Financial Services - Systems, Practices and Opportunities

FINANCIAL SERVICES – SYSTEMS,
PRACTICES & OPPORTUNITIES

by :
DR. T.K. JAIN
AFTERSCHO☺OL
centre for social entrepreneurship
sivakamu veterinary hospital road
bikaner 334001 rajasthan, india
FOR – CSE & PGPSE STUDENTS
(CSE & PGPSE are free online programmes
open for all, free for all)
mobile : 91+9414430763
5 DECEMBER 09 www.afterschool.tk 1
My word.....
My purpose here is to give an introductory lesson on financial services
in Indian context. Some of you can become entrepreneurs in this
sector. There are tremendous opportunities in this sector. N. Raju,
PGPSE from the first batch has become a successful entrepreneur in
this sector. Mahavir and Arihant (PGPSE from 2nd batch) have also
taken up this sector. I therefore believe that you can also start with this
sector - if you like it. Later, you may start your true non-profit
ventures also. Please pass this presentation to all those who might need
it. Let us spread knowledge as widely as possible. I welcome your
suggestions. I also request you to help me in spreading social
entrepreneurship across the globe – for which I need support of you
people – not of any VIP. With your help, I can spread the ideas – for
which we stand....
WHAT ARE THE TWO MAIN
COMPONENTS OF
FINANCIAL MARKET?
1. CAPITAL MARKET
2. MONEY MARKET
WHAT ARE THE TWO
COMPONENETS OF CAPITAL
MARKET ?
1. SECURITIES MARKET
2. OTHER INSTRUMENTS
WHAT ARE THE
COMPONENTS OF
SECURITIES MARKET?
1. new issue market / primary market

2. secondary market
WHAT IS DIFFERENCE
BETWEEN FI,FII,FDI?
FI = financial institution
(we also use the DFI = Domestic Financial
Institution for this)
FII = foreign institutional investor – they invest
through stock market
FDI =foreign direct invesment – direct
investment in companies
What is the term of judges of SAT
?
SAT = scurities appellate tribunal
as per Sec15N of SEBI act, the Presiding
Officer and every other member of Securities
Appellate Tribunal shall hold office for a term
of five years (or upto age 68 for presiding
officer and 62 for other members) from the
date he enters upon his office and is eligible for
reappointment.
What is insider trading ?
Insider = a person who is in a company

trading = price rigging / taking advantage of
share price
It is to take benefit in stock market from price

sensitive information related to a company
IT IS ILLEGAL
What is the penalty on insider
trading?
Section 15G of SEBI act gives meaning of insider trading : if
any insider 1. either on his own behalf or on behalf of any
other person, deals in securities of a company on any stock
exchange on the basis of any unpublished price sensitive
information; or
2. communicates any unpublished price sensitive information
to any person,
3. counsels to deal in any securities of any body corporate on
the basis of unpublished price sensitive information then :
penalty =twenty five crore rupees or three times the amount of
profits made out of insider trading, whichever is higher.
What is the penalty if any asset management
company of a mutual fund registered under
SEBI Act fails to comply the regulations of
SEBI?
As per sec. 15E : penalty of one lakh rupees for

each day during which such failure continues
or one crore rupees
What is a collective investment
scheme?
sub-clause (2) of Section 11AA of SEBI act :
1 investments are pooled and utilized as per a scheme
2. Investors contribute to this scheme to receive profits,
or income or produce or property
3. the investments is managed under the scheme on
behalf of the investors & the latter do not have day to day
control over the management and operation of the scheme
or arrangement.
What is not a collective
investment scheme ?
1. contribution to mutual fund
2. insurance
3.chit fund
4. company's deposits under sec. 58A
5. schemes of cooperative societies
6. other schemes, which come under some
other law
What are the powers of SEBI?
It is having powers equal to Civil Court under

the Code of Civil Procedure, 1908
it can :
1. INSPECT / SEIZE DOCUMENTS
2. TAKE EVIDENCE
3. SUMMON & ENFORCE ATTENDANCE
4. ISSUE COMMISSION
What is clause 41 of listing
agreement ?
It specifies that the company must submit the

number of investor complaints received,
disposed of, unresolved alongwith their
quarterly results to the stock exchange (where
it is listed).
What is the maximum cap on
invstment by a single investor in a
mutual fund scheme ?
no single investor can hold more than 25 per

cent of the corpus of any scheme/plan.
How much can mutual funds
invest in foriegn securities ?
up to 10 per cent of their net assets as on

