FINANCIAL MARKETS AND

INSTITUTIONS

03/25/11
BY A . ARULDOS S VITHAKAN

1
INDIAN FINANCIAL SYSTEN-AN
OVERVIEW

03/25/11
o Financial System of any country consists of financial
markets, financial intermediation and financial
instruments or financial products.
o The term "finance" in our simple understanding it is
perceived as equivalent to 'Money‘. But finance
exactly is not money, it is the source of providing
funds for a particular activity.
o Finance refers to assessing the requirements of funds,
identify sources , sourcing, deployment and
evaluating the results of such investment with a view
to improve performance in the future.
o The economic development of a nation is reflected by
the progress of the various economic units, broadly
classified into corporate sector, government and
household sector.  While performing their activities
these units will be placed in a surplus/deficit/balanced 2
budgetary situations.
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o There are areas or people with surplus funds and there
are those with a deficit.  A financial system or
financial sector functions as an intermediary and
facilitates the flow of funds from the areas of surplus
to the areas of deficit.  A Financial System is a
composition of various institutions, markets,
regulations and laws, practices, money manager,
analysts, transactions and claims and liabilities.
o The word "system", in the term "financial system",
implies a set of complex and closely connected or
interlined institutions, agents, practices, markets,
transactions, claims, and liabilities in the economy. 
The financial system is concerned about money,
credit and finance-the three terms are intimately
related yet are somewhat different from each other.
Indian financial system consists of financial market,
3
financial instruments and financial intermediation.
FINANCIAL MARKETS
o Money Market- The money market ifs a wholesale
debt market for low-risk, highly-liquid, short-term
instrument.  Funds are available in this market for

03/25/11
periods ranging from a single day up to a year.  This
market is dominated mostly by government, banks
and financial institutions.
o Capital Market -  The capital market is designed to
finance the long-term investments.  The transactions
taking place in this market will be for periods over a
year.
o Forex Market - The Forex market deals with the
multicurrency requirements, which are met by the
exchange of currencies.  Depending on the exchange
rate that is applicable, the transfer of funds takes
place in this market.  This is one of the most
developed and integrated market across the globe.
o Credit Market- Credit market is a place where banks, 4
FIs and NBFCs purvey short, medium and long-term
loans to corporate and individuals.
FINANCIAL INTERMEDIATION

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o To ensure that financial assets reach the ultimate
investor in order to garner the requisite amount. 
When the borrower of funds approaches the financial
market to raise funds, mere issue of securities will not
suffice.  Adequate information of the issue, issuer and
the security should be passed on to take place. 
There should be a proper channel within the financial
system to ensure such transfer.
o To serve this purpose, Financial intermediaries came
into existence.
o In the initial stages, the role of the intermediary was
mostly related to ensure transfer of funds from the
lender to the borrower.  This service was offered by
banks, FIs, brokers, and dealers.  However, as the
financial system widened along with the
developments taking place in the financial markets, 5
the scope of its operations also widened.
FINANCIAL INTERMEDIARIES

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o Some of the important intermediaries
operating ink the financial markets include;
investment bankers, underwriters, stock
exchanges, registrars, depositories,
custodians, portfolio managers, mutual
funds, financial advertisers financial
consultants, primary dealers, satellite
dealers, self regulatory organizations, etc.
Though the markets are different, there may
be a few intermediaries offering their
services in move than one market e.g.
underwriter.  However, the services offered
by them vary from one market to another. 6
FINANCIAL INTERMEDIARIES
Intermediary Market Role

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Stock Exchange Capital Market Secondary Market to
Investment Bankers Capital Market, Credit securities
Corporate advisory
Underwriters Market
Capital Market, Money services,
SubscribeIssue
to of
Registrars, Market
Capital Market securities
unsubscribed portion
Issue securities to the
Depositories,
Primary Dealers Money Market of securities
investors
Market on behalf
making in of
Custodians
Satellite Dealers
Forex Dealers Forex Market the company
government
Ensure and ink
securities
exchange
handle share transfer
currencies
activity

7
NATURE AND ROLE OF FINANCIAL SYSTEM
STRUCTURE OF FINANCIAL SYSTEM

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8
EQUILLIBRIUM IN FiNANCIAL MARKETS

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EQULLIBRIUM IS BASED ON THE ASSUMPTION THE
WORLD IS PERFECT
Financial market is expected to be perfect when:

§ There are large number of savers, investors and

operators in the market.
§ All participants are rational.
§ All are well informed and there is smooth and faster
flow of required information.
§ There is homogeneous expectations from all
participants in the market.
§ There are no taxes.
§ There are no transaction costs.
§ The financial assets are infinitely divisible. 9

DETERMINANTS OF SUPPLY AND
DEMAND OF FUNDS

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o Aggregate savings by the household sector., business
sector and the government in a given economy.
o Savings is the difference between possible income and
consumption expenditure..
o The level of current and expected income has a definite
bearing on volume of savings . Other factors are age
wise variations, certainty of income, inflation, desire
to save for old age, tax benefits, economic
development, desire to consume.
o Demand for funds are dependent on investment
climate, growth of economy, investment in working
capital, expansion, new establishments of industry or
service units,expoprts, technological changes
capacity utilisation,investment in housing,
infrastructure development, availability of internal
funds, cost of capital etc. 10
FINANCIAL SYSTEM AND ECONOMIC
DWVELOPMENT

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11
RELATIONSHIP BETWEEN FINANCIAL
SYSTEM AND ECONOMIC DEVELOMENT

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q Credit creation theory.- Investments are made in
anticipation of savings
q Theory of forced savings— According to this theory
investments are not determined by savings but it is
savings which determine investments which can be
increased automatically through monetary expansion
The monetary expansion speed up development through
four channels:
 1.if resources are unemployed it would increase
aggregate demand, output and savings.
 `2. If resources are fully employed it would generate
inflation which will lower the rate of return on
financial instruments or money. This
 will make the wealth holders to invest in physical
capital.
 3. Inflation changes income distribution in favourof
profit earners which will increase savings'.
 Inflation tax effect- Inflation imposes tax on real 12
money therby savings are transferred to
Government fo investments.

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q Financial market Regulation Theory- According to
this theory fincial market are prone to market failures
and that government intervention make them to
function better like RBI’s interest rate and monetary
policy, SEBI guidelines.
q Financial Liberalisation Theory- It is argued tha
the Government intervention and control of
financial sector not only lower the quantum of
investments but also tne quality as finacial
institutions are forced to have directed
investments in government specified priority
sectors which normally non productive assets .
Also they are primarily in l sectors which do not
contribute to economic development/GDP
growthh 13
RBI AND INDIAN FINANCIAL SYSTEM

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v Until 1994, different departments in Reserve Bank
of India were exercising supervision over banks,
non-banking financial companies and financial
institutions.
v Board for Financial Supervision was set up under
the aegis Reserve Bank under Reserve Bank of
India (Board for Financial Supervision)
Regulations, 1994 with the objective of paying
undivided attention to the supervision of the
institutions in the financial sector.
v Prior to 1993, the supervision and regulation of
commercial banks was handled by the
Department of Banking Operations &
Development (DBOD). In December 1993 the
Department of Supervision was carved out of the
DBOD with the objective of segregating the
14
supervisory role from the regulatory functions of
RBI.
v
 03/25/11
 Department of Banking Supervision (DBS)
 The Department of Banking Supervision at present
exercises the supervisory role relating to commercial
banks in the following forms:
 Preparing of independent inspection programmes for
different institutions.
 Undertaking scheduled and special on-site inspections,
off-site surveillance, ensuring follow-up and
compliance.
 Determining the criteria for the appointment of
statutory auditors and special auditors and assessing
audit performance and disclosure standards.
 Dealing with financial sector frauds.
 Exercising supervisory intervention in the
implementation of regulations which includes –
recommendation for removal of managerial and other
persons, suspension of business, amalgamation, 15
merger/winding up, issuance of directives and
imposition of penalties.
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 Department of Non-Banking Supervision(DNBS)
 Department of Non-Banking Supervision has following
responsibilities:
 Administration of Chapter IIIB of the RBI Act, formulating
regulatory framework and issuing directions to the
NBFCs (including residuary non-banking companies,
mutual benefit companies, chit fund companies);
 Administration of Chapter III-C of the RBI Act in respect of
unincorporated bodies, Chit Funds Act in respect of chit
fund companies, Prize Chits and Moneys Circulation
Schemes (Banning) Act in respect of prize chits;
 Identification and classification of NBFCs;
 Registration of NBFCs under section 45-IA of the RBI Act;
 On-site inspection and follow up;
 Off-site surveillance and scrutiny of various returns;
 Attending to complaints relating to NBFC sector; and
 Initiating deterrent action against the errant companies 16
Supervisory Process

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vOn-site inspection
vSupervision of overseas branches of
Indian banks
vFinancial Institutions
vNon-Banking Financial Companies
vOff-site Monitoring & Surveillance
System-Banks, All India Development
Financial Institutions, Non-Banking
Financial Companies
v

17
Board for Financial Supervision:
Constitution

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v Board for Financial Supervision (BFS) was
constituted on November 16, 1994 by the
Governor as a committee of the Central Board of
Directors of the Reserve Bank of India (RBI). It
functions under the RBI (BFS) Regulations, 1994
exclusively framed for the purpose in
consultation with the Government of India.
v Advisory Council to BFS was constituted on
November 16, 1994 and was in place till March
27, 1998.
v The BFS also constituted an Audit Sub-Committee
in January 1995
v The supervision by BFS at present covers
commercial banks, all India development
financial institutions and non-banking finance
companies. 18
v
v
 03/25/11
v Corporate Governance and Management
Guidance
v Transparency and Disclosure
v Internal controls and housekeeping in banks
v Reconciliation of inter-branch accounts
v Balancing of books
v Reconciliation of Nostro accounts
v Strengthening of internal audit /control
system
 Audit system in banks

 Fraud monitoring

 Core Principles for Effective Banking 19

Supervision
v
ASSIGNMENT -1

03/25/11
Discuss in brief the role, responsibilities and
functions of various financial intermediaries in
Indian Financial System
Note: 1. Assignment must be in your own

language, data / information can be gathered

from text books and the net.
 2. Assignment to be submitted lates by
29.06.2009

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SAVINGS AND INVESTMENTS

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Consumption and saving decisions


vDesired consumption is the consumption

amount desired by households


vDesired national saving is the level of

national saving when consumption is at its
desired level:


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Consumption and saving decisions:


 A person can consume less than current

income, i.e., saving is positive.
 A person can consume more than current
income i.e., saving is negative

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 03/25/11
 Consumption and saving decisions:
 There is a trade-off between current and
future
 consumption:
 •The price of 1 unit of current consumption is
1 + r units of future consumption, where r is
the real interest rate.
 Consumption-smoothing motive: the
desire to have a relatively even pattern of
consumption over time.

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 Effect of changes in current income:
 Increases in current income increase both

 consumption and saving.

 • Because the marginal propensity to

consume—the fraction of additional income
consumed—is less than 1.
 When current income (Y) rises, Cd rises, but
not by as much as Y, so Sd also rises.

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 Effect of changes in expected future
income:
 � Higher expected future income raises
current
 consumption even at the same current income
level, so current saving declines.
 Effect of changes in wealth:

 Increase in wealth raises current consumption

 even at the same current income level, so
current saving declines
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 Effect of changes in the real interest rate:
A higher real interest rate has 2 effects.

 • The Substitution effect on saving is

positive because a higher rate of return is
a greater reward for saving
 .• The Income effect on saving is mixed:
 – It is negative for a net saver because it
takes less saving toachieve a given amount in
the future (target saving).
 – It is positive for a net borrower because a
higher real interest rate represents a loss of
wealth. 26
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 Effect of changes in the real interest rate:
 Taxes and the real return to saving.

 • The expected after-tax real interest rate is

given by:
 - Effect of changes in fiscal policy:
 -Changes in fiscal policy affects desired
 consumption through changes in both current
and expected future income.
 They directly affect desired national saving:

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 Effect of changes in fiscal policy:
 Government purchases:
 Higher G financed by higher current
taxes reduces after-tax income, lowering
desired consumption.
 • Higher G financed by higher future taxes
also lowers desired consumption if people
realize that future after-tax income will
be lower.

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 Effect of changes in fiscal policy:
 Taxes:

 • A reduction in current taxes will increase

current (disposable) income and desired
consumption.
 • However, consumers may realize that a tax
cut today will result in higher taxes in the
future, which willreduce future expected
income.


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Effect of changes in fiscal policy:
 � Taxes—3 possible situations:

 • If the decline in future expected income is

less than the
 increase in current income, desired
consumption will rise.

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Effect of changes in fiscal policy:
Taxes—3 possible situations:

 • If the decline in future expected income

exactly offsets the increase in current
income, desired consumption will not
change.
 tax change affects only the timing of taxes,
not their ultimate (present value) amount

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 Effect of changes in fiscal policy:
Taxes:

 • In practice, people do not fully see that

future taxes will rise if taxes are cut today.
 • Consequently, a tax cut today leads to
increased desired consumption and reduced
desired national saving.

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Determinants of Desired National
Saving

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 Rise in current income.
 Increase in expected future income.

 Increase in wealth.

 Increase in real (after tax) interest rates

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INVESTMENT

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 Why is investment important?
 � Investment fluctuates sharply over the
business cycle.
 • Need to understand investment to
understand the business cycle.
 Investment plays a crucial role in long-term
growth.

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 Investment is determined by changes in the
 desired capital stock.

 The desired capital stock is the amount of

capital that allows firms to earn the largest
expected profit.
 • Depends on benefits and costs of additional
capital.

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 The desired capital stock:
The benefit associated with additional

capital
 depends on the future marginal product of
capital,
 • Because the marginal productivity of capital
falls a K increase, the MPKf also falls as K
increases.

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 03/25/11
 The desired capital stock:
The cost associated with additional capital

is the real cost of using a unit of capital per

year.
 • This is called the user cost of capital, uc,
which equals the sum of the real interest
cost and depreciation.


37
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 Changes in the desired capital stock:
 Any factor that changes the user cost of
capital willalso cause a change in the
desired capital stock:
 The real interest rate,

 • The depreciation rate, or

 • The price of capital.

