2. INDIAN FINANCIAL SYSTEN-AN
OVERVIEW
o Financial System of any country consists of financial markets,
financial intermediation and financial instruments or financial
products.
o The term "finance" in our simple understanding it is perceived
as equivalent to 'Money‘. But finance exactly is not money, it is
the source of providing funds for a particular activity.
o Finance refers to assessing the requirements of funds, identify
sources , sourcing, deployment and evaluating the results of
such investment with a view to improve performance in the
future.
o The economic development of a nation is reflected by the
progress of the various economic units, broadly classified into
corporate sector, government and household sector. While
performing their activities these units will be placed in a
surplus/deficit/balanced budgetary situations.
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3. o There are areas or people with surplus funds and there are
those with a deficit. A financial system or financial sector
functions as an intermediary and facilitates the flow of funds
from the areas of surplus to the areas of deficit. A Financial
System is a composition of various institutions, markets,
regulations and laws, practices, money manager, analysts,
transactions and claims and liabilities.
o The word "system", in the term "financial system", implies a
set of complex and closely connected or interlined institutions,
agents, practices, markets, transactions, claims, and liabilities
in the economy. The financial system is concerned about
money, credit and finance-the three terms are intimately
related yet are somewhat different from each other. Indian
financial system consists of financial market, financial
instruments and financial intermediation.
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4. FINANCIAL MARKETS
o Money Market- The money market ifs a wholesale debt
market for low-risk, highly-liquid, short-term
instrument. Funds are available in this market for periods
ranging from a single day up to a year. This market is
dominated mostly by government, banks and financial
institutions.
o Capital Market - The capital market is designed to finance
the long-term investments. The transactions taking place in
this market will be for periods over a year.
o Forex Market - The Forex market deals with the multicurrency
requirements, which are met by the exchange of
currencies. Depending on the exchange rate that is
applicable, the transfer of funds takes place in this
market. This is one of the most developed and integrated
market across the globe.
o Credit Market- Credit market is a place where banks, FIs and
NBFCs purvey short, medium and long-term loans to
corporate and individuals.
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5. FINANCIAL INTERMEDIATION
o To ensure that financial assets reach the ultimate investor in
order to garner the requisite amount. When the borrower of
funds approaches the financial market to raise funds, mere
issue of securities will not suffice. Adequate information of the
issue, issuer and the security should be passed on to take
place. There should be a proper channel within the financial
system to ensure such transfer.
o To serve this purpose, Financial intermediaries came into
existence.
o In the initial stages, the role of the intermediary was mostly
related to ensure transfer of funds from the lender to the
borrower. This service was offered by banks, FIs, brokers,
and dealers. However, as the financial system widened along
with the developments taking place in the financial markets,
the scope of its operations also widened.
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6. FINANCIAL INTERMEDIARIES
o Some of the important intermediaries operating ink
the financial markets include; investment bankers,
underwriters, stock exchanges, registrars,
depositories, custodians, portfolio managers,
mutual funds, financial advertisers financial
consultants, primary dealers, satellite dealers, self
regulatory organizations, etc. Though the markets
are different, there may be a few intermediaries
offering their services in move than one market e.g.
underwriter. However, the services offered by them
vary from one market to another.
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7. FINANCIAL INTERMEDIARIES
Intermediary Market Role
Stock Exchange Capital Market
Secondary Market to
securities
Investment Bankers
Capital Market, Credit
Market
Corporate advisory
services, Issue of securities
Underwriters
Capital Market, Money
Market
Subscribe to unsubscribed
portion of securities
Registrars, Depositories,
Custodians
Capital Market
Issue securities to the
investors on behalf of the
company and handle share
transfer activity
Primary Dealers Satellite
Dealers
Money Market
Market making in
government securities
Forex Dealers Forex Market
Ensure exchange ink
currencies
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8. NATURE AND ROLE OF FINANCIAL SYSTEM
STRUCTURE OF FINANCIAL SYSTEM
FINANCIAL
SYSTEM
FINANCIAL
INSTITUTIO
NS
BANKIN
G
NON
BANKIN
G
Inter
mediaries
Non-inter
mediaries
FINANCIAL
MARKETS
PRIMAR
Y
CAPITAL
MARKET
EQUITY DEBT DERIVATIVE
SECONDAR
Y
MONEY
MARKET
FINANCIAL
INSTRUMENTS
CLAIMS
ASSETS
SECURITIES
FINANCIAL
SERVICE
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9. EQUILLIBRIUM IN FINANCIAL MARKETS
EQULLIBRIUM IS BASED ON THE ASSUMPTION THE
WORLD IS PERFECT
Financial market is expected to be perfect when:
There are large number of savers, investors and operators in
the market.
All participants are rational.
All are well informed and there is smooth and faster flow of
required information.
There is homogeneous expectations from all participants in
the market.
There are no taxes.
There are no transaction costs.
The financial assets are infinitely divisible.
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10. DETERMINANTS OF SUPPLY AND
DEMAND OF FUNDS
o Aggregate savings by the household sector., business sector
and the government in a given economy.
o Savings is the difference between possible income and
consumption expenditure..
o The level of current and expected income has a definite
bearing on volume of savings . Other factors are age wise
variations, certainty of income, inflation, desire to save for old
age, tax benefits, economic development, desire to consume.
o Demand for funds are dependent on investment climate,
growth of economy, investment in working capital, expansion,
new establishments of industry or service units,expoprts,
technological changes capacity utilisation,investment in
housing, infrastructure development, availability of internal
funds, cost of capital etc.
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11. FINANCIAL SYSTEM AND ECONOMIC
DWVELOPMENT
ECONOMIC
DEVELOPMENT
SAVINGS&INVESTMENT
IN CAPITAL FORMATION
SURPLUS SPENDING
ECONOMIC UNITS
INCOME MINUS
CONSUMPTION+OWN
INVESTMENT
SURPLUS OR
SAVING
FINANCIAL SYSTEM
DEFICIT SPENDING
ECONOMIC UNITS
INCOME MINUS
CONSUMPTION+INVESTMENT
DEFICIT OR
NEGATIVE SAVING
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12. RELATIONSHIP BETWEEN FINANCIAL
SYSTEM AND ECONOMIC DEVELOMENT
Credit creation theory.- Investments are made in anticipation of
savings
Theory of forced savings— According to this theory
investments are not determined by savings but it is savings which
determine investments which can be increased automatically
through monetary expansion The monetary expansion speed up
development through four channels:
1.if resources are unemployed it would increase aggregate
demand, output and savings.
`2. If resources are fully employed it would generate inflation
which will lower the rate of return on financial instruments or
money. This
will make the wealth holders to invest in physical capital.
3. Inflation changes income distribution in favour of profit
earners which will increase savings'.
Inflation tax effect- Inflation imposes tax on real money therby
savings are transferred to Government fo investments.
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13. Financial market Regulation Theory- According to this
theory fincial market are prone to market failures and that
government intervention make them to function better like
RBI’s interest rate and monetary policy, SEBI guidelines.
Financial Liberalisation Theory- It is argued tha the
Government intervention and control of financial sector
not only lower the quantum of investments but also tne
quality as finacial institutions are forced to have directed
investments in government specified priority sectors
which normally non productive assets . Also they are
primarily in l sectors which do not contribute to economic
development/GDP growthh
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14. RBI AND INDIAN FINANCIAL SYSTEM
Until 1994, different departments in Reserve Bank of
India were exercising supervision over banks, non-
banking financial companies and financial institutions.
Board for Financial Supervision was set up under the
aegis Reserve Bank under Reserve Bank of India
(Board for Financial Supervision) Regulations, 1994 with
the objective of paying undivided attention to the
supervision of the institutions in the financial sector.
Prior to 1993, the supervision and regulation of
commercial banks was handled by the Department of
Banking Operations & Development (DBOD). In
December 1993 the Department of Supervision was
carved out of the DBOD with the objective of
segregating the supervisory role from the regulatory
functions of RBI.
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15. Department of Banking Supervision (DBS)
The Department of Banking Supervision at present exercises
the supervisory role relating to commercial banks in the
following forms:
Preparing of independent inspection programmes for different
institutions.
Undertaking scheduled and special on-site inspections, off-
site surveillance, ensuring follow-up and compliance.
Determining the criteria for the appointment of statutory
auditors and special auditors and assessing audit
performance and disclosure standards.
Dealing with financial sector frauds.
Exercising supervisory intervention in the implementation of
regulations which includes – recommendation for removal of
managerial and other persons, suspension of business,
amalgamation, merger/winding up, issuance of directives and
imposition of penalties.
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16. Department of Non-Banking Supervision(DNBS)
Department of Non-Banking Supervision has following
responsibilities:
Administration of Chapter IIIB of the RBI Act, formulating
regulatory framework and issuing directions to the NBFCs
(including residuary non-banking companies, mutual benefit
companies, chit fund companies);
Administration of Chapter III-C of the RBI Act in respect of
unincorporated bodies, Chit Funds Act in respect of chit fund
companies, Prize Chits and Moneys Circulation Schemes
(Banning) Act in respect of prize chits;
Identification and classification of NBFCs;
Registration of NBFCs under section 45-IA of the RBI Act;
On-site inspection and follow up;
Off-site surveillance and scrutiny of various returns;
Attending to complaints relating to NBFC sector; and
Initiating deterrent action against the errant companies
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17. SUPERVISORY PROCESS
On-site inspection
Supervision of overseas branches of Indian
banks
Financial Institutions
Non-Banking Financial Companies
Off-site Monitoring & Surveillance System-
Banks, All India Development Financial
Institutions, Non-Banking Financial Companies
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18. BOARD FOR FINANCIAL SUPERVISION:
CONSTITUTION
Board for Financial Supervision (BFS) was constituted
on November 16, 1994 by the Governor as a committee
of the Central Board of Directors of the Reserve Bank of
India (RBI). It functions under the RBI (BFS)
Regulations, 1994 exclusively framed for the purpose in
consultation with the Government of India.
Advisory Council to BFS was constituted on
November 16, 1994 and was in place till March 27,
1998.
The BFS also constituted an Audit Sub-Committee in
January 1995
The supervision by BFS at present covers commercial
banks, all India development financial institutions and
non-banking finance companies.
