Financial Institutions and Markets (MBA 406B) Module - I: Financial Markets

1. Financial System- Meaning

It is a complex and well integrated set of sub system of financial institutions, financial markets, and financial intermediaries, services w ic facilitate transfer and allocation of funds effectively and efficiently. It also consists of regulations, laws and practices followed in t e system.

!. Financial Markets- Meaning

Financial market refers to t ose centers and arrangements w ic facilitate buying " selling of financial assets # instruments. $ enever a financial transaction takes place, it is deemed to ave taken place in financial market. % ere is no specific place or location to indicate a financial market.

Financial markets consist of agents, brokers, institutions, and intermediaries transacting purc ases and sales of securities. % e many persons and institutions operating in t e financial markets are linked by contracts, communications networks w ic form an externally visible financial structure, laws, and friends ips. % e financial market is divided between investors and financial institutions. % e term financial institution is a broad p rase referring to organi&ations w ic act as agents, brokers, and intermediaries in financial transactions. 'gents and brokers contract on be alf of ot ers( intermediaries sell for t eir own account. Financial intermediaries purc ase securities for t eir own account and sell t eir own liabilities and common stock. For example, a stockbroker buys and sells stocks for us as our agent, but a savings and loan borrows our money )savings account* and lends it to ot ers )mortgage loan*. % e stockbroker is classified as an agent and broker, and savings and loan is called a financial intermediary. +rokers and savings and loans, like all financial institutions, buy and sell securities, but t ey are classified separately, because t e primary activity of brokers is buying and selling rat er t an buying and olding an investment portfolio. Financial institutions are classified according to t eir primary activity, alt oug t ey fre,uently engage in overlapping activities. Financial markets provide our speciali&ed, interdependent economy wit many financial services, including time preference, distribution of risk, diversification of risk, transactions economy, transmutation of contractual arrangements, and financial management

-. %ypes, .lassification of Financial Markets/

Types of financial markets are given in t e diagram below/

% e financial markets are classified into two groups/

A. Capital Market
1. .orporate Securities Market 0rimary Market Secondary Market !. 1overnment Securities Markets -. 2ong %erm 2oans Markets %erm 2oan Markets Mortgages Markets Financial 1uarantees Markets

B. Money Market
1. 3norgani&ed Market Money 2enders Indigenous +ankers . it Funds !. 4rgani&ed Money Market %reasury +ills .ommercial 0aper ).0* .ertificate 4f 5eposit ).5* etc .all Money Market .ommercial +ill Market
Classi ication o Financial Markets % ere are five ways t at one can classify financial markets/ (!) "ature o t#e clai$: % e claims traded in a financial market may be eit er for a fixed rupee amount or a residual amount and financial markets can be classified according to t e nature of t e claim. 's explained earlier, t e former financial assets are referred to as debt instruments, and t e financial market in w ic suc instruments are traded is referred to as t e debt market. % e latter financial assets are called e,uity instruments and t e financial market w ere suc instruments are traded is referred to as t e e,uity market or stock market. 0referred stock represents an e,uity claim t at entitles t e investor to receive a fixed rupee amount. .onse,uently, preferred stock as in common c aracteristics of instruments classified as part of t e debt market and t e e,uity market. 1enerally, debt instruments and preferred stock are classified as part of t e fixed income market. (%) Maturity o t#e clai$s: ' second way to classify financial markets is by t e maturity of t e claims. For example, a financial market for s ortterm financial assets is called t e money market, and t e one for longer maturity financial assets is called t e capital market. % e traditional cutoff between s ort term and long term is one year. % at is, a financial asset wit a maturity of one year or less is considered s ort term and t erefore part of t e money market. ' financial asset wit a maturity of more t an one year is part of t e capital market. % us, t e debt market can be divided into debt instruments t at are part of t e money market, and t ose t at are part of t e capital market, depending on t e number of years to maturity. (&) "e' (ersus seasoned clai$s: +ecause e,uity instruments are generally perpetual, a t ird way to classify financial markets is by w et er t e financial claims are newly issued. $ en an issuer sells a new financial asset to t e public, it is said to 6issue7 t e financial asset. % e market for newly issued financial assets is called t e primary market. 'fter a certain period of time, t e financial asset is boug t and sold )i.e., exc anged or traded* among investors. % e market w ere t is activity takes place is referred to as t e secondary market.