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 Changes in the desired capital stock:
 Any factor that shift the MPKf curve will also
 cause a change in the desired capital
stock:
 Technology, or

 • The labor force.

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 Changes in the desired capital stock:
Taxes and the desired capital stock:

 • With taxes, the return to capital is (1 – τ)

MPKf
 • The desired capital stock is where the after
tax return also cause a change in the
desired capital stock:

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 03/25/11
 Changes in the desired capital stock:
 � Taxes and the desired capital stock:

 • Tax-adjusted user cost of capital is uc/(1 – τ).

 • An increase in τ raises the tax-adjusted user

cost of Changes in the desired capital stock:
 � Taxes and the desired capital stock:

 • Tax-adjusted user cost of capital is uc/(1 – τ).

 • An increase in τ raises the tax-adjusted user

cost of

41
INTEREST RATE STRUCTURE

03/25/11
vImpact of interest rate is both in savings and
investment in the economy- borrowing and
lending decisions are primarily based on
interest rate.
vIn the macro sense interest rate and interest
income has vital role in the economy.
vSavings and investments which are influenced
by interest rates are the economic variables.

42
ROLE OF INTEREST RATES

03/25/11
vReward to capital-a factor of production.
vA return on savings
vCost to investments.
vAn instrument of monetary policy in credit
control. In addition to influencing the cost
and availability of funds from the supply
side, interest rate also influence the
quantum of investments from the demand
side and thus determine the income and the
employment in the economy.

43
THEORIES OF INTEREST RATE

03/25/11
vKeynes considered interest rate as monetary
phenomenon.
vHe took money as an asset with opportunity
cost , namely return on short term bonds.
vIn a partial equilibrium approach, we can
assume that the forces in the real economic
system remain constant and analyzed the
financial factors which explain the interest
rate.
vUnder this theory interest is the function of
supply and demand in the economy
vTransactions are generally pre cautionary or
specuklative and the late is known as aset 44
approach.
v
NEO-CLASSICAL THEORY

03/25/11
vAccording to this theory interest rate is also
based on the expectations of the public and
the rate of inflation in the economy.
vAccording to Irwing Fisher interest rate is also
a function of inflation as the nominal rate is
affected by expected rate of inflation.
vDuring inflationary periods the gap in the
rates between organised financial system
and the unorganised financial system
widens.
vFunds flow from organised to unorganisedand
vice versa inluence thecrates in both the 45
sectors.
Interest rate structure- factors influencing
interest rates

03/25/11
vSince the risk for an investor is greater than a
lender, interest on ownership capital must
be more than on loan capital.
vDifference in maturity periods.
vDegree of default risk.
vTax provisions-incentives or disincentives.
vMarketability-liquidity.
vSfety of funds.

46
INTEREST RATES IN INDIA

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v Bank rate- the rate fixed by the central bank-RBI
rate for advances to commercial and co-
operative banks.
v Normally bank rate is for discounting bills of
exchanges etc,
v In view if limited money and bills market bank rate
is not the leader for interest rate and the
refinance rate is the rate at which various
windows of RBI provides refinance to banks.
These rates are known as reference rates.
v Bank rate is made active indicator of f bank funds.
v Bank rate is revised by RBI under the RBI Act as
needed 47

v
MONEY MARKET ORGANISATION IN
INDIA

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48
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49
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1. Regulator of money and credit/ Monetary authority.
2. Open market operations- sale and purchase of central and
stae securities and Treasury Bills.
3. Bank Rate-Rate at which the RBI buy or rediscount bills
4. Refinance – to ease the liquidity issues in the system.
5. CRR-Cash which the banks has to keep with RBI as a
percentage of their demand and time liabilities to
ensure safety and liquidity of bank deposits.
6. SLR-Secondary and supplementary requirements to (i)
restrict expansion of bank credit; (ii)ensure solvency of
banks and (iii) augment bank’s investment in
government securities.
7. Liquidity Adjustment Faculty- RBI was providing specific
and sector based refinance like Export credit
refinance, Collateralized Lending Faculty
8. i.e advance against excess (over SLR requirements)
holdings of Government securities, T- Bills . 50
9.
 03/25/11
v Based on the recommendation of Narasimhancommittee
RBI policy has changed from sector specific direct
refinancing to indirect and general refinancing through
changes in REPO Reverse REPO rates which would
provide reasonable corridor for market play
v Provisions of Interim LAF:
-CLF at 0.25% of fortnightly aggregate deposits of 1997-98

which would be available for 2 weeks at Bank rate wef 21st

April 1999.
- An Additional amount equivalent to CLF would be available
at 2% over Bank Rate-
- Both CLF and ACLF are for 2 weeks.
- Restriction on participation in money market was
withdrawn
- Scheduled commercial banks were eligible export credit
refinance.at Bank Rate
- Liquidity support were made available to primary dealers 51
at B/Rfor 90 days.
 03/25/11
v Repo /reverse repo//ready forward/repurchase (Buy
back) refers to transactions where two parties
agree to sell and repurchase the same security
v The seller agrees to sell specified security with an
agreement to buy the same security at a future
price and date.
v Likewise a buyer agree to buy the same security
with an agreement to sell the same security at a
future date and price.
v The same transaction is known as repo from the
view point of the seller and reverse repo from
the point of the buyer.
v Repo is a collateralized short term borrowing and
lending. 52
v
 03/25/11
v The terms of such a contract is in terms of repo rate
representing the money market borrowing / lending
rate.
v Repo rate is the annual interest rate for the funds
transferred by the lender to the buyer. Repo rate is
generally lower than the B/R.
v There are two legs in Repo transactions: 1.Borrower
sells the security. The calculation is;
v Total consideration = Deal rate*face value+ Accrued
interest
v In the second leg interest paid for borrowing-repo rate-
is adjusted against the interest earned on the
securities during the holding period to arrive at the
reversal price. The calculation is:
v Reversal price = Deal rate* face value+ ( interest for
holding period-interest paid at repo rate)/face value
v Total consideration = reversal price + face value+ 53
Accrued interest.
 03/25/11
vBank X entered into a repo with Bank Y for 10
crores for 14 days
vSecurity chosen is 13.6% GS -2010. The repo
rate is 5%
vThe agreed purchase price is 101.12.
vThe last coupon was paid 30 days ago.
vYou are required to calculate first leg and
second leg net cash outflow and purchase
price rate.

54
 03/25/11
 Calculation for first leg:
 -Sale price 1011200000
 -Accrued interest (30 Days) 113333
 - cash out flow 1011313333
Calculation for second leg:

 -Repo interest income

 1011313333*0.05*14/365 1939500
Cash in flow(1011313333+1939500) 1013252833
Les Accrued interest (14days) 163945
Purchase Price 1013099893
Rate =101.31

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 CALL MONEY MARKET-MOSTLY SURPLUS
1.
FUNDS OF BANKS ARE TRADED WITH
MATURITY PERIOD OF 1-15 DAYS. IF FOR ONE
DAY IT IS CALLED ‘CALL MONEY’ MORE THAN
1 DAY ‘NOTICE MONEY’. PURPOSE IS-1.TO
MEET TEMPORARY GAP OR 2. TO MEET CRR
OR 3.TO MEET SUDDEN DEMAND FUNDS.
LOCATED IN COMMERCIAL CENTRES.
PRTICPANTS ARE BANKS, ICICI, RBI ETC.
 2. COMMERCIAL PAPER(CP) ARE S.T.
UNSECURED PROMISSORY NOTES AT A
DISCOUNT OF FACE VALUE ISSUED BY WELL
KNOWN COMPAMIESAS PER RBI GUIDELINES.
ISSUE EXPENSES INCLUDE STAMP DUTY
(BASED ON PERIOD), BROKER’S FEESRATING
AGENCIES FEES(CRISIL)
 56
 03/25/11
 CERTIFICATE OF DEPOSITS-ISSUED BY BANKS
AND ARE NEGOTIABLE
 -RISK IS NIL
 -NEGOTIABLE FREELY BY ENDORSEMENT
 -ISSUED AT A DISCOUNT TO FACE VALUE.
 -MYB IN BEARER FORM ALSO.
 -ALSO ISSUED TO DEMAT FIRMS
 -MINIMUM SIZE 1 LAKH.
 -CD ATTRACT STAMP DUTY.
MONEY MARKET MUTUAL FUNDS: - TO BENEFIT

SMALL INVESTORS IN MONEY MARKET.

BSE/NSE

 57
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58
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 STOCK EXCHANGE-WHERE OUTSTANDING
SECURITIES(ISSUED SHARES ) ARE TRADED.
 ORDER:
 LIMIT ORDER-LIMITED BY FIXED PRICE.
 BEST RTAE ORDER
 IMMEDIATE OR CANCEL ORDER
 LIMITED DISCRETIONARY ORDER.STOP LOSS
ORDER
 OPEN ORDER
 ORDER IS EXECUTED ON TRADING DAYS.

TRADING SYSTEM


 TRADING BY ‘PUBLIC OUTCR’

 OTCEI-SCREEN BASED TRADING. OTCEI
RESTRICTED TO SMALL MIIDCAP COMPANIES.
 59
 03/25/11
 DEPOSITORIES-ARE AGENCIES WHO
HOLD THE SECURITIES ON BEHALF OTHE
INVESTORS IN ELECTRONIC FORM TO
OVERCOME THE PROBLEM OF PHYSICAL
MOVEMENT OF DOCUMENTS.
 DEMATERIALISATION IS PROCESS BY WHICH
PHYSICAL CERTIFICATESARE DESTROYED
AND EQUIVALENT SECURITIES ARE
CREDITED TO INVESTORS ACCOUNT.
 CARRY FORWARD RESULTING IN DELAYS ,
DEFAULTS IS BANNED BY SEBI NAD A
MODIFED CARRY FORWARD SYSTEM IS
INTRODUCED.
 SETTLEMENT TO BE MADE COMPULSORILY
BYSEPTEMBER 3.
60

SETTLEMENT PROCEDURE AT NSE

03/25/11
 HAS A COMPUTRISED TRADING MECHANISM.
TRADING IS DONE ON THE BASIS OF ORDERS
IN THE SYSTEM AND BETWEEN 9.55 AM TO
3,30 PM.
 TILL THE TRANSACTION IS EXECUTED,
IDENTITY OF BROKER IS PROTECTED.
 SETTLEMENT IS DONE THROUGH BOOK ENTRY
TRANSFER IN DEPOSITORY.
 IN THE CENTRAL DEPOSITORY FUNDS AND
SECURITIES POSITION IS DEBITED/CREDITED
THROUGH ELECTRONIC BOOK TRANSFER.
 AT THE END OF THE DAY COMPUTER
GENERATE A STAEMENT SHOWING NET
POSITION FOR EACH MEMBER.
61

GOVERNMENT SECURITIE MARKET

03/25/11
 CENTRAL GOVERNMENT SECURITIES
 STATE GOVERNMENT SECURITIES
 SECURITIES GUARANTEED BY CENTRAL
GOVERNMENT FOR ALL INDIA FINANCIAL
INSTITUTIONS LIKE IDBI,ICISI,IFCI ETC.
 SECURITIES GUARANTEED BY STATE
GOVERNMENT FOR SATAE INSTITUTIONS
LIKE SEBS, HOUSING BOARDS
 TREASURY BILLS ISSUED BY RBI
FORMS OF GOVERNMENT
SECURITIES
 STOCK CERTIFICATES
 PROMISSORY NOTES
 BEARER BONDS
62

MARKET FOR GOVERNMENT
SECURITIES

03/25/11
 PRIMARY MARKET- RBI IS GIVEN THE TASK OF
MANAJING THE PUBLIC DEBTIN THE ECONOMY
 QUANTUM OF BORROWING IS SPECIFIED IN
BUDGET.
 AUCTION IS TIMED DURING HIGH LIQUIDITY
PERIODS TO RAISE MAXI,UM AMOUNT AT BEST
PRICE.
 TERMS OF ISSUE INVOLVE COUPON, MATURITY
TERMS AND NORMALL LONG TERM YIELD CURVE
DRAWN BY RBI IS FOLLOWED.
 INVESTORS-COMMERCIAL BANKS, FIs, LARGE
CORPORATE BODIES, RBI, AND FIIs.
 SECONDARY MARKET IS ACTIVE AFTER 1990s
63
SETTLEMET PROCEDURE
 RBI IS ACTING AS DEPOSITORY AND SETTLEMENTS

03/25/11
ARE DONE BY THEM THROUGH SGL ACCOUNT.
 IF INVESTOR DOES NOT HAVE SGL ACCOUNTTHEN IT
NEEDS TO OPEN WITH ANY REGISTERED BANK .
 TRANSHER IS THROUGH BOOK ENTRY.
 SECURITY DEALS ARE CARRIED OUT ON EX-INTEREST
BASIS AS PER THE BYE-LAWS OF THE STOCK
EXCHANGES.
 THIS ALSO LED TO ‘VOUCHER TRADING’-AMOUNT OF
INCOME TAX DEDUCTIBLE AT SOURCEON THE
ACCRUED INTEREST INCOMEOF GOVERNMENT
SECURITIES ID KNOWN AS ‘VOCHER’
 THUS SELLER IS TO GET=PRICE+INTEREST-TDS.
 BUYER GETS TDS CERTIFICATE.

64
TREASURY BILLS

03/25/11
 TBs ARE ISSUED TO MEET SHORT TERM NEED
OF THE GOVT. REVENUE COLLECTIONS ARE
BUNCHED BUT EXPENDITURE IS DISPERSED.
HENCE THIS NEED.