January 31 of each year subjects to limits of
minimum US $ 5 million and maximum of US
$ 50 million.
Can FII participate in divestment
by the Government in listed
companies.
Yes
Should FII report the issue of their
off shore derivative instruments to
SEBI?
Yes, FIIs, have to report issuance/

renewal/cancellation/redemption of off-shore
derivatives instruments against underlying
Indian securities
What is the difference between
primary and secondary market ?
The primary market provides the channel for

sale of new securities, while the secondary
market deals in securities previously issued
What is the difference between
capital market and money
market ?
Capital market is for long term funds (more
than 1 year)
as the name denotes – this market has focus on
the capital - the claims are to the capital of the
company – example : equity market
money market is for short term funds (less than
1 year) – here money is borrowed for short
term
What is the share of Indian equity
market in the world ?
1% of total world turnover

The market capitalization of all listed
companies taken together on all markets is
1.5% of the world (about US$ 100 trillion)
What is market capitalisation?
The total market value of all the shares listed
on stock exchanges is called total market
capitalisation similarly for a company, the
market price of all its shares is its market
capitalisation
example : XYZ has issued 1000 shares. Market
price of 1 share is 200, so its market
capitalisation is 200*1000 = 200,000
What is the overall holdings of
shares in India ?
The promotors hold about 50% non-promoters

hold about 50%, (which includes : the public
has 16.% and the institutional holdings by
(FIIs, MFs, FIs) have 24% & FIIs have about
9%. others 1%)
What is the contribution of
household sector in Indian
economy?
Savings : It has given 83% of gross domestic savings.
Their investments are as under : they have invested 38%
of financial savings in deposits, 25% in
insurance/provident funds, 12% on small savings, and 9%
in securities (out of which the investment in Gilts has been
24%), including government securities and units of mutual
funds. The fixed income bearing instruments are still the
most preferred investment option.
How much money has Indian
companies raised from ADR /
GDR issues ?
Since they were permitted access in 1992,

Indian companies have raised about Rs. 2 lakh
million through American Depository Receipts
(ADRs)/Global Depository Receipts (GDRs).
What is the investment by FIIs in
India?
They have invested about US $ 200 bn. In

India.
About 1000 FIIs are registered with SEBI
What is GETF?
GETF = gold exchange traded fund

from January 12, 2006 mutual funds are
permitted to issue GETFs in India subject to
certain investment restrictions
What do you understand from C
& D of stock exchanges ?
Corporatisation (c) and Demutualisation (d)

corporatisation = to convert into company
demutualisation = to spread out ownership
only NSE & OTCEI are C & D.
Should a share broker send both
ECN & physical contract note to
the client ?
No, Only one of them is required. If ECNs
(electronic contract note) have not been
delivered or have been rejected by the e-mail
ID of the client, the broker is obligated to send
the physical contract note(s) within the
stipulated time under the extant SEBI
guidelines.
Is it necessary that clients should
have UIN?
On the basis of Jagdish Capoor Committee &

