Professional Documents
Culture Documents
Capital Markets
market is considered as the part of emerging markets across the world. The
various liberal developments in the Indian Capital market includes opening of
mutual funds industry for banks and private players. This has helped a lot to
spread the equity culture. By investing in Mutual funds one can acquire the
shares of different companies, without actually buying them.
Question 2: What are Mutual funds? What are the different types of
Mutual Funds?
Answer 2:
A Mutual Fund is a body corporate that pools the savings of a number of
investors and invests the same in a variety of different financial instruments, or
securities.
The income earned through these investments and the capital appreciations
realized by the scheme are shared by its unit holders in proportion to the
number of units owned by them. Mutual funds can thus be considered as
financial intermediaries in the investment business that collect funds from the
public and invest on behalf of the investors. The losses and gains accrue to the
investors only. The Investment objectives outlined by a Mutual Fund in its
prospectus are binding on the Mutual Fund scheme. The investment objectives
specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in
various asset classes like equity, bonds, debentures, commercial paper and
government securities.
NAV or Net Asset Value of the fund is the cumulative market value of the assets
of the fund net of its liabilities. NAV per unit is simply the net value of assets
divided by the number of units outstanding. Buying and selling into funds is
done on the basis of NAV-related prices.
NAV is calculated as follows:
Classification
of Mutual
Funds
Index funds
These funds invest in the same pattern as popular market indices like S&P 500
and BSE Index. The value of the index fund varies in proportion to the
benchmark index.
Hedge Funds
These funds adopt highly speculative trading strategies. They hedge risks in
order to increase the value of the portfolio.
Open-ended Funds
These funds do not have a fixed date of redemption. Generally they are open for
subscription and redemption throughout the year. Their prices are linked to the
daily net asset value (NAV). From the investors' perspective, they are much
more liquid than closed-ended funds. Investors are permitted to join or withdraw
from the fund after an initial lock-in period.
Close-ended Funds
These funds are open initially for entry during the Initial Public Offering (IPO)
and thereafter closed for entry as well as exit. These funds have a fixed date of
redemption. One of the characteristics of the close-ended schemes is that they
are generally traded at a discount to NAV; but the discount narrows as maturity
nears. These funds are open for subscription only once and can be redeemed
only on the fixed date of redemption. The units of these funds are listed (with
certain exceptions), are tradable and the subscribers to the fund would be able
to exit from the fund at any time through the secondary market.
Merchant Bankers helps corporate to raise money from capital market through
the issue of shares, debentures, bonds etc. They are designated as managers to
the issue. Their main business is to attract public money to capital issue. They
also help the companies to determine the capital structure. The pricing of the
issue esp. in the public issue is very important.
The pricing has to be such that:
Investors will be attracted to invest at that price and get suitable returns. And
the Company at the same time should get the premium they are looking for, as
larger the premium lesser is the requirement for borrowed funds.
All issues should be managed by at least one merchant banker functioning as
the lead merchant banker. Provided that, in an issue of offer of rights to the
existing members with or without the right of renunciation the amount of the
issue of the body corporate does not exceed rupees fifty lakhs, the appointment
of a lead merchant banker shall not be essential. No merchant banker, other
than a bank or a public financial institution, who has been granted a certificate
of registration under these regulations, shall after June 30th, 1998 carry on any
business other than that in the securities market.
The Merchant Bankers offers following services and activities during the
public issue:
Holding the road shows to sell the issue for the analyst,
Companies are free to allot one or more agencies as managers to an issue. SEBI
guidelines insist that there should be at least one authorized Merchant Banker
for an issue less than Rs 100 crore and not more than two merchant bankers
should be associated as lead managers, advisors and consultants to public
issues over Rs 100 crore. This number could be up to max 4.
1. The merchant bankers should satisfy themselves with the viability of the
projects (Technical, financial, managerial, market etc) before promoting it to
the invertors. Also this helps him to sell the issue with confidence. They
should associate themselves with good issues for maintaining high
professional standards and reputation in the market.
2. They should act as the custodians of the investor’s money and this puts a lot
of responsibility on them. To discharge this function they need to exercise
due diligence independently by verifying the content of prospectus and the
reasonableness of the views expressed there in. Though they don’t have to
sign the prospectus, but the have to give a certificate to that effect to SEBI.
3. They are responsible to get the securities listed on all the stock exchanges
mentioned in the prospectus. It can be especially true of companies who
cannot list their shares on either NSE or BSE but promise listing in several
regional stock markets but actually they list the in one/two exchanges.
4. Non-receipt of the refund orders and allotment advice within the stipulated
period to the investors should be taken care. Introduction of DEMAT accounts
the allotment complaints have considerably reduced. But the timely refunds
and allotment of securities is the responsibility of lead/merchant bankers.
5. The Merchant bankers have to certify that the have verified everything and
they believe it to be true. This assures the investing public about the safety
of their investment. The precautions taken by merchant bankers would
ensure that the fake companies, whose intention is to defraud investors, do
not access market.