 TBs ARE ISSUED IN THE FORM OF
PROMISSORY NOTES OR SCRIP AND
CREDITED TO INVESTORS SGL ACCOUNT
 TBs ARE ISSUED IN FOUR TYPES 91-DAY,182
DAT, 14/28 DAY AND 364 DAY BILLS.
 RBI DO OPEN MARKET OPERATIONS AND THE
ECONOMY IS GRAETLY INFLUENCED BYGOVT.
SECURITIES.
 T-BILL YIELD CALCULATION:
 FACE VALUE=100
 BID RECEIVED BY RBI=88.24 FOR 364 DAY

65

 03/25/11
 THEN YIELD-k=F-P/P * 365/D.
 K=YIELD

 F=FACE VALUE

 P=PRICE

 D=MATURITY PERIOD IN DAYS

 K=100-88.24/88.24 * 365/364=13.36%

66
DISCOUNT AND FINANCE HOUSE OF
INDIA(DHFI)

03/25/11
vRole and Functions: (Ghore committee
recommendations)
 -It should be the sole depositor of surplus funds of
the banking system and Non-banking financial
institutions.
 -It should use the surplus funds to even out the
liquidity imabalances in the banking system subject to
RBI guidelines.
 - It should create ready market for commercial
bills, treasury bills , government guaranteed securities
by being ready to purchase from banks or sell to banks
such securities.
The committee also recommended that this discount

house is to be sponsored by commercial

banks,LIC,UTI,GIC with participation by IDBI, ICICI, SFCs. 67
 03/25/11
v Till Vaghul committee reviewed and recommended no
action was taken on this.
v Eventually in April 1988 Discount and Finance House of
India was set up with an authorised capital of Rs.250
crores. In a ratio of %:3:2 RBI, Psbs and Indian Financial
Institutions have contributed Rs. 200 crores as paid up
capita. In addition refinance facility with RBI and a line of
credit of RS.100 crores from 28 PSBs on a consortium
basis is the source of funds.
v The role of the DHFI is both developmental and stabilizing
v By developing active primary and secondary money
markets it facilitates smoothening of short term liquidity
imbalances.
v It discounts and deals in not only commercial bills but a;so
in TBs, and money market instruments.
v It acts as a specialised money market intermediary 68
v It undertakes short term buy back in Government and
approved- dated securities
 03/25/11
v Role of DHFI is both developmental and stabilising.
v It helps in smoothening of short term liquidity
imbalances by devloping primary and secondary
money markets.
v It acts a s a specialisedmoney market intermediary for
stimulating activity in the money market
instruments and developing secondary market for
those instruments.
v It not only deals in commercial bills but also in Treasury
billsand other money market instruments.
v It undertakes buy-back of governments and approved
dated securities.
v RBI provides re-finance facility to DHFI
69
SECURITIES TRADING CORPORATION
OF INDIA

03/25/11
vSTCI wa sset up in 1994 with the objective of
providing good secondary market for debt
instruments
vIt function as market maker at the long end of
the market which means that it along with
otherPDs has to take up part or whole of the
auction of government securities.
vIt primarily concentrate on government
securities..
vDHFI was set up for Shoer term –TBs –
government securities and STCE was set up
for long-dated government securities. 70

v
CAPITAL MARKET STRUCTURE

03/25/11
 Stock market volatility touches every
participant directly/indirectly in the
capital market.  General feeling is that
the stock markets worldwide have
become very fragile in the recent past on
account of various developments such as
Asian crisis.  Brazil Real fall and Russian
debacle.  Many far-reaching stock 
reforms have been introduced in the
Indian market for the last few years.
These reforms, in turn, changed market
structure.  Changing market  structure 71

influences nature of stock price behavior.

 03/25/11
 PRIMARY SECURITIES MARKET
  The primary capital market (PCM) plays an important
role in the overall functioning of securities market. 
Despite several measures the primary market
remained lackluster till recently and the pick up is
gradual. According to the SEBI annual report fewer
number of issues accessed the primary market during
the year and the significantly lower than that of the
Previous financial year.  Share of the equity issues, in
terms of number and amount Mobilized, however,
was higher in this financial year compared to the
previous one.  More than three-fourths of the total
amount was occupied second and no resourced were
in the previous years, banks and financial institutions
continued for 84.5% of the resourced mobilized 72
compared to 68.1% in 2001-02.  All other industries
shared the remaining portion.
PRIMARY MARKET ORGANISATION

03/25/11
73
 03/25/11
o Eligibility Norms:
o Should offer through offer documents-Prospectus or
statement in lieu of prospectus; letter of offer in case
of rights issue.
o Draft Offer documents are to be filed with SEBI- through
a merchant Banker in case of rights issue in exces
ofRs.50 lakh
o Fast track issues- In case of listed company filing of
offer documents in case of public/rights issue
provided certain conditions are fulfilled
o Separate conditions are to be complied with in case of
unlisted companies.

74
PRIMARY MARKET INTERMEDIARIES

03/25/11
75
SECONDARY MARKET
ORGANISATION

03/25/11
76
 03/25/11
  CAPITAL RAISED DURING 2002-03
  During the financial year 2002-03, primary
market witnessed a decrease of 46.0% in the
amount raised and also a decrease of 25.7%
in the number of issues launched compared
to the same period in 2001-02.  A total of 26
issues (14 public issues and 12 rights issues)
opened during the financial year 2002-03
raising Rs. 4070.29 crore (Rs. 3638.6 crore
through public issues and 431.6 crore
through rights issues).  In 2001-02 a total of
35 issues opened for raising Rs. 7543.0 crore
(20 public issues – Rs. 6501.8 crore and 15 77

rights issues – Rs. 1041.2).

 03/25/11
 INDUSTRY WISE CAPITAL MOBILIZATION
  Three industries ciz. Banks / Fls, Engineering
and Telecommunications accounted for 93.2
per cent of the resourced mobilized in 2001-
02.  In the current year, the same three
industries accounted for 84.7 per cent of the
funds raised.  With the banks and Fls,
increasing their share from 68.3 per cent to
84.5 per cent and companies in the
Telecommunications sector and raising any
resourced.  In 2002-03 the three industries
which accounted for 95.3 per cent of the
resources where Banking / Fls, Information 78

Technology, Paper and Pulp.

 03/25/11
 SECONDARY MARKET
  During 2002-03, performance of Indian Stock
market was, by and large, a lackluster one,
S&P CNX NIFTY and BSE Sensex both
registered
 negative returns of 13.4 percent and 12.1
percent respectively over the previous year. 
Other board indicators also fell down.
  Fall in the market in not specific too India
alone and it appears a global phenomena. 
Turnover has been increasing and its
reached peak in the month of December 79
2002.
 03/25/11
 DEVELOPMENT IN GOVERNMENT DEBT
MARKET
  Government securities market during the past
financial year witnesses significant upturns
in pries until mid-January 2003 when the
trend was reversed.  The pattern of
downturn in yields was halted due to the war
tensions and consequent uncertainly leading
to a heavy selling pressure.  According to the
report on Macro Economic and Monetary
Developments in 2002-03 published by the
RBI Major developments in government
80
securities market in 2002-03 were:

 03/25/11
 Introduction of the system of publishing a calendar by RBI
that outlines the issue of date government securities
every half-year. The calendar for the financial year 2002-
03 was issued in March 2003.
 
 Screen based order driven trading in government
securities on the stock exchanges introduced on January
16, 2003.
 
  CSGL account holders permitted to enter into repo
transactions in government securities effective from
March 3, 2003.
 
 Guidelines for uniform accounting for repo/reverse repo
transactions were issued by RBI.
 
 Under the securities lending scheme, the clearing
corporation of India limited (CCIL) has government 81
securities from select members
 03/25/11
 FII INVESTMENT
  Foreign institutional Investors (FIIS) were net buyers in
equities at Rs. 1 56bn on January 07, 2004. 
According to data available from the Securities and
Exchange Board of India (SEBI) web site, their
purchases for the day stood at Rs. 8.0.16bn.
  With this, they have poured in Rs. 15.19bn or
US$333.7mn in Indian equities so far in January. 
Their cumulative investment in Indian equities in July
stood Rs. 23.46bn or US$501.7mn.  They have
pumped in a net of Rs. 15.45mn or so far in the
2004.  In the entire 2002, FIIs had poured in a net ot
Rs36.77bn, or US$763.5mn.
  The stock markets continue its upward surge.  By the
end of the September 2003 the BSE Sensex has
added more than 1300 points and climbed up to
4302.  In fact the pick up in stock prices in August
2003 has been the highest over the previous four 82
months of the bull run.  The trend continues into
September except for a minor correction
The Trade-off Between Risk and Return

03/25/11
 The return earned on investments represents the
marginal benefit of investing.
 Risk represents the marginal cost of investing.

 A trade-off always arises between expected risk and

expected return.
 Valuing risky assets is a task fundamental to financial
management
 Three-step procedure for valuing a risky asset.
1. Determine the asset’s expected cash flows

2. Choose discount rate that reflects asset’s risk

3. Calculate present value (PV cash inflows - PV

outflows)

This three-step procedure is 83
called discounted cash flow (DCF)
analysis.
 03/25/11
 Effect of taxes on investment
 • Do changes in the tax rate have a significant

 effect on investment?

 � One study found that after major tax

reforms,
 investment responded strongly with an
elasticity of
 investment to changes in the user cost of
capita about –0.66.

84
Understanding Returns

03/25/11
q Total return: the total gain or loss experienced on an
investment over a given period of time
q Components of the total return
q Income stream from the investment
q Capital gain or loss due to changes in asset prices
q Total return can be expressed either in Rupee terms or in
percentage terms.
q Return on 30 shares of Rs.10 each =( 30*Rs.2,25) =
67.5=22.5%
q Capital Gain( Purchase for RS.12 and current market price
is 15 =
q Rs.(15-12)*30 =RS.90= 30%
q Total Return in Rs= 67.5+90 =157.50
q Total Return in Percentage = 22.5+30 =%2.5%
 85
 The Risk Dimension
Percentage Returns on Bills, Bonds, and Stocks, 1900 – 2006

03/25/11


 Nominal% Reaal %
Asset Class Average Best yr Worst yr Average Best yr Worst yr
Bills 4.0 1.47 0.00 1.1 1.97 -15.1
Bonds 5.2 4.04 -9.2 2.3 35.1 -19.4
Stocks 11.7 5.76 -43.9 8.5 56.5 -38.0


COMPARISON Risk Premium %

Stocks-Bills 11.7-4.0 7.7
Stocks-Bonds 11.7-5.2 6.5
Bonds-Stocks 5.2-4.0 1.3


 Risk premium: the additional return that an

investment must offer, relative to some alternative,
because it is more risky than the alternative.
 86
Why study Financial Markets and
Institutions?

03/25/11
 They are the cornerstones of the overall
financial system in which financial managers
operate
 Individuals use both for investing
 Corporations and governments use both for
financing


87
Overview of Financial Markets

03/25/11
 Primary Markets versus Secondary
Markets
 Money Markets versus Capital
Markets
 Foreign Exchange Markets


88
Money Markets versus Capital
Markets

03/25/11
 Money Markets
 marketsthat trade debt securities with
maturities of one year or less (e.g. CD’s,
Treasury bills)
 Capital Markets
 markets that trade debt (bonds) and equity
(stock) instruments with maturities of more
than one year

89
Foreign Exchange Markets

03/25/11
 “FX” markets deal in trading one currency for
another (e.g. dollar for yen)
 The “spot” FX transaction involves the
immediate exchange of currencies at the
current exchange rate
 The “forward” FX transaction involves the
exchange of currencies at a specified date in
the future and at a specified exchange rate

90
Overview of Financial Institutions

03/25/11
 Institutions that perform the
essential function of channeling
funds from those with surplus
funds to those with shortages of
funds (e.g. banks, thrifts,
insurance companies, securities
firms and investment banks,
finance companies, mutual funds,
pension funds)
91

Types of FIs

03/25/11
 Commercial banks
 depository institutions whose major assets are
loans and major liabilities are deposits
 Thrifts
 depository institutions in the form of savings
and loans, credit unions
 Insurance companies
 financial
institutions that protect individuals
and corporations from adverse events


92
 03/25/11
 Securities firms and investment
banks
 financialinstitutions that underwrite securities
and engage in securities brokerage and
trading
 Finance companies
 financialinstitutions that make loans to
individuals and businesses
 Mutual Funds
 financialinstitutions that pool financial
resources and invest in diversified portfolios
 Pension Funds 93

 financial institutions that offer savings plans for

Services Performed by Financial
Intermediaries

03/25/11
 Monitoring Costs
 aggregation of funds provides greater incentive to
collect a firm’s information and monitor actions
 Liquidity and Price Risk
 provide financial claims to savers with superior
liquidity and lower price risk
 Transaction Cost Services
 transaction costs are reduced through economies of
scale
 Maturity Intermediation
 greater ability to bear risk of mismatching maturities
of assets and liabilities
 Denomination Intermediation
 allow small investors to overcome constraints
94
imposed to buying assets imposed by large
minimum denomination size

Services Provided by FIs
Benefiting the Overall Economy

03/25/11
 Money Supply Transmission
 Depository
institutions are the conduit through
which monetary policy actions impact the
economy in general
 Credit Allocation
 oftenviewed as the major source of financing
for a particular sector of the economy (e.g.
farming and real estate)


95
 03/25/11
 Intergenerational Wealth Transfers
 life
insurance companies and pension funds
provide savers with the ability to transfer
wealth from one generation to the next
 Payment Services
 efficiencywith which depository institutions
provide payment services directly benefits
the economy

96
Risks Faced by Financial
Institutions

03/25/11
 Interest Rate Risk
 Foreign Exchange Risk
 Market Risk
 Credit Risk
 Liquidity Risk
 Off-Balance-Sheet Risk
 Technology Risk
 Operation Risk
 Country or Sovereign Risk
 Insolvency Risk
97
Regulation of Financial
Institutions

03/25/11
 FIs provide vital financial services
to all sectors of the economy;
therefore, their regulation is in
the public interest
 In an attempt to prevent their
failure and the failure of financial
markets overall


98
Globalization of Financial Markets
and Institutions

03/25/11
 Financial Markets became more global as the
value of stocks traded in foreign markets
soared
 Foreign bond markets have served as a major
source of international capital
 Globalization also evident in the derivative
securities market


99
Factors Leading to Significant
Growth in Foreign Markets

03/25/11
 The pool of savings from foreign
investors has increased
 International investors have turned to
U.S. and other markets to expand their
investment opportunities
 Information on foreign investments and
markets is now more accessible (e.g.
internet)
 Some mutual funds allow ability to invest
in foreign securities with low
transaction costs
 Deregulation has enhanced globalization 100

of capital flows
New Trading Mechanisms:
A Year After

03/25/11
 Technology has been a change driver
 Created Virtual market place

 Widened reach

 Increased market efficiencies

 Competitive market structures- ECNs?