(4) Cas# (ersus deri(ati(e instru$ents: Some financial assets are contracts t at eit er obligate t e investor to buy or sell anot er financial asset or grant t e investor t e c oice to buy or sell anot er financial asset. Suc contracts derive t eir value from t e price of t e financial asset t at may be boug t or sold. % ese contracts are called derivative instruments and t e markets in w ic t ey trade are referred to as derivative markets. % e array of derivative instruments includes options contracts, futures contracts, forward con- tracts, swap agreements, and cap and floor agreements. ()) *r+ani,ational structure o t#e $arket: 'lt oug t e existence of a financial market is not a necessary condition for t e creation and exc ange of a financial asset, in most economies financial assets are created and subse,uently traded in some type of organi&ed financial market structure. ' financial market can be classified by its organi&ational structure. % ese organi&ational structures can be classified as auction markets and over-t e-counter markets. (6) -.c#an+es and *(er-t#e-Counter Markets 8xc ange 9 buyers and sellers meet in a central location. 8xample/ +ombay Stock 8xc ange. 4ver-t e-.ounter )4%.* Market 9 dealers at different locations trade via computer and telep one networks. 8xamples/ 4ver t e counter exc ange of India )4%.8I*.

4. Money Market/
Money market is concerned wit t e supply and t e demand for investible funds. 8ssentially, it is a reservoir of s ort-term funds. Money market provides a mec anism by w ic s ort-term funds are lent out and borrowed( it is t roug t is market t at a large part of t e financial transactions of a country are cleared. It is place w ere a bid is made for s ort-term investible funds at t e disposal of financial and ot er institutions by borrowers comprising institutions, individuals and t e 1overnment itself. It is a market for dealing wit financial assets and securities w ic ave a maturity period of up to one year. :ence, it is a market for purely s ort term funds. % us, money market covers money, and financial assets w ic are close substitutes for money. % e money market is generally expected to perform following t ree broad functions/ )i* %o provide an e,uilibrating mec anism to even out demand for and supply of s ort term funds. )ii* %o provide a focal point for .entral bank intervention for influencing li,uidity and general level of interest rates in t e economy. )iii* %o provide reasonable access to providers and users of s ort-term funds to fulfill t eir borrowing and investment re,uirements at an efficient market clearing price.

Functions and importance of Money Market

' well-developed money market is essential for a modern economy. % oug , istorically, money market as developed as a result of industrial and commercial progress, it also as important role to play in t e process of industriali&ation and economic development of a country. Importance of a developed money market and its various functions are discussed below/ !. Financin+ Trade/ Money Market plays crucial role in financing bot internal as well as international trade. .ommercial finance is made available to t e traders t roug bills of exc ange, w ic are discounted by t e bill market. % e acceptance ouses and discount markets elp in financing foreign trade. %. Financin+ Industry: Money market contributes to t e growt of industries in two ways/ )a* Money market elps t e industries in securing s ort-term loans to meet t eir working capital re,uirements t roug t e system of finance bills, commercial papers, etc. )b* Industries generally need long-term loans, w ic are provided in t e capital market. :owever, capital market depends upon t e nature of and t e conditions in t e money market. % e s ort-term interest rates of t e money market influence t e long-term interest rates of t e capital market. % us, money market indirectly elps t e industries t roug its link wit and influence on long-term capital market.

