markets Option Transactions- Here buyer as a option to buy or sell a specified quantity of currency at a preSunitha .B.K ---- Faculty,SBMJC-CMS __________________________________ 57
determined price on or before a specified date in future. The option which gives the option holder a right to but foreign exchange at a predetermined price is called call option and the option to sell is called put option. This $3.21 trillion in global foreign exchange market "traditional" turnover was broken down as follows:

$1,005 billion in spot transactions $362 billion in outright forwards $1,714 billion in forex swaps $129 billion estimated gaps in reporting
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Advantages of Foreign Trade

Promotion of Foreign Trade Provision of Credit Coverage of Exports Risks Maintenance of uniform exchange rates Promotion of Foreign Travel Adjustment of Balance of Payments Position Easing of Liquidity problems of Banks
Rate of Exchange
The price of one countrys currency in terms of another countrys currency
Exchange Rate
Kinds of Exchange Rate

Spot Rate/ Floating Rate Forward Rate/ Multiple Rate Fixed Rate/ Flexible Rate
Spot Rate/ Forward Rate
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The term Spot Exchange rate refers to the rate being quoted for international transactions which require the immediate delivery of currencies If the rate quoted requires the delivery of currencies at a future date as per the agreement , it is a case of Forward Rate
Fixed / Flexible Rate

If the rate of exchange of a currency is fixed permanently in terms of gold or another currency, it is called a Fixed Rate Flexible Rate - Under this system , the rate is not fixed permanently. A specified rate is fixed for a short period and thereafter, it is subject to revision from timer to time depending upon the need of the country
Floating Rate
A Floating Rate is one which is fixed on the basis of demand and supply of currencies in the foreign exchange market. It fluctuates from time to time according to market conditions
Multiple Rate
Under the Multiple Exchange rate system, a country adopts different rates for different countries or different rates for exports and imports Eg : Two tier Exchange rate system Under Gold Standard
Determination of Exchange Rate
Under Paper Currency Standard
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Restrictions that are imposed by a nation on the free exchange and convertibility of its own currency
Exchange Control
Foreign exchange controls

Various forms of controls imposed by a government on the purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by nonresidents. The official control of the level of a country's foreign exchange transactions so as to regulate its holding of foreign currency. Limits are placed by a government on the purchase and sale of foreign currency.
To conserve Foreign Exchange To Correct Adverse Balance of Payments To Maintain Exchange Stability and control speculation To Prevent imports of non-essential items To regulate foreign companies and foreign dealings To freeze investments abroad and to prevent repatriation of funds To over-value or under-value the currency To control speculation
Objectives of Exchange Control
Methods of Exchange Control

Direct / Indirect Methods Unilateral / Bilateral or Multilateral Methods
Direct / Indirect Methods

Under Direct Method, the controlling authority directly interferes and regulates the foreign exchange.
Under Indirect Method, certain steps may be taken for reasons other than exchange control For e.g.: Exports Subsidies/ Import Restrictions
Unilateral Exchange Control are those methods which are adopted by a country unilaterally Some of these methods are as followsIntervention Restriction Regulation of Bank Rate Policy Regulation of Export and Import Multiple Exchange rates system Tariffs and Quotes
Unilateral Exchange Control
Bilateral or Multilateral Methods

Multilateral Methods are those methods which could be adopted only with an understanding or agreement with other countries. Some of these methods include the followings Payments Agreements Clearing Agreements Standstill Agreements Compensation Agreements
Chapter -6
What is a Mutual Fund?

A mutual fund is a pool of money managed by a
professional money manager.

The objective and the risk level are outlined in a
document called a prospectus. The prospectus
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provides detailed guidelines for the types of investments the manager can purchase. .
What is a Mutual Fund?

Mutual fund is a mechanism for pooling the resources
by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document.
Concept
A Mutual Fund is a trust that pools the savings of a
number of investors who share a common financial goal.

The money thus collected is then invested in capital
market instruments such as shares, debentures and other securities.
What are the different types of mutual fund schemes?

Schemes according to Maturity Period: A mutual fund scheme can be classified into open-ended scheme or closeended scheme depending on its maturity period.
Open-ended Fund/ Scheme

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective:

A scheme can also be classified as growth scheme, income scheme, or balanced scheme considering its investment objective.
Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows: Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.
Growth / Equity Oriented Scheme

The investors must indicate the option in the application
form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time. Income / Debt Oriented Scheme
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The aim of income funds is to provide regular and steady
income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. Income / Debt Oriented Scheme
These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
Balanced Fund
The aim of balanced funds is to provide both growth
and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents.
These are appropriate for investors looking for moderate
growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds. Money Market or Liquid Fund
These funds are also income funds and their aim is to
provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money, government securities, etc.. Money Market or Liquid Fund
Returns on these schemes fluctuate much less
compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods Gilt Fund
These funds invest exclusively in government
securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes. Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc . These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as "tracking error" in technical terms.
Index Funds
Necessary disclosures in this regard are made in the offer
document of the mutual fund scheme. There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.
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What are sector specific funds/schemes

These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time. They may also seek advice of an expert.
What are Tax Saving Schemes?

These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth oriented and invest pre-dominantly in equities. Their growth opportunities and risks associated are like any equity-oriented scheme.
What are the fees?

Mutual funds can either be purchased through a:
1 Front-end load: An investor pays a fee upfront
(usually, a percentage of the total investment).

Back-end load: An investor doesn't pay an initial fee, but they are locked into the fund family for a predetermined period of time (outlined in the prospectus). If the investor holds the fund to "maturity"of the "contract," they will never pay a fee. But, if they choose to redeem early, they will have to pay a redemption fee, which decreases on a percentage basis every year the fund is held.
No-load: An investor pays no fee upfront, or in the future.