101
 03/25/11
 Reach
 Geographical
 Made a distribution framework available
 Product Diversity
 Efficiencies
 Better order executions
 Increased liquidity

102
 03/25/11
 Price transparency
 Cost reduction
 Shorter settlement cycles
 Full line service from order capture to
settlement and risk management
 Regulatory issues with each new development


103
 03/25/11
 Rolling settlement
 Derivatives

 Client-level approach

104
Emerging Trends

03/25/11
 Wider client access to systems
 Order routing systems
 Net Trading
 More access to information
 Facilitating overseas interest
 Increased emphasis on due risk management
 Know Your client


105
 03/25/11
 Services becoming more commoditised
 Need to add value propositions

 Single line of service model to clients right

through to Risk Management
 Need to facilitate Technology Leverage by
Intermediaries
 Leverage the trading infrastructure

106
 03/25/11
 Customised products and OTC
 Large value investors and OTC

 Standardised products and contracts

 Changing product profile

 Time Horizons changing to span time zones

107
 03/25/11
 Changing Settlement scenario
 Changing Risk Management scenario

 Straight Through Processing

 Processing oriented to client level

 Interfaces with other settlement Agencies

 Integration emerging across markets

108
Market Instruments- Financial
instruments

03/25/11
Ø Equity shares
Ø Equity shares with detachable warrants
Ø Non voting equity share
Ø Preference share-redeemable
Ø Preferences share- cumulative convertible
Ø Debentures Non-convertible
Ø Debentures –convertible
Ø Zero interest fully convertible denture
Ø Deep discount bonds
Ø Stock invest
Ø Euro issue
Ø Zero coupon bonds
Ø Company fixed deposits
Ø warrants 109

Ø
Ø
NEW ISUE

03/25/11
 Kinds of Issue;
 Public- IPO- Initial Public Offer by a new company and
unlisted company .]
 Public- FPO- Further r Public Offer by a company already
issued shares to public and a listed company
 Rights Issue
 Preferential (private placement) to select persons
subject to provisions under the Companies Act and
further subject to SEBI guidelines relating to pricing,,
disclosures in notice etc.
 SEBI has laid down eligibility norms in 3 entry forms

110
Entry form I Entry form II Entry form III
Net tangible assets Alterative 1 for Alterative 2 for
of 3 crores for 3 companies not companies not
full years eligible under entry eligible under entry

03/25/11
Distributable profit form
Issue Ithrough book form I
The project to be
in 3 years building route with appraised by Fis
Net worth of 1 50% allotted to and SCBs with
crore for 3 years qualified buyers 10% comes from
appraisers
Change in name Post issue face Post issue face
50% of revenue value should be 10 value should be 10
rompr3ceeding 1 crores or crores or
year should be compulsory market compulsory market
from new activity making for at least making for at least
2 years 2 years
Issue size should 111

niot exceed 5 times

of pre-issue net
Documents of Issue

03/25/11
 Offer document: Structure of offer document:
 Cover page
 Risk factors- both internal external risks faced by the
ompany
 Introduction-summary of the industry, business of the
issuing company, summary of consolidated financials,
operating and other data. Important details like
capital structure, objects of offering , funds
requirement, funding plan, schedule of
implementation, funds deployed already, balance
funds required, , basic terms of issue, basis for issue
price, tax benefits etc. are covered.
 About us: includes a review of the details of the
business of the company, business strategy, 112
competitive strengths, insurance, industry regulation
,factory /corporate structure Corporate governance
 03/25/11
 History and main objects
 Name and address of promoters, managers,
managing directors etc.
 Location of project

 Collaboration, if any.

 Schedule for implementation.

 Profile of the products.

 Future prospects

 Stock market data



113
 03/25/11
 Financial statements including changes in accounting
policies in the last 3 years and the difference
between accounting policies of the company and
Indian Accounting Policies.
 Legal and other information
 Mandatory disclosures covering authority for issue,
prohibition of SEBI, eligibility of the company to issue,

114
Prospectus for New Issueto public.

03/25/11
 Part I
 A. General information:
 Name and address of the company
 Consent letter of Government (SEBI) and a
certificate fro Govt(SEBI) non- responsibilty
relating to financial soundness or
correctness of the statements
 Name of stock exchange where application is
made for listing.
 Compliance to applicable sections of
Companies Act for issue of shares to public.
 Statement/declaration regarding of refund if
90% subscription. 115


 03/25/11
 Declaration regarding issue of allotment letters.
 Date of opening and closing of issue.
 Name of auditors and managers.
 Name and address of trustee.
 Rating of CRISIL
 Underwriting agreements and details.
 B. Capital structure
 C. Terms of issue
 D. Particulars of the issue
 E. company management and Project
 F- Declarations of public issues made by the
company
 G.- Disclosure of outstanding litigations, general
prosecutions, defaults 116
 H- perception of risk factors.

Part II of the prospectus

03/25/11
A. General Information:


 Consent letters of Directors, Auditors,

managers to the issue. Solicitors/ advocates,
bankers to the company, bankers to the
issue etc.
 changes , if any in the last 3 years of
directors, auditors.
 Authority to the issue

 Procedure and time schedule for allotment

and issue of certificates.
 Name and address of the legal advisors,
managers, auditors etc. 117


 03/25/11
 B. Financial information:
 Auditors report
 Chartered accountants report when a business is
proposed to be acquired regarding financial standing
of the company
C. Statutory and other information:

 Minimum subscription.
 Expenses of the issue
 Underwriting commission
 Issue previously made for cash.
 Previous public or rights isue , if any.
 Date of allotment, date of closing, date of refund, date
of listing in stock exchange
 Shares issued at premium or discount and the amount
thereof.
118
 Commission, brokerage on previous issueissue of
shares other than for cash.

 03/25/11
 Debentures,preference shares etc issued by the company.
 Details of property purchased or proposed to purchase.
 Details of directors, whole time directors, government and
financial institution nominee directors etc.
 Every other material information.
 PART III
 Declaration confirming that all provisions of companies Act
and guidelines of SEBI are complied with.
 Application with prospectus.
Types of Prospectus:

1. Abridged prospectus
2. Prospectus for rights issue
3. Red-herring prospectus – a prospectus which does not
have complete particulars on the price of securities
offered and the quantum of securities offered. Here the
securities offered through ‘Book Building” process 119

Book building method of offer to public
 A company can issue 100% of share through book

03/25/11
building or 75% through book building and 25% at
the price determined through book building.
Reservation in firm allotment can be made for
promoter , permanent employees or permanent
employees of promoter company in case of new
company issue
 The issuer company should appoint eligible merchant
bankers as Book runner(s).
 The issuer company should enter into an agreement
with a stock exchange having the requisite facility of
online offering specifying inter alia their interse
rights, responsibilities and obligations.
 It should also provide dispute resolving mechanism.
120
 03/25/11
 The lead book runners should ensure compliance of the
following conditions:
1. The cap of the price band should not exceed 20% of
the floor or the price band should be less than or
equal to 120% of the floor price.
2. The price band can be revised during the building
period. The maximum revision on either sude should
not exceed 20%.
3. Any revision should be widely disseminated by –
informing stock exchange, press release, indicating
the changes in the relevant website
4. Building period should be extended by 3 days subject to
a maximum building period of 13 days.
5. The manner in which the shortfall as result of reduction
in the price band is to be met for meeting the 121
requirements of the project.

Underwriting and sebi’s role

03/25/11
 Certificate of registration has to be obtained from SEBI
by institutions and agencies who would like to take up
underwriting obligations. The following requirements
need to be complied with:
1. Availability of office space, equipment and manpower to
effectively functioning.
2. Previous experience in underwriting or have a minimum
of 2 persons having sufficient experience in
underwriting .
3. Capital adequacy requirements of minimu net worth of
Rs. 20 lakhs.
4. The applicant (Director, Principal officer, or the partner)
has not been convicted for nay offence, moral
turpitude or economic offence. 122
5.
 03/25/11
 Undertaking to fulfill of obligations under SEBI Act anf
rules and regulations.
 Undertaking to fulfill obligations under the Companies
Act and requirements to be complied as per ROC
notifications.
 Payment of prescribed fee for registration.
Agreement with issuing company.

Code of Conduct including (1) not to derive any benefit

from the issuing company other than underwriting

commission at agreed rate subject to a ceiling of 5% for
shares and 2.5% for debentures (2) not to take up , at
any time, total undertaking obligations exceeding 20
times the networth. (3) duty bound to subscribe within
45 days fronm the date of receipt of the information 123
from the issuing company.

Issue of securities

03/25/11
 Government securities are the marketable debt issued
by government or semi government bodies are called
government securities.
 Government securities market is where government
securities or gilt-edged securities are bought and
sold.
 RBI takes special care in purchase and sale of
securitties issued by the agencies- like Central and
state governments, metropolitan councils, IDBI,IFCI,
SFCs, NABARD, port trusyt etc.
 These securities are safe and guaranteed payment of
interest and repayment
 Offers comparatively lower rate of interest.
 Liquidity of securities varies lkiecentral Government 124
securities liquidity are high but not State
Government securities.
 03/25/11
 These securities offer wide ranging tax incentives.
 Market:- Gilt edged securities are over the counter
securities and government securities has Two
markets-
 Primary market consists of issuers like Central and Sate
Governments, and
 The secondary market consists of banks, financial
institutions, insurance companies,, provident funds,
primary dealers and RBI.the forms of central ans stae
government securities are inscribed stock or stock
certificate, promissory notes and bearer bonds

125
Stock Holding Corporation of India Ltd.

03/25/11
 Stock Holding Corporation of India Ltd. (SHCIL) was
incorporated at the special initiative of the
Government of India as a Public Limited Company in
1986. It has been jointly promoted and owned by the
All India Banks and Financial Institutions, viz., IDBI
Bank Ltd, ICICI Bank, SU-UTI, IFCI Ltd, LIC, GIC, NIA,
NIC, UIC, and TOICL all leaders in their fields of
business.
 SHCIL began by offering custodial and post trading
services, adding depository services and other
services to its portfolio over a period of time.
 SHCIL has established itself in India as a one-stop
solution provider in the Financial Services domain.

126
 03/25/11
 SHCIL, apart from being the country’s premier
Custodian and Depository Participant, SHCIL is also
the largest Professional Clearing Member; backed by
an immense capacity to process volumes with
precision. To give an idea of our capability, every year
we process around….
 SHCIL also provides Derivatives clearing, PF fund
accounting, SGL constituent account services,
distribution of mutual funds and other capital market
instruments, besides distribution of life and non-life
insurance policies.
 Other offerings added to the bouquet are online net
trading, loan against shares, Western Union Money
Transfer & E-stamping. In the pipeline are a host of
services that will complement the range of services 127

offered by SHCIL.
 03/25/11
 Our Depository Participant services cater to all
your individual investment needs. With a
parentage of leading financial institutions
and insurance majors and a proven track
record in the Custodian business, we have
reiterated our past success by establishing
ourselves as the first ever and largest
Depository Participant in India.

128
 03/25/11
 From a tentative foray in 1998 into the individual investor
arena to servicing around seven lakh accounts, we have
endeavored to constantly add and innovate to make
business a pleasure for you
 Over 191 of our networked branches ensure we are available
wherever you look out for us. Across the country, thirteen
Depository Participant Machines (DPMs) connected to NSDL
and seven connected to CDSL ensure fast and direct
processing of your instructions.
 Our customer-centric account schemes have been designed
keeping in mind the investment psyche of our clients. Your
DP account with us takes care of your Depository needs like
dematerializations, dematerializations and pledging of
shares.

129
 03/25/11
 Matching of your scanned signature on every
debit instruction with a digitally scanned
original in our system makes all your trading
transactions absolutely secure. Proactive
backup of your instructions prior to
execution in the Depository makes us
oblivious to system crashes.
 At SHCIL, we place a very high premium on
client reporting .Periodic statements sent to
you keep you informed of your account
status. Dedicated Customer Care lines
manned by trained staff answer your queries
130
on demat / trades / holdings.
 03/25/11
 SHCIL's long-standing association with Clearing Members has
enabled it to develop services based on an understanding
of their working and their requirement for timely and
accurate information.
 We accept deposits of collaterals( bank guarantees, FD's,
Demat shares) towards base capital and additional base
capital requirements stipulated by NSE for clearing
members trading on its capital market, Futures & OPTIONS,
CURRENCY FUTURES DERIVATIVE segment. Besides, our
new products with a broker empanelment clause ensures a
mutually beneficial tie-up. Clearing members stand to earn
a steady income from our product transactions and new
additions to their client-base, while we capitalize on their
rapport with the market.

131
 03/25/11
 We currently offer Depository services to more than 680
clearing members of various exchanges connected
with NSDL and CDSL. Our Customer Care lines answer
all your DP queries while the Interactive Voice
Response (IVR) system gives you information on your
account and other valuable data like CC calendar
details, tariff, ISIN information, etc. via telephone, fax
and e-mail.


