Before you talk, listen. Before you react, think. Before you criticize, wait.

Before you pray,

forgive. Before you quit, try

MODULE -1

Finance is a branch of economics concerned with resource allocation as well as resource

management, acquisition and investment. Simply, finance deals with matters related to money
and the markets.

It consist of 3 decisions viz :

1. financing decisions
2. investment decision
3. dividend decision

INDIAN FINANCIAL SYSTEM

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.

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.

Financial System;

The word "system", in the term "financial system", implies a set of complex and closely
connected or interlinked 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
and financial services.

STRUCTURE OF FINANCIAL SYSTEM:

Short term, medium

term, long term
Financial
Eg: Securities,
Instrume
debentures, warrants,
nts
bonds, treasury bills,
CDs, CPs, Call/Notice
Custodian, merchant
Money
banking, depository,
Fee investment banking ,
Based Underwriting and financial
Financial
Services consultancy
Fund
based
Underwriting, leasing,
factoring, forfaiting,
Bankin venture capitalist, housing
g finance, bills discounting
Financial
Intermediar
ies
Non LIC, GIC, NABARD,
Banking Venture capital

Primary
Market
Financial
Secondary
Markets
Market

Capital
market

Money
market

RBI

RBI(Reserve Bank of India) is the central Bank of the country. It is the centre of Indian financial
and Monetary system. As the Apex institution, it is guiding, monitoring, regulating, controlling
and promoting the Indian financial system.
RBI started functioning from 1st April, 1935 on the terms of the RBI ACT, 1934.It was a private
share holders institution till January 1949, after which it became a State-owned institution Under
the Reserve Bank (Transfer to Public Ownership) of India Act, 1948.

Organisation and Management:

The Bank is managed by

a. Central Board of directors (The governor, 4 Deputy governors and 15 Directors

nominated by central Govt.)

b. Four local board of directors

c. Committee of Central board of directors

• The functions of the Local Board of directors is to advice the Central Board of
directors

• The local board of directors are also required to perform the required duties

• The final control vests in the Central Board.

In order to perform various functions, the bank has been divided and sub-divided into a large no.
of departments. Apart from banking and issue departments, there are 20 departments and three
training establishments at the central office of the bank.

Functions of RBI:

1. To maintain monetary stability (Controlling of liquidity and inflation)

2. To maintain financial stability (Controlling the variation of rupee)
3. To maintain Balance of payment
4. To promote the financial infrastructure of the market and financial system
5. To ensure the proper credit allocation throughout the system
6. To regulate the overall volume of money and credit in the economy
Roles of RBI:

1. Note Issuing Authority:

RBI is the sole authority for issuing of currency except for minting of coins. The bank
can issue notes against the security of gold coins and gold bullion, foreign securities,
government securities.

2. Banker to the Government:

 The RBI is the banker to the Central and state Governments. It provides to the
Government all banking services such as acceptance of deposits, withdrawal of funds by
cheques, making payment as well as collections on behalf of government, transfer of
funds and management of public debts.

3. Banker’s Bank:

RBI is considered as the Banks bank. It has the authority to regulate all the commercial,
co-operative banks and financial institutions. RBI lends funds to the Banks In times of
shortage and the banks can park their excess funds with RBI. RBI is also called as the
lender of last resort.

4. Supervising Authority:

The RBI has the vast powers to control the Commercial and Co-operative banks with a
view to develop adequate and sound banking system. Hence,

a. It issues licenses for the establishment of new banks

b. It issues licenses for setting up of new branches
c. It prescribes minimum requirement for paid up capital, reserves, maintenance of cash
reserves etc.
d. It inspect and investigate working of banks
5. Exchange control authority:

RBI to maintain the stability of the external value of the rupee, follows the following
dimensions:

a. To administer the foreign exchange control

b. To manage and fix the exchange rate between Rupee and other currencies
c. To manage exchange reserves
d. To interact and negotiate with monetary authorities.
Monetary policy of RBI:

1. To accelerate economic development in an environment of reasonable price stability

2. To develop appropriate institutional set up
3. Controlled expansion of bank credit and money supply
4. To stabilize the Inflationary pressures
5. To maintain price stability.
The RBI uses following techniques to control the monetary pressures and policies

a. Bank rate
b. Statutory liquidity ratio(SLR)
c. Cash reserve ratio (CRR)
d. Open market operations
e. Credit planning
f. Liquidity Adjustment facility (LAF)
The recent developments in the Indian Monetary Policy are:

1. Reducing the rigidities

2. Introducing flexibility
3. encouraging diversification
4. Promoting more competitive environment
5. Imparting greater discipline and prudence in the operations of the financial system

Banking Operations/Special roles of the Commercial Banks

1. Balancing Profitability with Liquidity Management:

Commercial Banks provide various financial services to customers in return for payment
in the form of interest, discounts, fees, commission and so on. When compared to other
business concerns, banks have to give more attention to balancing profitability with
liquidity. The maintenance of liquidity is very important because of the nature of
liabilities. Banks deal with other peoples money, a substantial part of which is repayable
on demand.

2. Management of reserves:

The banks are expected to hold voluntarily a party of their deposits in the form of cash
reserves; and the ratio of cash reserves to deposits is known as the cash reserve ratio.
Central bank in every country is empowered to prescribe their reserve ratio that all banks
must maintain.

3. Creation of credit:

Another distinguishing feature of banks is, they can create as well as transfer money.
Banks are said to create deposits or credit or money, or it can be said that every loan
given by banks creates a deposit. This has given rise to the important concept of Deposit
 multiplier or money multiplier or money multiplier, i.e they add to the money supply in
the economy.

4. Basis and process of credit creation:

Apart from the currency issued by the government and the central bank, the demand or
current or checkable deposits with the banks are accepted as by public as money as they
are most liquid form of money.

SEBI
SEBI (Securities and Exchange board of India) is a regulatory authority established on April 12,
1988, later became a statutory and powerful body on 21st February, 1992.

Constitution and Organisation:

The SEBI is a body of 6 members comprising of:

a. The Chairman
b. 2 members from among the officials of the ministries of Central Government dealing
with finance and Law
c. 2 members who are professionals and have experience or special knowledge relating to
securities market
d. One member from RBI
All members except RBI member is appointed by the government, who also lays down their
terms of office, tenure and conditions of service.

The work of SEBI has been organised into 5 operational departments each of which is headed by
an executive director who reports to the chairman:

a. Primary Market Operations and regulatory Department

b. Secondary market operations and insider trading department
c. Issue management and intermediaries department
d. Secondary market exchange administration, inspection and non member intermediaries
department
e. Institutional investment department

Other than these departments, there are Legal and Investigation department also.

Objectives:

The overall objectives as per the Preamble of the SEBI Act, 1992 are:

a. To protect the interest of the Investors

 b. To promote and develop the securities market in India
c. To regulate the securities market and the matters concerned with
d. To prevent trading malpractices
e. To facilitate the efficient mobilization and allocation of resources throughout the
securities market.
f. To maintain transparency and to provide information to investors

Powers:

SEBI has the powers to regulate

a. Depository participants
b. Custodians
c. Debenture trustees and trust deeds
d. FIIs
e. Insider Trading
f. Merchant Bankers
g. Mutual Funds
h. Portfolio Managers and Investment Advisors
i. Registrars to the issue and share transfer agents
j. Stock brokers and sub-brokers
k. Underwriters
l. Venture capital funds
m. Banker to the issue

Guidelines:

SEBI can issue guidelines in respect of

a. Information disclosure
b. Operational transparency and investor protection
c. Development of financial institutions
d. Pricing of issues
e. Bonus issue
f. Preferential issues
g. Financial instruments
h. Firm allotment and transfer of shares among promoters

Terminologies:

1. Insider Trading: It refers to the trading of a corporation's stock or other securities (e.g.
bonds or stock options) by individuals with potential access to non-public information
about the company.
"Insider trading" is a term that most investors have heard and usually associate with illegal
conduct. But the term actually includes both legal and illegal conduct. The legal version is when
corporate insiders—officers, directors, and employees—buy and sell stock in their own
companies. When corporate insiders trade in their own securities, they must report their trades to
the exchange. If insiders trade when the inside information is public, such as soon after earnings
releases, then it is consider to be legal insider trading.

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty
or other relationship of trust and confidence, while in possession of material, nonpublic
information about the security. Insider trading violations may also include "tipping" such
information, securities trading by the person "tipped," and securities trading by those who
misappropriate such information.

2. Issue management: It is an activity where SEBI deals with various rules and regulations
regarding
a. Filing of offer document
b. Deciding on issue price
c. Promoters contribution
d. Issue Advertisement
e. Issue of debentures
f. Bonus Issue
g. Right Issue etc.

3. Appointment and Duties of Debenture Trustees:

In terms of Section 117 B, it has been made mandatory for any company making a
public/rights issue of debentures to appoint one or more debenture trustees before issuing
the prospectus or letter of offer and to obtain their consent which shall be mentioned in
the offer document.

This section also lists the functions that shall be performed by the Trustees. These include:

i.Protecting the interests of the debenture holders by addressing their grievances.

ii. Ensuring that the assets of the company issuing debentures are sufficient to discharge
the principal amount.
iii. To ensure that the offer document does not contain any clause which is inconsistent
with the terms of the debentures or the Trust Deed.
iv. To ensure that the company does not commit any breach of the provisions of the Trust
Deed.
v. To take reasonable steps as may be necessary to undertake remedy in the event of
 breach of any covenant in the Trust Deed.
vi. To convene a meeting of the debenture holders as and when required.

If the debenture trustees are of the opinion that the assets of the company are insufficient to
discharge the principal amount, they shall file a petition before the Central Government and the
latter may after hearing the parties pass such orders as is necessary in the interests of the
debenture holders. As per the SEBI (Debenture Trustees) Regulations, 1993, {hereinafter
referred to as the 'Regulations'} a Debenture Trustee can be a scheduled bank, an insurance
company, a body corporate or a public financial institution.

4. Debenture Trust Deed:

A Debenture Trust Deed shall, interalia, include the following:

a. An undertaking by the company to pay the Debenture holders, principal and interest.
b. Clauses giving the Trustees the legal mortgages over the company's freehold and leasehold
property.
c. Clauses that may make the security enforceable in the event of default in payment of principal
or interest i.e. appointment of receiver, foreclosure, sale of assets etc.
d. A clause giving the Trustees the power to take possession of the property charged when
security becomes enforceable.
e. Register of Debenture holders, meeting of all debenture holders and other administrative
matters may be included in the Deed.

In addition thereto, the SEBI regulations have laid format of the Trust Deed in Schedule IV to
the regulations. Some of the important provisions would include

f. Time limit of creation of security for issue of debentures.

g. Obligations of the body corporate towards the debenture holders.
h. Obligations towards the debenture holders - equity ratio and debt service coverage ratio.
i. Procedure for the inspection of charged assets by the Trustees.

5. Registrar to an Issue:

“Registrar to an issue” means any person carrying on the activities in relation to an issue
including collecting application forms from investors, keeping a record of applications and
money received from investors or paid to the seller of securities, assisting in determining the
basis of allotment of securities, finalizing the list of persons entitled to allotment of securities and
processing and dispatching allotment letters, refund orders or certificates and other related
documents;’ (section 65(89c) of the Finance Act, 1994)
 SEBI GUIDELINES
PRE- ISSUE GUDIELINES

1. The lead merchant banker shall exercise due diligence. The standard of due diligence shall
be such that the merchant banker shall satisfy himself about all the aspects of offering,
veracity and adequacy of disclosure in the offer documents.

2. The liability of the merchant banker shall continue even after the completion of issue process.

3. The lead merchant banker shall pay requisite fee in accordance with regulation

4. The lead merchant banker shall ensure that facility of Applications Supported by Blocked
Amount is provided in all book built public issues which provide for not more than one
payment option to the retail individual investors

5. No company shall make an issue of security through a public or rights issue unless a
Memorandum of Understanding has been entered into between a lead merchant banker and
the issuer company specifying their mutual rights, liabilities and obligations relating to the
issue.

6. In case of a fast track issue, the lead merchant banker shall furnish a due diligence certificate
to the Board as per the format specified

7. In case a public or rights issue is managed by more than one Merchant. Banker the rights,
obligations and responsibilities of each merchant banker shall be demarcated

POST ISSUE GUIDELINES

1. Irrespective of the level of subscription, the post-issue Lead Merchant. Banker shall
ensure the submission of the post-issue monitoring reports as per formats specified in
Schedule
2. These reports shall be submitted within 3 working days from the due Dates
3. Lead Merchant Banker responsible for post issue obligations (post issue Lead Merchant
Banker) shall ensure that a public representative nominated by the Board is associated in
the process of finalization of basis of allotment in following cases:
a) Par issues with over subscription level of more than 5 times

b) Premium issues with over subscription level of more than 2 times.

 4. The Post - Issue Lead Merchant Banker shall actively associate himself with post-issue
activities namely, allotment, refund, dispatch and giving instructions to Self Certified
Syndicate Banks and shall regularly monitor redressal of investor grievances arising
there from

5. If the issue is proposed to be closed at the earliest closing date, the lead Merchant Banker
shall satisfy himself that the issue is fully subscribed before announcing closure of the
issue.

6. In case, there is no definite information about subscription figures, the issue shall be kept
open for the required number of days to take care of the underwriters' interests and to
avoid any dispute, at a later date, by the underwriters in respect of their liability.

7. In case of undersubscribed issues, the lead merchant banker shall furnish information in
respect of underwriters who have failed to meet their underwriting devolvements to the
Board in the format specified

GUIDE LINES FOR PUBLIC ISSUE:

The due dates for submitting post issue monitoring report in case of

Public issues:

a. 3-Day Post Issue Monitoring Report:

The due date for this report shall be the 3rd day from the date of closure of subscription
of the issue.

b. 78-Day Post Issue Monitoring Report:

The due date for this report shall be the 78th day from the date of closure of subscription
of the issue."

c. Final post issue monitoring report for all issues:

The due date for this report shall be the 3rd day from the date of listing or 78 days from
the date of closure of the subscription of the issue, whichever is earlier

d. In case a public or rights issue is managed by more than one Merchant

Banker the rights, obligations and responsibilities of each merchant banker shall be
demarcated

Public Issue by Unlisted Companies :

An unlisted company shall make a public issue of any equity shares or any security
convertible into equity shares at a later date subject to the following: -
 • It has a pre-issue networth of not less than Rs.1 crore in three (3) out of preceding
five (5) years, with a minimum networth to be met during immediately preceding
two (2) years; and
• It has a track record of distributable profits in terms of section 205 of the Companies
Act, 1956, for at least three (3) out of immediately preceding five (5) years.
An unlisted company can make a public issue of equity shares or any security convertible
into equity shares at a later date, only through the book-building process if ,

• it does not comply with the conditions specified in clause above, or,
• its proposed issue size exceeds five times its pre-issue networth as per the last
available audited accounts either at the time of filing draft offer document with the
Board or at the time of opening of the issue

Provided that sixty percent (60%) of the issue size shall be allotted to the Qualified
Institutional Buyers (QIBs), failing which the full subscription monies shall be
refunded.

Public Issue by Listed Companies :

A listed company shall be eligible to make a public issue of equity shares or any security
convertible at later date into equity share.

• Provided that the issue size (i.e. offer through offer document + firm allotment +
promoters’ contribution through the offer document) does not exceed five (5) times
its pre-issue networth as per the last available audited accounts either at the time of
filing draft offer document with the Board or at the time of opening of the issue.
• A listed company which does not fulfil the condition given in the proviso to clause
above, shall be eligible to make a public issue only through the book building
process.

Provided that sixty percent (60%) of the issue size shall be allotted to the Qualified
Institutional Buyers (QIBs), failing which the full subscription monies shall be
refunded.