under MAPIN regulations, Unique
Identification Number (UIN) with biometric
impression is nessary for a trade order value of
Rs. 5 lakh and above.For lower value, a person
can submit eiher PAN or UIN.
Is it necessary to disclose issue
price to SEBI?
a company is required to disclose the issue
price or the price band in the offer document
filed with SEBI. In order to provide flexibility.
A company should fix and disclose the issue
price in case of a rights issue also.
But all these are there in fixed price issues.
Now most companies go for bidding and not
for fixed price issues – so these regulations are
not applicable.
Is letter of offer necessary in the
case of rights issue also ?
Yes,
the company can send either letter of offer or
abridged letter of offer.
An abridged letter of offer contains disclosures
as required to be given in the case of an
abridged prospectus.
What is the minimum public
shareholding requirement as per
SEBI (DIP) Guidelines, 2000
25%
What is clause 49 of listing
agreement ?
It contains details provisions relating to :
•independent directors,
•responsibilities of audit committees,
•improving quality of financial disclosures, related party
transactions
•proceeds from public/rights/preferential issues, formal code of
conduct
•CEO/CFO certification of financial statements disclosures to
shareholders
•whistle blower policy
What is shelf prospectus ?
From 2004-5, the facility of shelf prospectus
was introduced for public sector banks,
scheduled banks and public financial
institutions. They can file a draft shelf
prospectus in the first instance disclosing the
aggregate amount they intend to raise through
various tranches. Any amount of over-
subscription can be retained by the issuer in
each tranche subject to the overall limit set for
the year.
What is the the market capitalisation &
market turnover in Indian stock markets in
comparison to national income ?
Market capitalization as percent for GDP in

India is 65% (in developed countries, it is more
than 100% )
The turnover ratio, which is a measure of
liquidity, however is approximately 108% it is
115% for developed countries.
What is money market ?
It is the market for short term funds. It is a
wholesale debt market for low-risk, highly
liquid, short term instruments. Funds are
available in this market for periods ranging
from a single day upto a year. Mostly
government, banks and financial institutions
dominate this market. It is a formal financial
market that deals with short-term fund
management.
What is the nature of money
market – wholesale – or retail ?
The money market is a wholesale market. The

volumes are very large and generally
transactions are settled on a daily basis.
Trading in the money market is conducted over
the telephone, followed by written
confirmation from both the borrowers and
lenders.
Who are the main players in
money market ?
Government ( T bill )
banks
financial institutions
corporations
What is T bill ?
Treasury bill
It is issued for 3 months / 6 months
it is issued at discount price in comparison to
its face value
the discount rate is based on bidding process
generally banks / FI buy T bills – as these
instruments are very safe and fullfill SLR
requirements also
What is zero coupon bond ?
Zero Coupon bonds are bonds issued at
discount to face value and redeemed at par.
These were issued first on January 19, 1994
and were followed by two subsequent issues in
1994-95 and 1995-96 respectively.
Example : face value of bond is 100, it doesnot
carry any interest – it is issued at Rs. 90. At the
time of maturity, the investor would get 100
(so his return is 10 on 90)
What is Dated Security ?
These are govt of India (GOT) Securities

issued with fixed interest rate. They have fixed
maturity and fixed coupon securities usually
carrying semi-annual coupon. These are called
dated securities because these are identified by
their date of maturity and the coupon, e.g.,
11.03% GOI 2018 is a Central Government
security maturing in 2018
What are FRB (Floating rate
bond)?
loating Rate Bonds are bonds with variable
interest rate with a fixed percentage over a
benchmark rate (base rate – for example
LIBOR) . There may be a cap and a floor rate
attached Floating rate bonds of four year
maturity were first issued on September 29,
1995, followed by another issue on December
5, 1995. The coupon is reset every six months.
WHAT IS CAP & FLOOR ?
Maximum interest rate possible is here CAP

minimum rate of interest possible is FLOOR
What is benchmark rate ?
These are international rates which are used as base rate

for example : LIBOR , MIBOR
LIBOR = london inter bank offered rate
this rate changes every day – as it is based on market
forces and keeps fluctuating.
If you fix rate as : LIBOR + 50 BASIS POINTS
then your rate will be the prevailing LIBOR rate + 50
basis points if LIBOR is 3, the rate will be 3.5
What are bonds with call / put
option?
RBI issued a bond with call and put option in 2002 This
bond is due for redemption in 2012 and carries a coupon
(interest rate) of 6.72%. This bond has call and put option
after five years i.e. in year 2007. In other words it means
that holder of bond can sell back (put option) bond to
Government in 2007 or Government can buy back (call
option) bond from holder in 2007. (option = it is at the
choice of the investor – if he wants – he can exercise the
option – otherwise not. )
What is capital indexed bond ?
These are bonds where interest rate is a fixed
percentage over the wholesale price index.
These provide investors with an effective
hedge against inflation
example : if capital indexed bond is to be paid
interest at 2% above WPI. Suppose after 1 year
WPI is 105 in relation to issue date (taking
issue WPI as 100) – the interest rate should be
5+2 = 7% answer
What is the day count for one year
?
For government dated securities and state

