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FINANCIAL MARKETS AND
INSTITUTIONS
BY A . ARULDOS S VITHAKAN
1/30/2015
1
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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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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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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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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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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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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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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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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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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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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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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 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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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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 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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 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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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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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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 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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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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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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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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 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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 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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 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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 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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 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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 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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 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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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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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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 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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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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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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 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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 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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 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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 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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 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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 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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 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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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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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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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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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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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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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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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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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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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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 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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 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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 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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 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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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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 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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 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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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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 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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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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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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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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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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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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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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 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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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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 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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 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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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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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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 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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PRIMARY MARKET ORGANISATION
Primary
Market
ELIGIBILTY
NORMS
OTCEI
Issue
BOOK
BUILDIN
G
PRICING
OF
ISSUE
INDIAN
DEPOSITORY
RECEIPTS
E-IPO
Preferent
ial
issue
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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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PRIMARY MARKET INTERMEDIARIES
BROKERSUNDERWRITERS
MERCHANT
BANKKERS &
LEAD
MANGERS
DEBENTURE
TRUSTEES
BANKERS TO
ISSUE
PORTFOLIO
MANAGERS
PROHIBITION OF
FAUDULENT
TRADING
REGISTRAR TO
AN
ISSUE&TRANSFE
R AGENT
PROHIBITION OF
INSIDER TRADING
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SECONDARY MARKET
ORGANISATION
SECOND
ARY
MARKET
STOCK
BROKING
BROKERS SUB-BROKESR
FOREIGN
BROKERS
TRADING IN
DERIVATIVES
TRADING/
CLEARIN/SHORT
SELLING/LENDING
BORROWING
CUSTODIAL
SERVICES
DEPOSITORY
SYSTEM
NSDL
CDSL
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 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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 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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 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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 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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 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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 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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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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 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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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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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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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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OVERVIEW OF FINANCIAL MARKETS
Primary Markets versus Secondary
Markets
Money Markets versus Capital
Markets
Foreign Exchange Markets
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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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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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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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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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 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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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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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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 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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RISKS FACED BY FINANCIAL INSTITUTIONS
Interest Rate Risk
Foreign Exchange Risk
Market Risk
Credit Risk
Liquidity Risk
Off-Balance-Sheet Risk
Technology Risk
Operation Risk
Country or Sovereign Risk
Insolvency Risk
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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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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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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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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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 Reach
 Geographical
 Made a distribution framework available
 Product Diversity
 Efficiencies
 Better order executions
 Increased liquidity
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 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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 Rolling settlement
 Derivatives
 Client-level approach
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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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 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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 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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 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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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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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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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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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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 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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 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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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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 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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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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 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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 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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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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 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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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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 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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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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 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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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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 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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 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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 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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 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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 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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 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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 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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 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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 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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 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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 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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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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 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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 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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 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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 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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 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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 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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 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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 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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 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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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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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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 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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 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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 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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 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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 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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 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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 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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 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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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.