GUIDELINES FOR RIGHTS ISSUE:

The due dates for submitting post issue monitoring report in case of

Rights issues:

a. 3-Day Post-Issue Monitoring Report:

The due date for this report shall be the 3rd day from the date of closure of subscription of
the issue.

b. 50-Day Post - Issue Monitoring Report:

The due date for this report shall be the 50th day from the date of closure of subscription of
the issue.
 c. Due diligence certificate to be submitted with final post issue monitoring report

d. In case a public or rights issue is managed by more than one Merchant

Banker the rights, obligations and responsibilities of each merchant banker shall be
demarcated

GUIDELINES ON BOOK BUILDING

An issuer company proposing to issue capital through book building shall comply with the
following:

A. 75% Book Building Process

In an issue of securities to the public through a prospectus the option for 75% book
building shall be available to the issuer company subject to the following:

a. The option of book-building shall be available to all body corporate

which are otherwise eligible to make an issue of capital to the public.

b. The book-building facility shall be available as an alternative to, and to

the extent of the percentage of the issue which can be reserved for firm allotment, as per
these Guidelines.

c. The issuer company shall have an option of either reserving the

securities for firm allotment or issuing the securities through bookbuilding process.

d. The issue of securities through book-building process shall be

separately identified / indicated as 'placement portion category', in the prospectus.

e. In case the book-building option is availed of, underwriting shall be

mandatory to the extent of the net offer to the public.

GUIDELINES FOR ISSUE OF CONVERTIBLE DEBT INSTRUMENTS

1. Requirement of credit rating:

No company shall make a public issue or rights issue of (Convertible Debt Instrument),
unless credit rating is obtained from at least one credit rating agency registered with the
Board and disclosed in the offer document.

Where ratings are obtained from more than one credit rating agencies, all the ratings,
including the unaccepted ratings, shall be disclosed in the offer document.
2. Requirement in respect of Debenture Trustee:

a. No company shall issue a prospectus or a letter of offer to the public for subscription of
its debentures, unless the company has appointed one or more debenture trustees for
such debentures in accordance with the provisions of the Companies Act, 1956. The
names of the debenture trustees shall be stated in the Offer Documents and also in all the
subsequent periodical communications sent to the debenture holders

b. A trust deed shall be executed by the issuer company in favour of the

debenture trustees within three months of the closure of the issue.

c. The merchant banker shall also ensure that the security created is
adequate to ensure 100% asset cover for the debentures.

d. Trustees shall obtain a certificate from the company's auditors:

i. in respect of utilisation of funds during the implementation period of projects.

ii. Creation of Debenture Redemption Reserve (DRR) For the redemption of the
debentures issued, the company shall create debenture redemption reserve in
accordance with the provisions of the Companies Act, 1956.

3. Distribution of Dividends:

a. In case of the companies which have defaulted in payment of interest on debentures or

redemption of debentures or in creation of security as per the terms of issue of the
debentures, any distribution of dividend shall require approval of the Debenture Trustees and
the Lead Institution, if any

b. In the case of existing companies, prior permission of the lead institution

for declaring dividend exceeding 20% or as per the loan covenants is
necessary if the company does not comply with institutional condition
regarding interest and debt service coverage ratio.

c. Dividends may be distributed out of profit of particular years only after

transfer of requisite amount in DRR.

d. If residual profits after transfer to DRR are inadequate to distribute

reasonable dividends, company may distribute dividend out of general
reserve.

4. Redemption:The issuer company shall redeem the debentures as per the offer document.

5. Creation of charge:
The offer document shall specifically state the assets on which security shall be created and
shall also state the ranking of the charge/s. In case of second or residual charge or
subordinated obligation, the offer document shall clearly state the risks associated with such
subsequent charge. The relevant consent for creation of security such as consent of the
lessor of the land in case of leasehold land etc. shall be obtained and submitted to the
debenture trustee before opening of issue of debenture

GUIDELINES FOR MERCHANT BANKER:

1. An application should be submitted to SEBI in Form A of the SEBI (Merchant

Bankers) Regulations, 1992. SEBI shall consider the application and on being
satisfied issue a certificate of registration in Form B of the SEBI (Merchant Bankers)
Regulations, 1992 and Rs. 5 lakhs should be paid within 15 days before the grant of
certificate.

2. Without holding a certificate of registration granted by the Securities and Exchange

Board of India, no person can act as a merchant banker.

3. The validity of the certificate is three years

4. Three months before the expiry period, an application should be submitted to SEBI in
Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI shall consider the
application and on being satisfied renew certificate of registration for a further period
of 3 years with a renewal fees of 2.5 lakhs.

5. Only a body corporate other than a non-banking financial company shall be eligible
to get registration as merchant banker.
6. The categories for which registration may be granted are given below:

 Category I – to carry on the activity of issue management and to act as adviser, consultant,
manager, underwriter, portfolio manager.

 Category II - to act as adviser, consultant, co-manager, underwriter, portfolio manager.

 Category III - to act as underwriter, adviser or consultant to an issue

 Category IV – to act only as adviser or consultant to an issue

7. The capital requirement depends upon the category. The minimum net worth
requirement for acting as merchant banker is given below:

 Category I – Rs. 5 crores

 Category II – Rs, 50 lakhs
 Category III – Rs. 20 lakhs
 Category IV – Nil

SEBI GUIDELINES FOR DEPOSITORIES:

1. An application for the grant of a certificate of registration as a depository shall be made to

the Board by the sponsor in Form A, shall be accompanied by the fee specified
2. The certificate of registration issued under regulation 20, or renewed under regulation 22
shall be valid for a period of five years from the date of its issue or renewal, as the case may
be.
3. The minimum net worth stipulated by SEBI for a depository is Rs.100 crore.
4. The account opening form must be supported by copies of any one of the approved
documents to serve as proof of identity (POI) and proof of address (POA) as specified by
SEBI. Besides, production of PAN card in original at the time of opening of account has
been made mandatory
5. SEBI has rationalised the cost structure for dematerialisation by removing account opening
charges, transaction charges for credit of securities, and custody charges
6. Every depository shall maintain the following records and documents, namely: -

(a) records of securities dematerialised and rematerialised;

(b) the names of the transferor, transferee, and the dates of transfer of securities;

(c) a register and an index of beneficial owners

 MODULE – 2

NBFCs
EXIM
The EXIM bank was set up in January 1982 as a statutory corporation wholly owned by the
central government. It grants direct loans in India and outside for the purpose of exports and
imports, refinances loans of banks and other notified financial institutions for purposes of
international trade, rediscounts usance export bills for banks, provides overseas investment
finance for Indian companies towards their equity participations in joint ventures abroad

The products and services of EXIM banks include:

a. Post shipment term finance

b. Preshipment credit
c. Term loans for export oriented units
d. Overseas investment finance
e. Finance for export marketing
f. Relending facilities to banks abroad
g. Rediscounting of export bills
h. Refinance of export credit
i. Bulk import finance
j. Research, analysis, advisory and informational services

National Bank for Agriculture and Rural Development

(NABARD):
The NABARD was set up on july 12, 1982 under an act of parliament as a central or apex
institution for financing agriculatural and rural sectors. Its paid up capital of Rs 100 crore
subscribed by government and RBI in equal amounts.

Nabard provides:

a. Long term refinance for minor irrigation, plantation, horticulture, land development, farm
mechanization, animal husbandry, fisheries etc.

b. Short term loan assistance for financing of seasonal agricultural operations, marketing of
crops, purchase/procurement/distribution of agricultural inputs etc.

c. Medium-term loan facilities for approved agricultural purposes

d. Working capital refinance for handloom weavers

e. Refinance for financing government-sponsored programmes such as IRDP, Rozgar

yogna

Small Industries Development Bank of India (SIDBI):

The SIDBI was set up in October 1989 under the Act of Parliament as a wholly-owned
subsidiary of the IDBI.The authorized capital is 250 Crore with an enabling provision to increase
it to Rs. 1000 crore.

The Objectives are:

a. To initiate steps for technological up gradation and modernization of existing units

b. To expand channels for marketing of SSI sector products in India and abroad

c. To promote employment-oriented industries In semi urban areas and to check migration

of population to big cities.

The functions are:

a. SIDBI refinances the SFCs and commercial banks for modernization of projects

b. SIDBI refinances ceiling of Rs.50 lakhs fr single window scheme of SFCs etc

c. It participates in venture capital funds set up by public as well as public limited

companies.

d. It provides refinance to lending institutions which are now permitted to lend SSI units

Industrial Financial Corporation of India(IFCI)

This is the first term financing institution set up in july, 1948 by Government of India under IFCI
Act, 1948.

• It provides direct rupee and foreign currency loans for setting up new industrial projects
and for expansion, diversification, renovation and modernization of existing units.

• It also underwrites and directly subscribes to industrial securities, provides financial

guarantees, merchant banking services and lease finance.

Its resources are in the form of:

a. Loan from RBI

b. Share capital
c. Retained earnings
d. Repayment of loans
e. Issue of bonds
f. Loans from the government
g. Lines of credit from foreign lending agencies
h. Commercial borrowings in international capital markets.

Coperative Bank:
Co-operative banks are organized and managed on eh principals of Co-operation, self help
and mutual help. They function with the principle of “one member one vote”. Well being of
all the members is their motto and not profit.

The perform all the activities of banks such as deposit mobilization, supply of credit and
provision of remittance facilities..

The sources of funds for co-operative:

a. Central and state governments

b. The RBI and NABARD
c. Co-operative institutions
d. Ownership funds
e. Deposits
SMALL SAVINGS
Small Savings are mainly of two types:

a. Post office deposits b

b. Saving certificates and bonds

These in turn consists of small savings bank account with co-operative banks, Recurring
Deposits (RD), Cumulative Term Deposits (CTD) etc.

The main Characteristics of these are:

1. These assets represent medium and long term investment opportunities

2. They are the good substitute for liquidity, maturity and safety

3. Most of them will be in the for of reinvestment plans

4. POSB (Post office savings bank) are as liquid as bank deposits and constitute the money
sulpply in the economy

5. Unit linked insurance plans, RD and CTD provide insurance cover to the investor

6. Tax benefits can also be availed through some of the investments

Types of instruments in small savings media:

1. Post Office Savings Bank Deposits

2. Post office Cumulative Time Deposits(POCTD)
3. Post Office Time Deposits (POTD)
4. Post Office Recurring Deposits (PORD)
5. National Savings Certificate(NSC)
6. Indira Vikas Patra(IVP)
7. Kisan Vikas Patra (KVP)
8. National Savings Scheme (NSC)
9. Post Office Monthly Income Scheme (POMIS)

PROVIDENT FUNDS

This is the way of savings mostly by people who earn their income in salaries. However, with
the starting of the Public Provident Fund Schemes, it is possible even for non salaried earners
also to save in this form.
Savings in the form of Provident Fund is a contractual obligation and the main motto is to
provide for old age and for the family after ones death. Profit making or capital appreciation on
investment is not of much important aspect in these funds.
The various PF schemes operating in India are:

a. Provident funds for Exempted Industrial Establishments

b. Central and State Government Employee Provident Fund
c. Coal Mines Provident Fund
d. Assam Tea Plantations Provident Fund
e. Public Provident Fund

Factors promoting growth of PPF:

1. The adoption of statutory measures to make provident fund compulsory for industrial and
other establishments
2. The increase in the number of establishments covered under the statutory provisions
3. The expansion of industry and service sector mad consequent increase in no. of salary
earners
4. Introduction of good schemes
5. Provision of tax benefits
6. Increase in Minimum and Maximum rates of contribution by the employees and
employers
7. Attractive interest rates
8. Provision of loan facilities based on provident funds
Pension Funds:

Pension Plans (PP) is an arrangement to provide income to participants in the plan when they
retire. PPs are generally sponsored by private employers, government as an employer and labour
unions.
Classification of Pension Plans:

The financial intermediary, or an organization, or and institution or a trust that manages the
assets and pays the benefits to the old and retirees is called a Pension Fund (PF). Some pension
plans are said to be insured i.e in such cases, the sponsor pays premiums to a life insurance
company in exchange for a group annuity that would pay retirement benefits to the participants.
Another type of classification is

a. Defined Benefits pension Plan (DBPP)

b. Defined Contribution Pension Plan (DCPP) or Money Purchase Pension Plan (MPPP)

c. Pay –as-you-go Pension plan (PAYGPP)

Defined Benefits pension Plan (DBPP): under DBPP, the final pension is pre-defined based on
the final salary and the period of service. Most of the pension plans offered by public sector
enterprises and the government as employer in India are of DBPP variety. This type ensures a
predictable amount of pension to the employees for all the years after their retirement and it is
guaranteed by the state.

Defined Contribution Pension Plan (DCPP): DCPPs popular in US, do not guarantee the
amount of final benefit which the employees would get after they retire. In DCPP, The employee
and employer make a predetermined contribution each year, and these funds are invested over
the period of time till the retirement of employee. What ever the value of these investments at the
time of retirement, the employee will get the certain amount which he would use to purchase an
annuity.

Pay –as-you-go Pension plan (PAYGPP): In most European Countries, including France and
Germany, Pensions are paid through PAYGPP, under which the current employees pay a
percentage of their income to provide for the old, and this, along with the contribution of the
state, goes as a pension that sustains the older generation.

Some of the Pension schemes available in India are:

1. Government Employees’ pension scheme

2. Bank Employees Pension Scheme and Insurance Employees Pension Scheme

(BEPS/IEPS)

3. Privately Administered Superannuation fund

INSURANCE:
The concept of Life Insurance came to India fro UK in 1818. Then the Life Insurance Companies
Act, 1912 was taken as the first measure to regulate the life insurance business. The Life
Insurance Corporation of India came into existence in September 1956 by LIC Act passed by the
Indian Parliament.
The General Insurance Business started in India in 1850 with the establishment of Triton
Insurance Company Ltd. Later, Insurance act was passed in 1961 for the establishment of
General Insurance Company. The general insurance business was nationalized in India with
effect from 1st January, 1973 and all the Indian and Foreign players were amalgamated into four
operating companies under General Insurance Corporation viz

• National Insurance Company Limited

• New India Assurance company Limited

• Oriental Insurance Company Limited

• United India Insurance Company Limited

Insurance is a protection against the financial loss arising against the unforeseen contingences or
unexpected happenings. It gives the reimbursement or financial protection against the possible
future contingent losses or damages.

Insurance is a contract between two parties insurer and the insured. The insured pays a premium
to the insurer for indemnifying against the risk.

Definition:

Insurance is a contract between two parties whereby one party agrees to undertake the risk of
another in exchange for consideration known as premium and promises to pay a fixed sum of
money to the other party on happening of an uncertain event(death) or after the expiry of certain
period in case of life insurance or to indemnify the other party on happening of an uncertain
event in case of general insurance.

Lets take some examples to understand how insurance actually works:

Example 1 Example 2

SUPPOSE SUPPOSE

• Houses in a village = 1000 • Number of Persons = 5000

• Value of 1 House = Rs. 40,000/-
• Houses burning in a yr = 5
• Total annual loss due to fire = Rs.
2,00,000/-
• Contribution of each house owner = Rs.
300/-
• Age and Physical condition = 50 years &
Healthy
• Number of persons dying in a yr = 50
• Economic value of loss suffered by family
of each dying person = Rs. 1,00,000/-
• Total annual loss due to deaths = Rs.
50,00,000/-

• Contribution per person = Rs. 1,200/-

UNDERLYING ASSUMPTION UNDERLYING ASSUMPTION

All 1000 house owners are exposed to a common All 5000 persons are exposed to common risk, i.e.
risk, i.e. fire death
 PROCEDURE PROCEDURE
All owners contribute Rs. 300/- each as premium to the Everybody contributes Rs. 1200/- each as premium to the
pool of funds pool of funds

Total value of the fund = Rs. 3,00,000 (i.e. 1000 houses * Total value of the fund = Rs. 60,00,000 (i.e. 5000 persons
Rs. 300) * Rs. 1,200)

5 houses get burnt during the year 50 persons die in a year on an average

Insurance company pays Rs. 40,000/- out of the pool to Insurance company pays Rs. 1,00,000/- out of the pool to
all 5 house owners whose house got burnt the family members of all 50 persons dying in a year

EFFECT OF INSURANCE EFFECT OF INSURANCE

Risk of 5 house owners is spread over 1000 house Risk of 50 persons is spread over 5000 people,
owners in the village, thus reducing the burden on thus reducing the burden on any one person.
any one of the owners.

The benefits of insurance are:

• Safeguard oneself and one’s family for future requirements

• Peace of mind in case of financial loss

• Encourages savings

• Get tab rebates and benefits

• Protection from claims made by creditors

• Security against the various assets

• Provides a protection cover

Life Insurance:

The insurance that guarantees a specific sum of money to a designated beneficiary upon the
death of the insured or to the insured if he or she lives beyond a certain age is known as Life
Insurance.