government securities the day count is taken as
360 days for a year and 30 days for every
completed month. However for Treasury bills
it is 365 days for a year.
What is Dutch Auction?
It is also called uniform price auction. Here

bids are accepted at the same prices as decided
in the cut off.
Example : cut off price is 100, so bids are
accepted at 100
What is french auction?
It is used for Government dated securities and

treasury bills. Bids are accepted at different
prices/yields quoted in the individual bids.
What is cut off price ?
It is the minimum price accepted for the

security
What is cut off yield ?
Yield rate = rate of return. A yield rate of 10 means the
bond will give 10% return.
Bids at yields higher than the cut-off yield is rejected and
those lower than the cut-off are accepted. The cut-off
yield is set as the coupon rate for the security. Bidders
who have bid at lower than the cut-off yield pay a
premium on the security
example : a bond carrying Rs. 100 interest p.a. Is issued
on cut off yield basis. Cut off yield is 10%. That means
the bidder will pay 1000. If a bidder bids for 5% then he
will have to pay 2000 (here 1000 is premium paid by
him).
What is on tap issue ?
This is a reissue of existing Government securities having

pre-determined yields/ prices by Reserve Bank of India.
After the initial primary auction of a security, the issue
remains open to further subscription by the investors as
and when considered appropriate by RBI. The coupon
rate, the interest dates and the date of maturity remain the
same as determined in the initial primary auction. Reserve
Bank of India may sell government securities through on
tap issue at lower or higher prices than the prevailing
market prices.
EXAMPLE OF ON TAP ISSUE
A security was issued by Government of India

at 100 carrying coupon rate of 10%. 400 out of
1000 were taken away by investors thorugh
bidding. Since RBI participated in the auction
as non-bidder, the left out portion (600)
devolved on RBI. So RBI again went for on
TAP issue of these securities.
What is open market operation?
OMO=Government securities that are privately placed
with the RBI are sold in the market.
The yield at which these securities are sold may differ
from the yield at which they were privately placed with
RBI. Open market operations are used by the RBI to
infuse or suck liquidity from the system. Whenever the
RBI wishes to infuse the liquidity in the system, it
purchases government securities from the market, and
whenever it wishes to suck out the liquidity from the
system, it sells government securities in the market.
WHAT IS CALL MONEY
MARKET ?
Money at short notice is for a maturity of or up
to 14 days
banks participate in call money market to meet
their very short term liquidity needs
at the time of Lehman Brothers crisis, ICICI
extensively borrowed from Call money market
and the rates in this markets zoomed to very
high levels.
What is bill rediscounting ?
Bill-financing = seller drawing a bill of

exchange and the buyer accepting it, thereafter
the seller discounting it with, say, a bank, later
the bank gets it further rediscouted from other
banks / RBI
What is MMMF?
= Money Market Mutual Funds
a mutual fund that invests in money market
first introduced in 1971 by Bruce Bent and
Henry Brown of the Wall street.
RBI appointed a task force on MMMFs was
set up under the chairmanship of D Basu in
September, 1991 and itnroduced MMMF in
1992 and SEBI issued guidelines on these in
1994 .
Formation of which institution
enhanced call money market and
stabilised it?
The formation and operations of Discount and

Finance House of India (DFHI) led to
enhanced activities in this market segment.
What are the reasons for
fluctuations in call money
market ?
periodical large borrowings to meet CRR
requirements of banks.
certain banks operate excessive credit beyond
their permissible limits so they need money
from call moneymarket
call rates increase steeply when institutional
lenders and corporates withdraw huge amounts
for tax payments etc.
What types of IBP are possible?
IBP = inter bank participation