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19. Corporate Governance and Management
Guidance
Transparency and Disclosure
Internal controls and housekeeping in banks
Reconciliation of inter-branch accounts
Balancing of books
Reconciliation of Nostro accounts
Strengthening of internal audit /control system
Audit system in banks
Fraud monitoring
Core Principles for Effective Banking
Supervision
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20. ASSIGNMENT -1
Discuss in brief the role, responsibilities and functions
of various financial intermediaries in Indian
Financial System
Note: 1. Assignment must be in your own language,
data / information can be gathered from text books
and the net.
2. Assignment to be submitted lates by
29.06.2009
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21. SAVINGS AND INVESTMENTS
Consumption and saving decisions
Desired consumption is the consumption
amount desired by households
Desired national saving is the level of national
saving when consumption is at its desired level:
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22. Consumption and saving decisions:
A person can consume less than current income,
i.e., saving is positive.
A person can consume more than current income
i.e., saving is negative
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23. Consumption and saving decisions:
There is a trade-off between current and future
consumption:
•The price of 1 unit of current consumption is 1 + r
units of future consumption, where r is the real
interest rate.
Consumption-smoothing motive: the desire to
have a relatively even pattern of consumption over
time.
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24. Effect of changes in current income:
Increases in current income increase both
consumption and saving.
• Because the marginal propensity to consume—
the fraction of additional income consumed—is less
than 1.
When current income (Y) rises, Cd rises, but not by
as much as Y, so Sd also rises.
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25. Effect of changes in expected future income:
Higher expected future income raises current
consumption even at the same current income
level, so current saving declines.
Effect of changes in wealth:
Increase in wealth raises current consumption
even at the same current income level, so current
saving declines
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26. Effect of changes in the real interest rate:
A higher real interest rate has 2 effects.
• The Substitution effect on saving is positive
because a higher rate of return is a greater reward
for saving
.• The Income effect on saving is mixed:
– It is negative for a net saver because it takes less
saving toachieve a given amount in the future
(target saving).
– It is positive for a net borrower because a higher
real interest rate represents a loss of wealth.
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27. Effect of changes in the real interest rate:
Taxes and the real return to saving.
• The expected after-tax real interest rate is given
by:
- Effect of changes in fiscal policy:
-Changes in fiscal policy affects desired
consumption through changes in both current and
expected future income.
They directly affect desired national saving:
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28. Effect of changes in fiscal policy:
Government purchases:
Higher G financed by higher current taxes
reduces after-tax income, lowering desired
consumption.
• Higher G financed by higher future taxes also
lowers desired consumption if people realize that
future after-tax income will be lower.
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29. Effect of changes in fiscal policy:
Taxes:
• A reduction in current taxes will increase current
(disposable) income and desired consumption.
• However, consumers may realize that a tax cut
today will result in higher taxes in the future, which
willreduce future expected income.
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30. Effect of changes in fiscal policy:
Taxes—3 possible situations:
• If the decline in future expected income is less
than the
increase in current income, desired consumption
will rise.
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31. Effect of changes in fiscal policy:
Taxes—3 possible situations:
• If the decline in future expected income exactly
offsets the increase in current income, desired
consumption will not change.
tax change affects only the timing of taxes, not
their ultimate (present value) amount
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32. Effect of changes in fiscal policy:
Taxes:
• In practice, people do not fully see that future
taxes will rise if taxes are cut today.
• Consequently, a tax cut today leads to increased
desired consumption and reduced desired national
saving.
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33. DETERMINANTS OF DESIRED NATIONAL
SAVING
Rise in current income.
Increase in expected future income.
Increase in wealth.
Increase in real (after tax) interest rates
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34. INVESTMENT
Why is investment important?
Investment fluctuates sharply over the business
cycle.
• Need to understand investment to understand the
business cycle.
Investment plays a crucial role in long-term growth.
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35. Investment is determined by changes in the
desired capital stock.
The desired capital stock is the amount of
capital that allows firms to earn the largest
expected profit.
• Depends on benefits and costs of additional
capital.
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36. The desired capital stock:
The benefit associated with additional capital
depends on the future marginal product of capital,
• Because the marginal productivity of capital falls a
K increase, the MPKf also falls as K increases.
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37. The desired capital stock:
The cost associated with additional capital is the
real cost of using a unit of capital per year.
• This is called the user cost of capital, uc, which
equals the sum of the real interest cost and
depreciation.
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38. Changes in the desired capital stock:
Any factor that changes the user cost of capital
willalso cause a change in the desired capital stock:
The real interest rate,
• The depreciation rate, or
• The price of capital.
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39. Changes in the desired capital stock:
Any factor that shift the MPKf curve will also
cause a change in the desired capital stock:
Technology, or
• The labor force.
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40. Changes in the desired capital stock:
Taxes and the desired capital stock:
• With taxes, the return to capital is (1 – τ) MPKf
• The desired capital stock is where the after tax
return also cause a change in the desired capital
stock:
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41. Changes in the desired capital stock:
Taxes and the desired capital stock:
• Tax-adjusted user cost of capital is uc/(1 – τ).
• An increase in τ raises the tax-adjusted user cost
of Changes in the desired capital stock:
Taxes and the desired capital stock:
• Tax-adjusted user cost of capital is uc/(1 – τ).
• An increase in τ raises the tax-adjusted user cost
of
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42. INTEREST RATE STRUCTURE
Impact of interest rate is both in savings and
investment in the economy- borrowing and lending
decisions are primarily based on interest rate.
In the macro sense interest rate and interest
income has vital role in the economy.
Savings and investments which are influenced by
interest rates are the economic variables.
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43. ROLE OF INTEREST RATES
Reward to capital-a factor of production.
A return on savings
Cost to investments.
An instrument of monetary policy in credit control.
In addition to influencing the cost and availability of
funds from the supply side, interest rate also
influence the quantum of investments from the
demand side and thus determine the income and
the employment in the economy.
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44. THEORIES OF INTEREST RATE
Keynes considered interest rate as monetary
phenomenon.
He took money as an asset with opportunity cost ,
namely return on short term bonds.
In a partial equilibrium approach, we can assume
that the forces in the real economic system remain
constant and analyzed the financial factors which
explain the interest rate.
Under this theory interest is the function of supply
and demand in the economy
Transactions are generally pre cautionary or
specuklative and the late is known as aset
approach.
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45. NEO-CLASSICAL THEORY
According to this theory interest rate is also based
on the expectations of the public and the rate of
inflation in the economy.
According to Irwing Fisher interest rate is also a
function of inflation as the nominal rate is affected
by expected rate of inflation.
During inflationary periods the gap in the rates
between organised financial system and the
unorganised financial system widens.
Funds flow from organised to unorganised and vice
versa inluence thecrates in both the sectors.
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46. INTEREST RATE STRUCTURE- FACTORS
INFLUENCING INTEREST RATES
Since the risk for an investor is greater than a
lender, interest on ownership capital must be more
than on loan capital.
Difference in maturity periods.
Degree of default risk.
Tax provisions-incentives or disincentives.
Marketability-liquidity.
Sfety of funds.
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47. INTEREST RATES IN INDIA
Bank rate- the rate fixed by the central bank-RBI
rate for advances to commercial and co-operative
banks.
Normally bank rate is for discounting bills of
exchanges etc,
In view if limited money and bills market bank rate
is not the leader for interest rate and the refinance
rate is the rate at which various windows of RBI
provides refinance to banks. These rates are known
as reference rates.
Bank rate is made active indicator of f bank funds.
Bank rate is revised by RBI under the RBI Act as
needed
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48. MONEY MARKET ORGANISATION IN
INDIA
Money Market
Organisation
In India
RBI
FUNCTIONS ROLE
MONEY
MArket
Institutional
Development
Primary
Dealers
Money Market
Mutual Funds
SU Markets
CALL/BILLS/
T>Bills/CDs/CPs
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49. Reserve Bank Of India
Functions: To Maintan
Monetary stability
Financial stability
Stable payment system
Promote development of financial
infrastructure
To ensure credit allocation to meet national
economic priorities
Regulate volume of money and credit
ROLE
Note Issue
Govt.Banker
Banbker’s Bank
Regulator
Ex.Control Authority
Promotional Functions
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50. 1. Regulator of money and credit/ Monetary authority.
2. Open market operations- sale and purchase of central and
stae securities and Treasury Bills.
3. Bank Rate-Rate at which the RBI buy or rediscount bills
4. Refinance – to ease the liquidity issues in the system.
5. CRR-Cash which the banks has to keep with RBI as a
percentage of their demand and time liabilities to ensure safety
and liquidity of bank deposits.
6. SLR-Secondary and supplementary requirements to (i) restrict
expansion of bank credit; (ii)ensure solvency of banks and (iii)
augment bank’s investment in government securities.
7. Liquidity Adjustment Faculty- RBI was providing specific and
sector based refinance like Export credit refinance,
Collateralized Lending Faculty
8. i.e advance against excess (over SLR requirements) holdings
of Government securities, T- Bills .
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51. Based on the recommendation of Narasimhan committee RBI
policy has changed from sector specific direct refinancing to
indirect and general refinancing through changes in REPO
Reverse REPO rates which would provide reasonable corridor
for market play
Provisions of Interim LAF:
-CLF at 0.25% of fortnightly aggregate deposits of 1997-98 which
would be available for 2 weeks at Bank rate wef 21st April 1999.
- An Additional amount equivalent to CLF would be available at 2%
over Bank Rate-
- Both CLF and ACLF are for 2 weeks.
- Restriction on participation in money market was withdrawn
- Scheduled commercial banks were eligible export credit
refinance.at Bank Rate
- Liquidity support were made available to primary dealers at
B/Rfor 90 days.
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52. Repo /reverse repo//ready forward/repurchase (Buy
back) refers to transactions where two parties agree to
sell and repurchase the same security
The seller agrees to sell specified security with an
agreement to buy the same security at a future price
and date.
Likewise a buyer agree to buy the same security with
an agreement to sell the same security at a future date
and price.
The same transaction is known as repo from the view
point of the seller and reverse repo from the point of the
buyer.