In general, life insurance is a type of coverage that pays benefits upon a person's death or
disability. In exchange for relatively small premiums paid in the present, the policy holder
receives the assurance that a larger amount of money will be available in the future to help his or
her beneficiaries pay debts and funeral expenses. Some forms of life insurance can also be used
as a tax-deferred investment to provide funds during a person's lifetime for retirement or
everyday living expenses.
LIFE INSURANCE:

Life insurance or life assurance is a contract between the policy owner and the insurer, where the
insurer agrees to pay a sum of money upon the occurrence of the insured individual's or
individuals' death or other event, such as terminal illness or critical illness. In return, the policy
owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums.
There may be designs in some countries where bills and death expenses plus catering for after
funeral expenses should be included in Policy Premium. In the United States, the predominant
form simply specifies a lump sum to be paid on the insured's demise.

Parties to the Contract:

There is a difference between the insured and the policy owner (policy holder), although the
owner and the insured are often the same person. For example, if Joe buys a policy on his own
life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is
the owner and he is the insured. The policy owner is the guarantee and he or she will be the
person who will pay for the policy. The insured is a participant in the contract, but not
necessarily a party to it.

The beneficiary receives policy proceeds upon the insured's death. The owner designates the
beneficiary, but the beneficiary is not a party to the policy.

Types of Life Insurance Policies:

1. Whole Life Assurance: In this kind of policy, the insurance company collects
premium from the insured for whole life or till the time of his retirement and pays
claim to the family of the insured only after his death.

2. Endowment Assurance: In case of endowment assurance, the term of policy is

defined for a specified period say 15, 20, 25 or 30 years. The insurance company
pays the claim to the family of assured in an event of his death within the policy's
term or in an event of the assured surviving the policy's term.

3. Assurance for children: Under this policy, claim by insurance company is paid
on the option date which is calculated to coincide with the child's eighteenth or
twenty first birthday. In case the parent survives till option date, policy may either
be continued or payment may be claimed on the same date. However, if the parent
dies before the option date, the policy remains continued until the option date
without any need for payment of premiums. If the child dies before the option
date, the parent receives back all premiums paid to the insurance company.

4. Term Assurance: The basic feature of term assurance plans is that they provide
death risk-cover. Term assurance policies are only for a limited time, claim for
which is paid to the family of the assured only when he dies. In case the assured
survives the term of policy, no claim is paid to the assured.
 5. Annuities: Annuities are just opposite to life insurance. A person entering into an
annuity contract agrees to pay a specified sum of capital (lump sum or by
installments) to the insurer. The insurer in return promises to pay the insured a
series of payments until insured's death. Generally, life annuity is opted by a
person having surplus wealth and wants to use this money after his retirement.

There are two types of annuities, namely:

Immediate Annuity: In an immediate annuity, the insured pays a lump sum

amount (known as purchase price) and in return the insurer promises to pay him
in installments a specified sum on a monthly/quarterly/half-yearly/yearly basis.

Deferred Annuity: A deferred annuity can be purchased by paying a single

premium or by way of installments. The insured starts receiving annuity payment
after a lapse of a selected period (also known as Deferment period).

6. Money Back Policy: Money back policy is a policy opted by people who want
periodical payments. A money back policy is generally issued for a particular
period, and the sum assured is paid through periodical payments to the insured,
spread over this time period. In case of death of the insured within the term of the
policy, full sum assured along with bonus accruing on it is payable by hte
insurance company to the nominee of the deceased.

General Insurance:

Insurance other than ‘Life Insurance’ falls under the category of General Insurance. General
Insurance comprises of insurance of property against fire, burglary etc, personal insurance such
as Accident and Health Insurance, and liability insurance which covers legal liabilities. There are
also other covers such as Errors and Omissions insurance for professionals, credit insurance etc.

Non-life insurance companies have products that cover property against Fire and allied perils,
flood storm and inundation, earthquake and so on. There are products that cover property against
burglary, theft etc. The non-life companies also offer policies covering machinery against
breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo policy
covers goods in transit including by sea, air and road. Further, insurance of motor vehicles
against damages and theft forms a major chunk of non-life insurance business.

General Insurance is normally meant for a short term period of twelve months or less. Recently,
longer-term insurance agreements have made an entry into the business of general insurance but
their term does not exceed five years. General insurance can be classified as follows:

1. Fire Insurance: It provides protection against damage to property caused by accidents

due to fire, lightening or explosion, whereby the explosion is caused by boilers not being
used for industrial purposes. Fire insurance also includes damage caused due to other
 perils like storm tempest or flood; burst pipes; earthquake; aircraft; riot, civil commotion;
malicious damage; explosion; impact.

2. Marine Insurance: It basically covers three risk areas, namely, hull, cargo and freight.
The risks which these areas are exposed to are collectively known as "Perils of the Sea".
These perils include theft, fire, collision etc.

3. Miscellaneous: As per the Insurance Act, all types of general insurance other than fire
and marine insurance are covered under miscellaneous insurance. Some of the examples
of general insurance are motor insurance, theft insurance, health insurance, personal
accident insurance, money insurance, engineering insurance etc.

ULIP’S:
ULIP is an abbreviation for Unit Linked Insurance Policy. A ULIP is a life
insurance policy which provides a combination of risk cover and investment.
The dynamics of the capital market have a direct bearing on the performance
of the ULIPs. In unitlinked policies, the investment risk is generally borne by
the investor.

Selection of Insurance Policies:

With so many insurance deals on the market key points to compare include the insurance re:

• suitability for your particular needs

• cost
• flexibility: what happens if you miss a payment or wish to cancel or switch?
• terms: when does the policy pay out/are there restrictions?

Essentials of a valid Insurance Contract:

1. Offer and Acceptance: When applying for insurance, the first thing you do is get the
proposal form of a particular insurance company. After filling in the requested details,
you send the form to the company (sometimes with a premium check). This is your offer.
If the insurance company accepts your offer and agrees to insure you, this is called an
acceptance. In some cases, your insurer may agree to accept your offer after making some
changes to your proposed terms (for example, charging you a double premium for your
chain-smoking habit).
 2. Consideration: This is the premium or the future premiums that you have pay to your
insurance company. For insurers, consideration also refers to the money paid out to you
should you file an insurance claim. This means that each party to the contract must
provide some value to the relationship.

3. Legal Capacity: You need to be legally competent to enter into an agreement with your
insurer. If you are a minor or are mentally ill, for example, then you may not be qualified
to make contracts. Similarly, insurers are considered to be competent if they are licensed
under the prevailing regulations that govern them.

4. Legal Purpose: If the purpose of your contract is to encourage illegal activities, it is

invalid.

Advanced technologies in banking:

E-banking (Electronic Banking)
With advancement in information and communication technology, banking services are also
made available through computer. Now, in most of the branches you see computers being used to
record banking transactions. Information about the balance in your deposit account can be
known through computers. In most banks now a days human or manual teller counter is being
replaced by the Automated Teller Machine (ATM). Banking activity carried on through
computers and other electronic means of communication is called ‘electronic banking’ or ‘e-
banking’. Let us now discuss about some of these modern trends in banking in India.

• Automated Teller Machine

Banks have now installed their own Automated Teller Machine (ATM) throughout the country at
convenient locations. By using this, customers can deposit or withdraw money from their own
account any time.

• Debit Card
Banks are now providing Debit Cards to their customers having saving or current account in the
banks. The customers can use this card for purchasing goods and services at different places in
lieu of cash. The amount paid through debit card is automatically debited (deducted) from the
customers’ account.

• Credit Card
Credit cards are issued by the bank to persons who may or may not have an account in the bank.
Just like debit cards, credit cards are used to make payments for purchase, so that the individual
does not have to carry cash. Banks allow certain credit period to the credit cardholder to make
payment of the credit amount. Interest is charged if a cardholder is not able to pay back the
credit extended to him within a stipulated period. This interest rate is generally quite high.

• Net Banking
With the extensive use of computer and Internet, banks have now started transactions over
Internet. The customer having an account in the bank can log into the bank’s website and access
his bank account. He can make payments for bills, give instructions for money transfers, fixed
deposits and collection of bill, etc.

• Phone Banking
In case of phone banking, a customer of the bank having an account can get information of his
account, make banking transactions like, fixed deposits, money transfers, demand draft,
collection
and payment of bills, etc. by using telephone . As more and more people are now using mobile
phones, phone banking is possible through mobile phones. In mobile phone a customer can
receive and send messages (SMS) from and to the bank in addition to all the functions possible
through phone banking.
RTGS
The acronym “RTGS” stands for Real Time Gross Settlement. RTGS system is a funds transfer
mechanism where transfer of money takes place from one bank to another on a “real time” and
on “gross” basis. This is the fastest possible money transfer system through the banking channel.
Settlement in “real time” means payment transaction is not subjected to any waiting period. The
transactions are settled as soon as they are processed. “Gross settlement” means the transaction is
settled on one to one basis without bunching with any other transaction. Considering that money
transfer takes place in the books of the Reserve Bank of India, the payment is taken as final and
irrevocable.

The RTGS system is primarily for large value transactions. The minimum amount to be
remitted through RTGS is Rs.1 lakh. There is no upper ceiling for RTGS transactions. No
minimum or maximum stipulation has been fixed for EFT and NEFT transactions.

The remitting customer has to furnish the following information to a bank for effecting a RTGS
remittance:

1. Amount to be remitted
2. His account number which is to be debited
3. Name of the beneficiary bank
4. Name of the beneficiary customer
5. Account number of the beneficiary customer
6. Sender to receiver information, if any
7. The IFSC code of the receiving branch
Before the innovation of RTGS system, EFT and NEFT were used by banks for Fund
transfer:

EFT (Electronic Fund Transfer) and NEFT (National Electronic Fund Transfer) are electronic
fund transfer modes that operate on a deferred net settlement (DNS) basis which settles
transactions in batches. In DNS, the settlement takes place at a particular point of time. All
transactions are held up till that time. For example, NEFT settlement takes place 6 times a day
during the week days (9.30 am, 10.30 am, 12.00 noon. 1.00 pm, 3.00 pm and 4.00 pm) and 3
times during Saturdays (9.30 am, 10.30 am and 12.00 noon). Any transaction initiated after a
designated settlement time would have to wait till the next designated settlement time. Contrary
to this, in RTGS, transactions are processed continuously throughout the RTGS business hours.

ECS (Electronic Clearing System)

It is a mode of electronic funds transfer from one bank account to another bank account using the
services of a Clearing House. This is normally for bulk transfers from one account to many
accounts or vice-versa. This can be used both for making payments like distribution of dividend,
interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as
payments to utility companies like telephone, electricity, or charges such as house tax, water tax,
etc or for loan installments of financial institutions/banks or regular investments of persons.

Advantages to Beneficiary:

• The end beneficiary need not make frequent visits to his bank for depositing the physical
paper instruments.

• He need not apprehend loss of instrument and fraudulent encashment.

• The delay in realization of proceeds after receipt of paper instrument.

Advantages to user-like corporate bodies/institutions

• The ECS user saves on administrative machinery for printing,dispatch and reconciliation.

• Avoids chances of loss of instruments in postal transit.

• Avoids chances of frauds due to fraudulent access to the paper instruments and
encashment.

• Ability to make payment and ensure that the beneficiaries' accountgets credited on a
designated date.

Advantages to the banks

 • Banks handling ECS get freed of paper handling.

• Paper handling also creates lot of pressure on banks as they have to encode the
instruments, present them in clearing, monitor their return and follow up with the
concerned bank and customers.

• In ECS banks simply get the payment particulars relating to their customers. All they
need to do is to match the account particulars like name, a/c number and credit the
proceeds

• Wherever the details do not match, they have to return it back, as per the procedure

Securitization:
It is the process of taking an illiquid asset, or group of assets, and through financial engineering,
transforming them into a security.

Debt Securitization
It is nothing but the packaging of a pool of financial assets into marketable securities. It involves
issue of securities against illiquid assets of financial institutions and such securities are really
structured, whereby the originator transfer or sells some of the assets to a SPV which breaks
these assets into tradable securities of smaller value then sold to the investing public. The
general principle is that the maturities of these securities must coincide with the maturity
of the securitized loan.

This makes the bank independent in the field of raising funds other than the money market, loan
market etc. ……..EG: A securitization is a financial transaction in which assets are
pooled and securities representing interests in the pool are issued. An example
would be a financing company that has issued a large number of auto loans and
wants to raise cash so it can issue more loans. One solution would be to sell off its
existing loans, but there isn't a liquid secondary market for individual auto loans.
Instead, the firm pools a large number of its loans and sells interests in the pool to
investors. For the financing company, this raises capital and gets the loans off its
balance sheet, so it can issue new loans. For investors, it creates a liquid
investment in a diversified pool of auto loans, which may be an attractive
alternative to a corporate bond or other fixed income investment. The ultimate
debtors—the car owners—need not be aware of the transaction. They continue
making payments on their loans, but now those payments flow to the new investors
as opposed to the financing company.
The Following Diagram shows the process of Debt Securitization:

Originator Sells the

(Eg. Banks, Financial SPV (Special
Lic, Co. etc) Assets Purpose
Vehicle)

Breaks into
small securities

Secu Secu Securi Secu Secu Secur Secur

rity rity ty 4 Security
rity 5 1 rity 6 ity 7 ity 8
1 2

Parties to the Securitization:

1. The Originator – also interchangeably referred to as the Seller – is the entity whose
receivable portfolio forms the basis for ABS issuance.

2. Special Purpose Vehicle (SPV)- which as the issuer of the ABS ensures adequate cash
flow to the investors.

3. The Servicer- who bears all administrative responsibilities relating to the securitization
transaction.

4. The Trustee or the Investor Representative: who act in a fiduciary capacity

safeguarding the interests of investors in the ABS.

5. The Credit Rating Agency: which provides an objective estimate of the credit risk in
the securitization transaction by assigning a well-defined credit rating.

6. Investors: However, more important than all the afore mentioned are the investors in the
securitised paper. Investors are the ultimate judges of any securitization effort.
Originators should therefore interact actively with the investor community to get to know
investor preferences and concerns for effective structuring and distribution of ABS. Such
knowledge would also make the origination process more efficient.

Process of Securitization:
1. Creation of asset pool and its sale:
The originator/seller (of assets) creates a pool of assets and executes a legal true sale of
 the same to a special purpose vehicle (SPV). A SPV in such cases is either a trust or a
company, as may be appropriate under applicable law, setup to carry out a restricted set
of activities, management of which would usually rest with an independent board of
directors.

2. Designing the securities: The SPV will break the financial asset purchased from the
originator in securities of smaller value so as to make it convenient and affordable for the
public/investors. . Design of the instrument however would be based on the nature of
interest that investors would have on the asset pool. These securities will be designed in
such a manner that the maturity of the ABS(Asset Backed Securities) will have to match
with that of the underlying financial asset.

3. Credit rating: Once the securities has been designed, it should get approval and rated
from one of the recognized credit rating agency.

4. Issuance of the securitised paper:

This activity is usually performed by the SPV.

5. Credit Risk:
It must be made abundantly clear at the very outset that the accretions on the asset-
backed security, i.e., interest, amortisation and redemption payments, are entirely
dependent on the performance of the pooled assets, and will have nothing to do with the
credit of the originator. By the same argument, such cash flows would also be not
influenced by events affecting the condition of the originator, including insolvency.

6. Administration:
Formal delineation of duties and responsibilities relating to administration of securitised
assets, including payment servicing and managing relationship with the final obligors
must be spelt out clearly through a contractual agreement with the entity who would
perform those functions.

Advantages to issuer/Originator:
1. Reduces funding costs: Through securitization, a company rated BB but with AAA
worthy cash flow would be able to borrow at possibly AAA rates. This is the number one
reason to securitize a cash flow and can have tremendous impacts on borrowing costs.
The difference between BB debt and AAA debt can be multiple hundreds of basis points.
For example, Moody's downgraded Ford Motor Credit's rating in January 2002, but
senior automobile backed securities, issued by Ford Motor Credit in January 2002 and
April 2002, continue to be rated AAA because of the strength of the underlying collateral
and other credit enhancement.