132
 03/25/11
 Well integrated front and back office, paper and electronic
systems. A focussed Client Relation Team to manage your
needs & queries. A single point contact for your comfort.
   In-house capability to address all IT needs in terms of
software development, maintenance, back office
processing, database administration, network maintenance,
backups and disaster recovery.
   Multilevel security is maintained in software, applications
and guards to access to various data, client and internal
reports.
    Expertise in running processes utilising digital signatures.
   Regular Audits internal and external, by SEBI, Depositories,
Clients and compliance to rules and regulations
   Constant review and benchmarking of processes to ensure
adherence to global best practices
133
   Insurance cover with international re-insurance.
    Full Confidentiality of business operations.
 03/25/11
 We are a zero-debt, financially sound company with
healthy reserves.
   We have a consistent dividend-paying track record.
 Comprehensive business solutions adept in handling
high volume time critical transactions within a
secured environment.
   Zero error approach towards delivery of products and
services
   Single window view of business and up-to date
information.
   Oracle database currently of 1.2 Terabytes size (and
growing) managed by competent IT personnel with
domain expertise.
   Data mirroring using cluster technology and fibre optic
connection as part of Disaster Management Plan. 134
   

 03/25/11
 Network Security using Firewall, Proxy, Intrusion Detection
System(IDS) and Intrusion Prevention System (IPS)
   Internet products with built in PKI features.
   Dedicated communication channels with built-in
redundancies in connectivity to Client Institutions, Stock
Exchanges, Clearing houses and Depositories.
 Accolades and certification
   Citation and Medal from Smithsonian Institute, Washington
D.C, U.S.A. for " Visionary and Innovative use of Technology
in Finance, Insurance and Real Estate". First South Asian
Corporate to receive this.
   Computer Society of India Award for best IT usage in the
Country.
   Our software processes have been assessed at SEI CMM
Level 3. 135
   Accepted industry leader and pioneer in Custodial Systems.
 03/25/11
 SHCIL is a Custodian/Professional Clearing
Member of derivative segment at the
Bombay Stock Exchange and at the Futures
& Options Segment of the NSEIL
respectively.
 We have developed in-house Back Office
systems and procedures to cater to the
needs of various entities in the segment. A
dedicated team of professionals handle
derivative operations and assist its clients.


136
 03/25/11
 As a professional clearing member, SHCIL performs the
following functions:
   Clearing - Computing obligations of all his TM’s i.e.
determining positions to settle.
    Settlement - Performing actual settlement.
   Collateral Management - Collection of collateral
(cash/cash equivalents and securities), valuation on a
regular basis (as per J. R. Varma recommendations)
and setting up exposure limits for TMs and
Institutional clients.
   Risk Management- Setting position limits based on
up front deposits/margins for each TM and monitoring
positions on a continuous basis.
 137
LISTING OF SECURITIES

03/25/11
 The objectives of listing are mainly to:
 provide liquidity to securities;
 mobilize savings for economic development;
 Protect interest of investors by ensuring full disclosures
 The Exchange has a separate Listing Department to
grant approval for listing of securities of companies in
accordance with the provisions of the Securities
Contracts (Regulation) Act, 1956, Securities Contracts
(Regulation) Rules, 1957, Companies Act, 1956,
Guidelines issued by SEBI and Rules, Bye-laws and
Regulations of the Exchange.
 company intending to have its securities listed
on the Exchange has to comply with the listing
requirements prescribed by the Exchange. 138
Some of the requirements are as under:-

 03/25/11
 Minimum Listing Requirements for new companies
 Minimum Listing Requirements for companies listed on other
stock exchanges
 Minimum Requirements for companies delisted by this
Exchange seeking relisting of this Exchange
 Permission to use the name of the Exchange in an Issuer
Company's prospectus
 Submission of Letter of Application
 Allotment of Securities
 Trading Permission
 Requirement of 1% Security
 Payment of Listing Fees
 Compliance with Listing Agreement
 Cash Management Services (CMS) - Collection of Listing Fees   139

 03/25/11
 Minimum Listing Requirements for new companies
 The following revised eligibility criteria for listing of companies on the
Exchange, through Initial Public Offerings (IPOs) & Follow-on Public
Offerings (FPOs), effective August 1, 2006.
 ELIGIBILITY CRITERIA FOR IPOs/FPOs
 Companies have been classified as large cap companies and small cap
companies. A large cap company is a company with a minimum issue
size of Rs. 10 crores and market capitalization of not less than Rs. 25
crores. A small cap company is a company other than a large cap
company.


 In respect of Large Cap Companies

 The minimum post-issue paid-up capital of the applicant
company (hereinafter referred to as "the Company") shall
be Rs. 3 crores; and
 The minimum issue size shall be Rs. 10 crores; and
 The minimum market capitalization of the Company shall be
Rs. 25 crores (market capitalization shall be calculated by 140
multiplying the post-issue paid-up number of equity
shares with the issue price).

 03/25/11


 In respect of Small Cap Companies

 The minimum post-issue paid-up capital of the
Company shall be Rs. 3 crores; and
 The minimum issue size shall be Rs. 3 crores; and

 The minimum market capitalization of the Company

shall be Rs. 5 crores (market capitalization shall be

calculated by multiplying the post-issue paid-up
number of equity shares with the issue price); and
 The minimum income/turnover of the Company

should be Rs. 3 crores in each of the preceding

three 12-months period; and
 The minimum number of public shareholders after

the issue shall be 1000.

 A due diligence study may be conducted by an independent team
of Chartered Accountants or Merchant Bankers appointed by
141
the Exchange, the cost of which will be borne by the company.
The requirement of a due diligence study may be waived if a
financial institution or a scheduled commercial bank has
appraised the project
 03/25/11
 For all companies :
 In respect of the requirement of paid-up
capital and market capitalisation, the
issuers shall be required to include in the
disclaimer clause forming a part of the offer
document that in the event of the market
capitalisation (product of issue price and
the post issue number of shares)
requirement of the Exchange not being
met, the securities of the issuer would not
be listed on the Exchange.
 The applicant, promoters and/or group
companies, should not be in default in
compliance of the listing agreement.
 The above eligibility criteria would be in 142

addition to the conditions prescribed under

SEBI (Disclosure and Investor Protection)
 03/25/11
 Minimum Listing Requirements for companies listed on other
stock exchanges
 The Governing Board of the Exchange at its meeting held on 6th
August, 2002 amended the direct listing norms for companies listed
on other Stock Exchange(s) and seeking listing at BSE. These
norms are applicable with immediate effect.
 The company should have minimum issued and paid up equity capital
of Rs. 3 crores.
 The Company should have profit making track record for last three
years. The revenues/profits arising out of extra ordinary items or
income from any source of non-recurring nature should be excluded
while calculating distributable profits.
 Minimum networth of Rs. 20 crores (networth includes Equity capital
and free reserves excluding revaluation reserves).
 Minimum market capitalisation of the listed capital should be at least
two times of the paid up capital.
 The company should have a dividend paying track record for the last
3 consecutive years and the minimum dividend should be at least
10%. 143
 03/25/11
 Minimum 25% of the company's issued capital should be with Non-
Promoters shareholders as per Clause 35 of the Listing Agreement.
Out of above Non Promoter holding no single shareholder should
hold more than 0.5% of the paid-up capital of the company
individually or jointly with others except in case of Banks/Financial
Institutions/Foreign Institutional Investors/Overseas Corporate
Bodies and Non-Resident Indians.
 The company should have at least two years listing record with any of
the Regional Stock Exchange.
 The company should sign an agreement with CDSL & NSDL for demat
trading
 Minimum Requirements for companies delisted by this
Exchange seeking relisting of this Exchange
 The companies delisted by this Exchange and seeking relisting are
required to make a fresh public offer and comply with the prevailing
SEBI's and BSE's guidelines regarding initial public offerings.
 Permission to use the name of the Exchange in an Issuer
144
Company's prospectus
 03/25/11
 The Indian stock markets have really come of age there were
so many developments in the last 15 years that make the
markets on par with the developed markets.
 The important feature of developed markets is the growing
clout of institutional investors and this paper sets out to
find whether our markets have also being dominated by
institutional investors.
 The regression results show that the combined might of the
Flls and mutual funds are a potent force, and they in fact
direction can forecast market direction using the direction
of the flow of funds from Flls and mutual funds, the Granger
causality test has showed that the mutuafunds in fact lead
the market rise or fall and Flls follow suit.
 .This may actually raise questions on the efficiency but on the
contrary, markets become more efficient with the growing
presence of institutional investors who predominantly go by 145
fundamentals.
 Noise trading on the part of institutional investors will be less
 03/25/11
 Submission of Letter of Application
 As per Section 73 of the Companies Act, 1956, a company seeking
listing of its securities on the Exchange is required to submit a
Letter of Application to all the Stock Exchanges where it
 Allotment of Securities
 As per Listing Agreement, a company is required to complete
allotment of securities offered to the public within 30 days of the
date of closure of the subscription list and approach the Regional
Stock Exchange, i.e. Stock Exchange nearest to its Registered
Office for approval of the basis of allotment.
 In case of Book Building issue, Allotment shall be made not later than
15 days from the closure of the issue failing which interest at the
rate of 15% shall be paid to the investors.
 Trading Permission
 As per Securities and Exchange Board of India Guidelines, the issuer
company should complete the formalities for trading at all the
Stock Exchanges where the securities are to be listed within 7
working days of finalisation of Basis of Allotment.
 146
 03/25/11
 Requirement of 1% Security
 The companies making public/rights issues are required
to deposit 1% of issue amount with the Regional
Stock Exchange before the issue opens. This amount
is liable to be forfeited in the event of the company
not resolving the complaints of investors regarding
delay in sending refund orders/share certificates, non-
payment of commission to underwriters, brokers, etc.
 Payment of Listing Fees
 All companies listed on the Exchange have to pay
Annual Listing Fees by the 30th April of every
financial year to the Exchange as per the Schedule of
Listing Fees prescribed from time to time.

147
 03/25/11
1 Initial Listing Fees 20,000

2 Annual Listing Fees

(i) Companies with paid-up capital* upto Rs. 5 crores
10,000
3 Companies
(ii) AboveRs.which haveand
5 crores a paid-up capital*
upto Rs. of more than Rs. 20 crores will pay additional fee of
10 crores
Rs. 750/- for every increase of Rs. 1 crores or part thereof. 15,000
4 (iii)case
In Above Rs. 10 crores
of debenture and(not
capital uptoconvertible
Rs. 20 crores
into equity shares) of companies, the fees will be
charged @ 25% of the fees payable as per the above mentioned scales. 30,000

*includes equity shares, preference shares, fully convertible debentures, partly convertible debenture capital and any other security which
will be converted into equity shares.
Kindly Note the last date for payment of listing fee for the year 2006-2007 is April 30, 2006. Failure to pay the listing fee(for the
equity and/or debt segment) before the due date i.e. April 30, 2006 will attract imposition of interest @ 12% per annum w.e.f. May 1,
2006.

148
Role of SEBI in Share Trading

03/25/11
 Section 3 of SEBI Act protects the interests of the investors in securities
and also promotes the development of, and regulates, the securities
market and related matters.
The following are the financial products/instruments which the
secondary market deals with
Equity Shares
 Rights Issue/ Rights Shares
 Bonus Shares
 Preferred Stock/ Preference shares
 Cumulative Preference Shares
 Cumulative Convertible Preference Shares
 Participating Preference Share
 Bond
 Zero Coupon Bond
 Convertible Bond
 Debentures
 Commercial Paper
 Coupons
 Treasury Bills
149

 03/25/11
 In July 2002 SEBI launched Electronic Data Information Filing and
Retrieval System (EDIFAR) in association with National Informatics
Center (NIC) to facilitate filing of certain material information/
documents/statements by the listed companies on line in the
EDIFAR web site - www.sebiedifar.nic.in.

What is a Central Listing Authority?

The Central Listing Authority (CLA) is set up to address the issue of
multiple listing of the same security and to bring about uniformity
in the due diligence exercise in scrutinizing all listing applications
on any stock exchanges. The functions of CLA as enumerated in
SEBI (Central Listing Authority) Regulations, 2003 include:
processing the application made by any body corporate, mutual
fund or collective investment scheme for the letter of
recommendation to get listed at the stock exchange,
 making recommendations as to listing conditions, and
 any other functions that may be specified by the SEBI Board from time
to time.
150

 03/25/11
 What is the exit opportunity available for investors in case a
company gets delisted?
SEBI (Delisting of Securities) Guidelines, 2003 provide an exit
mechanism, whereby the exit price for voluntary delisting of
securities is determined by the promoter of the concerned
company which desires to get delisted, in accordance to book
building process. The offer price has a floor price ,which is average
of 26 weeks average of traded price quoted on the stock exchange
where the shares of the company are most frequently traded
preceding 26 weeks from the date public announcement is made.
There is no ceiling on the maximum price.

For infrequently traded securities, the offer price is as per

Regulation20 (5) of SEBI (Substantial Acquisition and Takeover)
Regulations. Regarding this, infrequently traded securities is
determined in the manner as provided in Regulation 20 (5) of SEBI
(Substantial Acquisition and Takeover) Regulations.

151
 03/25/11
 What is demutualization of stock exchanges?
Demutualization refers to the transition process of an exchange from a
"mutually-owned" association to a company "owned by shareholders".
In other words, transforming the legal structure of an exchange from a
mutual form to a business corporation form is referred to as
demutualisation. The above, in effect means that after demutualization,
the ownership, the management and the trading rights at the exchange
are segregated from one another.

How is a demutualised exchange different from a mutual

exchange?
The three functions of ownership, management and trading are
intervened into a single Group in a mutual exchange. The broker
members of the exchange over here are both the owners and the
traders on the exchange and they further manage the exchange as
well. A demutualised exchange has all these three functions clearly
segregated.
 currently there are two stock exchanges in India The National Stock
Exchange (NSE)
 Over the Counter Exchange of India (OTCEI) 152

 03/25/11
 What is the traditional structure of the stock exchanges in India?
According to legal structure, the stock exchanges in India could be
segregated into 2 broad groups
 20 stock exchanges which were set up as companies, either limited by
guarantees or by shares
 3 stock exchanges which are functioning as associations of persons (AOP)
viz. BSE, ASE and Madhya Pradesh Stock Exchange
 What happens if I do not get my money or share on the due date?
You can file a complaint with the respective stock exchange. The
exchange is required to resolve the complaints. To resolve the dispute,
the complainant can also resort arbitration as provided on the reverse
of contract note /purchase or sale note.
However, if the complaint is not addressed by the Stock Exchanges or is
unduly delayed, then the complaints along with supporting documents
may be forwarded to Secondary Market Department of SEBI. Your
complaint would be followed up with the exchanges for expeditious
redressal.
In case of complaint against a sub broker, the complaint may be
forwarded to the concerned broker with whom the sub broker is
affiliated for redressal.
153
 03/25/11
 What is the maximum brokerage that a
broker/sub broker can charge?
1.5% of the value mentioned in the respective
purchase or sale note.

How do I know whether my order is placed?