Repo is a collateralized short term borrowing and
lending.
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53. The terms of such a contract is in terms of repo rate
representing the money market borrowing / lending rate.
Repo rate is the annual interest rate for the funds transferred
by the lender to the buyer. Repo rate is generally lower than
the B/R.
There are two legs in Repo transactions: 1.Borrower sells the
security. The calculation is;
Total consideration = Deal rate*face value+ Accrued interest
In the second leg interest paid for borrowing-repo rate-is
adjusted against the interest earned on the securities during
the holding period to arrive at the reversal price. The
calculation is:
Reversal price = Deal rate* face value+ ( interest for holding
period-interest paid at repo rate)/face value
Total consideration = reversal price + face value+ Accrued
interest.
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54. Bank X entered into a repo with Bank Y for 10
crores for 14 days
Security chosen is 13.6% GS -2010. The repo rate
is 5%
The agreed purchase price is 101.12.
The last coupon was paid 30 days ago.
You are required to calculate first leg and second
leg net cash outflow and purchase price rate.
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55. Calculation for first leg:
-Sale price
1011200000
-Accrued interest (30 Days) 113333
- cash out flow 1011313333
Calculation for second leg:
-Repo interest income
1011313333*0.05*14/365 1939500
Cash in flow(1011313333+1939500) 1013252833
Les Accrued interest (14days) 163945
Purchase Price 1013099893
Rate =101.31
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56. 1. CALL MONEY MARKET-MOSTLY SURPLUS
FUNDS OF BANKS ARE TRADED WITH
MATURITY PERIOD OF 1-15 DAYS. IF FOR ONE
DAY IT IS CALLED ‘CALL MONEY’ MORE THAN 1
DAY ‘NOTICE MONEY’. PURPOSE IS-1.TO MEET
TEMPORARY GAP OR 2. TO MEET CRR OR 3.TO
MEET SUDDEN DEMAND FUNDS. LOCATED IN
COMMERCIAL CENTRES. PRTICPANTS ARE
BANKS, ICICI, RBI ETC.
2. COMMERCIAL PAPER(CP) ARE S.T.
UNSECURED PROMISSORY NOTES AT A
DISCOUNT OF FACE VALUE ISSUED BY WELL
KNOWN COMPAMIESAS PER RBI GUIDELINES.
ISSUE EXPENSES INCLUDE STAMP DUTY
(BASED ON PERIOD), BROKER’S FEESRATING
AGENCIES FEES(CRISIL)
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57. CERTIFICATE OF DEPOSITS-ISSUED BY
BANKS AND ARE NEGOTIABLE
-RISK IS NIL
-NEGOTIABLE FREELY BY ENDORSEMENT
-ISSUED AT A DISCOUNT TO FACE VALUE.
-MYB IN BEARER FORM ALSO.
-ALSO ISSUED TO DEMAT FIRMS
-MINIMUM SIZE 1 LAKH.
-CD ATTRACT STAMP DUTY.
MONEY MARKET MUTUAL FUNDS: - TO BENEFIT
SMALL INVESTORS IN MONEY MARKET.
BSE/NSE
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58. CAPITAL MARKET
PRIMARY PLAYERS SECONDARY
METHOD OF ISSUE
QUANTUM OF
ISSUE
COST OF
ISSUE
LISTING TRADING
SETTLEMENT
CLEARING
PUBLIC
RIGHT
BONUS
PRIVATE
PLACEMENT
COMPANY
BROKERS
PUBLIC
BOUGHT OUT
DEALS
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59. STOCK EXCHANGE-WHERE OUTSTANDING
SECURITIES(ISSUED SHARES ) ARE TRADED.
ORDER:
LIMIT ORDER-LIMITED BY FIXED PRICE.
BEST RTAE ORDER
IMMEDIATE OR CANCEL ORDER
LIMITED DISCRETIONARY ORDER.STOP LOSS
ORDER
OPEN ORDER
ORDER IS EXECUTED ON TRADING DAYS.
TRADING SYSTEM
TRADING BY ‘PUBLIC OUTCR’
OTCEI-SCREEN BASED TRADING. OTCEI
RESTRICTED TO SMALL MIIDCAP COMPANIES.
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60. DEPOSITORIES-ARE AGENCIES WHO
HOLD THE SECURITIES ON BEHALF OTHE
INVESTORS IN ELECTRONIC FORM TO
OVERCOME THE PROBLEM OF PHYSICAL
MOVEMENT OF DOCUMENTS.
DEMATERIALISATION IS PROCESS BY WHICH
PHYSICAL CERTIFICATESARE DESTROYED
AND EQUIVALENT SECURITIES ARE CREDITED
TO INVESTORS ACCOUNT.
CARRY FORWARD RESULTING IN DELAYS ,
DEFAULTS IS BANNED BY SEBI NAD A
MODIFED CARRY FORWARD SYSTEM IS
INTRODUCED.
SETTLEMENT TO BE MADE COMPULSORILY
BYSEPTEMBER 3.
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61. SETTLEMENT PROCEDURE AT NSE
HAS A COMPUTRISED TRADING MECHANISM.
TRADING IS DONE ON THE BASIS OF ORDERS
IN THE SYSTEM AND BETWEEN 9.55 AM TO 3,30
PM.
TILL THE TRANSACTION IS EXECUTED,
IDENTITY OF BROKER IS PROTECTED.
SETTLEMENT IS DONE THROUGH BOOK
ENTRY TRANSFER IN DEPOSITORY.
IN THE CENTRAL DEPOSITORY FUNDS AND
SECURITIES POSITION IS DEBITED/CREDITED
THROUGH ELECTRONIC BOOK TRANSFER.
AT THE END OF THE DAY COMPUTER
GENERATE A STAEMENT SHOWING NET
POSITION FOR EACH MEMBER.
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62. GOVERNMENT SECURITIE MARKET
CENTRAL GOVERNMENT SECURITIES
STATE GOVERNMENT SECURITIES
SECURITIES GUARANTEED BY CENTRAL
GOVERNMENT FOR ALL INDIA FINANCIAL
INSTITUTIONS LIKE IDBI,ICISI,IFCI ETC.
SECURITIES GUARANTEED BY STATE
GOVERNMENT FOR SATAE INSTITUTIONS LIKE
SEBS, HOUSING BOARDS
TREASURY BILLS ISSUED BY RBI
FORMS OF GOVERNMENT
SECURITIES
STOCK CERTIFICATES
PROMISSORY NOTES
BEARER BONDS
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63. MARKET FOR GOVERNMENT
SECURITIES
PRIMARY MARKET- RBI IS GIVEN THE TASK OF
MANAJING THE PUBLIC DEBTIN THE ECONOMY
QUANTUM OF BORROWING IS SPECIFIED IN
BUDGET.
AUCTION IS TIMED DURING HIGH LIQUIDITY
PERIODS TO RAISE MAXI,UM AMOUNT AT BEST
PRICE.
TERMS OF ISSUE INVOLVE COUPON,
MATURITY TERMS AND NORMALL LONG TERM
YIELD CURVE DRAWN BY RBI IS FOLLOWED.
INVESTORS-COMMERCIAL BANKS, FIs, LARGE
CORPORATE BODIES, RBI, AND FIIs.
SECONDARY MARKET IS ACTIVE AFTER 1990s
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64. SETTLEMET PROCEDURE
RBI IS ACTING AS DEPOSITORY AND SETTLEMENTS
ARE DONE BY THEM THROUGH SGL ACCOUNT.
IF INVESTOR DOES NOT HAVE SGL ACCOUNTTHEN IT
NEEDS TO OPEN WITH ANY REGISTERED BANK .
TRANSHER IS THROUGH BOOK ENTRY.
SECURITY DEALS ARE CARRIED OUT ON EX-INTEREST
BASIS AS PER THE BYE-LAWS OF THE STOCK
EXCHANGES.
THIS ALSO LED TO ‘VOUCHER TRADING’-AMOUNT OF
INCOME TAX DEDUCTIBLE AT SOURCEON THE
ACCRUED INTEREST INCOMEOF GOVERNMENT
SECURITIES ID KNOWN AS ‘VOCHER’
THUS SELLER IS TO GET=PRICE+INTEREST-TDS.
BUYER GETS TDS CERTIFICATE.
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65. TREASURY BILLS
TBs ARE ISSUED TO MEET SHORT TERM NEED
OF THE GOVT. REVENUE COLLECTIONS ARE
BUNCHED BUT EXPENDITURE IS DISPERSED.
HENCE THIS NEED.
TBs ARE ISSUED IN THE FORM OF
PROMISSORY NOTES OR SCRIP AND
CREDITED TO INVESTORS SGL ACCOUNT
TBs ARE ISSUED IN FOUR TYPES 91-DAY,182
DAT, 14/28 DAY AND 364 DAY BILLS.
RBI DO OPEN MARKET OPERATIONS AND THE
ECONOMY IS GRAETLY INFLUENCED BYGOVT.
SECURITIES.
T-BILL YIELD CALCULATION:
FACE VALUE=100
BID RECEIVED BY RBI=88.24 FOR 364 DAY
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66. THEN YIELD-k=F-P/P * 365/D.
K=YIELD
F=FACE VALUE
P=PRICE
D=MATURITY PERIOD IN DAYS
K=100-88.24/88.24 * 365/364=13.36%
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67. DISCOUNT AND FINANCE HOUSE OF
INDIA(DHFI)
Role and Functions: (Ghore committee
recommendations)
-It should be the sole depositor of surplus funds of the banking
system and Non-banking financial institutions.
-It should use the surplus funds to even out the liquidity
imabalances in the banking system subject to RBI guidelines.
- It should create ready market for commercial bills, treasury
bills , government guaranteed securities by being ready to
purchase from banks or sell to banks such securities.
The committee also recommended that this discount house is to
be sponsored by commercial banks,LIC,UTI,GIC with
participation by IDBI, ICICI, SFCs.
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68. Till Vaghul committee reviewed and recommended no action was
taken on this.
Eventually in April 1988 Discount and Finance House of India
was set up with an authorised capital of Rs.250 crores. In a ratio
of %:3:2 RBI, Psbs and Indian Financial Institutions have
contributed Rs. 200 crores as paid up capita. In addition
refinance facility with RBI and a line of credit of RS.100 crores
from 28 PSBs on a consortium basis is the source of funds.