6. Every merchant banker shall keep and maintain the following books of
accounts, records and documents namely:
(a) A copy of balance sheet as at the end of each accounting period;
(b) A copy of profit and loss account for that period;
(c) A copy of the auditor's report on the accounts for that period; and
(d) A statement of financial position.
Answer 4:
a) Book Building:
As the companies generally raise the capital through public issues where they
need to decide the size of the issue and also the price at which the shares
are to be offered to the investors. However in this system the issuer is not
able to ascertain the price that the market may be willing to pay forth
shares, before launching the issue. This is where book building comes to their
aid. Book building is also termed as “Price Discovery Method”. In the usual
process investors are not involved in determining the issue/offer price where
as in book building pricing of the issue is determined on the basis of
investors’ feedback only which assures investor demand. Also the issue price
after the issue marketing is flexible in terms of issue size and the prices of
the shares.
The issue may have a placement portion and a public portion. The public
offer is retail marketing of the offer to the public, the placement portion can
be offered through the book building process. For e.g. Bharati Tele has
recently made issues in this way.
b) Depositories
c) Rolling statements
Rolling settlement is the one in which trades outstanding (Payments made for
the purchases or deliveries in case of sale of securities) at the end of the day
have to be settled at the end of the settlement period. For E.g. In a T+5
Rolling settlement, a transaction entered into Monday has to be settled on
the fifth working day, which will be the subsequent Monday when either the
pay-in or pay-out transaction takes place.
Advantages of Rolling settlement:
The Rolling settlement payments are much quicker than weekly settlements.
Thus, investors benefit increases from the increased liquidity as in the Rolling
settlement system the investor would receive the payments on the fifth day
after the sales. Thus rolling settlement reduces delays.
Rolling settlement was introduced in India only after introduction of
depositories because the Rolling settlements necessarily require Electronic
transfer of funds and DEMAT facilities in place for trading of securities. This is
because of the fact that handling large volume of paper on a daily basis is
extremely difficult for the Clearinghouses of Stock exchanges. However, still
the transfer of funds in India takes two – three days, as all the Banks are not
yet connected electronically with all their branches, which delays the
clearance process.
d) Non-Voting Shares:
Non- voting shares therefore require being more attractive than the shares,
which carry Voting rights. This can be achieved in two ways:
1. By giving discount on the issue price
2. By giving higher dividend on Non- voting shares
To Companies/Issuer:
Most commonly the Non- voting shares will be quoted at a discounted price
with respect to normal share price. Due to the recent developments in the
economy the industries are growing at fast rate. Thus they require resources
for modernization, expansion, integration and for new projects. But raising
funds by the way of equity has an inherent danger of loosing control to
others. The ability to raise debts has its own limitations. Non- voting shares
provide a way out to companies to garner equity without dilution of the
promoter’s stake and control.
To Investors:
Some of the investors are always interested in gaining high returns from the
investment rather than the right to vote. This is quite evident from the fact
that very few investors/shareholders actually turn up in the annual general
body meetings of the companies and are really interested in the day-to-day
activities of the company. Mostly the investors are not really interested in the
affairs of company or wish to participate in the affairs of the company.
Question 5: Write a note on Money Market. What is the Whole sale Debt
Market of NSE?
Money Market Instruments: Money market is the most liquid market and very
short term in nature. Money market instruments are those with maturity less
than a year and highly liquid. Overnight inter bank call money market,
commercial paper market, certificate of deposit market and T-bills market come
under the purview of money market.
Money Market
Instruments
month and it can be rolled over. The minimum denomination for issue of such
securities is Rs. 25 lakhs. The issuers are usually highly rated corporates. The
issuer has to be compulsorily by any of the credit rating agencies. CP was
introduced in India in 1990 by RBI to enable highly rated corporate borrowers
diversify their sources of short-term borrowings and also to provide an additional
instrument to investors. The biggest advantage is that by issuing CPs, a top-
rated corporate can raise funds at even below the prime lending rate of banks.
• Face value of the instrument is the value that is written on the debt
certificate.
• Issue price, is the value at which the security is issued. It might be at par or
at a premium or discount.
• Coupon, the interest rates payable on the instrument.
• Terms and conditions like repayment period, pattern and mode of repayment.
Question 7: What is meant by Buy back of shares? What are the legal
provisions for buy back in India?
Answer 7:
Buy back of shares is nothing but Buying back of the securities issued by the
company to the shareholders either from the market or directly from the
investors.
5. A copy of the Board resolution authorizing the buy back shall be filed with the
SEBI and stock exchanges.
6. The date of opening of the offer shall not be earlier than seven days or later
than 30 days after the specified date
7. The buy back offer shall remain open for a period of not less than 15 days
and not more than 30 days.
8. A company opting for buy-back through the public offer or tender offer shall
open an escrow Account.