Unique Order Code Number is assigned by Stock
Exchanges to each transaction, which is intimated by
broker to his client and once the order is executed,
this order code number is printed on the contract
note. The broker member also maintains the record of
time when the client has placed order and reflect the
same in the contract note along with the time of
execution of the order.
154
 03/25/11
 Sebi and the exchanges have put in place surveillance
systems to monitor trading activity of listed
companies.

During the year 2007-08 and 2008-09, Sebi had

completed investigations in 169 and 116 cases,
respectively, for various types of irregularities that
include market manipulation, price rigging, insider
trading and others.

"Sebi remains vigilant at all times to detect any

malpractices in the market and wherever warranted,
takes actions against the entities violating the
provision of Sebi Act, Rules and Regulations,”
155
 03/25/11
 SEBI is watch dog of the stock exchanges of
India.It has been obligated to protect the
interests of the investors in securities and to
promote and development of , and to regulate
the securities market by such measures as it
thinks fit.The measures may provide for
 1)regulate the business in stock exchanges and
any other securities market
 2)registering and regulating the working of stock
brokers , sub-brokers, share transfer agents,
bankers to an issue,merchant bankers,portfolio
managers and such other intermediaries who
may be associated with securities markets in any
156
manner

 03/25/11
 3)regulate the working and functions of
depositories,participants, custodians of
securities, FIIS,credit rating agencies by
notification
 4)registering and regulating the working of
venture capital funds , mutual funds
 5)prohibiting unfair trade practices , insider
trading in securities
 6)under taking inspection, conducting
inquiries and audits of exchanges
 7)promoting investor education and training of
intermediaries of securities markets ref
NCFM capital markets ( dealers ) module 157
work book.
Buy back of shares

03/25/11
 Objectives of Buy Back: Shares may be bought back
by the company on account of one or more of the
following reasons
i. To increase promoters holding
ii. Increase earning per share
iii. Rationalise the capital structure by writing off
capital not represented by available assets. 
iv. Support share value
v. To thwart takeover bid
vi. To pay surplus cash not required by business
Infact the best strategy to maintain the share price in
a bear run is to buy back the shares from the open
market at a premium over the prevailing market
price.
 158
 03/25/11
 Resources of Buy Back
A Company can purchase its own shares
from 
(i) free reserves; Where a company
purchases its own shares out of free
reserves, then a sum equal to the nominal
value of the share so purchased shall be
transferred to the capital redemption
reserve and details of such transfer shall be
disclosed in the balance-sheet or
(ii) securities premium account; or 
(iii) proceeds of any shares or other specified
securities. A Company cannot buyback its
shares or other specified securities out of 159
the proceeds of an earlier issue of the same
kind of shares or specified securities.
 03/25/11
 Conditions of Buy Back
(a) The buy-back is authorised by the Articles of association of the
Company;
 (b) A special resolution has been passed in the general meeting of the
company authorising the buy-back. In the case of a listed company, this
approval is required by means of a postal ballot. Also, the shares for
buy back should be free from lock in period/non transferability.The buy
back can be made by a Board resolution If the quantity of buyback is or
less than ten percent of the paid up capital and free reserves;
 (c) The buy-back is of less than twenty-five per cent of the total paid-up
capital and fee reserves of the company and that the buy-back of
equity shares in any financial year shall not exceed twenty-five per cent
of its total paid-up equity capital in that financial year;
 (d) The ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy-back;
 (e) There has been no default in any of the following
i. in repayment of deposit or interest payable thereon,
ii. redemption of debentures, or preference shares or
iii. payment of dividend, if declared, to all shareholders within the
stipulated time of 30 days from the date of declaration of dividend or

160
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 iv. repayment of any term loan or interest payable thereon to any financial
institution or bank;
 (f) There has been no default in complying with the provisions of filing of
Annual Return, Payment of Dividend, and form and contents of Annual
Accounts;
 (g) All the shares or other specified securities for buy-back are fully paid-
up;
 (h) The buy-back of the shares or other specified securities listed on any
recognised stock exchange shall be in accordance with the regulations
made by the Securities and Exchange Board of India in this behalf; and
 (i) The buy-back in respect of shares or other specified securities of private
and closely held companies is in accordance with the guidelines as may
be prescribed.
 Disclosures in the explanatory statement
The notice of the meeting at which special resolution is proposed to be
passed shall be accompanied by an explanatory statement stating - 
(a) a full and complete disclosure of all material facts; 
(b) the necessity for the buy-back; 
(c) the class of security intended to be purchased under the buy-back; 
(d) the amount to be invested under the buy-back; and 
(e) the time-limit for completion of buy-back
 161
 03/25/11
 Filing of Declaration of solvency
After the passing of resolution but before making buy-
back, file with the Registrar and the Securities and
Exchange Board of India a declaration of solvency in
form 4A. The declaration must be verified by an
affidavit to the effect that the Board has made a full
inquiry into the affairs of the company as a result of
which they have formed an opinion that it is capable
of meeting its liabilities and will not be rendered
insolvent within a period of one year of the date of
declaration adopted by the Board, and signed by at
least two directors of the company, one of whom
shall be the managing director, if any: 
No declaration of solvency shall be filed with the
Securities and Exchange Board of India by a company 162
whose shares are not listed on any recognized stock
exchange.
 03/25/11
 Issue of further shares after Buy back
Every buy-back shall be completed within twelve months from
the date of passing the special resolution or Board resolution
as the case may be.
A company which has bought back any security cannot make
any issue of the same kind of securities in any manner whether
by way of public issue, rights issue up to six months from the
date of completion of buy back.
 Filing of return with the Regulator
A Company shall, after the completion of the buy-back file with
the Registrar and the Securities and Exchange Board of India, a
return in form 4 C containing such particulars relating to the
buy-back within thirty days of such completion. 
No return shall be filed with the Securities and Exchange Board
of India by an unlisted company.
 Prohibition of Buy Back
A company shall not directly or indirectly purchase its own
shares or other specified securities - 
(a) through any subsidiary company including its own
subsidiary companies; or 
163
 03/25/11
 Procedure for buy back
a. Where a company proposes to buy back its shares, it
shall, after passing of the special/Board resolution make a
public announcement at least one English National Daily,
one Hindi National daily and Regional Language Daily at the
place where the registered office of the company is
situated.
b. The public announcement shall specify a date, which
shall be "specified date" for the purpose of determining the
names of shareholders to whom the letter of offer has to be
sent.
c. A public notice shall be given containing disclosures as
specified in Schedule I of the SEBI regulations.
d. A draft letter of offer shall be filed with SEBI through a
merchant Banker. The letter of offer shall then be
dispatched to the members of the company.
e. A copy of the Board resolution authorising the buy back 164
shall be filed with the SEBI and stock exchanges.
f.
 03/25/11
 The date of opening of the offer shall not be earlier than
seven days or later than 30 days after the specified
date
g. The buy back offer shall remain open for a period
of not less than 15 days and not more than 30 days.
h. A company opting for buy back through the public
offer or tender offer shall open an escrow Account.
 Penalty
If a company makes default in complying with the
provisions the company or any officer of the company
who is in default shall be punishable with
imprisonment for a term which may extend to two
years, or with fine which may extend to fifty thousand
rupees, or with both. The offences are, of course
compoundable under Section 621A of the Companies 165
Act,1956.

Lending and pledging of shares

03/25/11
 If you wish to take a loan from a Bank against the security of
your physical share, the certificate must be physically
lodged with the Bank.This action is called a Pledge.In
electronic holding also you can pledge the shares by
making a request with your DP in favour of any Bank.
 What are the rules for Pledge Of Locked-in Securities?
Locked-in shares can be pledged with a Lendor (such as a
Bank) for a loan. However, the pledge cannot be closed or
invoked before the lock-in release date.
 How can I  Pledge / Hypothecate Shares? First of all the
Bank granting the loan should be a DP or a Client of a
DP.You may submit the written Pledge instruction to your
DP.The Pledged quantity is blocked in your DP Account by
the Bank electronically.The loan is now available for use by
you.
 166

 03/25/11
 Can I dematerialize shares which are Pledged
with a Bank if the Bank is also a DP? Yes. You
may, with the permission of the Bank.
 How to revoke pledged/hypothecated shares?
 To revoke pledged/hypothecate shares, you need to
submit a pledge revocation form to the DP asking for
the revocation of your pledged securities.
 What happens after the closure of my loan with
the Bank in case of a Pledge? Upon closure of
your loan with the Bank, the Pledge is closed in your
DP account by the Bank directly.Those released
shares in your DP account are once again available to
you as free balances.

167
 03/25/11
 What is Dematerialisation?

Dematerialisation (“Demat” in short form) signifies

conversion of a share certificate from its physical form to
electronic form for the same number of holding which is
credited to your demat account which you open with a
Depository Participant (DP).

Dematerialisation is a process by which the physical share

certificates of an investor are taken back by the Company
and an equivalent number of securities are credited in
electronic form at the request of the investor. An investor
will have to first open an account with a Depository
Participant and then request for the dematerialisation of his
share certificates through the Depository Participant so that
the dematerialised holdings can be credited into that
account. This is very similar to opening a Bank Account. 168
 03/25/11

 Dematerialisation of shares is optional and an investor can
still hold shares in physical form. However, he / she has
to demat the shares if he / she wishes to sell the same
through the Stock Exchanges. Similarly, if an investor
purchases shares, he / she will get delivery of the shares
in demat form.

 What is a Depository?
A Depository (NSDL & CDSL) is an organisation like a
Central Bank where the securities of a shareholder are
held in the electronic form at the request of the
shareholder through the medium of a Depository
Participant.
If an investor wants to utilise the services offered by a
Depository, the investor has to open an account with the
Depository through a Depository Participant. 169
 03/25/11
 Depository Participant

Similar to the brokers who trade on your behalf in and

outside the Stock Exchange; a Depository Participant
(DP) is your representative (agent) in the depository
system providing the link between the Company and
you through the Depository. Your Depository
Participant will maintain your securities account
balances and intimate to you the status of your
holding from time to time. According to SEBI
guidelines, Financial Institutions like banks,
custodians, stockbrokers etc. can become
participants in the depository. A DP is one with whom
you need to open an account to deal in electronic
form. While the Depository can be compared to a
Bank, DP is like a branch of your bank with whom you
can have an account. 170
 03/25/11
 Impact

1. Institutional Structure
There are quite a few institutions that are directly
and/or indirectly connected with dematerialised
operations of securities. Understanding the inter-
linkages and functional responsibilities of these
institutions will help us to have correct and holistic
perspective about functioning of dematerialisation.
The institutions connected with demat operations
include; a) Depositories, b) Stock Exchanges (SEs), c)
Clearing Corporations (CCs) / Clearing Houses (CHs),
d) Depository Participants (DPs), e) Registrars and
Transfer Agents (RTAs). Both the depositories NSDL
and CDSL are primarily promoted by the two leading
stock exchanges viz., National Stock Exchange of
India Ltd (NSE) and The Stock Exchange, Mumbai 171
(BSE) respectively.
 03/25/11
 2.Market Microstructure
Trading in dematerialised shares brought in many changes to the
entire structure of the capital market functioning. With the
introduction of demat, stock exchanges switched over (with a
choice) from five day accounting period to T + 5 trading and
settlement for demat stocks. Even for demat stocks dual
settlement is in operation: fixed account period as well as rolling
settlement. This partial change to T + 5 rolling settlement system
is a major shift in the market. Thus dematerialisation smoothly
paved the way for rolling settlement and India joined other
developed markets that are following T+ settlement system. In the
physical segment there is a long gap between delivery and
payment. This gap narrowed down, and it is almost on Delivery
Versus Payment basis (DVP). This near real time DVP reduced
market risks considerably. Clearing corporations / clearing houses
and stock exchanges are able to smoothly coordinate and settle the
trades effectively and timely. Clearing corporations / Clearing
houses are electronically directly connected to depositories that
make settlements faster and easier. Trading in dematerialised
shares attracts lesser brokerage and custodial charges, as a result.
Reduced transaction costs prompts investors
 This also makes bid-ask-spreads narrower, which reduces implicit
transaction costs. 172
 03/25/11
 Review of Literature
The usefulness of an event study comes from the fact that,
given rationality in the market place, the effect of an event will
be reflected immediately in asset prices. Thus the event’s
economic impact can be measured using asset prices observed
over a relatively short time period.
 Methodology
The event of importance in the present study is the start-date
of compulsory dematerialised trading in equity shares.
Therefore, task of conducting an event study and identifying
the period over which the event started having its impact on
various variables are of interest to. In order to measure impact
of the event (demat) on the behaviour of various identified
variables (liquidity, returns and volatility), there is a need to
consider equal lengths of time periods, as much as possible,
before and after the event. Therefore, data on various variables
before and after the compulsory trading in dematerialised
shares are obtained for various lengths. Trading and settlement
in shares, for all classes of investors, is made compulsory
starting from January 4, 1999 in select group of companies.
Thereafter, gradually, more number of companies are added to
the list of compulsory demat trading and settlement. 173
 03/25/11
 Demat Companies
Compulsory trading in the demat form for all classes of
investors was introduced starting from January 4, 1999 in a
phased manner. In each phase, a number of companies were
added to compulsory demat category. In the first phase 12
companies on January 4, 1999, in the second phase 19
companies from February 15, in the third phase 33 more
companies from April 5, and in the fourth phase 40 scrips were
included with effect from May 31, 1999.
 Control Group of Companies
Another matching sample group of companies is considered for
the study. Matching is, generally, done on the basis of relevant
parameters. Parameters considered consist of size of company,
market capitalisation, paid-up capital/number of shares
outstanding, number of shares traded, sales and others. In this
study, the most relevant parameter is number of shares
outstanding. In order to measure liquidity, returns and
volatility, control group of companies on the basis of paid-up
capital of the companies is selected. Paid-up capital has direct 174
bearing on the number of shares issued and traded. Thus, it
rightly represents liquidity
 03/25/11
 Liquidity
The data on trading volumes in both value and quantity terms
and number of trades are also analyzed to see the impact of
dematerialisation. In order to observe whether there is any
growth (lack of it) in the number of shares traded in the post-
demat period compared to pre-demat period, growth rates are
calculated over the pre-demat period.
Volatility
Volatility has become a topic of enormous importance to
almost anyone who is involved in the financial markets even as
a spectator. To many among the general public, the term is
simply synonymous with risk. High volatility is to be deplored,
because it means that security values are not dependable and
the capital markets are not functioning as well as they should.
While investor protection and solvency of financial institutions
are paramount concerns underlying public regulation of
securities markets, it is also evident that the regulatory
framework is to a considerable extent based on the premise
that unregulated securities markets are fragile and prone to
inefficiencies and systemic crises.
175
 03/25/11
 Volatility
Volatility has become a topic of enormous
importance to almost anyone who is involved in
the financial markets even as a spectator. To
many among the general public, the term is
simply synonymous with risk. High volatility is to
be deplored, because it means that security
values are not dependable and the capital
markets are not functioning as well as they
should. While investor protection and solvency of
financial institutions are paramount concerns
underlying public regulation of securities
markets, it is also evident that the regulatory
framework is to a considerable extent based on
the premise that unregulated securities markets
are fragile and prone to inefficiencies and
systemic crises. 176
 03/25/11
 What is Pledge Invocation? When a
pledgee does not repay the loan amount the
shares pledged with the Bank can be
transferred in their favour. This is similar to
the physical shares being transferred in the
name of the lendor in the event of a
default.Who will receive the corporate
actions like dividends, bonus etc in Pledged
shares . You continue to remain the
beneficial holder of pledged shares. You will
continue to receive the Dividends, Bonus
and all other Corporate actions.
177