2. Reduces asset-liability mismatch: "Depending on the structure chosen, securitization

can offer perfect matched funding by eliminating funding exposure in terms of both
 duration and pricing basis." Essentially, in most banks and finance companies, the
liability book or the funding is from borrowings. This often comes at a high cost.
Securitization allows such banks and finance companies to create a self-funded asset
book.

3. Lower capital requirements: Some firms, due to legal, regulatory, or other reasons,
have a limit or range that their leverage is allowed to be. By securitizing some of their
assets, which qualifies as a sale for accounting purposes, these firms will be able to lessen
the equity on their balance sheets while maintaining the "earning power" of the asset.

4. Locking in profits: For a given block of business, the total profits have not yet emerged
and thus remain uncertain. Once the block has been securitized, the level of profits has
now been locked in for that company, thus the risk of profit not emerging, or the benefit
of super-profits, has now been passed on.

5. Transfer risks (credit, liquidity, prepayment, reinvestment, asset concentration):

Securitization makes it possible to transfer risks from an entity that does not want to bear
it, to one that does. Similarly, by securitizing a block of business (thereby locking in a
degree of profits), the company has effectively freed up its balance to go out and write
more profitable business.

6. Increases Earnings: Securitization makes it possible to record an earnings bounce

without any real addition to the firm. When a securitization takes place, there often is a
"true sale" that takes place between the Originator (the parent company) and the SPE.
This sale has to be for the market value of the underlying assets for the "true sale" to stick
and thus this sale is reflected on the parent company's balance sheet, which will boost
earnings for that quarter by the amount of the sale. While not illegal in any respect, this
does distort the true earnings of the parent company.

7. Liquidity: Future cashflows may simply be balance sheet items which currently are not
available for spending, whereas once the book has been securitized, the cash would be
available for immediate spending or investment. This also creates a reinvestment book
which may well be at better rates.

Disadvantages to issuer/originator:
1. Costs: Securitizations are expensive due to management and system costs, legal fees,
underwriting fees, rating fees and ongoing administration. An allowance for unforeseen
costs is usually essential in securitizations, especially if it is an atypical securitization.

2. Size limitations: Securitizations often require large scale structuring, and thus may not
be cost-efficient for small and medium transactions.
 3. Risks: Since securitization is a structured transaction, it may include par structures as
well as credit enhancements that are subject to risks of impairment, such as prepayment

Advantages to investors:
1. Opportunity to potentially earn a higher rate of return (on a risk-adjusted basis)

Opportunity to invest in a specific pool of high quality credit-enhanced assets: Due to the
stringent requirements for corporations (for example) to attain high ratings, there is a
dearth of highly rated entities that exist. Securitizations, however, allow for the creation
of large quantities of AAA, AA or A rated bonds, and risk averse institutional investors,
or investors that are required to invest in only highly rated assets, have access to a larger
pool of investment options.

2. Portfolio diversification: Depending on the securitization, hedge funds as well as other

institutional investors tend to like investing in bonds created through Securitizations
because they may be uncorrelated to their other bonds and securities.

3. Isolation of credit risk from the parent entity: Since the assets that are securitized are
isolated (at least in theory) from the assets of the originating entity, under securitization it
may be possible for the securitization to receive a higher credit rating than the "parent,"
because the underlying risks are different. Even if the originator becomes bankrupt, it
will not have any effect on these securities because the financial asset is already sold
to the SPV and is not in the balance sheet of the originator. The creditors of the
originator cannot claim or have charge on the underlying asset of these Asset
Backed Securities.

Risks to investors
1. Liquidity risk

2. Credit/default: Default risk is generally accepted as a borrower’s inability to meet

interest payment obligations on time.

3. Prepayment/reinvestment/early amortization: The majority of revolving ABS are

subject to some degree of early amortization risk. The risk stems from specific early
amortization events or payout events that cause the security to be paid off prematurely.
Typically, payout events include insufficient payments from the underlying borrowers,
insufficient excess Fixed Income Sectors: Asset-Backed Securities spread, a rise in the
default rate on the underlying loans above a specified level, a decrease in credit
enhancements below a specific level, and bankruptcy on the part of the sponsor or
servicer.
 4. Currency interest rate fluctuations: Like all fixed income securities, the prices of fixed
rate ABS move in response to changes in interest rates. Fluctuations in interest rates
affect floating rate ABS prices less than fixed rate securities, as the index against which
the ABS rate adjusts will reflect interest rate changes in the economy. Furthermore,
interest rate changes may affect the prepayment rates on underlying loans that back some
types of ABS, which can affect yields. Home equity loans tend to be the most sensitive to
changes in interest rates, while auto loans, student loans, and credit cards are generally
less sensitive to interest rates.

5. Moral hazard: Investors usually rely on the deal manager to price the securitizations’
underlying assets. If the manager earns fees based on performance, there may be a
temptation to mark up the prices of the portfolio assets. Conflicts of interest can also arise
with senior note holders when the manager has a claim on the deal's excess spread.

6. Servicer risk: The transfer or collection of payments may be delayed or reduced if the
servicer becomes insolvent. This risk is mitigated by having a backup servicer involved
in the transaction.

Reasons of its unpopularity in India :

As because of lack of awareness of this concept it has not gained much of the market. It involves
heavy stamp duty and registration fees, which discourage to go in for this innovative technique
of financing. The transfer procedure is also very complicated as well as cumbersome. The
transfer of property calls for the transfer of property act and the irony is that the act does not
entails any clause regarding the procedure of securitization. Again the lack of standardized
procedure makes the working of SPV very difficult. Securitization without credit rating is not
trustworthy but the difficult thing is that in India there is shortage of such agencies to take up the
stupendous task of credit rating in of securitization purpose; Moreover all the working of this
procedure requires active involvement of trust so that the fair accounting procedure must be
adopted. The removal of asset is simple but How should one account of it is a challenge. It can
be termed as a challenge before the accounting professionals to evolve suitable accounting
procedure for securitization. The absence of proper guidelines by the regulatory authorities make
its usage unpopular.

Pass through Certificate:

A pool of fixed-income securities backed by a package of assets. A servicing intermediary
collects the monthly payments from issuers, and, after deducting a fee, remits or passes them
through to the holders of the pass-through security.
Also known as a "pass-through certificate" or "pay-through security."

The most common type of pass-through is a mortgage-backed certificate(MBS) and not Asset
backed securities (ABS), where homeowners' payments pass from the original bank through a
government agency or investment bank to investors. Presently the three institutions (Fannie
Mae, Freddie Mac and Ginnie Mae) act as the principal intermediaries in the market in as much
as they perform the activity of purchasing mortgages from home loan Originators and selling
MBS.

As an investor in Pass-Through Certificates, you are not necessarily the Holder of those Pass-
Through Certificates. You will ordinarily hold your Pass-Through Certificates through one or
more financial intermediaries. Your rights as an investor may be exercised only through the
Holder of your Pass-Through Certificates, and Freddie Mac may treat the Holder as the absolute
owner of your Pass-Through Certificates

Security that represents an undivided interest in pools of mortgages, backed by federally

guaranteed loans of the same maturity and coupon date are the Pass through cettificates.

EG: When a mortgage banker has collected at least $2 million in mortgages, the loans are
deposited in a custodian bank and a certificate is issued against the mortgages. Payments of
principal and interest are made monthly to certificate holders, and are guaranteed by the
Government National Mortgage Association(US) regardless of whether payments are received,
as borrowers pay down the loans. There is no holding back of interest payments as with
collateralized mortgage obligations and mortgage backed bonds.

Risk involved in pass through certificate:

1. Pass-Through Certificates May Not be Suitable Investments for You: If you require a
definite payment stream, or a single payment on a specific date, Pass-Through
Certificates are not suitable investments for you. If you purchase Pass-Through
Certificates, you need to have enough financial resources to bear all of the risks related to
your Pass-Through Certificates.

2. Principal Payment Rates are Uncertain: Principal payment rates on the Pass-Through
Certificates will depend on the rates of principal payments on the underlying Mortgages.
In general, prepayments tend to increase when current interest rates decline, as more
borrowers choose to take out their existing Mortgages. As current interest rates increase,
prepayments generally decline.

3. Prepayments Can Reduce Your Yield: Your yield on a class of Pass-Through

Certificates will depend on its price, the rate of prepayments on its underlying Mortgages
and the actual characteristics of those Mortgages. The Mortgages may be prepaid at any
time, in most cases without penalty.
 4. Pass-Through Certificates are Subject to Market Risks: The market values of your
Pass-Through Certificates will vary over time, primarily in response to changes in prevailing
interest rates. If you sell your Pass-Through Certificates when their market values are low,
you may experience significant losses. A secondary market for some types of Pass-Through
Certificates may not develop. Even if a market does develop, it may not be liquid enough to
allow you to sell your Pass-Through Certificates easily or at your desired price.

Special Purpose Vehicle (SPV) or Special Purpose Entity (SPE):

Securitisation offers higher quality assets to investors by virtue of the fact that the structures
insulate investors from the bankruptcy risk of the Originator. In order to ensure that the assets
actually achieve the bankruptcy remoteness, it is essential to move them out of the balance sheet
of the Originator and park them with another independent entity. Typically an SPV is employed
to purchase the assets from the Originator and issue securities against these assets. Such a
structure provides a comfort to the investors that they are investing in a pool of
assets which is held on their behalf only by the SPV and which is not subject to any subsequent
deterioration in the credit quality of the Originator. The SPV is usually a thinly capitalised
vehicle whose ownership and management are independent of the Originator. The main objective
of SPV is to distinguish the instrument from the Originator.

A special purpose entity (SPE) is a body corporate (usually a limited company of some type
or, sometimes, a limited partnership) created to fulfill narrow, specific or temporary
objectives, primarily to isolate financial risk, usually bankruptcy, specific taxation or
regulatory risk.

It is also referred to as a "bankruptcy-remote entity" whose operations are limited to the

acquisition and financing of specific assets. The SPV is usually a subsidiary company with an
asset/liability structure and legal status that makes its obligations secure even if the parent
company goes bankrupt.

A special purpose entity may be owned by one or more other entities and certain jurisdictions
may require ownership by certain parties in specific percentages. Often it is important that the
SPE not be owned by the entity on whose behalf the SPE is being set up (the sponsor). For
example, in the context of a loan securitisation, if the SPE securitisation vehicle were owned or
controlled by the bank whose loans were to be secured, the SPE would be consolidated with the
rest of the bank's group for regulatory, accounting, and bankruptcy purposes, which would defeat
the point of the securitisation. Therefore many SPEs are set up as 'orphan' companies with their
shares settled on charitable trust and with professional directors provided by an administration
company to ensure there is no connection with the sponsor.

Key features desired in an ideal SPV:

1. An SPV must be capable of acquiring, holding and disposing of assets.

2. It would be an entity, which would undertake only the activity of asset
securitisation and no other activity.
3. An SPV must be bankruptcy remote i.e. the bankruptcy of Originator should not
 affect the interests of holders of instruments issued by SPV.
4. An SPV must be bankruptcy proof. i.e. it should not be capable of being taken
into bankruptcy in the event of any inability to service the securitised paper issued
by it.
5. An SPV must have an identity totally distinct from that of its promoters/ sponsors/
constituents/ shareholders. Its creditors cannot obtain satisfaction from them.
6. The investors must have undivided interest in the underlying asset (as
distinguished from an interest in the SPV which is a mere conduit).
7. A SPV must be tax neutral i.e. there should be no additional tax liability or double
taxation on the transaction on account of the SPV acting as a conduit.
8. A SPV must have the capability of housing multiple securitisation. However, SPV
must take precaution to avoid co-mingling of assets of multiple securitisation. In
case of transactions involving various kinds of assets, they should restrict the
rights of investors to the specific pool.

Advantages of SPV:

• Conducting large and very risky projects without putting the parent firm at risk.
• Operate in ways that are "barely legal".
• A special Joint-Venture for sharing intellectual property.
• Securitizing loan portfolios of banks.
• Securitizing financial assets such as auto loans, credit card and hire purchase receivables,
finance leases, aircraft operating leases, real estate mortgages.
• Aircraft and ship financing.
• Protection from tax or legal consequences of the activities of the SPV (reinvoicing
subsidiaries and offshore insurance companies).

Disadvantage of SPV:

A corporation can use such a vehicle to finance a large project without putting the entire firm at
risk. Problem is, due to accounting loopholes, these vehicles became a way for CFOs to hide
debt. Essentially, it looks like the company doesn't have a liability when they really do.

MODULE – 3
LEASING:
Meaning of Leasing:

Leasing is an agreement which consists of two parties, viz., Lessor and Lessee

Lease is defined as “An agreement whereby the lessee uses the asset owned by the lessor by paying some
consideration”.

Lessor is a person who owns the asset.

Lessee is a person who uses the asset.

Lease Rentals refers to the consideration paid to the lessor in lump sum or in fixed installments by the
lessee for using the asset.

The various factors to be considered in leasing of an asset are:

1. Insufficient Funds: When there are insufficient in the business and if the business want to
allocate its funds in a more rational manner instead of investing in an asset, then the business unit
can go for leasing of an asset.

2. Lease Rentals: Lease rentals are cash outflows and are an expense which is deductible for tax.
Hence the benefit of tax savings can be taken in case of payment of lease rentals.

3. Duration: If the life time of the project is long, leasing is preferred.

4. No Obsolescence risk: As the asset is not owned, there is no risk of obsolescence as the lease
contract can be terminated for the obsolete one and new contract can be entered into. There are
also no replacement expenses for the obsolete asset in case of leasing.

5. Depreciation: There will not be any depreciation expenses as the asset is not owned by the
business unit and hence tax savings on depreciation cannot be claimed.

6. Interest: As the funds in not borrowed, there is no interest expense and thereby, tax savings on
interest cannot be claimed.

7. No loss: There is no risk of Short or Long Term Capital Loss as the asset is not sold at the end of
the project, but transferred back to lessor. As there is no ownership, sale does not occur in this
case.

8. Salvage value: There is no salvage value because asset is not sold as it is not owned but
transferred to the lessor at the end of the project.

HIRE PURCHASE:

Hire purchase is a system in which a buyer takes possession of an asset on payment of a deposit and
completes the purchase by paying a series of installments while the seller retains ownership until the final
installment is paid.
The various factors to be considered in purchase of an asset through hire purchase are:

1. Insufficient Funds: The business unit can go for this option in case of in sufficient funds as
purchase down payment will usually be 10 to 20% of the value of the asset. The remaining
amount can be paid in small installments annually.

2. Interest: Installments payment includes interest factor in it. And interest is an expense
deductible for tax, the benefit of tax savings arises.

3. Ownership: The business unit after the payment of entire series of installment claims the
ownership of the asset.

4. Depreciation: As the business unit owns the asset, it can claim depreciation which is an expense
deductible for tax and hence the benefit of tax savings also arises.

5. Salvage Value: At the end of the life time of the asset, the asset can be sold and the scrap value
realized will be considered as a cash inflow.

6. Profit or loss on sale of asset: Short or Long Term Profit or Loss on sale of asset has to be
considered. If it is a profit, well and good. If it is loss, tax savings can be claimed on the loss.

Difference between hire purchase and installment purchase:

In case of hire purchase, ownership is transferred at the end once all the installments are paid; in case of
installment purchase, ownership is transferred at the beginning as soon as the initial deposit is made.
However, this does not impact on any entries in the books of accounts.

HIRING:

Hiring is similar to that of leasing. In case of hiring, the hiree uses the asset of the owner by paying him a
consideration (rent).

The various factors to be considered in hiring an asset are:

1. No investment: As the business unit is not going for the purchase of the asset, no huge initial
investment is required.

2. Rent: The rent paid for hiring an asset is considered for the purpose for tax calculation.
Therefore, the tax benefit can be availed on rental expenses.

3. No Obsolescence risk: As the asset is not owned, there is no risk of obsolescence as the asset is
hired for some particular point of time, especially for a short period.

4. Depreciation: There will not be any depreciation expenses as the asset is not owned by the
business unit and hence tax savings on depreciation cannot be claimed.
 5. Interest: As the funds in not borrowed, there is no interest expense and thereby, tax savings on
interest cannot be claimed.