THEY ARE OF 2 TYPES :
1. on risk sharing basis
2. without risk sharing
these have been revived as per the suggestions
of Vaghul committeee
My bank wants to buy 91 Days Treasury Bill
Maturing on Dec. 26, 2009. The rate quoted by seller
is Rs. 99.5 per Rs. 100 face values. Today is 5/12/9,
What YTM?
YTM = yield to maturity
formula = ((100 – price paid) * 365*100)/
(price paid * days to maturity)
= ((100-99.5)*365*100) / (99.5*21)
YTM =8.73%
How do my bank bid to buy T bill
in primary market ?
Primary market = RBI (for govt. Bonds & T bill)
2. We have to submit Bid on NDS by 2:30 PM on Wednesday. If
Wednesday happens to be a holiday on Tuesday.
3. We have to submit Bid in terms of price per Rs 100. For
example, a bid for 91-day Treasury bill auction could be for Rs 98.
4. Auction committee of Reserve Bank of India decides the cut-off
price and results are announced on the same day.
5. Bids above the cut-off price receive full allotment; bids at cut-
off price may receive full or partial allotment and bids below the cut-
off price are rejected
What is CD ?
CD = certificate of deposit
It is a negotiable money market instrument and
issued in dematerialised form or as a Usance
Promissory Note, for funds deposited at a bank
or other eligible financial institution for a
specified time period.
What is minimum amount of CD ?
Rs.1 lakh
What should be the maturity
period of CDs issued by banks ?
not less than 15 days and not more than one

year
Can payment of CD be obtained
before maturity date ?
Yes, by sale. Physical CDs are freely

transferable by endorsement and delivery.
Demat CDs can be transferred as per the
procedure applicable to other demat securities.
There is no lock-in period for the CDs.
Banks/FIs cannot grant loans against CDs.
They cannot buy-back their own CDs before
maturity.
What is ICD ?
It is an unsecured loan extended by one

corporate to another.
What is CP ?
CP = commercial paper
It is an unsecured money market instrument
issued in the form of a promissory note. It is a
privately placed instrument. It was introduced
in India in 1990 with a view to enabling highly
rated corporate borrowers to diversify their
sources of short-term borrowings and to
provide an additional instrument to investors
What is the maturity period of
CP ?
minimum of 7 days and a maximum up to one

year
What are the different types of T
bills?
14 day
182 day
91 day
364 day
RBI issues these at a prefixed day and a fixed
amount.(they are issued in multiple of 100
crore rupees)
What is private placement of govt.
security ?
The Central Government may privately place

government securities with Reserve Bank of
India. This is usually done when the Ways and
Means Advance (WMA)
What is WMA?
As per the latest law, the government has to

give justification for any money that it wants to
raise from RBI. This justification based
borrowing is called WMA
WMA = WAYS AND MEANS ADVANCES
What is demutualisation ?
Convert stock exchange to FOR PROFIT

organisation
The board should consist of 75% public
interest/ shareholder directors and 25% broker
directors,
51% shareholding of the stock exchange
should be divested to public& 49% with the
trading member brokers.
Can you hold more than 1%
shares of a recognised stock
exchange ?
Yes, provided you have the following:
financial integrity;
good reputation and character; and
honesty.
(and of course a track record of no crime, no
bankruptcy, no scam etc.)
What is venture capital ?
Venture capital is the capital that is invested in

equity or debt securities (with equity
conversion terms) of young unseasoned
companies promoted by technocrats (like you)
who attempt to break new path.
It has more risk, more uncertainity, also more
returns.
Persons like you need it badly.
What was the first VCF in India ?
Technology Development Fund (TDF) in the

year 1987-88 (promoted by Govt. Of India)
Who is incubator?
hardcore technocrat who works with an