* All mutual funds are subject to management expense ratios
(MER). This is a fee charged by the fund company to cover the expenses for the management of the fund. It is accrued daily based on a percentage of the total value.
How is a mutual fund set up?

A mutual fund is set up in the form of a trust, which has
sponsor, trustees, asset management company (AMC) and custodian. The trust is established by a sponsor or more than
one sponsor who is like promoter of a company. The trustees of the mutual fund hold its property for the benefit of the unitholders.
Asset Management Company (AMC) approved by SEBI manages the funds by making investments in various types of securities. Custodian, who is registered with SEBI, holds the securities of various schemes of the fund in its custody. The trustees are vested with the general power of superintendence and direction over AMC. They monitor the performance and compliance of SEBI Regulations by the mutual fund.
Organisation of a Mutual Fund Advantages of Mutual Funds

Professional Management Diversification Convenient Administration Return Potential Low Costs Liquidity Transparency Flexibility Choice of schemes Tax benefits Well regulated
History of Mutual Fund

The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of the Government of India and Reserve Bank .
History of Mutual Fund

First Phase 1964-87 Second Phase 1987-1993 (Entry of Public Sector
Funds) Third Phase 1993-2003 (Entry of Private Sector Funds) Fourth Phase since February 2003
First Phase 1964-87

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K Unit Trust of India (UTI) was established on 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was de-linked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of RBI. The first scheme launched by UTI was Unit Scheme 1964.
Second Phase 1987-1993 (Entry of Public Sector Funds)

1987 marked the entry of non- UTI, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non- UTI Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87),
Second Phase 1987-1993 (Entry of Public Sector Funds)

Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December 1990.
Third Phase 1993-2003 (Entry of Private Sector Funds)

In 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except UTI were to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July 1993.
Third Phase 1993-2003 (Entry of Private Sector Funds) The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in 1996. The industry now functions under the SEBI (Mutual Fund) Regulations 1996. Third Phase 1993-2003 (Entry of Private Sector Funds)
The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. As at the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India with Rs.44,541 crores of assets under management was way ahead of other mutual funds. Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________ 68
Fourth Phase since February 2003

In February 2003, following the repeal of the Unit Trust of India Act 1963 UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs.29,835 crores as at the end of January 2003, representing broadly, the assets of US 64 scheme, assured return and certain other schemes. The second is the UTI Mutual Fund Ltd, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs.76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth.
Credit Cards
What are Credit Cards? Who Can be a credit card holder ?
$ The general criteria applied is a persons spending capacity & not merely his income or wealth. $ The other criteria is the worthiness of the client & his average monthly balance. Most of the banks have clear cut norms for giving credit cards
Who Can be a credit card holder ?

$ A person who earns a salary of Rs.60,000/ per annum is eligible for a card $ A unTra lai em niem vui khi duoc gan ben em, tra lai em loi yeu thuong em dem, tra lai em niem tin thang nam qua ta dap xay. Gio day chi la nhung ky niem buon... http://www.freewebtown.com/gaigoisaigon/ $
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Types of Credit Cards

Cards where purchases can be made in many locations
$ Bank Credit Cards
Card issued by financial institution Credit is issued by service provider (Wells Fargo Visa card) Balance paid-off at end of month or extended over period of time
$ Travel and Entertainment Credit Cards
Credit and card issued by service provider (Diners Club) Not accepted at as many locations as bank cards Entire balance must be repaid in 30 days
Types of Credit Cards

Cards where purchases are made in particular location
$ Retail Credit Cards
Credit and card issued by particular retailer (Old Navy, The Bon, Home Depot, Shell Oil) Balance paid-off at end of month or extended over period of time
Credit Rating
Definition
CRISIL Credit rating is an unbiased & independent opinion as to issuers capacity to meet its financial obligations. It does not constitute a recommendation to buy/sell or hold a particular security.
Credit Rating System

Credit Rating System consists of all of the methods, processes, controls and data collection and IT systems that support the assessment of credit risk, the assignment of internal risk ratings and the quantification of default and loss estimates.
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Features
Credit Rating is an assessment of the capacity of an issuer of debt security, by an independent agency. The ratings are expressed in a code number which can be easily comprehended even by the lay investors. In India it is done for a specific debt security & not for a company as a whole Credit Rating/ Debt rating is not a one time evaluation of credit risk. It is an on going appraisal A Credit Rating does not create a fiduciary relationship between the rating agency & the users of rating since there is no legal basis for such relationships.
Functions of Credit Ratings

Superior Information
It provides unbiased opinion Due to professional resources, a rating firm has greater ability to assess risks It has access to lot of information which may not be publicly available
Low Cost Information Basis for a Proper Risk- Return Trade Off Healthy Discipline on Corporate Borrowers Formulation of Public Policy Guidelines on Institutional Investment
Benefits of Credit Rating

Low Cost Information Quick Investment Decision Independent Investment Decision
Sources of Additional Certification Increase the Investors Population Forewarns Risks Encourages Financial Discipline Merchant Bankers Job Made Easy Foreign Collaborations Made Easy Benefits the Industry as a Whole Low Cost of Borrowing Rating as a Marketing Tool
Investors Protection
Credit Rating Information Services Limited (CRISIL)