6. No loss: There is no risk of Short or Long Term Capital Loss as the asset is not sold at the end of
the project, but transferred back to owner of the asset. As there is no ownership, sale does not
occur in this case.

7. Salvage value: There is no salvage value because asset is not sold as it is not owned but
transferred to the owner of the asset at the end of the project.

CREDIT RATING AND ITS PROCESS

Meaning:

Credit rating refers to the assessment of the credit worthiness of individuals and corporations. It
is based upon the history of borrowing and repayment, as well as the availability of assets and
extent of liabilities.

Credit is important since individuals and corporations with poor credit will have difficulty
finding financing, and will most likely have to pay more due to the risk of default.

The rating is based on the opinions of banks, financial institutions and financial analysis to
investigate stability and credit history and they consistently provide ratings which are
independent, objective and of the highest possible quality.

How are instruments are rated?

The rating process begins with an application to the rating agencies by the issuer in writing.

The rating request is usually done several weeks before the issuance of the instruments to allow
time for the rating agencies to perform their review and analysis. Generally, the following
documentations are provided to the rating agencies as soon as possible:

 the preliminary official statement;

 latest audited and unaudited financial statements;
 the latest budget information, including economic assumptions and trends;
 capital outlay plans;
 the bond counsel opinion addressing the authority and tax-exempt status of
the bond issuance;
 all legal documents relating to the security for the bonds; and
  any other documents that may pertain to the bond issuance as requested by
the rating agencies.

Following this, a meeting is set up at the rating agency's or issuer's office to present the
creditworthiness. The credit analyst prepares a municipal credit report which discusses key
analytical factors. The credit analyst presents credit for "sign-off" with the senior analyst and
makes a recommendation for rating. The credit analyst makes a presentation before a rating
committee comprised of senior analysts. Finally, the rating is released to the issuer.

The credit ratings effectively categorise issuers into corresponding grades, depending on whether
they are considered as more or less default-prone. Credit rating agencies employ comprehensive
creditworthiness scales, with the critical border line running between the so-called investment
grade (low-risk) and speculative grade (high-risk), reflecting the risks related to the security (i.e.
the likelihood of default).

The elements involved in determining a credit rating are:

1. Economic Factors
Evaluation of historical and current economic factors

 Economic diversity
 Response to business cycles
 Economic restructuring
 Assessing the quality of life in the given area
2. Debt/Issue Structure
Economic feasibility and need for project

 Length of bond's maturity, short-term debt financing
 Pledged security and other bondholder protections
 Futuristic outlook: capital improvement plan
3. Financial Factors
Sufficient resources accumulated to meet unforeseen contingencies and

liquidity requirements
 On-going operations are financed with recurring revenues
 Prudent investing of cash balances
 Ability to meet expenditures within economic base
4. Management/Structural Factors
Organization of government and management

 Taxes and tax limits
 Clear delineation of financial and budgetary responsibilities
5. Expanded Analytical Topics
6. Investment Policies and Practices
 Portfolio composition-credit risk, diversification, and market risk
  Leverage-increase of assets to enhance yield
 Liquidity Management-portfolio maturity profile that matches cash flow
 Infrastructure needs
7. Willingness to Pay
 Effective and timely budget response
 Willingness to bring budget into balance and still pay debt
 Willingness to make payment

A detailed flow chart of rating process is as under:

ISSUER Rating
Agency

Request for a
rating

Rating team assigned.

Signs rating
Team collects
agreement,
information, Conducts
provides information
preliminary analysis
and rating fees

Team conducts site visits

Management
and performs analysis
meetings with the
rating team

Analysis presented to
rating committee

Accepts the rating Rating assigned and

or appeal communicated to the
issuer
Rating published
 All ratings kept under
continuous surveillance
throughout validity

Depository and Depository participant:

Depository: A depository is an organisation which holds securities of investors in electronic

form at the request of the investors through a registered Depository Participant. It also
provides services related to transactions in securities. At present two Depositories are
registered with SEBI.viz.

• National Securities Depository Limited (NSDL)

• Central Securities Depository Limited (CSDL)

The minimum net worth stipulated by SEBI for a depository is Rs.100 crore.

It can be compared with a bank, which holds the funds for depositors.

BANK DEPOSITORY

Holds funds in an account Hold securities in an account

Transfers funds between Transfers securities between accounts

accounts on the instruction of on the instruction of the account
the account holder holder

Facilitates transfer without Facilitates transfer of ownership

having to handle money without having to handle securities

Facilitates safekeeping of Facilitates safekeeping of securities

money
 Role of Depositories:

• Dematerialisation i.e., converting physical certificates to electronic form;

• Rematerialisation i.e., conversion of securities in demat form into physical certificates;
• Facilitating repurchase / redemption of units of mutual funds;
• Electronic settlement of trades in stock exchanges connected to NSDL;
• Pledging/hypothecation of dematerialised securities against loan;
• Electronic credit of securities allotted in public issues, rights issue;
• Receipt of non-cash corporate benefits such as bonus, in electronic form;
• Freezing of demat accounts, so that the debits from the account are not permitted;
• Nomination facility for demat accounts;
• Services related to change of address;
• Effecting transmission of securities;
• Instructions to your DP over Internet through SPEED-e facility. (Please check with your
DP for availing the facility);
• Account monitoring facility over Internet for clearing members through SPEED facility;
• Other facilities viz. holding debt instruments in the same account, availing stock
lending/borrowing facility, etc.

NSDL:

Although India had a vibrant capital market which is more than a century old, the paper-based
settlement of trades caused substantial problems like bad delivery and delayed transfer of title till
recently. The enactment of Depositories Act in August 1996 paved the way for establishment of
NSDL, the first depository in India. This depository promoted by institutions of national stature
responsible for economic development of the country has since established a national
infrastructure of international standards that handles most of the securities held and settled in
dematerialised form in the Indian capital market.

Using innovative and flexible technology systems, NSDL works to support the investors and
brokers in the capital market of the country. NSDL aims at ensuring the safety and soundness of
Indian marketplaces by developing settlement solutions that increase efficiency, minimise risk
and reduce costs. At NSDL, we play a quiet but central role in developing products and services
that will continue to nurture the growing needs of the financial services industry.

In the depository system, securities are held in depository accounts, which is more or less similar
to holding funds in bank accounts. Transfer of ownership of securities is done through simple
account transfers. This method does away with all the risks and hassles normally associated with
paperwork. Consequently, the cost of transacting in a depository environment is considerably
lower as compared to transacting in certificates.

• Commencement of Demat trading at NSE in Dec, 1996.

• Commencement of Demat trading at BSE in Dec, 1997.
 • Compulsory demat trading for Institutional investors in Jan, 1998.
• Introduction of Demat of Government Securities Dec, 1998.
• Launch of PAN card services in June, 2004.
• NSDL and DTCC (US Depository) sign Information Sharing and Collaboration Pact in
June 2007.
• Value of securities held in dematerialised form at NSDL crosses US$ 1 trillion in Sept
2007.
• Launch of SMS alert facility for investors in Sept, 2007.

CSDL:

CDSL was set up with the objective of providing convenient, dependable and secure depository
services at affordable cost to all market participants. Some of the important milestones of CDSL
system are:

• CDSL received the certificate of commencement of business from SEBI in February,

1999.
• Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the operations of
CDSL on July 15, 1999.
• Settlement of trades in the demat mode through BOI Shareholding Limited, the clearing
house of BSE, started in July 1999.
• All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange,
Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc have established
connectivity with CDSL.
• As at the end of Dec 2007, over 5000 issuers have admitted their securities (equities, bonds,
debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the
CDSL system.

Depository participant:

A Depository Participant (DP) is an agent of the depository through which it interfaces with
the investor. A DP can offer depository services only after it gets proper registration from
SEBI. Banking services can be availed through a branch whereas depository services can be
availed through a DP.
The benefits of availing of depository services are:
• A safe and convenient way to hold securities;
• Immediate transfer of securities;
• No stamp duty on transfer of securities;
 • Elimination of risks associated with physical certificates such as bad delivery, fake
securities, delays, thefts etc.;
• Reduction in paperwork involved in transfer of securities;
• Reduction in transaction cost;
• No odd lot problem, even one share can be sold;
• Nomination facility;
• Change in address recorded with DP gets registered with all companies in which investor
holds securities electronically eliminating the need to correspond with each of them
separately;
• Transmission of securities is done by DP eliminating correspondence with companies;
• Automatic credit into demat account of shares, arising out of
bonus/split/consolidation/merger etc.
• Holding investments in equity and debt instruments in a single account.

Dematerialisation:

1. What is dematerialisation?

Dematerialisation is the process by which physical certificates of an investor are converted to

an equivalent number of securities in electronic form and credited into the investor's account
with his/her DP.

2. How can one convert physical holding into electronic holding i.e how can one
dematerialise securities?

In order to dematerialise physical securities one has to fill in a DRF (Demat Request Form)
which is available with the DP and submit the same along with physical certificates one
wishes to dematerialise. Separate DRF has to be filled for each ISIN Number. The complete
process of dematerialisation is outlined below:

• Surrender certificates for dematerialisation to your depository participant.

• Depository participant intimates Depository of the request through the system.
• Depository participant submits the certificates to the registrar of the Issuer Company.

Registrar confirms the dematerialisation request from depository.

• After dematerialising the certificates, Registrar updates accounts and informs depository
of the completion of dematerialisation.
• Depository updates its accounts and informs the depository participant.
• Depository participant updates the demat account of the investor.

3. What is an ISIN?
ISIN (International Securities Identification Number) is a unique identification number for a
security.

4. Can odd lot shares be dematerialised?

Yes, odd lot share certificates can also be dematerialised.

5. Can electronic holdings be converted back into Physical Certificates?

Yes. The process is called rematerialisation. If one wishes to get back his securities in the
physical form one has to fill in the RRF (Remat Request Form) and request his DP for
rematerialisation of the balances in his securities account. The process of rematerialisation is
outlined below:

• One makes a request for rematerialisation.

• Depository participant intimates depository of the request through the system.
• Depository confirms rematerialisation request to the registrar.
• Registrar updates accounts and prints certificates.
• Depository updates accounts and downloads details to depository participant.
• Registrar dispatches certificates to investor.

4. Custodian Bank:
It is an organization responsible for safeguarding a firm's or individual's financial assets.

The role of a custodian in such a case would be the following:

a. to hold in safekeeping assets such as equities and bonds, arrange settlement of any
purchases and sales of such securities
b. collect information on and income from such assets (dividends in the case of
equities and interest in the case of bonds)
c. provide information on the underlying companies and their annual general
meetings
d. manage cash transactions
e. perform foreign exchange transactions where required and
f. provide regular reporting on all their activities to their clients.
The following companies offer custodian bank services:

• BNP Paribas
• Citigroup
• Deutsche Bank AG
• Goldman Sachs
• HSBC
• JPMorgan Chase
• Northern Trust

MODULE – 4

Custodian Bank: It is an organization responsible for safeguarding a firm's or individual's

financial assets.

The role of a custodian in such a case would be the following:

a. to hold in safekeeping assets such as equities and bonds, arrange settlement of any
purchases and sales of such securities
b. collect information on and income from such assets (dividends in the case of equities and
interest in the case of bonds)
c. provide information on the underlying companies and their annual general meetings
d. manage cash transactions
e. perform foreign exchange transactions where required and
f. provide regular reporting on all their activities to their clients.

The following companies offer custodian bank services:

• BNP Paribas
• Citigroup
• Deutsche Bank AG
• Goldman Sachs
• HSBC
 • JPMorgan Chase

B. Merchant Banking

A merchant bank is a financial institution primarily engaged in international finance and long-
term loans for multinational corporations and governments.

They are known as “accepting and issuing houses” in UK and as “Investment banks” in US.

Investment banking is the traditional aspect of investment banks which involves helping
customers raise funds in the capital markets and advising on mergers and acquisitions.

The functions of Merchant Banker are:

1. Underwriting:

This is a way of placing a newly issued security, such as stocks or bonds, with investors. A
syndicate of banks (the lead-managers) underwrite the transaction, which means they have taken
on the risk of distributing the securities.

Underwriters make their income from the price difference (the "underwriting spread") between
the price they pay the issuer and what they collect from investors or from broker-dealers who
buy portions of the offering.

Underwriter promises to purchase certain quantity of shares if there is no sufficient subscription

for which he charges underwriting commission to the issuer.

2. Project promotion and Project finance: This service refers to the encouragement of new
projects to establish new business and industries by providing required funds and also
enabling the new set up to raise fund from various other sources.

3. Syndication of credit: When two or more financial institutions join hands and lend credit to a
big corporation/company/multinational, such a set up is known as loan syndication or credit
syndication.

4. Leasing is an arrangement, similar to rent agreements, for the use of property (buildings, cars,
office equipment and other items) in return for payments to the owner. The lessee (person
taking out a lease) agrees to pay a number of fixed or flexible installments over an agreed
period to the lessor, who remains the owner of the asset (item) throughout the period of the
lease. Lease provides tax advantages to the lessee because lease payments are usually tax-
deductible.

5. Venture Capital: Venture capital (also known as VC or Venture) is a type of private equity
capital typically provided to immature, high-potential, growth companies in exchange for shares
in the interest of generating a return through an eventual realization event such as an IPO or trade
sale of the company. Venture capital investments are generally made as cash in exchange for
shares in the invested company.

A venture capitalist (also known as a VC) is a person or investment firm that makes venture
investments, and these venture capitalists are expected to bring managerial and technical
expertise as well as capital to their investments. A venture capital fund refers to a pooled
investment vehicle that primarily invests the financial capital of third-party investors in
enterprises that are too risky for the standard capital markets or bank loans

As the venture capitalists invest into new ventures, there is a very high risk. And if the setup
becomes successful, they get huge profits also.

After getting the huge profits, they exit the business by selling the shares.

6. Assistance regarding Mutual and Offshore funds: This service consists of information
regarding the provision of information to various clients about the performance of various
mutual funds and industries along with the information of offshore funds.

7. Corporate and investment advisory services: this service consists of advising the corporate
on the matters such as acquisition, mergers and demergers, amalgamations, diversification,
joint ventures etc.

Structure of Merchant Banker:

The set up of the entire merchant banking system in India can be studied under the following
four heads:

1. Commercial Banks: The commercial banks own wholly owned subsidiaries to carry out
the merchant banking services. Eg; SBI, Canara Bank, Bank of Baroda etc.
2. All India Financial Institutions: The Authorized financial institutions from SEBI can
also provide merchant banking services. Eg: ICICI, IFC, IDBI.
3. Private Consultancy Firms: Various private consultancy firms with the permission of
RBI and SEBI also provide merchant banking services. They usually venture into small
funding business. Eg: DSP Financial Consultants, JM Financial and Investment Services
etc.
4. Technical Consultancy Organization: These organizations provide merchant banking
service to medium and small sized units.

C. Investment Banking:

Investment banking is the traditional aspect of investment banks which involves helping
customers raise funds in the capital markets and advising on mergers and acquisitions. These
jobs tend to be extremely competitive and difficult to land. Investment banking may involve
subscribing investors to a security issuance, coordinating with bidders, or negotiating with a
merger target. Other terms for the investment banking division include mergers and acquisitions
(M&A) and corporate finance. The investment banking division (IBD) is generally divided into
industry coverage and product coverage groups. Industry coverage groups focus on a specific
industry such as healthcare, industrials, or technology, and maintain relationships with
corporations within the industry to bring in business for a bank. Product coverage groups focus
on financial products, such as mergers and acquisitions, leveraged finance, equity, and high-
grade debt.

D. Depository Services:

Depository services refer to those services offered by the Depository participants such as:

i. Purchasing and selling of shares on behalf of client

ii. informing the client about the fundamentals and technicals of the various assets and
markets

i. helping the client to keep the track record of various financial assets in his account
ii. Provides investor information
iii. Helps in conversion of shares and debentures into dematerialized and rematerialized
format through the help of Depositories.

E. Financial Consultancy:

Providing consultancy services regarding investments, tax policies and savings, mergers, joint
ventures etc.