CREDIT RATING

03/25/11
 Application for grant of certificate
 3. (1) Any person proposing to commence any activity
as a credit rating agency on or after the date of
commencement of these regulations shall make an
application to the Board for the grant of a certificate
of registration for the purpose
 (2) Any person, who was immediately before the said
date carrying on any activity as a credit rating
agency, shall make an application to the Board for
the grant of a certificate within a period of three
months from such date:
 Provided that the Board may, where it is of the opinion
that it is necessary to do so, for reasons to be
recorded in writing, extend the said period uptoa
178
maximum of six months form such date
 .
03/25/11
179
Promoter of credit rating agency

03/25/11
 The Board shall not consider an application under regulation (3)
unless the applicant is promoted by a person belonging to any
of the following categories, namely
i. A public limited company
ii. A scheduled commercial bank
iii. A foreign bank operating in India
iv. A foreign credit rating agency
v. A company or a body corporate having continuous net worth of
100 crores.
Eligibility criteria

 A registered company under Companies Act 1956

 The net worth should be not less than 5 crores
 Credit rating activity is included in the Memorandum of
Association
 The provisions of the Securities and Exchange Board of India
(Criteria for Fit and Proper Person) Regulations, 2004 shall, as
far as may be, apply to all applicants or the credit rating
agencies under these regulations 180


 03/25/11
 Conditions of certificate and validity period
 9. (1) The certificate granted under regulation 8 shall be,
subject to the following conditions, namely:
 (a) the credit rating agency shall comply with the
provisions of the Act, the regulations made there under
and the guidelines, directives, circulars and instructions
issued by the Board from time to time on the subject of
credit rating.
 (b) (1) where any information or particulars furnished to
the Board by a credit rating agency:
 (i) is found to be false or misleading in any material
particular ; or
 (ii) has undergone change subsequently to its furnishing at
the time of the application for a certificate; the credit
rating agency shall forthwith inform the Board in writing.
 (2) the period of validity of certificate of registration shall 181
be three years.
Code of Conduct

03/25/11
 Agreement with the client
 Monitoring of ratings must be done by the agency during the life
time of the security rated by it
 Procedure for review of rating- There must be periodic reviews..
 f the company do not cooperate, the agency can rate based on
best available information and this fact should be disclosed
 Rating cannot be withdrawn except when the company merges or
gets amalgamated with another company.
 Internal procedures to be framed
 17. Every credit rating agency shall frame appropriate procedures
and systems for monitoring the trading of securities by its
employees in the securities of its clients, in order to prevent
contravention of –
 (a) the Securities and Exchange Board of India (Insider Trading)
Regulations, 1992;
 (b) the Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices relating to the Securities
Market) Regulations, 1995; and
 (c) other laws relevant to trading of securities. 182

 03/25/11
 Disclosure of Rating Definitions and Rationale
 18. (1) Every credit rating agency –
 (a) shall make public the definitions of the concerned rating,
along with the symbol and,
 (b) shall also state that the ratings do not constitute
recommendations to buy, hold or sell any securities
 (2) Every credit rating agency shall make available to the general
public information relating to the rationale of the ratings, which
shall cover an analysis of the various factors justifying a
favourable assessment, as well as factors constituting a risk.
 Submission of information to the Board
 Compliance with circulars etc., issued by the Board
 Appointment of Compliance Officer
 (1.) Every credit rating agency shall appoint a compliance officer
who shall be responsible for monitoring the compliance of the
Act, rules and regulations, notifications, guidelines, instructions
etc issued by the Board or the Central Government. 183


 03/25/11
 Maintenance of Books of Accounts records, etc.
 Steps on auditor’s report
 Every credit rating agency shall, within two month’s from the
date of the auditor’s report, take steps to rectify the
deficiencies if any, made out in the auditor’s report, insofar
as they relate to the activity of rating of securities.
 Confidentiality
 Every credit rating agency shall treat, as confidential,
information supplied to it by the client and no credit rating
agency shall disclose the same to any other person, except
where such disclosure is required or permitted by under or
any law for the time being in force.


 184
Rating process

03/25/11
 (1) Every credit rating agency shall –
 (a) specify the rating process;
 (b) file a copy of the same with the Board for record; and file
with the Board any modifications or additions made therein
from time to time.
 (2) Every credit rating agency shall, in all cases, follow a
proper rating process.
 (3) Every credit rating agency shall have professional rating
committees, comprising members who are adequately
qualified and knowledgeable to assign a rating.
 (4) All rating decisions, including the decisions regarding
changes in rating, shall be taken by the rating committee
 .(5) Every credit rating agency shall be staffed by analysts
qualified to carry out a rating assignment.
 185
 03/25/11
 (6) Every credit rating agency shall inform the Board about
new rating instruments or symbols introduced by it.
 (7) Every credit rating agency, shall, while rating a security,
exercise due diligence in order to ensure that the rating
given by the credit rating agency is fair and appropriate.
 (8) A credit rating agency shall not rate securities issued by it.
 (9) Rating definition, as well as the structure for a particular
rating product, shall not be changed by a credit rating
agency, without prior information to the Board.
 (10) A credit rating agency shall disclose to the concerned
stock exchange through press release and websites for
general investors, the rating assigned to the securities of a
client, after periodic review, including changes in rating, if
any.

186

 03/25/11
 Participatory Notes
 What moves the Capital Market is a question that
needs to be explained in the extraordinary
movement of the SENSEX.
 The Foreign Institutional Investors have played
an important role in the Sensex’s movement
because of fund inflows.
 Liquidity then is critical factor. The recent issue
was about Participatory Notes through which
foreign funds flowed into the market.
 • The issue may be seen in a Q & A format
 What are Participatory Notes?
 Participatory Notes are derivative instruments
issued against an underlying security (Shares,
Debentures and Derivatives) 187


 03/25/11
 Who issues Participatory Notes?
 These are issued by Foreign Portfolio Investors registered in
India to overseas clients who may not eligible to invest in
the markets in India.
 What is the benefit to Participatory Notes` holders?
 They gain from the capital appreciation underlying the shares
 What is the share of Participatory Notes as a percentage of
the total foreign portfolio flow?
 It rose from 32% late last year to 51.6% by August
2007.


 What is the total outstanding value of Participatory Notes?

Theoutstanding value of Participatory Notes with
underlying as securities is 30% of the total outstanding
(Rs.3.53484 Cr) at 1,17,071 Cr .The notional value of
Participatory Notes outstanding in March 2004 was
Rs.31875/-Cr. This shows an increase of 51.6% of the assets
under the custody of Foreign Institutional Investor in India.

188



 03/25/11


 Why did Reserve Bank of India call for the ban of fresh
issue of Participatory Notes by Foreign Institutional
Investor’s?
 Reserve Bank of India’s proposal is fallout of the
desperate battle that the monetary policy
authorities are fighting in the face of unprecedented
inflow. In the last week of September alone the
Reserve Bank of India had mopped up $12 bn with
Foreign Institutional Investors pumping in a net
amount of over 8.5 bn, since the September 19,fed
rate cut.
 What is the idea of controlling inflows?The move
aims at controlling inflows, which were coming
from unknown quarters. The idea is to
encourage investors who come through
Participatory Notes to invest directly. To
tighten “know your customer” norms,
investors through Participatory Notes are
welcome to invest in India but for the present 189
it is important to moderate these inflows and
they must come directly as Foreign
Institutional Investors.
 03/25/11


 What is the foreign portfolio inflow so far this

year?
 It is $17.6 Bn this year as of October 15,2007
 What is the size of India dedicated country funds
across the world in assets? What is the future?
 It is $42 Bnin assets. It is expected that these
portfolio inflows will increase along side a
private equity and foreign direct investment
inflow.
 Is there a cap on the sum of issue of the
Participatory Notes?
 SEBI has restricted Participatory Notes
issued by Foreign Institutional Investors 190
to 40% of assets under custody in India.

 03/25/11


 Explain why foreign investors choose the Participatory Notes route?

Legitimate investors may not register because they are wealthy
individuals, trusts or secretive hedge funds that are registered in
the US as well. These entities will instead invest through brokers
registered as Foreign Institutional Investors in India. It is the job of
the brokers (Foreign Institutional Investors) to ensure that they are
not invest in underworld money.


 What steps SEBI has taken to take the Foreign Institutional

Investors onto confidence?A discussion paper on offshore
derivative instruments (ODIs) has been issued by SEBI.
Broadly the proposals are: -Participatory Notes will not be
banned.
 Participatory Notes will be regulated.
 Cannot issue or renew Participatory Notes invested in
derivatives.
 Within 18 months existing positions must be wound up.
 A limit for each Foreign Institutional Investor
 Foreign Institutional Investor registration process will be
 simplified and quickened. 191

 – There will be moderation in the quantity of inflow.
 03/25/11


 Do Foreign Institutional Investors influence the

functioning of the Indian capital market and if so
how?Yes. Foreign Institutional Investors substantial
holdings give them the muscle power to dictate
terms on the stock market. Foreign Institutional
Investor investments in the equity market have
touched Rs.286, 477 Cr (67.07 Bn $). The market
value of the investment is presently Rs.685, 000 Cr
according to SEBI. The market value of the holdings
of Foreign Institutional Investors through
Participatory Notes is Rs.353,484 Cr (51.6% of total
holdings). Against this total holdings of domestic
mutual funds is 1,50,000 Cr. Foreign Institutional
Investors hold almost 40% of the paid-up capital
(excluding promoters’ holdings) in the Sensex
companies. This constitutes the free flow of paid-up
capital.
 Is the fear that Participatory Notes are becoming a
favorite with a host of Indian money launderers 192
justified?
 Yes…………..

 03/25/11

 What is the conclusion after issue of Discussion Paper?

 Foreign Institutional Investors can issue PNs only to ‘regulated
entities’
 May shut the doors to hedge funds; Fund flow may come down in
the short-term
 Both Proprietary and Corporate sub-accounts can issue PN till
registration
 Small Mercy. Some have already got registration; for others
transition time may be short
 Pension Funds, Foundations, University Funds, Endowment and
Charitable Trusts can register as Foreign Institutional Investors
 Some are PN investors. As new entities register more long-term
money will come in.
 Cut off date for calculating assets under custody: September 30;
operational date: October 25
 Any position built by an Foreign Institutional Investor between 193
the two dates will not have to be unwound Foreign Institutional
Investors who are above the new limit can stay at that level:
Those below the limit can issue PNs of 5% of Asset Under Custody
a year
 03/25/11
 Depository receipts
 A firm may wish to list its shares
internationally for various legal and
financial reasons. Depository receipts offer
a means for firms to tap foreign capital
markets without directly listing their
shares abroad.
 The best-known securities of this sort
are:American Depository Receipts, or
ADRS, which are traded in the United
States, and
 Global Depository Receipts, or GDRS,
which are traded mainly in London
 Latin American companies account for a
large share of trading in ADRS, and the
GDRS of Indian companies are the biggest 194
source of GDR trading in London.

 03/25/11
 These securities come in two varieties:A sponsored ADR or
GDR is set up at the behest of the share issuer,
which deposits the desired number of its own shares
with a bank in the country where the receipts are to
be traded. The receipts themselves are technically
securities issued by the bank, giving the holder a
claim on the earnings and price appreciation of the
shares the bank hold.
 An unsponsored ADR or GDR is set upon the initiative
of an outside party, such as an investment bank,
rather than of the firm that has issued the shares.
 • Both sponsored and unsponsored depository receipts trade
on stock exchanges.
 • The main difference between them is that owners of
unsponsored receipts may have more difficulty obtaining
financial reports and other information from the share 195
issuer, because the issuer has not sought to issue the
receipts.
 03/25/11


 At July 2005, ADRS of 299 firms were trading on the

New York Stock Exchange and a further 117 on
NASDAQ. Some 118 firm had listed GDRS on the
London Stock Exchange.
 Euro Issues
 Indian companies raise resources from international
markets through the issue of Foreign Currency
Convertible Bonds (FCCB’s), GDRs and ADRs.
 GDRs/ADRs are similar to Indian shares and are traded
on overseas stock exchanges.
 In India, they are reckoned as part of foreign direct
investment and hence, need to conform to the
existing FDI policy.
 During 2005-06, there is a significant spurt in the 196
resources mobilised through Euro Issues, that
increased to Rs. 113,580 million as against Rs.
33,530 million raised during 2004-2005
 03/25/11
 ADR / GDR
 Financial capital goods import
 Capital expenditure
 Prepayment of scheduled payment of ECB
 Investments abroad
 Equity investment in JV / WOS in India
 Governed by SEBI Guidelines on issue of ADR / GDR
 - should have consistent track record of 3 years since

197
 03/25/11
 Investments in ADRs/GDRs/Foreign securities by MFs
 Mutual Funds schemes where disclosure pertaining to investments in
ADRs/GDRs/foreign securities has not been made in the offer
document, in such cases prior to investment in ADRs/GDRs/foreign
securities for the first time, the AMC shall ensure that a written
communication about the proposed investment is sent to each
unitholder and an advertisement is given in one English daily
newspaper having nationwide circulation as well as in a newspaper
published in the language of the region where the Head Office of
the MF is situated
 The communication to unitholdersshall also disclose the risk factors
associated with such investments. However this provision shall also
disclose the risk factors associated with such investments. However
this provision shall not applicable to existing MF schemes where
relevant disclosure regarding investing in ADRs/GDRs/foreign
securities has already been made.