The role of the DHFI is both developmental and stabilizing
By developing active primary and secondary money markets it
facilitates smoothening of short term liquidity imbalances.
It discounts and deals in not only commercial bills but a;so in
TBs, and money market instruments.
It acts as a specialised money market intermediary
It undertakes short term buy back in Government and approved-
dated securities
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69. Role of DHFI is both developmental and stabilising.
It helps in smoothening of short term liquidity imbalances by
devloping primary and secondary money markets.
It acts a s a specialised money market intermediary for
stimulating activity in the money market instruments and
developing secondary market for those instruments.
It not only deals in commercial bills but also in Treasury
billsand other money market instruments.
It undertakes buy-back of governments and approved
dated securities.
RBI provides re-finance facility to DHFI
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70. SECURITIES TRADING CORPORATION
OF INDIA
STCI wa sset up in 1994 with the objective of
providing good secondary market for debt
instruments
It function as market maker at the long end of the
market which means that it along with otherPDs
has to take up part or whole of the auction of
government securities.
It primarily concentrate on government securities..
DHFI was set up for Shoer term –TBs –
government securities and STCE was set up for
long-dated government securities.
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71. CAPITAL MARKET STRUCTURE
• Stock market volatility touches every participant
directly/indirectly in the capital market. General
feeling is that the stock markets worldwide have
become very fragile in the recent past on
account of various developments such as Asian
crisis. Brazil Real fall and Russian
debacle. Many far-reaching stock reforms
have been introduced in the Indian market for
the last few years. These reforms, in turn,
changed market structure. Changing
market structure influences nature of stock
price behavior.
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72. PRIMARY SECURITIES MARKET
The primary capital market (PCM) plays an important role in
the overall functioning of securities market. Despite several
measures the primary market remained lackluster till recently
and the pick up is gradual. According to the SEBI annual
report fewer number of issues accessed the primary market
during the year and the significantly lower than that of the
Previous financial year. Share of the equity issues, in terms of
number and amount Mobilized, however, was higher in this
financial year compared to the previous one. More than three-
fourths of the total amount was occupied second and no
resourced were in the previous years, banks and financial
institutions continued for 84.5% of the resourced mobilized
compared to 68.1% in 2001-02. All other industries shared
the remaining portion.
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74. o Eligibility Norms:
o Should offer through offer documents-Prospectus or
statement in lieu of prospectus; letter of offer in case of rights
issue.
o Draft Offer documents are to be filed with SEBI- through a
merchant Banker in case of rights issue in exces ofRs.50 lakh
o Fast track issues- In case of listed company filing of offer
documents in case of public/rights issue provided certain
conditions are fulfilled
o Separate conditions are to be complied with in case of
unlisted companies.
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77. CAPITAL RAISED DURING 2002-03
During the financial year 2002-03, primary market
witnessed a decrease of 46.0% in the amount
raised and also a decrease of 25.7% in the number
of issues launched compared to the same period in
2001-02. A total of 26 issues (14 public issues and
12 rights issues) opened during the financial year
2002-03 raising Rs. 4070.29 crore (Rs. 3638.6
crore through public issues and 431.6 crore through
rights issues). In 2001-02 a total of 35 issues
opened for raising Rs. 7543.0 crore (20 public
issues – Rs. 6501.8 crore and 15 rights issues –
Rs. 1041.2).
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78. INDUSTRY WISE CAPITAL MOBILIZATION
Three industries ciz. Banks / Fls, Engineering and
Telecommunications accounted for 93.2 per cent of
the resourced mobilized in 2001-02. In the current
year, the same three industries accounted for 84.7
per cent of the funds raised. With the banks and
Fls, increasing their share from 68.3 per cent to
84.5 per cent and companies in the
Telecommunications sector and raising any
resourced. In 2002-03 the three industries which
accounted for 95.3 per cent of the resources where
Banking / Fls, Information Technology, Paper and
Pulp.
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79. SECONDARY MARKET
During 2002-03, performance of Indian Stock
market was, by and large, a lackluster one, S&P
CNX NIFTY and BSE Sensex both registered
negative returns of 13.4 percent and 12.1 percent
respectively over the previous year. Other board
indicators also fell down.
Fall in the market in not specific too India alone
and it appears a global phenomena. Turnover has
been increasing and its reached peak in the month
of December 2002.
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80. DEVELOPMENT IN GOVERNMENT DEBT
MARKET
Government securities market during the past
financial year witnesses significant upturns in pries
until mid-January 2003 when the trend was
reversed. The pattern of downturn in yields was
halted due to the war tensions and consequent
uncertainly leading to a heavy selling
pressure. According to the report on Macro
Economic and Monetary Developments in 2002-03
published by the RBI Major developments in
government securities market in 2002-03 were:
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81. Introduction of the system of publishing a calendar by RBI that
outlines the issue of date government securities every half-year.
The calendar for the financial year 2002-03 was issued in March
2003.
Screen based order driven trading in government securities on
the stock exchanges introduced on January 16, 2003.
CSGL account holders permitted to enter into repo transactions
in government securities effective from March 3, 2003.
Guidelines for uniform accounting for repo/reverse repo
transactions were issued by RBI.
Under the securities lending scheme, the clearing corporation of
India limited (CCIL) has government securities from select
members
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82. FII INVESTMENT
Foreign institutional Investors (FIIS) were net buyers in
equities at Rs. 1 56bn on January 07, 2004. According to data
available from the Securities and Exchange Board of India
(SEBI) web site, their purchases for the day stood at Rs.
8.0.16bn.
With this, they have poured in Rs. 15.19bn or US$333.7mn in
Indian equities so far in January. Their cumulative investment
in Indian equities in July stood Rs. 23.46bn or
US$501.7mn. They have pumped in a net of Rs. 15.45mn or
so far in the 2004. In the entire 2002, FIIs had poured in a net
ot Rs36.77bn, or US$763.5mn.
The stock markets continue its upward surge. By the end of
the September 2003 the BSE Sensex has added more than
1300 points and climbed up to 4302. In fact the pick up in
stock prices in August 2003 has been the highest over the
previous four months of the bull run. The trend continues into
September except for a minor correction
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83. THE TRADE-OFF BETWEEN RISK AND RETURN
The return earned on investments represents the marginal
benefit of investing.
Risk represents the marginal cost of investing.
A trade-off always arises between expected risk and expected
return.
Valuing risky assets is a task fundamental to financial
management
Three-step procedure for valuing a risky asset.
1. Determine the asset’s expected cash flows
2. Choose discount rate that reflects asset’s risk
3. Calculate present value (PV cash inflows - PV outflows)
This three-step procedure is called
discounted cash flow (DCF) analysis.
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84. Effect of taxes on investment
• Do changes in the tax rate have a significant
effect on investment?
One study found that after major tax reforms,
investment responded strongly with an elasticity of
investment to changes in the user cost of capita
about –0.66.
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85. UNDERSTANDING RETURNS
Total return: the total gain or loss experienced on an investment
over a given period of time
Components of the total return
Income stream from the investment
Capital gain or loss due to changes in asset prices
Total return can be expressed either in Rupee terms or in
percentage terms.
Return on 30 shares of Rs.10 each =( 30*Rs.2,25) = 67.5=22.5%
Capital Gain( Purchase for RS.12 and current market price is 15
=
Rs.(15-12)*30 =RS.90= 30%
Total Return in Rs= 67.5+90 =157.50
Total Return in Percentage = 22.5+30 =%2.5%
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86. THE RISK DIMENSION
Percentage Returns on Bills, Bonds, and Stocks, 1900 – 2006
Nominal% Reaal %
Asset Class Average Best yr Worst yr Average Best yr Worst yr
Bills 4.0 1.47 0.00 1.1 1.97 -15.1
Bonds 5.2 4.04 -9.2 2.3 35.1 -19.4
Stocks 11.7 5.76 -43.9 8.5 56.5 -38.0
COMPARISON Risk Premium %
Stocks-Bills 11.7-4.0 7.7
Stocks-Bonds 11.7-5.2 6.5
Bonds-Stocks 5.2-4.0 1.3
Risk premium: the additional return that an investment must
offer, relative to some alternative, because it is more risky
than the alternative.
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87. WHY STUDY FINANCIAL MARKETS AND
INSTITUTIONS?
• They are the cornerstones of the overall financial
system in which financial managers operate
• Individuals use both for investing
• Corporations and governments use both for
financing
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88. OVERVIEW OF FINANCIAL MARKETS
Primary Markets versus Secondary
Markets
Money Markets versus Capital
Markets
Foreign Exchange Markets
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89. MONEY MARKETS VERSUS CAPITAL
MARKETS
Money Markets
markets that trade debt securities with maturities of one
year or less (e.g. CD’s, Treasury bills)
Capital Markets
markets that trade debt (bonds) and equity (stock)
instruments with maturities of more than one year
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90. FOREIGN EXCHANGE MARKETS
“FX” markets deal in trading one currency for
another (e.g. dollar for yen)
The “spot” FX transaction involves the immediate
exchange of currencies at the current exchange
rate
The “forward” FX transaction involves the exchange
of currencies at a specified date in the future and at
a specified exchange rate
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91. OVERVIEW OF FINANCIAL INSTITUTIONS
Institutions that perform the essential
function of channeling funds from
those with surplus funds to those with
shortages of funds (e.g. banks, thrifts,
insurance companies, securities firms
and investment banks, finance
companies, mutual funds, pension
funds)
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92. TYPES OF FIS
Commercial banks
depository institutions whose major assets are loans
and major liabilities are deposits
Thrifts
depository institutions in the form of savings and loans,
credit unions
Insurance companies
financial institutions that protect individuals and
corporations from adverse events
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93. Securities firms and investment banks
financial institutions that underwrite securities and
engage in securities brokerage and trading
Finance companies
financial institutions that make loans to individuals and
businesses
Mutual Funds
financial institutions that pool financial resources and
invest in diversified portfolios
Pension Funds
financial institutions that offer savings plans for
retirement
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94. SERVICES PERFORMED BY FINANCIAL
INTERMEDIARIES
Monitoring Costs
aggregation of funds provides greater incentive to collect a
firm’s information and monitor actions
Liquidity and Price Risk
provide financial claims to savers with superior liquidity and
lower price risk
Transaction Cost Services
transaction costs are reduced through economies of scale
Maturity Intermediation
greater ability to bear risk of mismatching maturities of assets
and liabilities
Denomination Intermediation
allow small investors to overcome constraints imposed to
buying assets imposed by large minimum denomination size
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95. SERVICES PROVIDED BY FIS BENEFITING
THE OVERALL ECONOMY
Money Supply Transmission
Depository institutions are the conduit through which
monetary policy actions impact the economy in general
Credit Allocation
often viewed as the major source of financing for a
particular sector of the economy (e.g. farming and real
estate)
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96. Intergenerational Wealth Transfers
life insurance companies and pension funds provide
savers with the ability to transfer wealth from one
generation to the next
Payment Services
efficiency with which depository institutions provide
payment services directly benefits the economy
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98. REGULATION OF FINANCIAL INSTITUTIONS
FIs provide vital financial services to
all sectors of the economy; therefore,
their regulation is in the public interest
In an attempt to prevent their failure
and the failure of financial markets
overall
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99. GLOBALIZATION OF FINANCIAL MARKETS
AND INSTITUTIONS
Financial Markets became more global as the value
of stocks traded in foreign markets soared
Foreign bond markets have served as a major
source of international capital
Globalization also evident in the derivative
securities market
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100. FACTORS LEADING TO SIGNIFICANT
GROWTH IN FOREIGN MARKETS
The pool of savings from foreign investors
has increased
International investors have turned to U.S.