F. Underwriting: This is a way of placing a newly issued security, such as stocks or bonds, with
investors. A syndicate of banks (the lead-managers) underwrite the transaction, which means
they have taken on the risk of distributing the securities.

Underwriters make their income from the price difference (the "underwriting spread") between
the price they pay the issuer and what they collect from investors or from broker-dealers who
buy portions of the offering.

Underwriter promises to purchase certain quantity of shares if there is no sufficient subscription

for which he charges underwriting commission to the issuer.

G. Leasing: is an arrangement, similar to rent agreements, for the use of property (buildings,
cars, office equipment and other items) in return for payments to the owner. The lessee
(person taking out a lease) agrees to pay a number of fixed or flexible installments over an
agreed period to the lessor, who remains the owner of the asset (item) throughout the period of
 the lease. Lease provides tax advantages to the lessee because lease payments are usually tax-
deductible.

H. Factoring: It refers to the selling of a company's accounts receivable, at a discount, to a

factor, who then assumes the credit risk of the account debtors and receives cash as the
debtors settle their accounts also called accounts receivable financing. In this case the profit
of the factor is Realized debtors – Discounted value paid by the factor.

I. Hire Purchase is a system in which a buyer takes possession of merchandise on payment of a

deposit and completes the purchase by paying a series of installments while the seller retains
ownership until the final installment is paid.

J. Forfaiting: This kind of service is usually used in international trade. Usually Banks and
financial institutions offer the services of Forfaiting.

Whenever exporter sends the goods as specified and agreed by the importer, exporter receives
the Bill of payment from the importer approved by the Importer’s Bank. The Banks then come
into picture i.e they purchase the approved Bills of exchange from the Exporter by providing
him the discounted value and on the maturity date of the bill, the banker collects the actual
value from the importer. Thus it’s a win win situation where the exporters working capital
gets released early and banker also makes the profit (Actual value of the bill – discounted
value paid)

K.Venture Capitalism: Venture capital (also known as VC or Venture) is a type of private

equity capital typically provided to immature, high-potential, growth companies in exchange for
shares in the interest of generating a return through an eventual realization event such as an IPO
or trade sale of the company. Venture capital investments are generally made as cash in
exchange for shares in the invested company.

A venture capitalist (also known as a VC) is a person or investment firm that makes venture
investments, and these venture capitalists are expected to bring managerial and technical
expertise as well as capital to their investments. A venture capital fund refers to a pooled
investment vehicle that primarily invests the financial capital of third-party investors in
enterprises that are too risky for the standard capital markets or bank loans

As the venture capitalists invest into new ventures, there is a very high risk. And if the setup
becomes successful, they get huge profits also.

After getting the huge profits, they exit the business by selling the shares.

L. Housing Finance:
M. Bills Discounting: In case of trade, the banker purchases the bills from the seller and pays
him the discounted value. Then on the maturity date, the banker receives from the drawer of the
bill i.e. the buyer the actual value of the bill. Thus discounting of bills is a kind of short term
financing where the sellers working capital gets released as soon as he sells the goods and the
buyer also gets the time to pay the purchase price. Profit of the Banker is Actual value of the bill
– Discounted value.

MODULE – 5
MUTUAL FUNDS

A Mutual fund is an intermediary which performs the function of buying and selling of securities
on behalf of its unit holders. The investors in the MF are given the share in its total funds which
is proportionate to their investments, and which is evidenced by the unit certificates.

Advantages:

1. Spread of Risk
2. Expert and professional management
3. Diversification of Portfolio
4. Low brokerage and transaction cost
5. High return potential
6. Convenient administration
7. Liquidity
8. Flexibility
9. Tax benefits
 10. Investment Opportunity
11. Alternative for savings
Organisation:

The Organisation of Mutual fund consists of 5 Bodies

a. Sponsors
b. Board of Trust
c. Asset Management Company
d. Custodian
e. Unit Holders
Types of Schemes:

1. Open Ended Funds:

These are the funds which are sold and redeemed everyday or continuously. The unit
holders can enter into and exit from these funds any time. These units are perpetuities
without and redemption date or lock in period. Open ended funds have to invest major
part in highly liquid assets in order to be ready to repurchase the units as and when the
unit holders sell it. Open ended funds are assured with dividends, capital appreciation,
safety and liquidity.

2. Closed Ended Funds: The closed ended funds have a fixed time duration for their
operation. Their corpus or capitalization remains fixed or intact till their redemption.
They have a long term lock in period such as 3 yrs or 5 yrs. Closed ended funds can be
traded in the stock market also.

3. Fund of funds:

In this scheme, instead of investing in equities or debt instruments, the investment is

made on other mutual funds. It enables double diversification.

4. Exchange Traded Funds:

These are the investment in funds which represent the securities which are traded on an
exchange. Unlike open ended funds, ETFs can be bought and sold like any other stock.

5. Index Funds:

In this scheme, the investment in funds represents the securities which are included in the
index such as SEnsex of BSe or Nifty of NSE. The performance of these funds replicates
the performance of the market represented by the index.
 6. Money market Mutual Funds:

These are short term investment pooling arrangements. They perform well when the
interest rate in the market is very high. These are the parking place for cash reserves.

Valuation of Funds:

In case of mutual funds, the value of each unit should be ascertained to track the performance of
the fund. The NAV (net asset value) of the unit is an important concept in this context. The NAV
of the unit is basically is arrived at by calculating the total market value of investments or assets
of the mutual funds, substracting liabilities and dividing by the number of outstanding units.

NAV=Total market value of assets or securities in the portfolio of the fund - Liabilities
No of outstanding units

In case of OEFs, NAV is calculated daily and the sales and repurchases on each day are
made at the most recently calculated NAV.

In case of CEFs, daily prices are determined on the stock market by the forces of supply
and demand.

Regulatory Frame Work:

1. AMCs should have a minimum net worth of 10 crores

2. AMCs can under take other fund based business such as providing investment
management services

3. The consent of the investors should be taken by the investors before making any change
in the fundamental attributes of the scheme

4. All the CEFs should be listed from the closure of the issue.

5. MFs have to identify and provide for non performing asset as per SEBI guidelines

6. MFs are required to display half yearly financial results.

MODULE – 6

1. Financial Assets or Financial Instruments represents a claim to the payment of a sum

of money sometime in the future and /or periodic payment in the form of interest or
dividend .
2. A Financial Market can be defined as the market in which financial assets are created or
transferred. As against a real transaction that involves exchange of money for real goods
or services, a financial transaction involves creation or transfer of a financial asset.

iv. Money Market is 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. Eg: Call money, Treasury Bills, Commercial papers, Certificate of
Deposits.

a. Call/Notice money is the money borrowed or lent on demand for a very short period.
When money is borrowed or lent for a day, it is known as Call (Overnight) Money.
Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on
a day and repaid on the next working day, (irrespective of the number of intervening
holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14
days, it is "Notice Money". No collateral security is required to cover these transactions.

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

c. Certificates of Deposit (CDs) is a negotiable money market instrument and issued in

dematerialized form or as a Usance Promissory Note, for funds deposited at a bank or other
eligible financial institution for a specified time period. Guidelines for issue of CDs are
presently governed by various directives issued by the Reserve Bank of India, as amended
from time to time. CDs can be issued by (i) scheduled commercial banks excluding
Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India
Financial Institutions that have been permitted by RBI to raise short-term resources within
the umbrella limit fixed by RBI.

d. Commercial Paper (CPs) is a note in evidence of the debt obligation of the issuer. On
issuing commercial paper the debt obligation is transformed into an instrument. CP
is thus an unsecured promissory note privately placed with investors at a discount
rate to face value determined by market forces. CP is freely negotiable by
endorsement and delivery. A company shall be eligible to issue CP provided –

(a) the tangible net worth of the company, as per the latest audited balance sheet,
is not less than Rs. 4 crore;

(b) the working capital (fund-based) limit of the company from the banking system
is not less than Rs.4 crore and
 (c) The minimum maturity period of CP is 7 days.

(d) The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by
other agencies.

v. Capital Market is designed to finance the long-term investments. The transactions

taking place in this market will be for periods over a year. Eg: Shares, Debentures,
Warrants, zero coupon bonds, deep discount bonds etc. as providing information on
the stock market and other issues like market trends.

1. Primary Market is a market that issues new securities on an exchange. Companies,

governments and other groups obtain financing through debt or equity based securities.
Primary markets are facilitated by underwriting groups, which consist of investment
banks that will set a beginning price range for a given security and then oversee its sale
directly to investors. Also known as "new issue market" (NIM). It is a market for new
securities issues where the security is purchased directly from the issuer.

2. Secondary markets are markets where investors purchase securities or assets from other
investors, rather than from issuing companies themselves. The exchanges - such as the
Bombay Stock Exchange, National Stock Exchanges are secondary markets

A newly issued IPO will be considered a primary market trade when the shares are first
purchased by investors directly from the underwriting investment bank; after that any
shares traded will be on the secondary market, between investors themselves. In the
primary market prices are often set beforehand, whereas in the secondary market only
basic forces like supply and demand determine the price of the security.

a. Share is an Evidence of ownership that represents an equal proportion of a firm's capital.

It entitles its holder (the shareholder) to an equal claim on the firm's profits and an equal
obligation for the firm's debts and losses. Two major types of shares are (1) ordinary
shares (common stock), which entitle the shareholder to share in the earnings of the firm
as and when they occur, and to vote at the firm's annual general meetings and other
official meetings, and (2) preference shares (preference stock) which entitle the
shareholder to a fixed periodic income (interest) but generally do not give him or her
voting rights.

b. A Debenture is an instrument of debt (fixed income bearing instrument)executed by the

company acknowledging its obligation to repay the sum at a specified future date and
also carrying an interest. It is only one of the methods of raising the loan capital of the
company. A debenture is thus like a certificate of loan or a loan bond evidencing the fact
that the company is liable to pay a specified amount with interest.
 It is a type of debt instrument that is not secured by physical asset or
collateral. Debentures are backed only by the general creditworthiness and reputation of
the issuer. Both corporations and governments frequently issue this type of bond in order
to secure capital.

c. Warrants are Long-term certificate issued by a firm giving the holder the right to
purchase its securities at a stipulated price (exercise price) in the future. Warrants are
negotiable instruments that usually serve to enhance the marketability of corporate bonds
or preferred stock (preference shares). They are similar to call-options but are issued by
firms and not by futures exchanges, and have much longer time spans

d. Bonds:

3. Financial Intermediary is a financial institution that accepts money from savers or

investors and loans those funds to borrowers, thus providing a link between those seeking
earnings on their funds and those seeking credit. Financial intermediaries include savings
and loan associations, building and loan associations, savings banks, commercial banks,
life insurance companies, credit unions and investment companies. Some of the important
intermediaries operating in 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.

4. Financial services can be defined as the products and services offered by institutions
like banks of various kinds for the facilitation of various financial transactions and other
related activities in the world of finance like loans, insurance, credit cards, investment
opportunities and money management as well as providing information on the stock
market and other issues like market trends.

FOREX

FOREX stands for foreign exchange Market.

The basis for making profit while working on various financial markets is a simple rule: to
purchase cheaper and to sell more expensively. Thus all the work on various financial markets
comes to consecutive trade operations on the purchase and sale of trading instruments: currency,
stocks and their index rates.

Meaning:

The value of one currency stated in terms of another currency. A person who exchanges one
country’s money for currency issued by another country.

The requirement to exchange currencies arises on account of a variety of transactions:

● An importer in India buying goods from England by paying GBP to the supplier,
● A company, earning foreign currency, wanting to hedge against exchange rate movements
● Banks wanting to exchange currencies to meet the requirements of their clients
● A speculative customer hoping to profit from the movement of exchange rate between
different currencies
● A customer wanting to take advantage of the price disparities amongst various foreign
currency markets (Arbitrage)
The main advantages of Forex over other financial markets are:

• Liquidity: the market works with huge amounts of money and gives customers complete
freedom to open or close their position of just about any volume at the existing current
price.
• Leverage: the main distinction of working on the Forex market is that a trader has an
opportunity to purchase and sell currency without having the full amount of money
needed for such an operation. To make a transaction, the player has to deposit an initial
amount (margin) after which he/she can run transactions whose volume exceeds the
invested amount many times. This is called leverage. So in case one deposits $10 000
USD into their account with a leverage of 1:100, they will have an opportunity to work
with $1 000 000 USD.
• Round-the-clock trading access: ability to trade 24 hours a day

Concepts used in FX

Exchange rate
Exchange rate is the number of units of one currency (say Currency1) that would be exchanged
for a specified amount of another currency (say Currency2). To illustrate, if 48 Indian Rupees are
exchanged for 1 US Dollar, the exchange rate between USD and INR is 48.

Buy and sell rates

A bank would be involved in both buying and selling foreign currencies. It makes a profit by
selling foreign currencies at a higher rate as compared to rate at which it buys foreign currencies.
The exchange rate at which the bank is willing to buy a foreign currency is called ‘buy’ rate,
while the exchange rate at which it is willing to sell a foreign currency is called the ‘sell’ rate.

Buy and sell spread

The difference between buy rate and sell rate is called spread. It indicates profit margin of a
foreign exchange deal.

Spot Rate: The exchange rate on current date

Forward rates
A forward rate is the rate available in the market for a date greater than the spot date. The
difference between the forward rate and the spot rate is called the forward margin / premium.

Arbitrage
The process of buying one currency at lower rate and selling it in other currency at higher market
rate and making riskless profit is known as currency market arbitrage.
External Commercial Borrowings (ECBs) include bank loans, suppliers' and buyers' credits, fixed and floating
rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial
Institutions such as International Finance Corporation. Euro-issues include Euro-convertible bonds and GDRs.

In India, External Commercial Borrowings are being permitted by the Government for providing an additional
source of funds to Indian corporates and PSUs for financing expansion of existing capacity and as well as for
fresh investment, to augment theresources available domestically. ECBs can be used for any purpose (rupee-
related expenditure as well as imports) except for investment in stock market and speculation in real estate.

External Commercial Borrowings (ECB) are defined to include

commercial bank loans,

buyer’s credit,
supplier’s credit,
securitised instruments such as floating rate notes, fixed rate bonds etc.,
credit from official export credit agencies,
commercial borrowings from the private sector window of multilateral financial institutions such as IFC, ADB,
AFIC, CDC etc.
and Investment by Foreign Institutional Investors (FIIs) in dedicated debt funds

Applicants are free to raise ECB from any internationally recognised source like banks, export credit agencies,
suppliers of equipment, foreign collaborations, foreign equity - holders, international capital markets etc.

REGULATOR

The department of Economic Affairs, Ministry of Finance, Government of India with support of Reserve Bank
of India, monitors and regulates Indian firms access to global capital markets. From time to time, they
announce guidelines on policies and procedures for ECB and Euro-issues.

DEBIT AND CREDIT CARDS

Debit Card

1. Savings A/c
2. It is always positive balance one
3. Account will be debited when u use debit card
4. Does no charge any interest
5. Used for withdrawal of money
6. You are not liable to pay back what u have withdrawn
Credit Card: The Account is credited when ever any payment or purchase is made through this plastic mney.

1. C urrent or OD A/c

2. It usually shows negative balance

3. U r taking credit from bank when u use credit card

BANGALORE UNIVERSITY SOLVED PAPERS
SECTION A
1. What is Capital Adequacy Ratio?

Capital Adequacy Ratio or CAR: It is ratio of capital fund to risk weighted assets
expressed in percentage terms. Also known as "Capital to Risk Weighted Assets Ratio (CRAR)."

Minimum requirements of capital fund in India:

* Existing Banks 09 %
* New Private Sector Banks 10 %
* Banks undertaking Insurance business 10 %
* Local Area Banks 15%

Capital fund - Capital Fund has two tiers

Tier I capital includes

*paid-up capital
*statutory reserves
*other disclosed free reserves
*capital reserves representing surplus arising out of sale proceeds of assets.
Minus
*equity investments in subsidiaries,
*intangible assets, and
*losses in the current period and those brought forward from previous periods
to work out the Tier I capital.