entrepreneur to develop a business idea, and
prepares a Company for subsequent rounds of
growth & funding
Who is angel investor ?
The venture capitalist, who invests in his
chosen field of technology, take active
participationin in day-to-day running of the
Company, does not insist on detailed business
plans
He also help in “second round” of funding.
Angel investor invests in small or mid sized
organisations.
Who are private equity players?
They invest into proven/ established businesses
How to start a venture capital
fund (VCF)?
Take up a pool of financers, Prepare a

company. Along with a copy of memorandum
of association, make an application to SEBI for
grant of a certificate in the prescribed form
accompanied by a non-refundable application
fee
Can Venture capital fund raise
money from any investor ?
Yes,
provided, such investment from any investor is
more than five lakh rupees.
Can VCF invest money arbitrarily
?
No, VCF has to disclose the investment

strategy at the time of application for
registration and should not invest more than
25% corpus of the fund in one venture capital
undertaking.
Can the units of VCF be listed?
Yes, after the expiry of three years from the

date of the issuance of units by the venture
capital fund.
Can VCF Invest in another VCF
or shares of a financial services
company ?
No
Can VCF invest in sick
company ?
Yes, in fact 80 percent of funds raised by a
venture capital fund should be invested in:
1. sick company OR
2. shares of an unlisted company
3. invested in companie which are investing in
sick company / un listed company
What is a placement
memorandum?
It should give details of the terms subject to

which monies are proposed to be raised from
investors. VCF has to prepare it before raising
money from the market
Can collective investment scheme
be launched any time?
No, only after the scheme is approved by the

Trustee and it has obtain rating from a credit
rating agency and has been appraised by an
appraising agency.
When was buy back allowed?
It was allowed by
The Companies (Amendment) Ordinance,
1998
Is it necessary to have an escrow
account before a company buys
back its shares?
Yes, an escrow account is an account opened
by a company with a scheduled commercial
bank by way of a security for discharging its
obligation and shall consist either of cash or
bank guarantee in favour of a merchant banker
or deposit of acceptable securities
What is depository ?
It is an organisation, where securities of a

shareholder are held in the electronic form
example : NSDL,CDSL
WHAT IS THE DIFFERENCE BETWEEN
CUSTODIAN AND DEPOSITORY ?
Depository can legally transfer beneficial

ownership, but a custodian cannot, otherwise
they are very similar
Are market makers necessary?
Yes, for all the companies which have total face value
of less than Rs. 10 crores,
the role of market makers is that they
— they undertake to offer buy and sell quotes for a
minimum 300 shares;
— they have to ensure that the bid-ask spread
(difference between quotations for sale and purchase)
for their quotes must not exceed 10%;
— Their inventory must be at least 5% of the
proposed issue of the company.
Which company can go for fast
track issue?
Large companies with following requirements :

1. “average market capitalisation of public
shareholding” of the company at least Rs.
10,000 crores
2. 95% investor grievances solved
3. 2% of turnover on stock exchange
What are the rights of trustees of
collective investment schemes?
The trustee have a right to obtain from the

Collective Investment Management Company
such information as is considered necessary by
the trustee and to inspect the books of accounts
and other records relating to the scheme.
Can the collective investment
scheme be closed before the due
date ?
In some cases yes, the law says that the

scheme should be wound up on the expiry of
duration specified in the scheme or on the
accomplishment of the purpose of the scheme.
Is collective investment
management company required to
register under SEBI?
YES, under : SEBI (Collective Investment
Scheme) Regulations 1999
Collective Investment Management Company
is a company incorporated under the
Companies Act, 1956 and registered with SEBI
in order to organise, operate and manage a
collective investment scheme.
How can collective investment
scheme be launched ?
A scheme should be constituted in the form of

a trust and the instrument of trust should be in
the form of a deed duly registered under the
provisions of the Indian Registration Act, 1908
executed by the Collective Investment
Management Company in favour of the
trustees named in such an instrument.
What is a domestic custodian
bank ?
It is a banking company which acts as a

custodian for the ordinary shares or FCCB
(foreign currency convertible bonds) of an
Indian Company which are issued by it against
global Depository receipts or certificates

WHAT ARE FCCBs?
foreign currency convertible bonds –bonds issued in

accordance with this scheme and subscribed by a non-
resident in foreign currency and convertible into ordinary
shares of the issuing company in any manner, either in
whole, or in part, on the basis of any equity related
warrants attached to debt instruments. they are
unsecured, carry a fixed rate of interest and an option for
conversion into a fixed number of equity shares of the
issuer company.