Why CRISIL ?
CRISIL is Indias leading, independent research house providing an integrated view on the Indian Economy, Industries and Companies In-depth understanding of key issues and factors that affect the performance and profitability of a large number of Industries and companies Large team of research analysts which are fire-walled from the ratings team
Strong equity research skills at IREVNA (CRISILs subsidiary), recently voted as the best investment research outsourcing firm in the world by Investment Banks, Hedge Funds and Private equity firms Over 500 domestic and international clients depend on CRISIL research as a key input to their decision making process
CRISIL's comprehensive offerings include ratings for long-term instruments such as debentures/bonds and preference shares, Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________ 72
FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K structured obligations (including asset-backed securities) and fixed deposits; it also rates short-term instruments such as commercial paper programmes and short-term deposits. As part of bank loan ratings, CRISIL also rates credit facilities extended to borrowers by banks. In addition, CRISIL undertakes credit assessments of various entities including state governments. CRISIL also assigns financial strength ratings to insurance companies.
CRISIL Ratings
CRISIL Ratings is the only ratings agency in India to operate on the basis of sectoral specialisation. It reflects our sharpness of analysis, the responsiveness of the process and the large-scale dissemination of opinion. CRISIL Ratings plays a leading role in the development of the debt markets in India. The Rating Criteria & Product Development Centre, responsible for policy research, new product development and ratings' quality assurance, has developed new ratings methodologies for debt instruments and innovative structures across sectors. CRISIL Ratings provides technical know-how to clients worldwide. We have helped set up ratings agencies in Malaysia (RAM), Israel (MAALOT) and in the Caribbean.
CRISIL FundServices
CRISIL FundServices is India's leading provider of fund evaluation services and risk solutions to the mutual fund industry. The Centre for Economic Research The Centre for Economic Research is uniquely positioned to provide benchmarks and analyses for India's policy and business decision makers.
Credit Ratings
AAA - : Highest Safety AA - : High Safety A-: Adequate Safety BBB - : Moderate Safety BB - : Sub -moderate Safety B - : Inadequate Safety C - : Substantial Risk D - : Default Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________ 73
Investment Information and Credit Rating Agency of India (ICRA)

ICRA Limited (an Associate of Moody's Investors Service) was incorporated in 1991 as an independent and professional company. ICRA is a leading provider of investment information and credit rating services in India. ICRAs major shareholders include Moody's Investors Service and leading Indian financial institutions and banks. With the growth and globalisation of the Indian capital markets leading to an exponential surge in demand for professional credit risk analysis, ICRA has been proactive in widening its service offerings, executing assignments including credit ratings, equity gradings, specialised performance gradings and mandated studies spanning diverse industrial sectors.
In addition to being a leading credit rating agency with expertise in virtually every sector of the Indian economy, ICRA has broad-based its services for the corporate and financial sectors, both in India and overseas, and currently offers its services under the following banners:
Credit Analysis And Research Limited (CARE)


Credit Analysis & Research Ltd. (CARE Ratings) is a full service rating company that offers a wide range of rating and grading services across sectors. CARE has an unparallel depth of expertise. CARE Ratings methodologies are in line with the best international practices

CARE Ratings has completed over 3850 rating assignments having aggregate value of about Rs 8071 billion (as at December 2007), since its inception in April 1993. CARE is recognised by Securities and Exchange Board of India (Sebi), Government of India (GoI) and Reserve Bank of India (RBI) etc
Onida Individual Credit Rating Agency Ltd (ONICRA)

Onida Individual Credit Rating Agency Ltd (ONICRA) )
It is recognized and empanelled by the likes of NSIC (Government of India) for SSI assessment. The Indian Banks Association have accorded approval for the said Rating Model. It is the first company to launch commercial services and provide individual credit rating and reporting services to the Indian market. We have been delivering objective and reliable pre and post disbursement credit validation and information on credit takers and have been successfully doing the employee screening for wide gamut of requirements.
ONICRA provides Dynamic Customer-Focused solutions that bridges the gap between principals and
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their prospective / existing customers. We provide spectrum of services which include the services like Credit Rating, Associate Rating, Employee Screening, SSI/SME Rating, Customer Verification, Lifestyle Analysis and Royalty Retention.
Duff Phelps Credit Rating Pvt. Ltd. (DCR India)

The J.M.Financial & Allance Group in joint venture with Duffs & Phelps has now set-up DCR in India
International Credit Rating Agencies doing credit rating of India Standards & Poors JP Morgan Price Water House Morgan Stanley Merill Lynch
What is e-banking?
What is Internet Banking ?
This is an umbrella term for the process by which a customer may perform banking transactions electronically without visiting a brick-and-mortar institution.
Internet Banking
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e-banking is the use of electronic means to deliver banking services, mainly through the Internet. The term is also used to refer to ATMs, telephone banking, use of plastic money, mobile phone banking and electronic funds transfers.
Internet banking (or E-banking) means any user with a personal computer and a browser can get connected to his bank -s website to perform any of the virtual banking functions. In internet banking system the bank has a centralized database that is web-enabled. All the services that the bank has permitted on the internet are displayed in menu. Any service can be selected and further interaction is dictated by the nature of service. The traditional branch model of bank is now giving place to an alternative delivery channels with ATM network.
Once the branch offices of bank are interconnected through terrestrial or satellite links, there would be no physical identity for any branch. It would a borderless entity permitting anytime, anywhere and anyhow banking. The network which connects the various locations and gives connectivity to the central office within the organization is called intranet. These networks are limited to organizations for which they are set up. SWIFT is a live example of intranet application.
What are the forms of e-banking?

Common embodiments of e-banking include the following:
Mobile/SMS Banking Telephone Banking Electronic funds transfers Self Service (PC) Banking POS Banking (Credit and Debit cards) ATMs Interactive TV Branchless Banking Intranet
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Information Kiosks Basic Internet Banking E-commerce Banking Electronic Remittances Foreign Inward Remittance Payment Schemes (FIRPS) Real-time Gross Settlement
Internet Banks Products
Superiority over Cheque System

Speedy Collections Irrevocable Payments No Settlements Risks Easy Liquidity Management Reduction in Processing Cost provide online services
Constraints in e-banking
Computer illiteracy among majority of the population. Poor and/or lack of technological infrastructure. Lack of proper legislation governing e-transactions. Preference to paper money, as opposed to virtual cash in transactions.
FINANCIAL ADVISER
FINANCIAL ADVISER

A financial adviser is a professional who renders investment advice and financial planning services to individuals and businesses. Ideally, the financial
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adviser helps the client maximize their net worth while minimizing risk by using proper asset allocation.