and other markets to expand their investment
opportunities
Information on foreign investments and
markets is now more accessible (e.g. internet)
Some mutual funds allow ability to invest in
foreign securities with low transaction costs
Deregulation has enhanced globalization of
capital flows
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101. NEW TRADING MECHANISMS:
A YEAR AFTER
Technology has been a change driver
Created Virtual market place
Widened reach
Increased market efficiencies
Competitive market structures- ECNs?
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102. Reach
Geographical
Made a distribution framework available
Product Diversity
Efficiencies
Better order executions
Increased liquidity
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103. Price transparency
Cost reduction
Shorter settlement cycles
Full line service from order capture to settlement and
risk management
Regulatory issues with each new development
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105. EMERGING TRENDS
Wider client access to systems
Order routing systems
Net Trading
More access to information
Facilitating overseas interest
Increased emphasis on due risk management
Know Your client
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106. Services becoming more commoditised
Need to add value propositions
Single line of service model to clients right through
to Risk Management
Need to facilitate Technology Leverage by
Intermediaries
Leverage the trading infrastructure
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107. Customised products and OTC
Large value investors and OTC
Standardised products and contracts
Changing product profile
Time Horizons changing to span time zones
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108. Changing Settlement scenario
Changing Risk Management scenario
Straight Through Processing
Processing oriented to client level
Interfaces with other settlement Agencies
Integration emerging across markets
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109. MARKET INSTRUMENTS- FINANCIAL
INSTRUMENTS
Equity shares
Equity shares with detachable warrants
Non voting equity share
Preference share-redeemable
Preferences share- cumulative convertible
Debentures Non-convertible
Debentures –convertible
Zero interest fully convertible denture
Deep discount bonds
Stock invest
Euro issue
Zero coupon bonds
Company fixed deposits
warrants
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110. NEW ISUE
Kinds of Issue;
Public- IPO- Initial Public Offer by a new company and
unlisted company .]
Public- FPO- Further r Public Offer by a company already
issued shares to public and a listed company
Rights Issue
Preferential (private placement) to select persons subject to
provisions under the Companies Act and further subject to
SEBI guidelines relating to pricing,, disclosures in notice etc.
SEBI has laid down eligibility norms in 3 entry forms
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111. Entry form I Entry form II Entry form III
Net tangible assets of
3 crores for 3 full
years
Alterative 1 for
companies not
eligible under entry
form I
Alterative 2 for
companies not
eligible under entry
form I
Distributable profit in
3 years
Issue through book
building route with
50% allotted to
qualified buyers
The project to be
appraised by Fis and
SCBs with 10%
comes from
appraisers
Net worth of 1 crore
for 3 years
Change in name 50%
of revenue rom
pr3ceeding 1 year
should be from new
activity
Post issue face value
should be 10 crores
or compulsory market
making for at least 2
years
Post issue face value
should be 10 crores
or compulsory market
making for at least 2
years
Issue size should niot
exceed 5 times of
pre-issue net worth.
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112. DOCUMENTS OF ISSUE
Offer document: Structure of offer document:
Cover page
Risk factors- both internal external risks faced by the ompany
Introduction-summary of the industry, business of the issuing
company, summary of consolidated financials, operating and
other data. Important details like capital structure, objects of
offering , funds requirement, funding plan, schedule of
implementation, funds deployed already, balance funds
required, , basic terms of issue, basis for issue price, tax
benefits etc. are covered.
About us: includes a review of the details of the business of
the company, business strategy, competitive strengths,
insurance, industry regulation ,factory /corporate structure
Corporate governance
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113. History and main objects
Name and address of promoters, managers,
managing directors etc.
Location of project
Collaboration, if any.
Schedule for implementation.
Profile of the products.
Future prospects
Stock market data
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114. Financial statements including changes in accounting policies
in the last 3 years and the difference between accounting
policies of the company and Indian Accounting Policies.
Legal and other information
Mandatory disclosures covering authority for issue, prohibition
of SEBI, eligibility of the company to issue,
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115. PROSPECTUS FOR NEW ISSUETO PUBLIC.
Part I
A. General information:
Name and address of the company
Consent letter of Government (SEBI) and a
certificate fro Govt (SEBI) non- responsibilty
relating to financial soundness or correctness of the
statements
Name of stock exchange where application is made
for listing.
Compliance to applicable sections of Companies
Act for issue of shares to public.
Statement/declaration regarding of refund if 90%
subscription.
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116. Declaration regarding issue of allotment letters.
Date of opening and closing of issue.
Name of auditors and managers.
Name and address of trustee.
Rating of CRISIL
Underwriting agreements and details.
B. Capital structure
C. Terms of issue
D. Particulars of the issue
E. company management and Project
F- Declarations of public issues made by the company
G.- Disclosure of outstanding litigations, general
prosecutions, defaults
H- perception of risk factors.
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117. PART II OF THE PROSPECTUS
A. General Information:
Consent letters of Directors, Auditors, managers to
the issue. Solicitors/ advocates, bankers to the
company, bankers to the issue etc.
changes , if any in the last 3 years of directors,
auditors.
Authority to the issue
Procedure and time schedule for allotment and
issue of certificates.
Name and address of the legal advisors, managers,
auditors etc.
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118. B. Financial information:
Auditors report
Chartered accountants report when a business is proposed to
be acquired regarding financial standing of the company
C. Statutory and other information:
Minimum subscription.
Expenses of the issue
Underwriting commission
Issue previously made for cash.
Previous public or rights isue , if any.
Date of allotment, date of closing, date of refund, date of
listing in stock exchange
Shares issued at premium or discount and the amount
thereof.
Commission, brokerage on previous issueissue of shares
other than for cash.
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119. Debentures,preference shares etc issued by the company.
Details of property purchased or proposed to purchase.
Details of directors, whole time directors, government and
financial institution nominee directors etc.
Every other material information.
PART III
Declaration confirming that all provisions of companies Act and
guidelines of SEBI are complied with.
Application with prospectus.
Types of Prospectus:
1. Abridged prospectus
2. Prospectus for rights issue
3. Red-herring prospectus – a prospectus which does not have
complete particulars on the price of securities offered and the
quantum of securities offered. Here the securities offered
through ‘Book Building” process
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120. BOOK BUILDING METHOD OF OFFER TO PUBLIC
A company can issue 100% of share through book building or
75% through book building and 25% at the price determined
through book building. Reservation in firm allotment can be
made for promoter , permanent employees or permanent
employees of promoter company in case of new company
issue
The issuer company should appoint eligible merchant bankers
as Book runner(s).
The issuer company should enter into an agreement with a
stock exchange having the requisite facility of online offering
specifying inter alia their interse rights, responsibilities and
obligations.
It should also provide dispute resolving mechanism.
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121. The lead book runners should ensure compliance of the
following conditions:
1. The cap of the price band should not exceed 20% of the
floor or the price band should be less than or equal to 120%
of the floor price.
2. The price band can be revised during the building period.
The maximum revision on either sude should not exceed
20%.
3. Any revision should be widely disseminated by – informing
stock exchange, press release, indicating the changes in the
relevant website
4. Building period should be extended by 3 days subject to a
maximum building period of 13 days.
5. The manner in which the shortfall as result of reduction in
the price band is to be met for meeting the requirements of
the project.
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122. UNDERWRITING AND SEBI’S ROLE
Certificate of registration has to be obtained from SEBI by
institutions and agencies who would like to take up
underwriting obligations. The following requirements need to
be complied with:
1. Availability of office space, equipment and manpower to
effectively functioning.
2. Previous experience in underwriting or have a minimum of 2
persons having sufficient experience in underwriting .
3. Capital adequacy requirements of minimu net worth of Rs.
20 lakhs.
4. The applicant (Director, Principal officer, or the partner) has
not been convicted for nay offence, moral turpitude or
economic offence.
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123. Undertaking to fulfill of obligations under SEBI Act anf rules
and regulations.
Undertaking to fulfill obligations under the Companies Act and
requirements to be complied as per ROC notifications.
Payment of prescribed fee for registration.
Agreement with issuing company.
Code of Conduct including (1) not to derive any benefit from the
issuing company other than underwriting commission at
agreed rate subject to a ceiling of 5% for shares and 2.5% for
debentures (2) not to take up , at any time, total undertaking
obligations exceeding 20 times the networth. (3) duty bound to
subscribe within 45 days fronm the date of receipt of the
information from the issuing company.
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124. ISSUE OF SECURITIES
Government securities are the marketable debt issued by
government or semi government bodies are called
government securities.