What are ECBs?
External Commercial Borrowings (ECB)

include commercial bank loans, buyers’ credit,
suppliers credit, securitised instruments such as
floating rate notes and fixed rate bonds.

If you want to go for GDR /
FCCB issue, whose permission
should you get ?
1. Approval of a
Board of Directors, 2. shareholders, 3. ”In
principle and Final” approval of Ministry of
Finance, 4. Approval of Reserve Bank of India,
5. In-principle consent of Stock Exchange for
listing of underlying shares 6. In-principle
consent of Financial institutions.
What are the routes of External
Commercial Borrowings (ECB)?
It can be accessed under two routes,

(i) Automatic Route
(ii) Approval Route.

Can you use ECB money for real
estate transactions ?
No
ECB proceeds cant be used for on-lending or
investment in capital market or acquiring a
company (or a part thereof) in India by a
corporate, real estate, working capital, general
corporate purpose and repayment of existing
Rupee loans.
Where can we use ECB? See next slide...
Where can we use ECB?
For import of capital goods , new projects,
modernization/expansion of existing small and medium
enterprises (SME) and infrastructure sector in India.
for overseas direct investment in Joint Ventures (JV)/Wholly
Owned Subsidiaries .
In the I / II stage of acquisition of shares in the disinvestment
process
to NGOs for lending to self-help groups or for micro-credit
or for micro finance activity including capacity building.

What is infrastructure sector ?
power, telecommunication, railways, road

including bridges, sea port and airport,
industrial parks and urban infrastructure
including water supply, sanitation and sewage
projects

What is the upper cap on ECB?
USD 500 million or equivalent during a

financial year.

HOW MUCH ECB CAN BE
RAISED BY NGOs?
NGOs engaged in micro finance activities can

raise ECB up to USD 5 million during a
financial year.

WHO GIVES CERTIFICATE OF
DUE DILIGENCE AT THE
TIME OF ECB?
The lender

What are the contents of this
certificate?
that the lender maintains an account with the bank for at

least a period of two years,
that the lending entity is organised as per the local law
and held in good esteem by the business/local community
and
that there is no criminal action pending against it.

What are recognised sources for
ECB?
international banks, international capital

markets, multilateral financial institutions
(such as IFC, ADB, CDC etc.,), export credit
agencies, suppliers of equipment, foreign
collaborators and foreign equity holders (other
than erstwhile OCBs).

Which sectors are in automatic
route for ECB?
ECB for investment in real sector, industrial

sector, especially infrastructure sector, are
under Automatic Route, i.e. it does not require
RBI/ Government approval.

Which units can access ECB in
automatic route?
1. companies
2. NGOs
3. units in Special Economic Zones

What is book building ?
During road shows of public issues, the

investors give indication of their willingness to
buy a particular quantity at particular terms.
Their willingness is booked as orders by the
marketing force of lead manager and co-lead
manger. This process is known as book
building.
What are road shows?
Roadshows represent meetings of issuers,

analysts and potential investors. Details about
the company are presented in the roadshows
and such details including history, culture,
milestones etc.

What is pre-marketing of issue ?
It is done before issue of equity. In this phase,
the research analysts along with the sales force
of the syndicate members meet the prospective
investors during pre marketing roadshows.
This enables the syndicate members to
understand the market and the probable
response from the prospective investors. The
pre-marketing exercise helps in assessing the
depth of investors’ interest in the proposed
issue, their view about the valuation of the
5 DECEMBER 09 share
www.afterschool.tk 117
What is offering circular?
It gives true and complete information

regarding the financial strength of the
company, its past performance, past and
envisaged research and business promotion
activities, track record of promoters and the
company. It is prepared at the time of issue of
shares in Euro capital market.
What is the role of listing agent?
listing agent in getting its Euro-issue

instruments listed on the Overseas Stock
Exchanges.