Financial advisers help clients to choose the most suitable financial products and services, such as investments, savings, pensions, mortgages or insurance.
Financial advisers can work in one of three ways 'tied', 'multi-tied' or independent:
tied advisers usually work for banks, building societies or insurance companies, and only offer that companys financial products multi-tied advisers deal with a number of companies and sell products from only those companies independent financial advisers (IFAs) offer whole-of-market advice.
FINANCIAL ADVISER

Financial advisers use stocks, bonds, mutual funds and insurance products to meet the needs of their clients. Many financial advisers receive a commission payment for the various financial products that they broker, although "fee-based" planning is becoming increasingly popular in the industry.
A further distinction should be made between "fee-based", i.e., they charge fees and collect commissions, and "fee-only" advisers. Feeonly advisers receive 100% of their compensation directly from their clients and have no outside conflicts of interest created by commissions or referral fees paid by other product or service providers.
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K Chapter -4
SECURITIES AND EXCHANGE BOARD OF INDIA
SECURITIES AND EXCHANGE BOARD OF INDIA

Securities and Exchange Board of India (SEBI) was set up on April 12, 1988. To start with, SEBI was set up as a non-statutory body. It took almost four years for the government to bring about a separate legislation in the name of Securities arid Exchange Board of India Act, 1992 conferring statutory powers. The Act, charged to SEBI with comprehensive powers over practically all aspects of capital market operations.
Objectives
According to the preamble of the SEBI Act, the primary objective of the SEBI is to promote healthy and orderly growth of the securities market and secure investor protection. For this purpose, the SEBI monitors the activities of not only stock exchanges but also merchant bankers etc. The objectives of SEBI are as follows: 1. To protect the interest of investors so that there is a steady flow of savings into the capital market. 2. To regulate the securities market and ensure fair practices by the issuers of securities so that they can raise resources at minimum cost. 3. To promote efficient services by brokers, merchant bankers and other intermediaries so that they become competitive and professional.
Functions
Section 11 of the SEBI Act specifies the functions as follows: 1. Regulatory Functions: (a) Regulation of stock exchange and self regulatory organisations. (b) Registration and regulation of stock brokers, sub-brokers, registrar to all issue, merchant bankers, underwriters, portfolio managers and such other intermediaries who are associated with securities market. (c) Registration and regulation of the working of collective investment schemes including mutual funds. (d) Prohibition of fraudulent and unfair trade practices relating to securities market. (e) Prohibition of insider trading in securities. (f) Regulating substantial acquisitions of shares and take over of companies. 2. Developmental Functions: (a) Promoting investors education. (b) Training of intermediaries. (c) Conducting research and published information useful to all market participants.
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K (d) Promotion of fair practices. Code of conduct for self-regulatory organisations. (e) Promoting self-regulatory organisations.
Powers
SEBI has been vested with the following powers: 1. Power to call periodical returns from recognised stock exchanges. 2. Power to call any information or explanation from recognised stock exchanges or their members. 3. Power to direct enquiries to be made in relation to affairs of stock exchanges or their members. 4. Power to grant approval to bye-laws of recognised stock exchanges. 5. Power to make or amend bye-laws of recognised stock exchanges. 6. Power to compel listing of securities by public companies. 7. Power to control and regulate stock exchanges. 8. Power to grant registration to market intermediaries. 9. Power to levy fees or other charges for carrying out the purpose of regulation. 10. Power to declare applicability of Section 17 of the Securities Contract (Regulation) Act is any state or area to grant licences to dealers in securities.
Organisation
Chapter II of the SEBI Act deals with establishment, incorporation, administration and management of the Board of Directors etc. The SEBI Act provides for the establishment of a statutory board consisting of six members. The chairman and two members are to be appointed by the Central Government, one member to be appointed by the Reserve Bank and two members having experience of securities market to be appointed by the Central Government. Section II deals with the powers of the Board.
SEBI has divided its activities into four operational departments namely
Primary market department, issue management and intermediaries department,: secondary market department and institutional department, each headed by an Executive Director. Apart from these there are two other departments viz., Legal Department and Investigation Department, also headed by officials of the rank of Executive Directors. Primary Market Department: Primary market department deals with all policy matters and regulatory issues relating to primary market, market intermediaries and matters pertaining to SROs and redressal of investor grievances. Issue Management and Intermediaries Department: This department is concerned with vetting of offer documents and other things like registration, regulation and monitoring of issue related to intermediaries.
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K Secondary Market Department: It looks after all the policy and regulatory issues for the secondary market; administration of the major stock exchanges and other matters related to it. Institutional In vestment Department: This department is concerned with framing policy for foreign institutional investors, mutual funds and other matters like publications, membership in international organisations, etc. SEBI has two Advisory Committees, one each for primary and secondary markets. The committees are constituted from among the market players, recognised investor associations and eminent persons associated with the capital market. They provide advisory inputs in framing policies and regulations. These Committees are nonstatutory in nature and SEBI is not bound by the committees.
SEBI and the Central Government