 198
 03/25/11


 GOVERNMENT
 Consistent track record for am minimum period of 3 years can
be related for infrastructures.
 • Euroissue treated as Direct Foreign Investment.
 • Aggregate Foreign Investment not to exceed 51%. FIPB
clearance required before financial clearance from Finance
Ministry for above 51% of post issue subscribed capital.
 • Listing of Depository Receipts in any international Stock
Exchange, OTC Exchange etc.,
 • NRI’s free to possess, transfer or purchase Depository
Receipts
 • Companies to go through with the issue within 3 months of
the Final approval of the Finance Ministry.
 • 10% Deduction of tax at source on Interest payments
Dividend
199
 • No capital gains tax on Conversion into shares
 Transfer of bonds outside India.

 03/25/11
 Government’s Role Guidelines
 Entire Euro issue proceeds may be retained abroad
 Repatriation as and when expenditure for the approval
end uses are incurred or may remit funds into India
in anticipation of end use of funds.
 Packing of the Euro issue proceeds in stock markets
and real estates not allowed.
 Quarterly statements on the repatriation of Euro issue
proceeds into the country and the manner of their
deployment for the approval end uses to be
submitted to the Government. markets.
 • Issue of warrants barred.
 elect all India Financial Institutions allowed access to
the Euro
200
 03/25/11
 End-use Restrictions on the issue proceeds
 The five end-use restrictions on the monies raised through
Euro issue are as follows:
 Financing capital goods import;
 Financing domestic purchase/installation of plant, equipment
and buildings;
 Prepayment or scheduled repayment of earlier external
borrowings;
 Making Investments abroad where these have been approved
by competent authorities;
 A margin of 25% of the total proceeds of an issue for other
general corporate restructuring uses; and
 The five end-use restrictions on the monie

201
ROLE OF FIIS In INDIAN capital
market

03/25/11
 An important feature of the development of stock market in India
in the last 15 years has been the growing participation of
Institutional Investors, both foreign institutional investors and
the Indian mutual funds combined together, the total assets
under their management amounts to almost 18% of the entire
market capitalization. This paper examines the role of these
investors in Indian stock markets and finds that the market
movement can be explained
 Growing Clout of Institutional Investors on Indian
Markets:
 A Grave Balance of Payments situation forced the policymakers to
take a relook at allowing foreign capital Into the country and
the year of 1991 marked the announcement of some fiscal
disciplinary measures along with reforms on the external sector
made, it possible for the foreign capital to reach the shores of
the country. As on 31st March 2005 there were 685 (ISMR
2004-05 NSE, Mumbai) registered foreign institutional
 investors in the Indian stock market. As on that date the net
cumulative investments made by Flls are around USD 35.9 202
billion representing around 6.55% of India's market
capitalization.

 03/25/11
 The Indian stock markets have really come of age there were so
many developments in the last 15 years that make the markets
on par with the developed markets.
 The important feature of developed markets is the growing clout
of institutional investors and this paper sets out to find whether
our markets have also being dominated by institutional
investors.
 The regression results show that the combined might of the Flls
and mutual funds are a potent force, and they in fact direction
can forecast market direction using the direction of the flow of
funds from Flls and mutual funds, the Granger causality test
has showed that the mutuafunds in fact lead the market rise or
fall and Flls follow suit.
 .This may actually raise questions on the efficiency but on the
contrary, markets become more efficient with the growing
presence of institutional investors who predominantly go by
fundamentals.
 Noise trading on the part of institutional investors will be less in
 Indian context since all their trades are delivery based
 203
Ye ar

03/25/11
Net Investments
by Flls (Rs Cr.)
Year
1992­93 4.27
1993­94 5444.60
1994­95
4776.60
1995­96
6720.90
1996­97
7386.20
1997­98
5908.45 ­
1998­99
1999­00 729.11
2000­01 9765.13
2001­02 9682.52
2002­03 8272.90
2003­04 2668.90
204
2004­05 44000.03
41416.45
Leasing and hire purchase

03/25/11
 A lease transaction is a commercial arrangement whereby an
equipment owner or Manufacturer conveys to the
equipment user the right to use the equipment in return for
a rental.
 In other words, lease is a contract between the owner of an
asset (the lessor) and its user (the lessee) for the right to
use the asset during a specified period in return for a
mutually agreed periodic payment (the lease rentals).
 The important feature of a lease contract is separation of the
ownership of the asset from its usage.
 Lease financing is based on the observation made by Donald
B. Grant:“Why own a cow when the milk is so cheap? All
you really need is milk and not the cow.”



205
 03/25/11
 FINANCIAL LEASE
 Long-term, non-cancellable lease contracts are known as
financial leases. The essential point of financial lease
agreement is that it contains a condition whereby the
lessor agrees to transfer the title for the asset at the end
of the lease period at a nominal cost. At lease it must
give an option to the lessee to purchase the asset he has
used at the expiry of the lease.
 Under this lease the lessor recovers 90% of the fair value
of the asset as lease rentals and the lease period is 75%
of the economic life of the asset. The lease agreement is
irrevocable. Practically all the risks incidental to the
asset ownership and all the benefits arising there from
are transferred to the lessee who bears the cost of
maintenance, insurance and repairs
 . Only title deeds remain with the lessor. Financial lease is
also known as ‘capital lease
 ’. In India, financial leases are very popular with high-cost 206
and high technology equipment

 03/25/11
 An operating lease stands in contrast to the
financial lease in almost all aspects. This lease
agreement gives to the lessee only a limited
right to use the asset.
 The lessor is responsible for the upkeep and
maintenance of the asset.
 The lessee is not given any uplift to purchase the
asset at the end of the lease period.
 Normally the lease is for a short period and even
otherwise is revocable at a short notice.
 Mines, Computers hardware, trucks and
automobiles are found suitable for operating
lease because the rate of obsolescence is very 207
high in this kind of assets.

ADVANTAGES OF LEASING

03/25/11
 SAVING OF CAPITAL: Leasing covers the full cost of the
equipment used in the business by providing 100% finance.
 FLEXIBILITY AND CONVENIENCE: The lease agreement can be
tailor- made in respect of lease period and lease rentals
according to the convenience and requirements of all
lessees.
 (3) PLANNING CASH FLOWS: Leasing enables the lessee to
plan its cash flows properly. The rentals can be paid out of
the cash coming into the business from the use of the same
assets.
 (4) IMPROVEMENT IN LIQUADITY: Leasing enables the lessee
to improve their liquidity position by adopting the sale and
lease back technique.


208
 03/25/11
 HIRE PURCHASE::buying after leasing, leasing with the option
to buy at the end of the lease period Finance lease::A
finance lease effectively allows a firm to finance the
purchase of an asset, even if, strictly speaking, the firm
never acquires the asset. Typically, a finance lease will give
the lessee control over an asset for a large proportion of
the asset's useful life, providing them the benefits (and
risks) of ownership.
 Hire purchase is a purchase of an asset in which customer
makes down payment and finance rest of the ammount
through financial insti or bank.On rest of the unpaid amnt
he pays interest at a certain pre-described rate of
interest.After making complete payment the assest
becomes the legal right of customer. Lease on the other
hand is an agreement of using asset for certain period and
paying rent on it at a pre-described rate of interest.It is a
temorary acuiring of an asset just to use it.Generally Pvt 209
schools are bulid on lease land. Interest on lease is fully
exemt from tax.
 03/25/11
 Hire purchase is a type of installment credit under which the
hire purchaser, called the hirer, agrees to take the goods on
hire at a stated rental, which is inclusive of the repayment
of principal as well as interest, with an option to purchase.
 Under this transaction, the hire purchaser acquires the
property (goods) immediately on signing the hire purchase
agreement but the ownership or title of the same is
transferred only when the last installment is paid
 . The hire purchase system is regulated by the Hire Purchase
Act 1972. This Act defines a hire purchase as “an
agreement under which goods are let on hire and under
which the hirer has an option to purchase them in
accordance with the terms of the agreement and includes
an agreement under which:
 1) The owner delivers possession of goods thereof to a person
on condition that 210
 such person pays the agreed amount in periodic instalments.

 03/25/11
 2) The property in the goods is to pass to such person on the
payment of the last of such instalments, and
 3) Such person has a right to terminate the agreement at any
time before the property so passes”.
 Hire purchase should be distinguished from instalment sale
wherein property passes to the purchaser with the payment
of the first instalment.
 But in case of HP ( ownership remains with the seller until the
last instalment is paid) buyer gets ownership after paying
the last installment. HP also differs form leasing.


211
DIFFERENCE BETWEEN LEASE FINANCING
AND HIRE PURCHASE

03/25/11
BASIS LEASE FINANCING HIRE PURCHASE

Meaning A lease transaction is a Hire purchase is a type of

commercial arrangement, instalment credit under
Option to user whereby
No optionanisequipment
provided to which
Optionthe hire purchaser
is provided to the hirer (user).
owner
the or manufacturer
lessee (user) to agrees to take the goods on
conveys
purchase tothethegoods
equipment hire at a stated rental,
Nature of expenditure Lease rentals paid by the Only interest element
user the right to use the which is inclusive of the
lessee are entirely revenue included in the HP
equipment in return for a rental repayment of principal as
Components expenditure
Lease rentalsofcomprise
the lessee.
of instalments
HP is revenue
wellinstalments
as interest, comprise
with an option to
2 elements (1) finance expenditure
of 3 elements by(1)
nature
normal
purchase.
charge and (2) capital recovery. trading profit (2) finance
charge and (3) recovery of
cost of goods/assets.

212
Securitisation of debt

03/25/11
 Securitization Defined
 Securitization of debt, or asset securitization as is more often
referred to, is a process by which identified pools of
receivables, which are usually illiquid on their own, are
transformed into marketable securities through suitable
repackaging of cashflows that they generate.
 Securitization, in effect, is a credit arbitrage transaction that
permits for more efficient management of risks by isolating
a specific pool of assets from the originator's balance sheet.
 Further, unlike the case of conventional debt financing, where
the interest and principal obligations of a borrowing entity
are serviced out of its own general cash flows, debt
servicing with asset backed securities (ABS) is from the
cash flows originating from its underlying assets.



213


 03/25/11
 What can be Securitized?
 In concept, all assets generating stable and predictable
cash flows can be taken up for securitization. In
practice however, much of the securitised paper
issued have underlying periodic cash flows secured
through contracts defining cash flow volumes, yield
and timing. In this respect, securitization of auto
loans, credit card receivables, computer leases,
unsecured consumer loans, residential and
commercial mortgages, franchise/royalty payments,
and other receivables relating to telecom, trade, toll
road and future export have gained prominence.
 Typically, asset portfolios that are relatively
homogeneous with regard to credit, maturity and
interest rate risk could be pooled together to create a 214

securitization structure.

 03/25/11
 Why Securitize?
 Securitization effort will call for considerable investments in
time and resources. Hence, on a comparative cost scale it
can even be somewhat more expensive than other types of
debt financing that may be available to a borrower, at least
in the initial stages
 . However, it has been demonstrated that a continuing
securitization program rather than a single deal often goes
to reduce the costs, as economies of scale and expertise
pick up over a period of time. Bearing this in mind, many
securitization programs are run with a long-term strategic
perspective.



215

 03/25/11
 Parties in a Securitization Transaction
 Securitization programs usually involve several
participants, each carrying out a specialist function,
such as, creating and analysing the asset pool,
include:
 Administration, credit rating, accounting, legal
negotiation, etc.
 • The Originator – also interchangeably referred to as
the Seller – is the entity whose receivable portfolio
forms the basis for ABS issuance,
 • Special Purpose Vehicle (SPV), which as the issuer of
the ABS ensures adequate distancing of the
instrument from the originator,
 • The Servicer, who bears all administrative
responsibilities relating to the securitization
transaction,
 • The Trustee or the Investor Representative, who act in 216
a fiduciary capacity safeguarding the interests of
investors in the ABS,

Securitization Process

03/25/11
 1. Creation of asset pool and its sale
 2. Issuance of the securitised paper This activity is
usually performed by the SPV. Design of the
instrument however would be based on the nature of
interest that investors would have on the asset pool.
In the case of pass-through issuances, the investors
will have a direct ownership interest in the underlying
assets, while pay-throughs are debt issued by the SPV
secured by the assets and their cash flows.
 3. 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 217
insolvency.

 03/25/11
 Merchant Banking

 Commercial Banking

 Investments

 Bankers to Issue - Escrow Bankers

 Underwriting

 Loan Syndication
218


 03/25/11
 SPECTRUM OF SERVICES :
Equity Issue (Public/Rights) Management

 Debt Issue Management

 Private Placements

 Project Appraisals

 Monitoring Agency Assignments

 IPO Funding
219

 Security Trustee Services

 03/25/11
 Agriculture Consultancy Services

 Corporate Advisory Services

 Mergers and Acquisitions

 Buy Back Assignments

 Share Valuations

 Syndication 220
 03/25/11
 ISSUE MANAGEMENT SERVICES :
Project Appraisal

 Capital structuring

 Preparation of offer document

 Tie Ups (placement)

 Formalities with SEBI / Stock Exchange / ROC etc.,

 Underwriting
221


 03/25/11
 Promotion /Marketing of Issues

 Collecting Banker / Banker to an issue

 Post Issue Management

 Refund Bankers

 Handling of Dividend Warrant/Interest Warrant

Payments

222
 Debenture Trusteeship