What are the steps in euro issue ?
(i) Constitution of a Board Sub-Committee; (ii)
Selection of Syndicate Members; (iii)
Constitution of a task force for due diligence;
(iv) Listing; (v) Offering Circular; (vi)
Research papers; (vii) Pre-marketing; (viii)
Timing, pricing and size of the issue; (ix)
Roadshows; (x) Book building and pricing of
the issue; (xi) Closing of the issue; (xii)
Allotment; (xiii) Investor Relation Programme;
and (xiv) Quarterly Statement submission.
What is agency agreement ?
At the time of euro essue, a company has to

enter into an agency agreement with certain
persons known as conversion agents.They have
to make the principal and interest payments to
the holders of FCCBs from the funds provided
by the company.

What is the role of lead manager?
to structure the issue and arrange for the

marketing.

What is OVERSEAS
DEPOSITORY BANK ?
It is authorised by the issuing company to issue

Depository Receipts against issue of ordinary
shares or Foreign Currency Convertible Bonds
of issuing company.

Can ADR/GDR be issued without
prior permission ?
Yes The government guidelines on ADR/GDR
dt. 19-1-2000 brought ADR/GDR under the
automatic route, thus there is no need of
obtaining approval of Ministry of Finance,
Department of Economic Affairs
private placement of ADR/GDR will also not
require prior approval provided the issue is
lead managed by investment banker.
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Financial Services - Systems, Practices and Opportunities

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FINANCIAL SERVICES – SYSTEMS,

PRACTICES & OPPORTUNITIES

1. new issue market / primary market

Insider = a person who is in a company

It is to take benefit in stock market from price

As per sec. 15E : penalty of one lakh rupees for

It is having powers equal to Civil Court under

It specifies that the company must submit the

no single investor can hold more than 25 per

up to 10 per cent of their net assets as on

Yes, FIIs, have to report issuance/

The primary market provides the channel for

1% of total world turnover

The promotors hold about 50% non-promoters

Since they were permitted access in 1992,

They have invested about US $ 200 bn. In

GETF = gold exchange traded fund

Corporatisation (c) and Demutualisation (d)

On the basis of Jagdish Capoor Committee &

Market capitalization as percent for GDP in

The money market is a wholesale market. The

These are govt of India (GOT) Securities

Maximum interest rate possible is here CAP

These are international rates which are used as base rate

For government dated securities and state

It is also called uniform price auction. Here

It is used for Government dated securities and

It is the minimum price accepted for the

This is a reissue of existing Government securities having

A security was issued by Government of India

Bill-financing = seller drawing a bill of

The formation and operations of Discount and

IBP = inter bank participation

not less than 15 days and not more than one

Yes, by sale. Physical CDs are freely

It is an unsecured loan extended by one

minimum of 7 days and a maximum up to one

The Central Government may privately place

As per the latest law, the government has to

Convert stock exchange to FOR PROFIT

Venture capital is the capital that is invested in

Technology Development Fund (TDF) in the

hardcore technocrat who works with an

They invest into proven/ established businesses

Take up a pool of financers, Prepare a

No, VCF has to disclose the investment

Yes, after the expiry of three years from the

It should give details of the terms subject to

No, only after the scheme is approved by the

It is an organisation, where securities of a

Depository can legally transfer beneficial

Large companies with following requirements :

The trustee have a right to obtain from the

In some cases yes, the law says that the

A scheme should be constituted in the form of

It is a banking company which acts as a

5 DECEMBER 09 www.afterschool.tk 100

foreign currency convertible bonds –bonds issued in

5 DECEMBER 09 www.afterschool.tk 101

External Commercial Borrowings (ECB)

5 DECEMBER 09 www.afterschool.tk 102

It can be accessed under two routes,

5 DECEMBER 09 www.afterschool.tk 104