The Central Government has the power to issue directions to the SEBI Board, to supersede the Board, if necessary and to call for returns and report etc. as and when necessary. The Central Government has also powers to give any guidelines or to make regulations and rules for SEBI and its operations. The activities of SEBI are financed by grants from the Government in addition to fees, charges etc. collected by SEBI. The fund called the SEBI General Fund, is set up to which all grants, fees, charges etc. are credited. The fund is used to meet the expenses of the Board and to pay salaries of staff and remuneration to officers, members of the Board etc.
SEBI GUIDELINES
SEBI has brought out a number of guidelines separately, from time to time, for primary market, secondary market, mutual funds, merchant bankers, foreign institutional investors, investor protection etc. The guidelines are described below. 1. Guidelines for Primary Market New Company: A new company is one (a) which has not completed 12 months commercial production and does not have audited results and (b) where the promoters do not have a track record. These companies will have to issue shares only at par. New Company set-up by Existing Company: When a new company is being set-up by existing companies with a five year track record of consistent profitability and a contribution of at least 50% in the equity of new company, it will be free to price its issue, i.e., it can issue its share at premium. Private and Closely held Companies: The private and closely held companies having a track record of consistent profitability for at least three years, shall be permitted to price their issues freely. The issue price shall be determined only by the issues in consultation with lead managers to the issue. Existing Listed Companies: The existing listed companies will be allowed to raise fresh capital by freely pricing expanded capital provided the promoters contribution is 50% on first Rs. 100 crores of issue, 40% on next Rs. 200 crores, 30% on next Rs. 300 crores and 15% on balance issue amount.
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Reservation of Issues
Reservations under public subscription for various categories of persons is made in the following manner: 1. Permanent employees 10% 2. Indian Mutual Funds 20% 3. Foreign Institutional Investors 15% 4. Development Financial Institutions 20% 5. Shareholders of group of companies 10%
Composite Issues
In the case of composite issue, i.e., right cum public issue by existing listed companies differential pricing shall be allowed. In other words, issue to the public can be priced differentially as compared to issue to right shareholders. However, justification for the price difference should be given in the offer document.
Lock In Period
Lock in period is five years for promoters contribution from the date c allotment or from the commencement of commercial production whichever late. At persent, the lock in period has been reduced to one year.
Guidelines for Public Issue

1. Abridged prospectus has to be attached with every application. 2. A company has to highlight the risk factors in the prospectus. 3. Objective of the issue and cost of project should be mentioned in the prospectus. 4. Companys management, past history and present business of the firm should be highlighted in the prospectus. 5. Particulars in regard to company and other listed companies under the same management which made any capital issues during the last three years are to be stated in the prospectus. 6. Justification for premium, in the case of premium is to be stated. 7. Subscription list for public issues should be kept open for a minimum of three days and a maximum of 10 working days. 8. The collection centres should be at least 30 which include all centres with stock exchanges. 9. Collection agents are not to collect application money in cash. 10. The quantum of issue, whether through a right or public issue, shall not exceed the amount specified in the prospectus. No retention of over subscription is permissible under any circumstances. 11. A compliance report in the prescribed form should be submitted to SEBI within 45 days from the date of closure of issue. 12. Minimum number of shares per application has been fixed at 500 shares of face value of Rs. 100.
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K 13. The allotments have to be made in multiples of tradable lot of 100 shares of Rs. 10 each. 14. Issues by way of bonus, rights etc. to be made in appropriate lots to minimise odd lots. 15. If minimum subscription of 90% has not been received, the entire amount is to be refunded to investors within 120 days. 16. The capital issue should be fully paid up within 120 days. 17. Underwriting has been made mandatory. 18. Limit of listing of companies issue in the stock exchange has been increased from Rs. 3 crores to Rs. 5 crores. 19. The gap between the closure dates of various issues viz, rights and public should not exceed 30 days. 20. Issues should make adequate disclosure regarding the terms and conditions of redemption, security conversion and other relevant features of the new instrument so that an investor can make reasonable determination of risks, returns, safety and liquidity of the instrument. The disclosure shall be vetted by SEBI in this regard.
Secondary Market Stock Exchange

1. Board of Directors of stock exchange has to be reconstituted so as to include nonmembers, public representatives, government representative to the extent of 50% of total number of members. 2. Capital adequacy norms have been laid down for members of various stock exchanges depending upon their turnover of trade and other factors. 3. Working hours for all stock exchanges have been fixed uniformly. 4. All the recognised stock exchanges will have to inform about the transaction within 24 hours. 5. Guidelines have been issued for introducing the system of market making in less liquid scrips in a phased manner in all stock exchanges.
Brokers
1. Registration of brokers and sub-brokers is made compulsory. 2. In order to ensure that brokers are professionally qualified and financially solvent, capital adequacy norms for registration of brokers have been evolved. 3. Compulsory audit of brokers book and filing of audit report with SEBI have been made mandatory. 4. To bring about greater transparency and accountability in the broker-client relationship, SEBI has made it mandatory for brokers to disclose transaction price and brokerage separately in the contract notes issued to client. 5. No broker is allowed to underwrite more than 5% of public issue.
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3. Foreign Institutional Investors (FII)