1/30/2015
159
 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.
1/30/2015
160
 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
1/30/2015
161
 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
1/30/2015
162
 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.
1/30/2015
163
 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
1/30/2015
164
 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.
1/30/2015
165
 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.
1/30/2015
166
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.
1/30/2015
167
 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.
1/30/2015
168
 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.
1/30/2015
169
 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.
1/30/2015
170
 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.
1/30/2015
171
 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.
1/30/2015
172
 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.
1/30/2015
173
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Financial market & services

  • 1. FINANCIAL MARKETS AND INSTITUTIONS BY A . ARULDOS S VITHAKAN 1/30/2015 1
  • 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. 1/30/2015 2
  • 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. 1/30/2015 3
  • 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. 1/30/2015 4
  • 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. 1/30/2015 5
  • 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. 1/30/2015 6
  • 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 1/30/2015 7
  • 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 1/30/2015 8
  • 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. 1/30/2015 9
  • 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. 1/30/2015 10
  • 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 1/30/2015 11
  • 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. 1/30/2015 12
  • 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 1/30/2015 13
  • 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. 1/30/2015 14
  • 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. 1/30/2015 15
  • 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 1/30/2015 16
  • 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 1/30/2015 17
  • 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. 1/30/2015 18
  • 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 1/30/2015 19
  • 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 1/30/2015 20
  • 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: 1/30/2015 21
  • 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 1/30/2015 22
  • 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. 1/30/2015 23
  • 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. 1/30/2015 24
  • 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 1/30/2015 25
  • 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. 1/30/2015 26
  • 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: 1/30/2015 27
  • 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. 1/30/2015 28
  • 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. 1/30/2015 29
  • 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. 1/30/2015 30
  • 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 1/30/2015 31
  • 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. 1/30/2015 32
  • 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 1/30/2015 33
  • 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. 1/30/2015 34
  • 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. 1/30/2015 35
  • 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. 1/30/2015 36
  • 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. 1/30/2015 37
  • 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. 1/30/2015 38
  • 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. 1/30/2015 39
  • 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: 1/30/2015 40
  • 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 1/30/2015 41
  • 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. 1/30/2015 42
  • 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. 1/30/2015 43
  • 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. 1/30/2015 44
  • 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. 1/30/2015 45
  • 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. 1/30/2015 46
  • 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 1/30/2015 47
  • 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 1/30/2015 48
  • 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 1/30/2015 49
  • 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 . 1/30/2015 50
  • 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. 1/30/2015 51
  • 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. 1/30/2015 52
  • 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. 1/30/2015 53
  • 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. 1/30/2015 54
  • 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 1/30/2015 55
  • 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) 1/30/2015 56
  • 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 1/30/2015 57
  • 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 1/30/2015 58
  • 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. 1/30/2015 59
  • 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. 1/30/2015 60
  • 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. 1/30/2015 61
  • 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 1/30/2015 62
  • 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 1/30/2015 63
  • 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. 1/30/2015 64
  • 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 1/30/2015 65
  • 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% 1/30/2015 66
  • 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. 1/30/2015 67
  • 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 1/30/2015 68
  • 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 1/30/2015 69
  • 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. 1/30/2015 70
  • 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. 1/30/2015 71
  • 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. 1/30/2015 72
  • 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. 1/30/2015 74
  • 75. PRIMARY MARKET INTERMEDIARIES BROKERSUNDERWRITERS MERCHANT BANKKERS & LEAD MANGERS DEBENTURE TRUSTEES BANKERS TO ISSUE PORTFOLIO MANAGERS PROHIBITION OF FAUDULENT TRADING REGISTRAR TO AN ISSUE&TRANSFE R AGENT PROHIBITION OF INSIDER TRADING 1/30/2015 75
  • 76. SECONDARY MARKET ORGANISATION SECOND ARY MARKET STOCK BROKING BROKERS SUB-BROKESR FOREIGN BROKERS TRADING IN DERIVATIVES TRADING/ CLEARIN/SHORT SELLING/LENDING BORROWING CUSTODIAL SERVICES DEPOSITORY SYSTEM NSDL CDSL 1/30/2015 76
  • 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). 1/30/2015 77
  • 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. 1/30/2015 78
  • 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. 1/30/2015 79
  • 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: 1/30/2015 80
  • 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 1/30/2015 81
  • 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 1/30/2015 82
  • 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. 1/30/2015 83
  • 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. 1/30/2015 84
  • 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% 1/30/2015 85
  • 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. 1/30/2015 86
  • 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 1/30/2015 87
  • 88. OVERVIEW OF FINANCIAL MARKETS Primary Markets versus Secondary Markets Money Markets versus Capital Markets Foreign Exchange Markets 1/30/2015 88
  • 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 1/30/2015 89
  • 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 1/30/2015 90
  • 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) 1/30/2015 91
  • 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 1/30/2015 92
  • 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 1/30/2015 93
  • 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 1/30/2015 94
  • 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) 1/30/2015 95
  • 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 1/30/2015 96
  • 97. RISKS FACED BY FINANCIAL INSTITUTIONS Interest Rate Risk Foreign Exchange Risk Market Risk Credit Risk Liquidity Risk Off-Balance-Sheet Risk Technology Risk Operation Risk Country or Sovereign Risk Insolvency Risk 1/30/2015 97
  • 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 1/30/2015 98
  • 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 1/30/2015 99
  • 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 1/30/2015 100
  • 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? 1/30/2015 101
  • 102.  Reach  Geographical  Made a distribution framework available  Product Diversity  Efficiencies  Better order executions  Increased liquidity 1/30/2015 102
  • 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 1/30/2015 103
  • 104.  Rolling settlement  Derivatives  Client-level approach 1/30/2015 104
  • 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 1/30/2015 105
  • 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 1/30/2015 106
  • 107.  Customised products and OTC  Large value investors and OTC  Standardised products and contracts  Changing product profile  Time Horizons changing to span time zones 1/30/2015 107
  • 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 1/30/2015 108
  • 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 1/30/2015 109
  • 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 1/30/2015 110
  • 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. 1/30/2015 111
  • 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 1/30/2015 112
  • 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 1/30/2015 113
  • 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, 1/30/2015 114
  • 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. 1/30/2015 115
  • 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. 1/30/2015 116
  • 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. 1/30/2015 117
  • 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. 1/30/2015 118
  • 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 1/30/2015 119
  • 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. 1/30/2015 120
  • 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. 1/30/2015 121
  • 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. 1/30/2015 122
  • 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. 1/30/2015 123
  • 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. 1/30/2015 124
  • 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 1/30/2015 125
  • 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. 1/30/2015 126
  • 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. 1/30/2015 127
  • 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. 1/30/2015 128
  • 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. 1/30/2015 129
  • 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. 1/30/2015 130
  • 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. 1/30/2015 131
  • 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. 1/30/2015 132
  • 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. 1/30/2015 133
  • 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.  1/30/2015 134
  • 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. 1/30/2015 135
  • 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. 1/30/2015 136
  • 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. 1/30/2015 137
  • 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:- 1/30/2015 138
  • 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 1/30/2015 139
  • 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). 1/30/2015 140
  • 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 1/30/2015 141
  • 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. 1/30/2015 142
  • 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%. 1/30/2015 143
  • 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 1/30/2015 144
  • 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 1/30/2015 145
  • 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. 1/30/2015 146
  • 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. 1/30/2015 148
  • 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. 1/30/2015 149
  • 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 1/30/2015 150
  • 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. 1/30/2015 151
  • 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. 1/30/2015 152
  • 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) 1/30/2015 153
  • 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. 1/30/2015 154
  • 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. 1/30/2015 155
  • 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,” 1/30/2015 156
  • 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 1/30/2015 157
  • 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. 1/30/2015 158
  • 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. 1/30/2015 159
  • 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. 1/30/2015 160
  • 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 1/30/2015 161
  • 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 1/30/2015 162
  • 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. 1/30/2015 163
  • 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 1/30/2015 164
  • 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. 1/30/2015 165
  • 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. 1/30/2015 166
  • 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. 1/30/2015 167
  • 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. 1/30/2015 168
  • 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. 1/30/2015 169
  • 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. 1/30/2015 170
  • 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. 1/30/2015 171
  • 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. 1/30/2015 172
  • 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. 1/30/2015 173