Government securities market is where government securities
or gilt-edged securities are bought and sold.
RBI takes special care in purchase and sale of securitties
issued by the agencies- like Central and state governments,
metropolitan councils, IDBI,IFCI, SFCs, NABARD, port trusyt
etc.
These securities are safe and guaranteed payment of interest
and repayment
Offers comparatively lower rate of interest.
Liquidity of securities varies lkie central Government securities
liquidity are high but not State Government securities.
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125. These securities offer wide ranging tax incentives.
Market:- Gilt edged securities are over the counter securities
and government securities has Two markets-
Primary market consists of issuers like Central and Sate
Governments, and
The secondary market consists of banks, financial institutions,
insurance companies,, provident funds, primary dealers and
RBI.the forms of central ans stae government securities are
inscribed stock or stock certificate, promissory notes and
bearer bonds
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126. STOCK HOLDING CORPORATION OF INDIA
LTD.
Stock Holding Corporation of India Ltd. (SHCIL) was
incorporated at the special initiative of the Government of
India as a Public Limited Company in 1986. It has been jointly
promoted and owned by the All India Banks and Financial
Institutions, viz., IDBI Bank Ltd, ICICI Bank, SU-UTI, IFCI Ltd,
LIC, GIC, NIA, NIC, UIC, and TOICL all leaders in their fields
of business.
SHCIL began by offering custodial and post trading services,
adding depository services and other services to its portfolio
over a period of time.
SHCIL has established itself in India as a one-stop solution
provider in the Financial Services domain.
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127. SHCIL, apart from being the country’s premier Custodian and
Depository Participant, SHCIL is also the largest Professional
Clearing Member; backed by an immense capacity to process
volumes with precision. To give an idea of our capability, every
year we process around….
SHCIL also provides Derivatives clearing, PF fund accounting,
SGL constituent account services, distribution of mutual funds
and other capital market instruments, besides distribution of
life and non-life insurance policies.
Other offerings added to the bouquet are online net trading,
loan against shares, Western Union Money Transfer & E-
stamping. In the pipeline are a host of services that will
complement the range of services offered by SHCIL.
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128. Our Depository Participant services cater to all your
individual investment needs. With a parentage of
leading financial institutions and insurance majors
and a proven track record in the Custodian
business, we have reiterated our past success by
establishing ourselves as the first ever and largest
Depository Participant in India.
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129. From a tentative foray in 1998 into the individual investor arena to
servicing around seven lakh accounts, we have endeavored to
constantly add and innovate to make business a pleasure for you
Over 191 of our networked branches ensure we are available
wherever you look out for us. Across the country, thirteen Depository
Participant Machines (DPMs) connected to NSDL and seven
connected to CDSL ensure fast and direct processing of your
instructions.
Our customer-centric account schemes have been designed keeping
in mind the investment psyche of our clients. Your DP account with
us takes care of your Depository needs like dematerializations,
dematerializations and pledging of shares.
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130. Matching of your scanned signature on every debit
instruction with a digitally scanned original in our
system makes all your trading transactions
absolutely secure. Proactive backup of your
instructions prior to execution in the Depository
makes us oblivious to system crashes.
At SHCIL, we place a very high premium on client
reporting .Periodic statements sent to you keep you
informed of your account status. Dedicated
Customer Care lines manned by trained staff
answer your queries on demat / trades / holdings.
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131. SHCIL's long-standing association with Clearing Members has
enabled it to develop services based on an understanding of their
working and their requirement for timely and accurate information.
We accept deposits of collaterals( bank guarantees, FD's, Demat
shares) towards base capital and additional base capital
requirements stipulated by NSE for clearing members trading on its
capital market, Futures & OPTIONS, CURRENCY FUTURES
DERIVATIVE segment. Besides, our new products with a broker
empanelment clause ensures a mutually beneficial tie-up. Clearing
members stand to earn a steady income from our product
transactions and new additions to their client-base, while we
capitalize on their rapport with the market.
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132. We currently offer Depository services to more than 680
clearing members of various exchanges connected with NSDL
and CDSL. Our Customer Care lines answer all your DP
queries while the Interactive Voice Response (IVR) system
gives you information on your account and other valuable data
like CC calendar details, tariff, ISIN information, etc. via
telephone, fax and e-mail.
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133. Well integrated front and back office, paper and electronic systems. A
focussed Client Relation Team to manage your needs & queries. A
single point contact for your comfort.
In-house capability to address all IT needs in terms of software
development, maintenance, back office processing, database
administration, network maintenance, backups and disaster recovery.
Multilevel security is maintained in software, applications and
guards to access to various data, client and internal reports.
Expertise in running processes utilising digital signatures.
Regular Audits internal and external, by SEBI, Depositories, Clients
and compliance to rules and regulations
Constant review and benchmarking of processes to ensure
adherence to global best practices
Insurance cover with international re-insurance.
Full Confidentiality of business operations.
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134. We are a zero-debt, financially sound company with healthy
reserves.
We have a consistent dividend-paying track record.
Comprehensive business solutions adept in handling high
volume time critical transactions within a secured
environment.
Zero error approach towards delivery of products and
services
Single window view of business and up-to date information.
Oracle database currently of 1.2 Terabytes size (and
growing) managed by competent IT personnel with domain
expertise.
Data mirroring using cluster technology and fibre optic
connection as part of Disaster Management Plan.
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135. Network Security using Firewall, Proxy, Intrusion Detection
System(IDS) and Intrusion Prevention System (IPS)
Internet products with built in PKI features.
Dedicated communication channels with built-in redundancies in
connectivity to Client Institutions, Stock Exchanges, Clearing houses
and Depositories.
Accolades and certification
Citation and Medal from Smithsonian Institute, Washington D.C,
U.S.A. for " Visionary and Innovative use of Technology in Finance,
Insurance and Real Estate". First South Asian Corporate to receive
this.
Computer Society of India Award for best IT usage in the Country.
Our software processes have been assessed at SEI CMM Level 3.
Accepted industry leader and pioneer in Custodial Systems.
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136. SHCIL is a Custodian/Professional Clearing
Member of derivative segment at the Bombay Stock
Exchange and at the Futures & Options Segment of
the NSEIL respectively.
We have developed in-house Back Office systems
and procedures to cater to the needs of various
entities in the segment. A dedicated team of
professionals handle derivative operations and
assist its clients.
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137. As a professional clearing member, SHCIL performs the
following functions:
Clearing - Computing obligations of all his TM’s i.e.
determining positions to settle.
Settlement - Performing actual settlement.
Collateral Management - Collection of collateral (cash/cash
equivalents and securities), valuation on a regular basis (as
per J. R. Varma recommendations) and setting up exposure
limits for TMs and Institutional clients.
Risk Management- Setting position limits based on up front
deposits/margins for each TM and monitoring positions on a
continuous basis.
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138. LISTING OF SECURITIES
The objectives of listing are mainly to:
provide liquidity to securities;
mobilize savings for economic development;
Protect interest of investors by ensuring full disclosures
The Exchange has a separate Listing Department to grant
approval for listing of securities of companies in accordance
with the provisions of the Securities Contracts (Regulation)
Act, 1956, Securities Contracts (Regulation) Rules, 1957,
Companies Act, 1956, Guidelines issued by SEBI and Rules,
Bye-laws and Regulations of the Exchange.
company intending to have its securities listed on the
Exchange has to comply with the listing requirements
prescribed by the Exchange. Some of the requirements
are as under:-
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139. Minimum Listing Requirements for new companies
Minimum Listing Requirements for companies listed on other stock
exchanges
Minimum Requirements for companies delisted by this Exchange
seeking relisting of this Exchange
Permission to use the name of the Exchange in an Issuer Company's
prospectus
Submission of Letter of Application
Allotment of Securities
Trading Permission
Requirement of 1% Security
Payment of Listing Fees
Compliance with Listing Agreement
Cash Management Services (CMS) - Collection of Listing Fees
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140. Minimum Listing Requirements for new companies
The following revised eligibility criteria for listing of companies on the Exchange,
through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs),
effective August 1, 2006.
ELIGIBILITY CRITERIA FOR IPOs/FPOs
Companies have been classified as large cap companies and small cap
companies. A large cap company is a company with a minimum issue size of Rs.
10 crores and market capitalization of not less than Rs. 25 crores. A small cap
company is a company other than a large cap company.
In respect of Large Cap Companies
The minimum post-issue paid-up capital of the applicant company
(hereinafter referred to as "the Company") shall be Rs. 3 crores; and
The minimum issue size shall be Rs. 10 crores; and
The minimum market capitalization of the Company shall be Rs. 25 crores
(market capitalization shall be calculated by multiplying the post-issue paid-
up number of equity shares with the issue price).
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141. In respect of Small Cap Companies
The minimum post-issue paid-up capital of the Company shall be
Rs. 3 crores; and
The minimum issue size shall be Rs. 3 crores; and
The minimum market capitalization of the Company shall be Rs. 5
crores (market capitalization shall be calculated by multiplying the
post-issue paid-up number of equity shares with the issue price);
and
The minimum income/turnover of the Company should be Rs. 3
crores in each of the preceding three 12-months period; and
The minimum number of public shareholders after the issue shall
be 1000.
A due diligence study may be conducted by an independent team of
Chartered Accountants or Merchant Bankers appointed by the
Exchange, the cost of which will be borne by the company. The
requirement of a due diligence study may be waived if a financial
institution or a scheduled commercial bank has appraised the project
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142. For all companies :
In respect of the requirement of paid-up capital and
market capitalisation, the issuers shall be required to
include in the disclaimer clause forming a part of the
offer document that in the event of the market
capitalisation (product of issue price and the post
issue number of shares) requirement of the
Exchange not being met, the securities of the issuer
would not be listed on the Exchange.
The applicant, promoters and/or group companies,
should not be in default in compliance of the listing
agreement.
The above eligibility criteria would be in addition to
the conditions prescribed under SEBI (Disclosure and
Investor Protection) Guidelines, 2000.
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143. Minimum Listing Requirements for companies listed on other stock
exchanges
The Governing Board of the Exchange at its meeting held on 6th August,
2002 amended the direct listing norms for companies listed on other Stock
Exchange(s) and seeking listing at BSE. These norms are applicable with
immediate effect.