1. Foreign institutional investors have been allowed to invest in all securities traded in primary and secondary markets. 2. There would be no restriction on the volume of investment for the purpose of entry of FIIs. 3. The holding of single FIT in a company will not exceed the ceiling of 5% of the equity capital of a company. 4. Disinvestment will be allowed only through stock exchanges in India. 5. FIIs have to pay a concessional tax rate of 10 per cent on large capital gain (more than one year) and 30 per cent on short term capital gains. A tax rate of 20% on dividend and interest is prescribed
. 4. Bonus Issue
The guidelines relating to the issue of bonus shares have undergone several changes since 1969. The latest set of guidelines announced by SEBI were made effective from April 13, 1994. At present, there are in all 10 guidelines laid down for bonus shares. 1. There should be a provision in the Articles of Association of the Company for issue of bonus shares. If not, the company should pass a resolution at the General Body Meeting, making provision for capitalisation of profits. The proposal for bonus issues is recommended by the Board of Directors and then approved in the General Body Meeting. 2. The bonus is made out of free reserves built out of the genuine profits or share premiums collected in cash only. 3. Reserves created by revaluation of fixed assets are not permitted to be capitalised. 4. The declaration of bonus issue in lieu of dividend is not to be made. 5. Bonus issues are not permitted unless the partly paid shares existing are fully paid up. 6. No bonus issue will be permitted if there is sufficient reasons to believe that the company has defaulted in respect of payment of statutory dues to the employees such as provident fund, gratuity, bonus, etc. Further, no bonus issue is permitted if the company defaults in payment of principal or interest on fixed deposits or on debentures. 7. No bonus issue can be made within 12 months of any public issue/rights issue. 8. A company which announces 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 proposal and shall not have the option of changing the decision. 9. Consequent to the issue of bonus shares, if the subscribed and paid up capital exceed the authorised share capital, a resolution shall be passed by the company at its general body meeting for increasing the authorised capital. 10. Issue of bonus shares after any public/rights issue is subject to the condition that no bonus shall be made which will dilute the value or rights of a holder of debenture, convertible fully or partly. The company shall forward a certificate duly signed by the issuer and duly countersigned by its statutory auditor or by a company secretary in practice to the
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K effect that the terms and conditions for the issue of bonus shares as laid down in these guidelines have been complied with.
5. Rights Issue
Section 81 of the Companies Act specifies the conditions to be satisfied by a public company for issuing rights shares. SEBI has issued the following guidelines for the issue of rights share. 1. Composite Issue 2. Appointment of Merchant Banker 3. Minimum Subscription 4. Preferential Allotment 5. Underwriting. 6. Rights of FCDIPCD Holders 7. Over Subscription not to be Retained 8. Promoters Contribution 9. Vetting of Letter of Offer by SEBI 10. Disclosure in the Letter of Offer 11.Advertisement in Newspaper 12. Compliance Report. 13. Applicability of SEBI Guidelines 14. Revised Disclosure Norms for Listed Companies : To enable the listed companies to raise funds easily from the primary market, the SEBI has amended its Disclousre and Investor Protection Guidelines in March, 2006. These guidelines are applicable to those listed companies that are regular in filing periodic returns with stock exchanges and have comprehensive investor grievances mechanism. The following are the important guidelines: (i) Listed companies going in for a rights issue can now fix and disclose the issue price any time prior to fixing the record date in consultation with the designated stock exchange. (ii) In the case of fixed price route, for public issues of such companies, the price can be fixed before filing of the prospectus with the Registrar of Companies. (iii) Further, companies making rights issues are now permitted to despatch an abridged letter of offer, containing disclosures as required in the abridged prospectus. However, such companies may provide the detailed letter of offer to any shareholder upon request. (iv) Again, companies that have filed a draft offer document with full disclosures can now come out with further capital issues even before the shares pertaining to the document are listed on the bourses. These guidelines do not apply to rights issue by existing private companies! closely held or other unlisted companies. They have to comply with the requirements as laid down in the Companies Act.
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6. Debentures
1. The amount of working capital debenture should not exceed 20% of the gross current assets. 2. The debt equity ratio should not exceed 2: 1. 3. The rate of interest can be decided by the company. 4. Credit rating is compulsory for all debentures excepting debentures issued by public sector companies, private placement of Non-Convertible Debentures (NCD) with financial institutions and banks. 5. Debentures are to be redeemed after the expiry of seven years from the date of allotment. NCD is permitted to be redeemed at 5% premium. 6. Normally debentures above seven years can not be issued. 7. Debentures issued to public have to be secured and registered. 8. A Debenture Redemption Reserve is to be set up out of profits of the company. 9. Debentures Trustee and Debenture Trust Deed are to be finalised within six months of the public offer. Fully Convertible Debenture (FCD), Partly Convertible Debenture (PCD), Non-Convertible Debentures (NCDs). 1. FCDIPCDINCD issued for a period of more than 18 months are to be compulsorily credit rated. 153 F 2. The debentures converted within 18 months are treated as equity. 3. FCDs having conversion period more than 36 months will not be permitted. 4. The terms of issue should be predetermined and stated in the prospectus. 5. The interest rate can be determined by the issuer. 6. Conversion after 18 months from the date of allotment but before 36 months will be optional at the hand of the debenture holders. 7. Appointment of Debenture Trustees and Creation of Debenture Redemption Reserve are not necessary if the maturity period is 18 months or less. 8. The Debenture Trust Deed should be executed within six months of the closure of the issue. 9. The offer document should specify existing and future equity, long term debt equity ratio, servicing of existing debentures, payment of interest on existing loans and debenture. 10. No objection for second or pari pasu charge. 11. In the case of roll over of NCD portion of debentures, the following conditions are to be complied with: (i) Six months before the date of redemption, fresh credit rating should be obtained and it should be communicated to debenture holders. (ii) The company must have obtained the positive consent of debenture holders. (iii) SEBI should vet the role over and its terms and conditions.
7. Guidelines for Protection of the Debenture Holders
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K (I) Servicing of Debentures A Debenture Redemption Reserve shall be created by companies issuing debentures on the following basis: Existing companies need not create DRR upto the date of commercial production. DRR shall be created in equal installments for the remaining period. For new companies, creation of DRR will commence from the year the company earns profit and it should be created in equal or in one or more installments for the remaining life of debentures. In the case of PCDs, DRR should be created only for NCD portion. DRR should be created upto 50% of the amount before redemption commences. Withdrawal from DRR will be permitted only after 10 per cent of the liability is actually redeemed. DRR will be treated as a part of general reserve for the purpose of bonus issue. In the case of new companies, distribution of dividend shall require approval of trustees to the debenture issue and the lead institution, if any. In the case of existing companies, prior permission of the lead institution for declaring dividend exceeding 20 per cent or as per the loan covenant is necessary if the company does not comply with institutional conditions regarding interest and debt service coverage ratio. (ii,) Protection of Interest of Debenture Holders Trustees to the debenture issue shall be vested with the requisite powers for protecting the interest of debenture holders including a right to appoint a nominee director on the Board of the Company in consultation with institutional debenture holders. Lead institution/investment institutions will monitor the progress in respect of debentures for project finance, modernization, diversification etc. The lead bank for the company will monitor debentures raised for working capital funds. The company shall file with SEBI, a certificate from their bankers that the assets on which security is to be created are free from encumbrances and necessary permissions to mortgage the assets have been obtained or a no objection certificate from the financial institutions or banks for a second or pari pasu charge in case where assets are encumbered. The security should be created within six months from the date of issue of debentures. It can be created within 12 months provided 2% penal interest is paid to debenture holders. If the security is not created even after 18 months, a meeting of the debenture holders shall be called within 21 days to explain the reasons thereof and the date by which the security would be created. The trustees to the debenture holders will supervise the implementation of the conditions regarding creation of security for the debenture and debenture redemption reserve. The trustees and institutional debenture holders should obtain a certificate from the companys auditors in respect of utilisation of funds during the implementation of
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K period of projects and at the end of each accounting year in the case of debentures for working capital.
Underwriters
1. No person can act as underwriter unless he holds certificate of registration granted by SEBI. 2. The certificate of registration is valid for a period of three years from the date of issue. Financial Markets and Services 3. The total underwriting obligations should not exceed 20 times of his net worth. 4. In the case of devolvement, the underwriter should subscribe to such securities within 30 days of the receipt of the intimation from the company. 5. The underwriter should furnish within a period of six months from the end of the financial year a copy of the balance sheet, profit and loss account, the statement of capital adequacy requirements and such other documents as required by SEE!. 6. The books of accounts should be maintained for a period of five years.
9. Investor Protection
Investor protection is the major responsibility of the SEBI. SEBI has taken various measures to protect the interests of investors. New Issues The issuing company should provide fair and correct information. Allotment process should be transparent and not tainted by any bias. The draft prospectus of the companies is scrutinised for full and fair disclosure. No delay in refunds or despatch of share certificates. Underwriting obligations is necessary to inspire confidence of investors. Risk factors and highlights should be fairly stated without any bias in the prospectus. Listing should be timely and transferability is ensured. Both stock exchange and companies are responsible for investor protection in respect of free trading and transferability of shares. The investor protection is to be ensured by not only the Director/Secretary of the company but by all the parties in the new issue process namely merchant bankers, Registrars, collecting banks, stock exchange and SEBI. Recently SEBI has instituted the system of appointing its representatives to supervise the allotment process to ensure that no malpractices take place in allotment process.
Prohibition of Unfair Trade Practices Regulation of Insider Trading