Answer 8:
Portfolio Management involves the allocation of assets for individuals and
institutions, keeping in mind their previous investment experience, their needs
and circumstances (such as liquidity needs, risk appetite, tax considerations),
and their investment objectives. Every portfolio is tailored to the individual
client's requirement, and the attempt is to provide personalized financial
solutions.
Investment requirements are as unique as the individual. An individual's
investment needs would be driven by his current financial status, future
requirements, social and age profile. To comprehensively cover his needs, a
person would ideally require exposure to equities, debt, insurance, fixed
deposits, real estate, etc. Evaluation and investment in each requires a unique
skill.
Answer 9:
The Securities Contracts (Regulation) Act 1956 defines derivative as under:
1. A "Derivative” is a security derived from a debt instrument, share, and loan
whether secured or unsecured, risk instrument or contract for differences or
any other form of security;
2. A "Derivative" is a contract, which derives its value from the prices, or index
of prices of underlying securities
In other words, Derivative means a forward, future, option or any other hybrid
contract of pre determined fixed duration, linked for the purpose of contract
fulfillment to the value of a specified real or financial asset or to an index of
securities.
Classification of Derivatives:
a forward contract for a specific commodity. The forward price makes the
forward contract have no value when the contract is written. However, if the
value of the underlying commodity changes, the value of the forward
contract becomes positive or negative, depending on the position held.
Forwards are priced in a manner similar to futures. Like in the case of a
futures contract, the first step in pricing a forward is to add the spot price to
the cost of carry (interest forgone, convenience yield, storage costs and
interest/dividend received on the underlying). Unlike a futures contract
though, the price may also include a premium for counter party credit risk,
and the fact that there is not daily marking to market process to minimize
default risk. If there is no allowance for these credit risks, then the forward
price will equal the futures price.
Types of swaps:
• An Interest Rate Swap (IRS) is a financial contract between two parties
exchanging or swapping a stream of interest payments for a 'notional
principal' amount on multiple occasions during a specified period. Such
contracts generally involve exchange of a 'fixed to floating' or 'floating to
floating' rates of interest. Accordingly, on each payment date - that occurs
Question 12: Write a note on Credit and Debit cards. Comment on the
future of plastic money in India.
Answer 12:
Credit Card
A credit card is a payment card issued to a person for purchasing goods and
services and obtaining cash against a line of credit established by the issuer.
It is a card (usually plastic) that assures a seller that the person using it has a
satisfactory credit rating and that the issuer will see to it that the seller receives
payment for the merchandise delivered. Some companies are now offering credit
cards for those with bad or no credit that do not require a security deposit. The
application fees, annual fees, and interest rates associated with these unsecured
cards are higher than standard cards. These cards should be used only to re-
establish a good credit history only, and not to run up a big balance.
Debit cards
A Debit card is a payment card (usually plastic) that enables the holder to
withdraw money or to have the cost of purchases charged directly to the
holder's bank account.
They are very similar to credit cards in that they can be used to withdraw cash
from ATMs and make purchases at millions of locations worldwide just as with a
regular Visa or MasterCard. The major difference is that amounts used for
purchases with your debit card are immediately deducted from your checking
account. Merchants prefer them to checks because they don't bounce and the
money is transferred quickly.
The biggest advantage of debit cards is convenience. Not only one needs to
carry cash, one doesn’t run up interest charges like in case of credit card. For
this reason, debit cards are a good option for those who have gotten into trouble
with credit cards in the past. They certainly will reign in uncontrolled spending,
since purchase amounts are immediately deduced from one's bank account, and
one can keep track of spending and expenses.
Card Issuers are mainly the banks. They are interested in this business
because of high margins i.e. they charge up to 3% fees from member
establishments, Charge annual fees from their customers, earn interest on the
credit made available to the users. The Banks also have to bear the costs
Like the cost of marketing the cards, the credit information cost, membership
fees paid to clearing agencies, admin fees and cost of bad debts.
Card Holders includes both the individuals and the business organization.
The debit card may still prove closer to the Indian heart, allowing conservative
spenders that ``perfect control on expenses.'' Yet the road ahead for the debit
card too is not entirely without its share of prickly gravel. ``The biggest
deterrent would be that very few merchant establishments in India are equipped
to accept debit cards and there is no grace period available.''
Answer 15:
Information on ones credit report comes from companies that have loaned
money. National credit reporting agencies, also known as credit bureaus,
organize the information and keep credit reports on file. Anyone who has ever
used credit to buy anything probably has a credit report.
The need for credit rating is different for different parties depending on the
benefits it offers to the various parties utilizing these services viz. investors,
intermediaries, issuers and the regulatory authority.
• Benefits to Investors:
1. Credit Rating will supplement the investors’ credit evaluation process.
2. It facilitates comparison of relative value between competing securities.
3. It helps in recognizing the risk involved in the investment.