The company should have minimum issued and paid up equity capital of Rs.
3 crores.
The Company should have profit making track record for last three years. The
revenues/profits arising out of extra ordinary items or income from any source
of non-recurring nature should be excluded while calculating distributable
profits.
Minimum networth of Rs. 20 crores (networth includes Equity capital and free
reserves excluding revaluation reserves).
Minimum market capitalisation of the listed capital should be at least two
times of the paid up capital.
The company should have a dividend paying track record for the last 3
consecutive years and the minimum dividend should be at least 10%.
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144. Minimum 25% of the company's issued capital should be with Non-Promoters
shareholders as per Clause 35 of the Listing Agreement. Out of above Non
Promoter holding no single shareholder should hold more than 0.5% of the
paid-up capital of the company individually or jointly with others except in
case of Banks/Financial Institutions/Foreign Institutional Investors/Overseas
Corporate Bodies and Non-Resident Indians.
The company should have at least two years listing record with any of the
Regional Stock Exchange.
The company should sign an agreement with CDSL & NSDL for demat trading
Minimum Requirements for companies delisted by this Exchange
seeking relisting of this Exchange
The companies delisted by this Exchange and seeking relisting are required
to make a fresh public offer and comply with the prevailing SEBI's and BSE's
guidelines regarding initial public offerings.
Permission to use the name of the Exchange in an Issuer Company's
prospectus
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145. The Indian stock markets have really come of age there were so
many developments in the last 15 years that make the markets on
par with the developed markets.
The important feature of developed markets is the growing clout of
institutional investors and this paper sets out to find whether our
markets have also being dominated by institutional investors.
The regression results show that the combined might of the Flls and
mutual funds are a potent force, and they in fact direction can
forecast market direction using the direction of the flow of funds from
Flls and mutual funds, the Granger causality test has showed that
the mutuafunds in fact lead the market rise or fall and Flls follow suit.
.This may actually raise questions on the efficiency but on the
contrary, markets become more efficient with the growing presence
of institutional investors who predominantly go by fundamentals.
Noise trading on the part of institutional investors will be less in
Indian context since all their trades are delivery based
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146. Submission of Letter of Application
As per Section 73 of the Companies Act, 1956, a company seeking listing of
its securities on the Exchange is required to submit a Letter of Application to
all the Stock Exchanges where it
Allotment of Securities
As per Listing Agreement, a company is required to complete allotment of
securities offered to the public within 30 days of the date of closure of the
subscription list and approach the Regional Stock Exchange, i.e. Stock
Exchange nearest to its Registered Office for approval of the basis of
allotment.
In case of Book Building issue, Allotment shall be made not later than 15 days
from the closure of the issue failing which interest at the rate of 15% shall be
paid to the investors.
Trading Permission
As per Securities and Exchange Board of India Guidelines, the issuer
company should complete the formalities for trading at all the Stock
Exchanges where the securities are to be listed within 7 working days of
finalisation of Basis of Allotment.
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148. Requirement of 1% Security
The companies making public/rights issues are required to
deposit 1% of issue amount with the Regional Stock
Exchange before the issue opens. This amount is liable to be
forfeited in the event of the company not resolving the
complaints of investors regarding delay in sending refund
orders/share certificates, non-payment of commission to
underwriters, brokers, etc.
Payment of Listing Fees
All companies listed on the Exchange have to pay Annual
Listing Fees by the 30th April of every financial year to the
Exchange as per the Schedule of Listing Fees prescribed
from time to time.
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149. 1 Initial Listing Fees 20,000
2
Annual Listing Fees
(i) Companies with paid-up capital* upto Rs. 5 crores
(ii) AboveRs. 5 crores and upto Rs. 10 crores
(iii) Above Rs. 10 crores and upto Rs. 20 crores
10,000
15,000
30,000
3 Companies which have a paid-up capital* of more than Rs. 20 crores will pay additional fee of
Rs. 750/- for every increase of Rs. 1 crores or part thereof.
4 In case of debenture capital (not convertible into equity shares) of companies, the fees will be
charged @ 25% of the fees payable as per the above mentioned scales.
*includes equity shares, preference shares, fully convertible debentures, partly convertible debenture capital and any other security which
will be converted into equity shares.
Kindly Note the last date for payment of listing fee for the year 2006-2007 is April 30, 2006. Failure to pay the listing fee(for the
equity and/or debt segment) before the due date i.e. April 30, 2006 will attract imposition of interest @ 12% per annum w.e.f. May
1, 2006.
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150. ROLE OF SEBI IN SHARE TRADING
Section 3 of SEBI Act protects the interests of the investors in securities and also
promotes the development of, and regulates, the securities market and related
matters.
The following are the financial products/instruments which the secondary market
deals with
Equity Shares
Rights Issue/ Rights Shares
Bonus Shares
Preferred Stock/ Preference shares
Cumulative Preference Shares
Cumulative Convertible Preference Shares
Participating Preference Share
Bond
Zero Coupon Bond
Convertible Bond
Debentures
Commercial Paper
Coupons
Treasury Bills
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151. In July 2002 SEBI launched Electronic Data Information Filing and Retrieval
System (EDIFAR) in association with National Informatics Center (NIC) to
facilitate filing of certain material information/ documents/statements by the
listed companies on line in the EDIFAR web site - www.sebiedifar.nic.in.
What is a Central Listing Authority?
The Central Listing Authority (CLA) is set up to address the issue of multiple
listing of the same security and to bring about uniformity in the due diligence
exercise in scrutinizing all listing applications on any stock exchanges. The
functions of CLA as enumerated in SEBI (Central Listing Authority)
Regulations, 2003 include:
processing the application made by any body corporate, mutual fund or
collective investment scheme for the letter of recommendation to get listed at
the stock exchange,
making recommendations as to listing conditions, and
any other functions that may be specified by the SEBI Board from time to
time.
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152. What is the exit opportunity available for investors in case a company
gets delisted?
SEBI (Delisting of Securities) Guidelines, 2003 provide an exit mechanism,
whereby the exit price for voluntary delisting of securities is determined by the
promoter of the concerned company which desires to get delisted, in
accordance to book building process. The offer price has a floor price ,which
is average of 26 weeks average of traded price quoted on the stock exchange
where the shares of the company are most frequently traded preceding 26
weeks from the date public announcement is made. There is no ceiling on the
maximum price.
For infrequently traded securities, the offer price is as per Regulation20 (5) of
SEBI (Substantial Acquisition and Takeover) Regulations. Regarding this,
infrequently traded securities is determined in the manner as provided in
Regulation 20 (5) of SEBI (Substantial Acquisition and Takeover) Regulations.
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153. What is demutualization of stock exchanges?
Demutualization refers to the transition process of an exchange from a
"mutually-owned" association to a company "owned by shareholders". In
other words, transforming the legal structure of an exchange from a mutual
form to a business corporation form is referred to as demutualisation. The
above, in effect means that after demutualization, the ownership, the
management and the trading rights at the exchange are segregated from one
another.
How is a demutualised exchange different from a mutual exchange?
The three functions of ownership, management and trading are intervened
into a single Group in a mutual exchange. The broker members of the
exchange over here are both the owners and the traders on the exchange
and they further manage the exchange as well. A demutualised exchange has
all these three functions clearly segregated.
currently there are two stock exchanges in India The National Stock
Exchange (NSE)
Over the Counter Exchange of India (OTCEI)
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154. What is the traditional structure of the stock exchanges in India?
According to legal structure, the stock exchanges in India could be segregated into
2 broad groups
20 stock exchanges which were set up as companies, either limited by guarantees
or by shares
3 stock exchanges which are functioning as associations of persons (AOP) viz.
BSE, ASE and Madhya Pradesh Stock Exchange
What happens if I do not get my money or share on the due date?
You can file a complaint with the respective stock exchange. The exchange is
required to resolve the complaints. To resolve the dispute, the complainant can
also resort arbitration as provided on the reverse of contract note /purchase or sale
note.
However, if the complaint is not addressed by the Stock Exchanges or is unduly
delayed, then the complaints along with supporting documents may be forwarded
to Secondary Market Department of SEBI. Your complaint would be followed up
with the exchanges for expeditious redressal.
In case of complaint against a sub broker, the complaint may be forwarded to the
concerned broker with whom the sub broker is affiliated for redressal.
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155. What is the maximum brokerage that a broker/sub broker
can charge?
1.5% of the value mentioned in the respective purchase or
sale note.
How do I know whether my order is placed?
Unique Order Code Number is assigned by Stock Exchanges
to each transaction, which is intimated by broker to his client
and once the order is executed, this order code number is
printed on the contract note. The broker member also
maintains the record of time when the client has placed order
and reflect the same in the contract note along with the time of
execution of the order.
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156. Sebi and the exchanges have put in place surveillance
systems to monitor trading activity of listed companies.
During the year 2007-08 and 2008-09, Sebi had completed
investigations in 169 and 116 cases, respectively, for various
types of irregularities that include market manipulation, price
rigging, insider trading and others.
"Sebi remains vigilant at all times to detect any malpractices in
the market and wherever warranted, takes actions against the
entities violating the provision of Sebi Act, Rules and
Regulations,”
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157. SEBI is watch dog of the stock exchanges of
India.It has been obligated to protect the interests
of the investors in securities and to promote and
development of , and to regulate the securities
market by such measures as it thinks fit.The
measures may provide for
1)regulate the business in stock exchanges and
any other securities market
2)registering and regulating the working of stock
brokers , sub-brokers, share transfer agents,
bankers to an issue,merchant bankers,portfolio
managers and such other intermediaries who may
be associated with securities markets in any
manner
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158. 3)regulate the working and functions of
depositories,participants, custodians of securities,
FIIS,credit rating agencies by notification
4)registering and regulating the working of venture
capital funds , mutual funds
5)prohibiting unfair trade practices , insider trading
in securities
6)under taking inspection, conducting inquiries and
audits of exchanges
7)promoting investor education and training of
intermediaries of securities markets ref NCFM
capital markets ( dealers ) module work book.