Insider trading takes place when insiders or any persons who by virtue of
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K their position in office or otherwise, have access to unpublished price sensitive information relating to the affairs of the company and deal in the securities of such companies. SEBI regulates insider trading by imposing penalty upto Rs. 5.00 lakhs for those who indulge in insider trading.
Investor Education
SEBI has issued a few investors guidance, advertisements and published a book on Investor Grievances - Rights and Remedies. SEBI has also registered certain active Investors Association. SEBI has issued an Advertisement Code for the issuers to ensure that the advertisements are fair and do not contain statements to mislead the investors or vitiate their informed judgement.
Grievance Cell
An Investor Grievance Cell is set up to handle investor complaints. Stock invest Stock invest was designed by the SEBI in consultation with RBI and banks as an additional facility for making applications for new issues. The stock invest facility is available to individuals who can approach the bank with whom they maintain an account for issue of stock invest of required denominations for payment of application money while making an application for shares. The stock invest scheme envisages that the investors account gets debited only on the allotment of shares. The investor, therefore, has to part with his funds only when he is eligible to get allotment of shares. Till such time, the investors fund remains in his account and continues to earn interest, which is normally four months.
10. Book Building

The normal method of offering shares at a price fixed by the issuers does not take into account the investors demands. Hence, it is not considered as an efficient method. The book-building method, on the other hand, explicitly uses investors demand for share at various prices as an important input to arrive at an offer price. The book-building is done in the following steps: 1. The company wishing to issue shares, approaches its merchant banker and informs him of the number of shares it wishes to issue and other material information on the company. 2. The merchant banker now invites his known investors to bid for the companys share. The investors are generally institutional investors. These investors are asked to indicate the number of shares they would like to buy at different prices. Once the price is finalised, allocation is made on the basis of highest price bid. 3. If the company agrees with the offer price the issue goes through and the shares are allocated based on bids. The company has the option to cancel the issue if it feels that the price is too low. 4. The trading commences from the next day. Book-Building in India
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K The book building method of pricing securities is becoming popular in India. During 1997-98, various issuers like IPCL, HUDCO, HAL, IOC and Hindalco Industries have used book building route to fix the coupon rate on their bond issues.
Terms Associated with Book-Building Process Retail Investor

Retail investor refers to an investor who applies or bids for securities of a company for a value of not more than Rs. 1 lakh. If he bids for more than the value, he will be branded as non-institutional buyer.
Qualified institutional Buyer (Q1B)

Qualified institutional Buyer means a public financial institution or a commercial bank or a mutual fund or FII or venture capitalist or an insurance company or any other such body corporate who applies or bids for securities.
Red Herring Prospectus (RHP)

It is nothing but a prospectus which does not have details of either price or number of shares being offered or the amount of issue. Generally, the price will not be disclosed, but the number of shares and price band will be disclosed. However, all details are made available to an investor on a day just prior to the date of issue open.
Offer Document
Offer document is nothing but a prospectus in the case of public issue or offer for sale and letter of offer in the case of rights issue. It has to be filed with the Registrar of Companies and Stock Exchanges.
Green Shoe Option

Green Shoe option means an option of allocating shares in excess of the shares floated in the public issue and operating a post issue price stabilising mechanism for a period not exceeding 30 days. This permission has been granted to a company to be exercised with caution through a stabilising agent. As per this arrangement, an issue could be over allotted to the extent of a maximum of 15% of the issue size. From an investors point of view, an issue with green shoe option provides more probability of getting shares allotted to him. It also ensures that the post listing price will be more stable than the market price.
Syndicate Member
Syndicate member refers to a person whose work is to collect the entire bid forms in a book built issue.
Floor Price/Cap Price/Cut off Price