Tier II capital consists of:

*Un-disclosed reserves and cumulative perpetual preference shares:
*Revaluation Reserves (at a discount of 55 percent while determining their value for
inclusion in Tier II capital)
*General Provisions and Loss Reserves upto a maximum of 1.25% of weighted risk assets:
*Investment fluctuation reserve not subject to 1.25% restriction
*Hybrid debt capital Instruments (say bonds):
*Subordinated debt (long term unsecured loans:

Risk weighted assets - Fund Based : Risk weighted assets mean fund based assets such as
cash, loans, investments and other assets. Degrees of credit risk expressed as percentage
weights have been assigned by RBI to each such assets.

Non-funded (Off-Balance sheet) Items : The credit risk exposure attached to off-balance
sheet items has to be first calculated by multiplying the face amount of each of the off-
balance sheet items by the credit conversion factor. This will then have to be again multiplied
by the relevant weight age.

Reporting requirements :
Banks are also required to disclose in their balance sheet the quantum of Tier I and Tier II
capital fund, under disclosure norms.
An annual return has to be submitted by each bank indicating capital funds, conversion of
off-balance sheet/non-funded exposures, calculation of risk -weighted assets, and
calculations of capital to risk assets ratio,

2. Mention the components of Tier 2 Capital.

The components of Tier-2 capital are:

• Un-disclosed reserves and cumulative perpetual preference shares

• Revaluation Reserves (at a discount of 55 percent while determining their value

for inclusion in Tier II capital)

• General Provisions and Loss Reserves upto a maximum of 1.25% of weighted

risk assets

• Investment fluctuation reserve not subject to 1.25% restriction

• Hybrid debt capital Instruments (say bonds)

• Subordinated debt (long term unsecured loans:

3. What is non performing Assets?

 An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank. A non performing asset is a loan or an advance when one of the
following is applicable.

• Interest and/or installment of principal remain overdue for a period of more than
90 days in respect of term loan

• An account remains out of order in respect of an overdraft/cash credit

• The bill remains overdue for a period of more than 90 days

Categories of NPA:

Banks in India are required to classify NPAs into the following three categories:

a. Sub standard assets: A sub-standard asset would be one, which has remained NPA for a
period of less than or equal to 12 months.

b. Doubtful assets: An asset is classified as doubtful if it has remained in the substandard

category for a period of 12 months or more.

c. Loss assets: A loss asset is one which is considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted-although there may be some
salvage or recovery value. Also, these assets would have been identified as ‘loss assets’
by the bank or internal or external auditors or the RBI inspection but the amount would
not have been written off wholly.

4. What is residuary non banking finance company?

A non-banking financial company (NBFC) is a company registered under the Companies

Act, 1956 and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by government or local authority or other
securities of like marketable nature, leasing, hire-purchase, insurance business, chit business,
but does not include any institution whose principal business is that of agriculture activity,
industrial activity, sale/purchase/construction of immovable property.

A non-banking institution which is a company and which has its principal business of
receiving deposits under any scheme or arrangement or any other manner, or lending in any
manner is known as residuary non-banking finance company.

5. What are the components of securitization transaction?

Assets, Originator, SPV(Special Purpose Vehicle), Investors, ABS(Asset Backed Securities)
and MBS(Mortgage Backed Securities)

6. What is dematerialization?

Dematerialization refers to converting physical certificates to electronic form

7. Who can participate in call money market?

Banks and Authorised financial institutions Can participate in call money market

8. What is insider trading?

It refers to the trading of a corporation's stock or other securities (e.g. bonds or stock
options) by individuals with potential access to non-public information about the company.

9. What is net asset value?

NAV of the unit is basically is arrived at by calculating the total market value of investments
or assets of the mutual funds, substracting liabilities and dividing by the number of
outstanding units.

NAV= Total market value of assets or securities in the portfolio of the fund - Liabilities
No of outstanding units

10. What is PLR?

It is the bench mark rate. It is the rate at which banks lend to their most credit worthy
customers. The PLR in India differs from bank to bank. Each bank can decide its own
PLR(Prime Lending Rate).

11. Distinguish between physical and financial asset?

Physical assets Vs financial assets

 Physical assets determine the productive wealth of the society where as financial assets
determine the wealth of the individuals or firms holding them.
 Physical assets includes assets like land, building, machinery, furniture, knowledge etc,
where as Financial assets includes assets like cash, bonds, shares, derivative instruments
etc.
 Financial asset determines the means by which individuals hold their claims on Physical
assets.
 Physical assets appear only on the asset side of the balance sheet where as Financial
assets appear both on asset side and liability side of Balance Sheet. When we aggregate
overall Balance Sheet, Financial asset will cancel out leaving only the sum of Physical
assets as net wealth of aggregate economy.
 Physical asset are destroyed only by accident or by wearing out over time where as
Financial assets are created and destroyed in ordinary course of doing business.

12. What is depository participant?

A Depository Participant (DP) is an agent of the depository through which it interfaces with
the investor. A DP can offer depository services only after it gets proper registration from
SEBI. Banking services can be availed through a branch whereas depository services can be
availed through a DP.

13. What is securitization?

It is the process of taking an illiquid asset, or group of assets, and through financial
engineering, transforming them into a security.

14. What is margin trading?

Margin trading is buying stocks without having the entire money to do it. The exchanges
have an institutionalised method of buying stocks without having the capital through the
futures market.

15. What is rematerialization?

Rematerialisation refers conversion of securities in demat form into physical certificates

 16. Distinguish between primary and secondary market

Sl.
Primary Market Secondary Market
No.
This is the market for fresh
1 This is the market for exisiting securities
issue
2 It results in creation of capital It does not result in creation of capital
The money will be transferred Money will be transferred from one
3
from the investor to the issuer investor to another
There is creation of financial
4 There is transfer of financial asset
asset
Issuing companies, investors,
depositories, depository
Investors and depositories and depository
5 participants and financial
participants are the major participants
institutions are the major
participants

17. What are the components of tier 1 capital?

The Components of tier-1 capital are:

• paid-up capital

• statutory reserves

• other disclosed free reserves

• capital reserves representing surplus arising out of sale proceeds of assets.

Minus

• equity investments in subsidiaries,

• intangible assets, and

• losses in the current period and those brought forward from previous periods
to work out the Tier I capital.

18. What is short selling?

"Shorting" is the practice of selling a financial instrument that the seller does not own
at the time of the sale. Short selling is done with intent of later purchasing the financial
 instrument at a lower price. Short-sellers attempt to profit from an expected decline in the
price of a financial instrument.

19. What do you mean by securitization of debts?

Debt securitization refers to the packaging of a pool of financial assets into marketable
securities. It involves issue of securities against illiquid assets of financial institutions and
such securities are really structured, whereby the originator transfer or sells some of the
assets to a SPV which breaks these assets into tradable securities of smaller value then
sold to the investing public.

20. What are pension funds?

Pension Fund is an arrangement to provide income to participants when they retire out of
current savings.

21. What is factoring and forfaiting?

Factoring: It refers to the selling of a company's accounts receivable, at a discount, to a

factor, who then assumes the credit risk of the account debtors and receives cash as the
debtors settle their accounts also called accounts receivable financing. In this case the
profit of the factor is Realized debtors – Discounted value paid by the factor.

Forfaiting: Whenever exporter sends the goods as specified and agreed by the importer,
exporter receives the Bill of payment from the importer approved by the Importer’s Bank. The
Banks then come into picture i.e they purchase the approved Bills of exchange from the
Exporter by providing him the discounted value and on the maturity date of the bill, the
banker collects the actual value from the importer. Thus it’s a win win situation where the
exporters working capital gets released early and banker also makes the profit (Actual value of
the bill – discounted value paid).

22. What do you mean by credit and debit cards?

Credit Card: The account represent the Credit/loan standing against you when ever u make any
purchase or transaction.

• Current or OD A/c

• It usually shows negative balance

 • U r taking credit from bank when u use credit card

• Interest is charged

• High penalty will be charged if used to withdrawal of money

• You are liable to pay back what u have used
Debit Card: It is a plastic money which represents your savings account. Your account is
debited whenever the money is taken out in the form of cash or purchases.

• Savings A/c

• It is always positive balance one

• Account will be debited when u use debit card

• Does no charge any interest

• Used for withdrawal of money

• You are not liable to pay back what u have withdrawn

23. What do you mean by depository and custodial services?

Depository services: refer to those services offered by the Depository participants such as:

a. Purchasing and selling of shares on behalf of client

b. informing the client about the fundamentals and technicals of the various assets and
markets
c. helping the client to keep the track record of various financial assets in his account
d. Provides investor information
e. Helps in conversion of shares and debentures into dematerialized and rematerialized
format through the help of Depositories.

Custodian services: It is an organization responsible for safeguarding a firm's or individual's

financial assets. The role of a custodian in such a case would be the following:

• to hold in safekeeping assets such as equities and bonds, arrange settlement of any
purchases and sales of such securities
• collect information on and income from such assets (dividends in the case of equities
and interest in the case of bonds)
• provide information on the underlying companies and their annual general meetings
• manage cash transactions
• perform foreign exchange transactions where required and
• provide regular reporting on all their activities to their clients.
24. What do you mean by call money market?

Call/Notice money is the money borrowed or lent on demand for a very short period.
When money is borrowed or lent for a day, it is known as Call (Overnight) Money.
Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed
on a day and repaid on the next working day, (irrespective of the number of intervening
holidays) is "Call Money". When money is borrowed or lent for more than a day and up
to 14 days, it is "Notice Money". No collateral security is required to cover these
transactions.

25. What are swaps?

A swap is a derivative in which two counterparties agree to exchange one stream of cash
flows against another stream. EG: Interest rate swaps, currency swaps

26. What is a commercial paper?

Commercial Paper (CPs) is a note in evidence of the debt obligation of the issuer. On
issuing commercial paper the debt obligation is transformed into an instrument. CP is
thus an unsecured promissory note privately placed with investors at a discount rate to
face value determined by market forces. CP is freely negotiable by endorsement and
delivery. A company shall be eligible to issue CP provided –

(a) the tangible net worth of the company, as per the latest audited balance sheet, is
not less than Rs. 4 crore;

(b) the working capital (fund-based) limit of the company from the banking system
is not less than Rs.4 crore and

(c) The minimum maturity period of CP is 7 days.

(d) The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by
other agencies.

27. What is repo instrument?

REPO refers to Repurchase Agreement. It is the rate at which RBI lends to other commercial
banks. Commercial banks take loan from RBI against Government securities where by
commercial banks promise RBI to repurchase those government securities by paying back
the loan amount.
 28. What do you mean by duration of Bond?

The duration of the bond is the fulcrum point where the scale would be balanced using
the present value of each cash flows as weights.

29. Who is a market maker?

A market maker is a firm that quotes both a buy and a sell price in a financial
instrument or commodity, hoping to make a profit on the bid/offer spread

30. What is cross border leasing?

Cross-border leasing is a leasing arrangement where lessor and lessee are

situated in different countries. This presents significant additional issues
related to tax avoidance and tax shelters.

31. Meaning of derivatives, options, futures and forwards.

SECTION B

1. Distinguish between Commercial and Merchant Banking.

Sl.
No Commercial Banking Merchant Banking/ NBFC
.
It is a banking
1 It is a Non banking financial Intermediary
intermediary
The main function is
The provide various services such as underwriting,
2 accepting of deposits
venture capitalism, custodian services, leasing etc
and lending of funds
Only commercial banks
and authorised financial Only authorised financial institution can perform these
3
institution can perform functions
this function

2. Distinguish between share and mutual fund unit

Sl.
Share Mutual Fund Unit
No.
1 it represents ownership It does not represent ownership
Shares are highly liquid
2 Liquidity is comparitively less
financial assets
 The value of share is
The value of unit is determined
3 determined on the basis of
by Net asset value of the fund
demand and supply
Only closed ended fund units
4 Shares are easily transferable
are transferable
Share represent investment in Unit represents investment in
5
the company fund

3. Explain briefly the role played by RBI in the provision of rural credit

Nabard, Waiver of agricultural credit, development of small scale industries through

SIDBI.

4. Discuss the modus operandi of factoring services

Mode of operation of Factoring:

• Factor purchases the debtors of a company at a discount

• Gets the right from the company to collect from its debtors

• Collects all the debts from the debtors on behalf of the company

• Makes profit by (Total debtors realized-discounted value of debtors paid to

the company)

5. What are the benefits of availing depository services?

The benefits of availing of depository services are:

1. A safe and convenient way to hold securities;

2. Immediate transfer of securities;
3. No stamp duty on transfer of securities;
4. Elimination of risks associated with physical certificates such as bad delivery,
fake securities, delays, thefts etc.;
5. Reduction in paperwork involved in transfer of securities;
6. Reduction in transaction cost;
7. No odd lot problem, even one share can be sold;
8. Nomination facility;
 9. Change in address recorded with DP gets registered with all companies in ch
investor holds securities electronically eliminating the need to correspond with
each of them separately;
10. Transmission of securities is done by DP eliminating correspondence with
companies;
11. Automatic credit into demat account of shares, arising out of
bonus/split/consolidation/merger etc.
12. Holding investments in equity and debt instruments in a single account.

13. What are the advantages of credit rating?

The advantages of credit rating are:

• Companies can get good reputation with good rating

• Company with good rating can get the capital easily

• Company can gain the investors faith with good rating

• Helps investors in making ideal investment decision

• It protects the interest of the investors

14. Explain open market operations?

The buying and selling of government securities in the open market in order to expand or
contract the amount of money in the banking system. Purchases inject money into the
banking system and stimulate growth while sales of securities do the opposite.

By buying and selling securities, mostly short-term Treasury obligations, i.e., Treasury
bills, the Reserve Bank is able to: (1) meet the public demand for cash by adjusting bank
reserves upward or downward, as needed, and (2) influence bank interest rates, including
rates such as the Federal Funds (Fed Funds) rate that banks charge for short-term sale of
Excess Reserves . Because reserve accounts at Federal Reserve Banks don't earn interest,
banks try to hold reserves to a minimum or to the level of required reserves.

Open market operations are the most flexible monetary tool available in implementing
monetary policy objectives. Because commercial banks have about three-fourths of the
nation's checking account deposits, the RBI, by managing the level of reserves in the
banking system, is able to influence the nation's supply of money (the money supply or
money stock), and the cost of credit. Both the RBI Funds rate, which is the market rate
banks pay one another for non borrowed reserves, and the bank prime rate are influenced
to a large degree by the RBI's actions in open market operations.

15. If Capital adequacy ratio is 9%, avg risk weight of assets is 65% and capital is
250 crores then what is total assets.

By Capital adequacy ratio (9%), we mean, total capital should be 9% of risk weighted
assets.

In this Case total Capital is 250 crores= 9% of RWA

Total risk weighted assets 250*100/9 = 2777.77 Crores

Average risk weightage of assets is 65%

So Total assets = 2777.77*100/65 = 4273 Crores

16. What is monetary policy. Explain the monetary policy developments.

Monetary policy is the process by which the government, central bank, or

monetary authority of a country controls (i) the supply of money, (ii) availability of
money, and (iii) cost of money or rate of interest, in order to attain a set of
objectives oriented towards the growth and stability of the economy.

Recent Developments:

Decrease in Repo rates.

Decrease in CRR

Giving more importance to LAF (liquidity adjustment facility)

Doubling the borrowing limits under (LAF)

17. What is treasury bill market. Who are the players in it.
 Treasury bills are short-term debt instruments issued by the Central government.
Treasury bills play a vital role in cash management of the Government. Being risk-
free, their yields at varied maturities serve as short term benchmarks and help pricing
varied floating rate products in the market.

The players are:

1. Government: Issuer

2. RBI: Govt issues Treasury bills through RBI

3. Investors: Banks, financial institutions and companies

18. Explain the functions of IRDA.

IRDA (Insurance Regulatory and Development Authority) is the

administrative agency of Government of India for insurance sector supervision and
development.