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159. BUY BACK OF SHARES
Objectives of Buy Back: Shares may be bought back by the
company on account of one or more of the following reasons
i. To increase promoters holding
ii. Increase earning per share
iii. Rationalise the capital structure by writing off capital not
represented by available assets.
iv. Support share value
v. To thwart takeover bid
vi. To pay surplus cash not required by business
Infact the best strategy to maintain the share price in a bear
run is to buy back the shares from the open market at a
premium over the prevailing market price.
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160. Resources of Buy Back
A Company can purchase its own shares from
(i) free reserves; Where a company purchases its
own shares out of free reserves, then a sum equal
to the nominal value of the share so purchased
shall be transferred to the capital redemption
reserve and details of such transfer shall be
disclosed in the balance-sheet or
(ii) securities premium account; or
(iii) proceeds of any shares or other specified
securities. A Company cannot buyback its shares or
other specified securities out of the proceeds of an
earlier issue of the same kind of shares or specified
securities.
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161. Conditions of Buy Back
(a) The buy-back is authorised by the Articles of association of the
Company;
(b) A special resolution has been passed in the general meeting of the
company authorising the buy-back. In the case of a listed company, this
approval is required by means of a postal ballot. Also, the shares for buy
back should be free from lock in period/non transferability.The buy back
can be made by a Board resolution If the quantity of buyback is or less
than ten percent of the paid up capital and free reserves;
(c) The buy-back is of less than twenty-five per cent of the total paid-up
capital and fee reserves of the company and that the buy-back of equity
shares in any financial year shall not exceed twenty-five per cent of its
total paid-up equity capital in that financial year;
(d) The ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy-back;
(e) There has been no default in any of the following
i. in repayment of deposit or interest payable thereon,
ii. redemption of debentures, or preference shares or
iii. payment of dividend, if declared, to all shareholders within the
stipulated time of 30 days from the date of declaration of dividend or
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162. iv. repayment of any term loan or interest payable thereon to any
financial institution or bank;
(f) There has been no default in complying with the provisions of filing of
Annual Return, Payment of Dividend, and form and contents of Annual
Accounts;
(g) All the shares or other specified securities for buy-back are fully paid-
up;
(h) The buy-back of the shares or other specified securities listed on any
recognised stock exchange shall be in accordance with the regulations
made by the Securities and Exchange Board of India in this behalf; and
(i) The buy-back in respect of shares or other specified securities of
private and closely held companies is in accordance with the guidelines
as may be prescribed.
Disclosures in the explanatory statement
The notice of the meeting at which special resolution is proposed to be
passed shall be accompanied by an explanatory statement stating -
(a) a full and complete disclosure of all material facts;
(b) the necessity for the buy-back;
(c) the class of security intended to be purchased under the buy-back;
(d) the amount to be invested under the buy-back; and
(e) the time-limit for completion of buy-back
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163. Filing of Declaration of solvency
After the passing of resolution but before making buy-back,
file with the Registrar and the Securities and Exchange Board
of India a declaration of solvency in form 4A. The declaration
must be verified by an affidavit to the effect that the Board has
made a full inquiry into the affairs of the company as a result
of which they have formed an opinion that it is capable of
meeting its liabilities and will not be rendered insolvent within
a period of one year of the date of declaration adopted by the
Board, and signed by at least two directors of the company,
one of whom shall be the managing director, if any:
No declaration of solvency shall be filed with the Securities
and Exchange Board of India by a company whose shares are
not listed on any recognized stock exchange.
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164. Issue of further shares after Buy back
Every buy-back shall be completed within twelve months from the date of
passing the special resolution or Board resolution as the case may be.
A company which has bought back any security cannot make any issue
of the same kind of securities in any manner whether by way of public
issue, rights issue up to six months from the date of completion of buy
back.
Filing of return with the Regulator
A Company shall, after the completion of the buy-back file with the
Registrar and the Securities and Exchange Board of India, a return in
form 4 C containing such particulars relating to the buy-back within thirty
days of such completion.
No return shall be filed with the Securities and Exchange Board of India
by an unlisted company.
Prohibition of Buy Back
A company shall not directly or indirectly purchase its own shares or
other specified securities -
(a) through any subsidiary company including its own subsidiary
companies; or
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165. Procedure for buy back
a. Where a company proposes to buy back its shares, it shall, after
passing of the special/Board resolution make a public announcement
at least one English National Daily, one Hindi National daily and
Regional Language Daily at the place where the registered office of
the company is situated.
b. The public announcement shall specify a date, which shall be
"specified date" for the purpose of determining the names of
shareholders to whom the letter of offer has to be sent.
c. A public notice shall be given containing disclosures as specified in
Schedule I of the SEBI regulations.
d. A draft letter of offer shall be filed with SEBI through a merchant
Banker. The letter of offer shall then be dispatched to the members of
the company.
e. A copy of the Board resolution authorising the buy back shall be
filed with the SEBI and stock exchanges.
f.
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166. The date of opening of the offer shall not be earlier than seven
days or later than 30 days after the specified date
g. The buy back offer shall remain open for a period of not
less than 15 days and not more than 30 days.
h. A company opting for buy back through the public offer or
tender offer shall open an escrow Account.
Penalty
If a company makes default in complying with the provisions
the company or any officer of the company who is in default
shall be punishable with imprisonment for a term which may
extend to two years, or with fine which may extend to fifty
thousand rupees, or with both. The offences are, of course
compoundable under Section 621A of the Companies
Act,1956.
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167. LENDING AND PLEDGING OF SHARES
If you wish to take a loan from a Bank against the security of your
physical share, the certificate must be physically lodged with the
Bank.This action is called a Pledge.In electronic holding also you can
pledge the shares by making a request with your DP in favour of any
Bank.
What are the rules for Pledge Of Locked-in Securities? Locked-in
shares can be pledged with a Lendor (such as a Bank) for a loan.
However, the pledge cannot be closed or invoked before the lock-in
release date.
How can I Pledge / Hypothecate Shares? First of all the Bank
granting the loan should be a DP or a Client of a DP.You may submit
the written Pledge instruction to your DP.The Pledged quantity is
blocked in your DP Account by the Bank electronically.The loan is
now available for use by you.
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168. Can I dematerialize shares which are Pledged with a Bank
if the Bank is also a DP? Yes. You may, with the permission
of the Bank.
How to revoke pledged/hypothecated shares?
To revoke pledged/hypothecate shares, you need to submit a
pledge revocation form to the DP asking for the revocation of
your pledged securities.
What happens after the closure of my loan with the Bank
in case of a Pledge? Upon closure of your loan with the
Bank, the Pledge is closed in your DP account by the Bank
directly.Those released shares in your DP account are once
again available to you as free balances.
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169. What is Dematerialisation?
Dematerialisation (“Demat” in short form) signifies conversion of a
share certificate from its physical form to electronic form for the same
number of holding which is credited to your demat account which you
open with a Depository Participant (DP).
Dematerialisation is a process by which the physical share
certificates of an investor are taken back by the Company and an
equivalent number of securities are credited in electronic form at the
request of the investor. An investor will have to first open an account
with a Depository Participant and then request for the
dematerialisation of his share certificates through the Depository
Participant so that the dematerialised holdings can be credited into
that account. This is very similar to opening a Bank Account.
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170. Dematerialisation of shares is optional and an investor can still
hold shares in physical form. However, he / she has to demat the
shares if he / she wishes to sell the same through the Stock
Exchanges. Similarly, if an investor purchases shares, he / she
will get delivery of the shares in demat form.
What is a Depository?
A Depository (NSDL & CDSL) is an organisation like a Central
Bank where the securities of a shareholder are held in the
electronic form at the request of the shareholder through the
medium of a Depository Participant.
If an investor wants to utilise the services offered by a Depository,
the investor has to open an account with the Depository through
a Depository Participant.
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171. Depository Participant
Similar to the brokers who trade on your behalf in and outside
the Stock Exchange; a Depository Participant (DP) is your
representative (agent) in the depository system providing the
link between the Company and you through the Depository.
Your Depository Participant will maintain your securities
account balances and intimate to you the status of your
holding from time to time. According to SEBI guidelines,
Financial Institutions like banks, custodians, stockbrokers etc.
can become participants in the depository. A DP is one with
whom you need to open an account to deal in electronic form.
While the Depository can be compared to a Bank, DP is like a
branch of your bank with whom you can have an account.
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172. Impact
1. Institutional Structure
There are quite a few institutions that are directly and/or
indirectly connected with dematerialised operations of
securities. Understanding the inter-linkages and functional
responsibilities of these institutions will help us to have correct
and holistic perspective about functioning of dematerialisation.
The institutions connected with demat operations include; a)
Depositories, b) Stock Exchanges (SEs), c) Clearing
Corporations (CCs) / Clearing Houses (CHs), d) Depository
Participants (DPs), e) Registrars and Transfer Agents (RTAs).
Both the depositories NSDL and CDSL are primarily promoted
by the two leading stock exchanges viz., National Stock
Exchange of India Ltd (NSE) and The Stock Exchange,
Mumbai (BSE) respectively.
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173. 2. Market Microstructure
Trading in dematerialised shares brought in many changes to the entire
structure of the capital market functioning. With the introduction of demat,
stock exchanges switched over (with a choice) from five day accounting
period to T + 5 trading and settlement for demat stocks. Even for demat
stocks dual settlement is in operation: fixed account period as well as rolling
settlement. This partial change to T + 5 rolling settlement system is a major
shift in the market. Thus dematerialisation smoothly paved the way for rolling
settlement and India joined other developed markets that are following T+
settlement system. In the physical segment there is a long gap between
delivery and payment. This gap narrowed down, and it is almost on Delivery
Versus Payment basis (DVP). This near real time DVP reduced market risks
considerably. Clearing corporations / clearing houses and stock exchanges
are able to smoothly coordinate and settle the trades effectively and timely.
Clearing corporations / Clearing houses are electronically directly connected
to depositories that make settlements faster and easier. Trading in
dematerialised shares attracts lesser brokerage and custodial charges, as a
result. Reduced transaction costs prompts investors
This also makes bid-ask-spreads narrower, which reduces implicit transaction
costs.
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