In a book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The lower end price is called the floor price and the higher end price is called cap price. The actual discovered price can be any price between the two and it is called cut off price.
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SEBI Guidelines on Book-Building

SEBI issued guidelines for new issues through book building so as to enable issuers to reap benefits arising out of price and demand discovery. The guidelines came into operational with effect from September 1997. 1. The option of 100% book-building shall be available only to those issuer companies which propose to make an issue of capital of and above Rs. 100 crores. 2. Book-building shall be for the portion other than the promoters contribution and allocation made to permanent employees of the issuer company and shareholders of the promoting companies in case of a new company and shareholders of group companies in case of existing companies. 3. The issuing company shall appoint category I Merchant Banker as book runner(s) and their names shall be mentioned in the draft prospectus submitted to SEBI. The lead merchant banker shall act as the Lead Book runner may appoint Syndicate Members who shall be from those intermediaries who are registered with SEBI who are permitted to carry on activity as the underwriter. 4. The draft prospectus shall be filed with SEBI by the Lead Merchant Bankers. 5. The issuer company, after receiving final observations, if any, on the offer document from SEBI makes an advertisement in newspapers. The information in the advertisement shall contain: (i) The date of opening and closing of the bidding. (ii) The method and process of bidding. (iii) The names and addresses of the syndicate members as well as bidding terminals for accepting bids.
BUY BACK OF SHARES

The Government amended the Companies Act,1956 to permit buyback of shares by promoters of companies. Accordingly, a company can buyback its own shares &other securities to the extent of 25% of the paid up capital & Free Reserves. The Buyback can be transacted out of companys free reserve, Securities premium account or proceeds of any earlier issues specially made for buyback purposes
What is BUYBACK?
Buyback is a method of cancellation of Share capital. It leads to reduction in the share capital of a company as opposed to issue of shares which results in an increase in share capital
Why Buyback
To reduce Equity base thereby injecting much needed flexibility To prevent take over bids To return surplus cash to shareholders To increase the underlying share value To support the share price during periods of temporary weakness To maintain a target capital structure
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ADVANTAGES INVESTORS
It is a viable proposition to investors to sell back the shares instead of going through the secondary market It will improve return on capital & net profitability, increase the Earning per share & provide higher price to investors
COMPANIES
It offers flexibility to companies to reorganize their capital structure It helps to eliminate discontented shareholders, fractional share holdings & odd lots & thereby render better service to remaining shareholders by way of sustained divedentd & appreciation of share value in the long run
Buyback is an instrument to ward off hostile takeover bids. Economy

Buyback of shares helps to revive the capital market. The operation of demand and supply factors will boost prices of shares. It also offers liquidity to dormant shares.
SEBI Guidelines
The SEBI has been made as a regulatory authority of the licence to buyback shares by the Ordinance. The regulations of SEBI contains the following: 1. The companies are permitted to buyback the shares through six moves: (i) Tender offers (ii) Open offers (iii) Dutch auction (iv) Repurchase of odd lots (v) Reverse rights issue (vi) Employee stock option. Tender offers will specify the exact price and will have only one price to offer. In the Dutch auction, shares offered at the lowest price would be given priority over others. 2. The companies are not permitted to buyback through negotiated deals, spot transactions and private placement. 3. Promoters have been debarred from participating if the company opts to
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K buyback shares through stock exchange route. 4. Companies buying through stock exchanges must disclose purchase details daily. 5. The companies will have to specify the maximum price payable in the resolution seeking shareholders approval. 6. The buyback should be done only in cash and an escrow account will have to be maintained by the merchant bankers. 7. No company is allowed to withdraw the buyback offer once it is announced. Merchant bankers be associated in every offer for buyback wherein they would be required to give a due diligence certificate. The Registrar of shares or transfer agents will have to certify that the company has adhered to all regulations. SEBI (Amendment Bill) 2002 Parliament passed the SEBI (Amendment) Bill, 2002 giving more powers to SEBI to punish market offenders. The Bill entrust SEBI wide powers including seizure of books and accounts, impose fine upto Rs. 25 crore on insider trading, slap a penalty of Rs. 1 lakh a day and upto Rs. 1 crore in cases where small investors were cheated. The SEBI is being given powers to suspend the governors of the stock exchange. It is also being empowered to impound the proceedings of the exchanges The SEBIs governing board itself would have powers to appoint investigating agency.
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FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.

Financial Markets and Services

Financial Markets and Services Chapter One

What is Financial System

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Types of Financial Intermediaries

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Gilt-edged /Government Securities Market

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Financial Guarantees Market

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Importance of Capital Market

FINANCIAL INSTRUMENTS or FINANCIAL SECURITIES

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

FEATURES OF FINANCIAL INSTRUMENTS

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

DEVELOPMENT OF FINANCIAL SYSTEM IN INDIA

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

ROLE OF THE INDIAN FINANCIAL INSTITUTIONS IN DEVELOPMENT OF THE NATION.

WEAKNESSES OF INDIAN FINANCIAL SYSTEM

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Features of a Money Market

Commercial Bank NBFCs Discount Houses Acceptance Houses

economy through its intervention in this market

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Characteristic Features of a Developed Money Market

Importance of Money Market

Composition /Main Segments of the Money Market

Call / Notice Money

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Operations in Call / Notice Money

Certificate of Deposit (CD)

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

DFHI trades in these instruments in the secondary market. The

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Commercial Paper What is Commercial Paper

Sunitha .B.K ---- Faculty,SBMJC-CMS __________________________________

FINANCIAL MARKETS AND SERVICES MODULE ----------------SUNITHA.B.K

Existence of Unorganised Sector Absence of Intergration Diversity in Money Rates of Interest

Seasonal Stringency of Funds Absence of Bill Market

Limited instruments Limited Secondary Market Limited Participants