The functions of IRDA are:

a. issue to the applicant a certificate of registration, renew, modify, withdraw,

suspend or cancel such registration;

b. protection of the interests of the policy holders in matters concerning assigning of

policy, nomination by policy holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance;

c. specifying requisite qualifications, code of conduct and practical training for

intermediary or insurance intermediaries and agents;

d. specifying the code of conduct for surveyors and loss assessors;

e. promoting efficiency in the conduct of insurance business;

f. promoting and regulating professional organisations connected with the

insurance and re-insurance business;

g. levying fees and other charges for carrying out the purposes of this Act;

h. calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organisations connected with the insurance business;
 i. control and regulation of the rates, advantages, terms and conditions that may be
offered by insurers in respect of general insurance business not so controlled and
regulated by the Tariff Advisory Committee under section 64U of the Insurance
Act, 1938 (4 of 1938);

j. specifying the form and manner in which books of account shall be maintained
and statement of accounts shall be rendered by insurers and other insurance
intermediaries;

k. regulating investment of funds by insurance companies;

l. regulating maintenance of margin of solvency;

m. adjudication of disputes between insurers and intermediaries or insurance

intermediaries;

n. supervising the functioning of the Tariff Advisory Committee;

o. specifying the percentage of premium income of the insurer to finance schemes

for promoting and regulating professional organisations referred to in clause (f);

p. specifying the percentage of life insurance business and general insurance

business to be undertaken by the insurer in the rural or social sector; and

q. exercising such other powers as may be prescribed

19. How far SEBI has achieved investor protection?

SEBI had achieved its main objective of investor protection by taking following
measures:

• Issues guidelines

• Revises guidelines from time to time

• Strict Listing requirements

• Disclosure of information

• Prevention of Insider trading

• Monitoring transactions in the market

 20. Distinguish between Hire purchase and lease. Explain why leasing could not
make much progress in our country.

HIRE PURCHASING LEASING

1 Hire installments has to be paid annually
2 The Parties involved are Hirer and Hiree
3 It results in creation of an asset
The user gets the ownership of the asset
4 after the completion of all installment
payments
5 The Hiree can claim the depreciation
6 The hiree can reap the benefits of tax
savings on depreciation
Lease Rentals has to be paid annualy
The Parties involved are Lessor and Lessee
There is no creation of asset
The uses cannot become the owner of the asset
The lessee cannot claim the depreciation
The lessee cannot reap the benefits of tax savings
on depreciation

Leasing could not make much progress because:

1. Lack of initiatives from the NBFC’s to get into leasing business

2. Risk of obsolescence

3. Risk of non payment of rentals

21. Bring out various inventions made by commercial banks in India in recent past.

1. Debit and credit cards

2. ATM facilities

3. Online and internet banking

4. Core banking facility

5. Good customer service

6. New investment opportunities

22. What is meant by merchant banking. Bring out the regulations as applicable to
merchant Banker.

A merchant bank is a financial institution primarily engaged in international finance and

long-term loans for multinational corporations and governments.
The regulations as applicable to merchant Bankers are:

a. An application should be submitted to SEBI in Form A of the SEBI

(Merchant Bankers) Regulations, 1992. SEBI shall consider the application and
on being satisfied issue a certificate of registration in Form B of the SEBI
(Merchant Bankers) Regulations, 1992 and Rs. 5 lakhs should be paid within 15
days before the grant of certificate.

b. Without holding a certificate of registration granted by the Securities and

Exchange Board of India, no person can act as a merchant banker.

c. The validity of the certificate is three years

d. Three months before the expiry period, an application should be submitted

to SEBI in Form A of the SEBI (Merchant Bankers) Regulations, 1992. SEBI
shall consider the application and on being satisfied renew certificate of
registration for a further period of 3 years with a renewal fees of 2.5 lakhs.

e. Only a body corporate other than a non-banking financial company shall

be eligible to get registration as merchant banker.

f. The categories for which registration may be granted are given below:

 Category I – to carry on the activity of issue management and to act as adviser,

consultant, manager, underwriter, portfolio manager.

 Category II - to act as adviser, consultant, co-manager, underwriter, portfolio

manager.

 Category III - to act as underwriter, adviser or consultant to an issue

 Category IV – to act only as adviser or consultant to an issue

g. The capital requirement depends upon the category. The minimum net
worth requirement for acting as merchant banker is given below:
  Category I – Rs. 5 crores
 Category II – Rs, 50 lakhs
 Category III – Rs. 20 lakhs
 Category IV – Nil

23. Explain different types of treasury bills issued.

Treasury bills are short-term debt instruments issued by the Central government.
Treasury bills play a vital role in cash management of the Government. Being risk-free,
their yields at varied maturities serve as short term benchmarks and help pricing varied
floating rate products in the market.

364-day Treasury bill rate (100 %) Yields on short term debt instruments issued by national
government to collect immediate funds needed to clear the financial burdens on the government
itself. Treasury Bill rates are determined in weekly auctions by the Bureau of Treasury.

Treasury Bills (Tbills) are direct and unconditional obligations of the national government.
They are issued by the Bureau of Treasury (BTr). They carry a maturity of one year or less
and can be traded in the secondary market before maturity.

Treasury Bills are considered one of the primest investment instruments in the market. They
are safe, liquid and offer attractive returns to investors.

Features:

Issuer : National government

Term : 91, 182, 364 days
Tax feature : Interest income subject to 20% final withholding tax
Type of income : Tax paid income
Interest computation : True discount formula
Manner of purchase : Auction or through secondary market
Treasury Bills do not bear interest. They are issued and sold at a discount from face value
and are redeemed at maturity for the full face value of the instrument.

24. Bring out the factors of futures and options Out line the process followed by
CRISIL in awarding ratings. Are they more useful to investor than fundamental
analysis.

Ratings are more useful for investors than fundamental basis because,
 • Rating considers in-depth analysis of the Company before rating where as
fundamental analysis considers mainly the financial statements and
performance n the economy

• Ratings are revised from time to time

• Rating information can be availed by all the investors as it is officially

published where as fundamental analysis reaches few specific people

25. Differentiate between bills discounting and factoring. Which one do u

recommend.

Bills Discounting Factoring

It refers to the transfering of
1 receivables to a bank or financial
institution
2 Instrument involved is bill
Bill has to be drawn to discount the
3
bill
4 Bills are discounted only by a bank
or authorised financial institution
This can happen in case of both
5
small and large business
It refers to selling of debtors of one entity
to another entity at a discount
the instrument involved is the agreement
of the debtors and the co
There is no need of bills of exchange in
case of factoring
Debtors can be discounted either by a
bank, financial institution or by another
business entity.
This can happen only in case of large scale
business

26. What is CRISIL. What are its functions.

CRISIL offers domestic and international customers a unique combination of local

insights and global perspectives, delivering independent information, opinions and
solutions that help them make better informed business and investment decisions,
improve the efficiency of markets and market participants, and help shape infrastructure
policy and projects. Its integrated range of capabilities includes credit ratings and risk
assessment; research on India's economy, industries and companies; investment
research outsourcing; fund services; risk management and infrastructure
advisory services more

RATING

• Long term: AAA, AA, A, BBB, BB, B, C, D

• Short Term: P-1, P-2, P-3

 • Fixed Investments: FAAA, FAA, FA, FBBB, FBB, FB, FC, FD

Functions of CRISIL are:

• Conducting analysis

• Collection of information and data for analysis

• Conduction meetings and discussion with the management of companies

• Assigning of Rates

• Revising of rates

• Protection of interest of investors

• Informing the public about the performance of various companies

27. What is meant by securitization of debt. What are the obstacles according to you
for developing vibrant market for it in India.

It is nothing but the packaging of a pool of financial assets into marketable securities. It
involves issue of securities against illiquid assets of financial institutions and such
securities are really structured, whereby the originator transfer or sells some of the assets
to a SPV which breaks these assets into tradable securities of smaller value then sold to
the investing public. The general principle is that the maturities of these securities
must coincide with the maturity of the securitized loan.

The obstacles for securitization are:

• Lack of knowledge of the process of securitization

• Difficulty in the process of recording and accounting

• Unorganized Financial industry

• Lack of initiatives

28. Sate the process of Book building

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which
aids price and demand discovery. It is a process used for marketing a public offer of equity
shares of a company. It is a mechanism where, during the period for which the book for the IPO
is open, bids are collected from investors at various prices, which are above or equal to the floor
price. The process aims at tapping both wholesale and retail investors. The offer/issue price is
then determined after the bid closing date based on certain evaluation criteria.

The Process:

• The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.
• The Issuer specifies the number of securities to be issued and the price band for orders.
• The Issuer also appoints syndicate members with whom orders can be placed by the
investors.
• Investors place their order with a syndicate member who inputs the orders into the
'electronic book'. This process is called 'bidding' and is similar to open auction.
• A Book should remain open for a minimum of 5 days.
• Bids cannot be entered less than the floor price.
• Bids can be revised by the bidder before the issue closes.
• On the close of the book building period the 'book runner evaluates the bids on the basis
of the evaluation criteria which may include -
o Price Aggression
o Investor quality
o Earliness of bids, etc.
• The book runner and the company conclude the final price at which it is willing to issue
the stock and allocation of securities.
• Generally, the number of shares are fixed, the issue size gets frozen based on the price
per share discovered through the book building process.
• Allocation of securities is made to the successful bidders.
• Book Building is a good concept and represents a capital market which is in the
process of maturing.
29. Process of rating of debentures

The process of rating is same for all securities.

30. Explain Financial forwards

31. Guidelines of RBI on commercial papers

Commercial Paper (CPs) is a note in evidence of the debt obligation of the issuer. On
issuing commercial paper the debt obligation is transformed into an instrument. CP is
thus an unsecured promissory note privately placed with investors at a discount rate to
 face value determined by market forces. CP is freely negotiable by endorsement and
delivery. A company shall be eligible to issue CP provided –

(a) the tangible net worth of the company, as per the latest audited balance sheet,
is not less than Rs. 4 crore;

(b) the working capital (fund-based) limit of the company from the banking system
is not less than Rs.4 crore and

(c) The minimum maturity period of CP is 7 days.

(d) The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by
other agencies.

Section C
1. Explain the regulatory frame work of capital markets in India?

• Listing through sebi to enter the primary market

• Guidelines laid down by sebi in case of book building, issue management, pricing
of issue and related matters

• Monitoring the activities of listed companies by SEBI

• Foreign companies should be listed through sebi to enter into Indian capital
markets through IDR.

• Sebi guidelines and instructions for FII

• Sebi guidelines and instructions for ECB and FDI

2. Explain the various challenges before Indian banks in the back drop of
deregulation, increasing level of competition and risk?

• Internet banking-password hacking and misuse

• Lack of security-leakage of data on online transactions

• Risk in lending at sub prime rates

• Default risk

• Loan waiver orders from the government

 3. Discuss recent policy measures made by RBI with regard to working of NBFC in
India.

The RBI regulates NBFCs engaged in equipment leasing, hire purchase finance, loan and
investment, residuary non-banking companies (RNBCs) and the deposit taking activity of
miscellaneous non-banking companies (chit funds).
• It is obligatory for NBFCs to apply for a certificate of registration
• Minimum net owned fund should be Rs.200 lakh for obtaining a Certificate of
Registration from the RBI for commencing the business of an NBFC
• Transparency of operations, especially in the connected lending relationships,
• Corporate governance standards including professionalisation of the Boards and
ensuring ‘fit and proper’ criteria inconsonance with the standards in banks,
• Avoiding untenable rates of commission to agents
• Adherence to ‘know your customer’ rules,
• Customer service in terms of clear indication of the identifiable contact with the
field agents so that matters such as unclaimed deposits are appropriately
addressed.

4. Distinguish between Money market and Capital Market?

Sl.No Basis Money Market Capital Market

1 Period Short Term Long Term
Duration- maturity with one or Duration-maturity with more
2 Duration
less than one year than one year
Call money and notice money,
3 Instruments Certificate of Deposits, Treasury Shares, debentures, warrants
bills, Commercial papers, Bills
High liquidity inc ase of
4 Liquidity Very high shares and comparitively less
in case of other assets
This market is dominated mostly Public, SEBI, RBI,all banks
Major
5 by government, banks and and financial institutions,
players
financial institutions Companies

5. Explain Basel 2 frame work and RBI policy measures to monitor various risks faced
by Indian banks:

Capital adequacy ratio requirements for banks and tier one and tier two capital aspects are
to be presented.
6. Explain regulatory frame work for derivative markets in India

Entry Rules

•No automatic entry

•Capital adequacy - higher than cash market
•Clearing and non-clearing members
•Minimum net worth Rs 300 lakhs
•Minimum deposit Rs 50 lakhs
•Option writers - higher deposits
•Broker members, sales persons and dealers to pass a certification program
•Registration with SEBI in addition to registration with exchange

Mark to Market and Settlement

•Daily settlement of futures contracts

•Daily settlement price - closing price of futures
•Final settlement price - closing price of underlying security

Brokerage

•Prices on the system shall be exclusive of brokerage

•Maximum brokerage rates shall be prescribed by the exchange
•Brokerage to be separately indicated in the contract note

Brokerage

•Prices on the system shall be exclusive of brokerage

•Maximum brokerage rates shall be prescribed by the exchange
•Brokerage to be separately indicated in the contract note

Margins From Clients

•Margins to be collected from all clients/trading members

•Daily margins to be further collected
•Right of clearing member to close out positions of clients/TMs not paying daily
margins
•Losses if any to be charged to clients/TMs and adjusted against margins

Cash V/s Futures Market

 •CC - full novation i.e. Counterparty to each trade
•Value at risk - 99% confidence
•Daily settlement through EFT
•Trading and Clearing members
•Certification requirement
•Higher capital adequacy and deposit
•Compulsory collection of margins from clients
•Segregation of clients funds
•Shifting of positions to other members
•Client registration, risk disclosure document and ethical sales practices
•Inspection of all members
•SEBI approval for new contracts

Liquid Net Worth

•Total liquid assets deposited with the exchange/cc less

•Initial margin applicable to total gross open position
•Liquid net worth shall be at least Rs 50 lakhs
•Gross open positions shall not exceed 33.33 times liquid net worth
•Back-testing over 8 years reveals that this level has been insufficient
only twice
on Nifty and never on Sensex
•LNW includes cash, fixed deposits, bank guarantees, treasury bills, Govt
securities, dematerialised securities
•Securities to be marked to market at least on weekly basis
•Only investment grade debt securities accepted - haircut 10%
•Equity in demat form - 15% haircut
•Acceptable equities - top 100 by market cap out of top 200 by market cap and
trading value
•All securities to pledged in favour of CC
•At least 50% shall be cash, bank guarantees, FDs, T-bills and Govt sec
7. Explain the salient features of the recent monetary policy unveiled by the
government.

• Reduction in Repo and reverse repo rates

• Increase in external commercial borrowing limit

• Decrease in CRR

• Providing liquidity adjustment facility (LAF)

8. Discuss various measures taken to make capital markets vibrant?

• Listing through sebi to enter the primary market

 • Guidelines laid down by sebi in case of book building, issue management, pricing of
issue and related matters

• Monitoring the activities of listed companies by SEBI

• Foreign companies should be listed through sebi to enter into Indian capital markets
through IDR.

• sebi guidelines and instructions for FII

• Sebi guidelines and instructions for ECB and FDI

9. What measures have been taken by government as well as banks to arrest Non
performing assets in India?

• Reducing risk by strengthening banks, raising disclosure standards

• Securitization
• Lok Adalats and Debt Recovery Tribunals are other effective mechanism to handle this
task.
• Regulations must incorporate a contextual perspective (like temporary cash flow
problems) and clients should be handled in a manner which reflects true value of their
assets and future potential to pay.

10. Mutual fund provide stability of share prices, safety to investors and resources to
prospective entrepreneurs. Discuss.

• Mutual funds are the institutional investors which provide broad based investment

• Closed ended mutual funds enable stability in the markets as they are invested for
quite a long time

• Investors who are unaware of market can also invest in market through mutual
fund

• They provide a mode of savings

• They provide liquidity and high return

• NBFC’s which are permitted from RBI and SEBI can only do the Mutual fund
business which is a major to protect investors

• They pool the funds and provide huge capital to various companies there by
supporting entrepreneurship
11. Explain the structure and function of Indian Financial System?

12. Explain the valuation of life policies and discuss the problems involved in valuation
of life policies

13. State and explain the function of NBFC’s in India

14. What is a venture capital fund. Explain.

15. Why venture capital funds could not make much head way in our country.

16. Critically evaluate the performance of RBI

17. What is meant by venture capital. Evaluate the functioning of venture capital funds
in India.

18. Differentiate between leasing and hire purchasing

19. Critically examine foreign exchange market in recent year.