&. /ro ita0le In(est$ent: Money market enables t e commercial banks to use t eir excess reserves in profitable investment. % e main ob;ective of t e commercial banks is to earn income from its reserves as well as maintain li,uidity to meet t e uncertain cas demand of t e depositors. In t e money market, t e excess reserves of t e commercial banks are invested in near-money assets (e.g. s ort-term bills of exc ange* w ic are ig ly li,uid and can be easily converted into cas . % us, t e commercial banks earn profits wit out losing li,uidity. 4. 1el -1u iciency o Co$$ercial Bank: 5eveloped money market elps t e commercial banks to become self-sufficient. In t e situation of emergency, w en t e commercial banks ave scarcity of funds, t ey need not approac t e central bank and borrow at a ig er interest rate. 4n t e ot er and, t ey can meet t eir re,uirements by recalling t eir old s ort-run loans from t e money market. ). 2elp to Central Bank: % oug t e central bank can function and influence t e banking system in t e absence of a money market, t e existence of a developed money market smoot ens t e functioning and increases t e efficiency of t e central bank. Money $arket #elps t#e central 0ank in t'o 'ays: )a* % e s ort-run interest rates of t e money market serves as an indicator of t e monetary and banking conditions in t e country and, in t is way, guide t e central bank to adopt an appropriate banking policy, )b* % e sensitive and integrated money market elps t e central bank to secure ,uick and widespread influence on t e sub-markets, and t us ac ieve effective implementation of its policy.
Money market can be furt er sub divided into/ .all money market .ommercial bill market %reasury bill market S ort term loan market .ommercial paper market .ertificate of deposit market % e key ob;ective of money market is to provide balancing mec anism for s ort term surpluses and deficits.

). Call $oney Market:

% e most active segment of t e money market as been t e call money market, w ere t e day to day imbalances in t e funds position of sc eduled commercial banks are eased out. % e call notice money market as graduated into a broad and vibrant institution ..all#<otice money is t e money borrowed or lent on demand for a very s ort period. $ en money is borrowed or lent for a day, it is known as .all )4vernig t* Money. Intervening olidays and#or Sunday are excluded for t is purpose. % us money, borrowed on a day and repaid on t e next working day, )irrespective of t e number of intervening olidays* is =.all Money=. $ en money is borrowed or lent for more t an a day and up to 1> days, it is =<otice Money=. <o collateral security is re,uired to cover t ese transactions. It is also known as Inter-bank money market. In t is, day to day surplus funds mostly of banks are traded. It is a market for extremely s ort period loans say one day to fourteen days. Suc loans are repayable on demand at t e option of eit er t e lender or t e borrower. Interest rates c anges our to our or day to day based on t e demand and supply of money. % e entry into t is field is restricted by ?+I. .ommercial +anks, .o-operative +anks and 0rimary 5ealers are allowed to borrow and lend in t is market. Specified 'll-India Financial Institutions, Mutual Funds, and certain specified entities are allowed to access to .all#<otice money market only as lenders. ?eserve +ank of India as recently taken steps to make t e call#notice money market completely inter-bank market. :ence t e non-bank entities will not be allowed access to t is market beyond 5ecember -1, !@@@.

From May 1, 1ABA, t e interest rates in t e call and t e notice money market are market determined. Interest rates in t is market are ig ly sensitive to t e demand - supply factors. $it in one fortnig t, rates are known to ave moved from a low of 1 - ! per cent to di&&y eig ts of over 1>@ per cent per annum. 2arge intra-day variations are also not uncommon. :ence t ere is a ig degree of interest rate risk for participants. In view of t e s ort tenure of suc transactions, bot t e borrowers and t e lenders are re,uired to ave current accounts wit t e ?eserve +ank of India. % is will facilitate ,uick and timely debit and credit operations. % e call market enables t e banks and institutions to even out t eir day to day deficits and surpluses of money. +anks especially access t e call market to borrow#lend money for ad;usting t eir cas reserve re,uirements ).??*. % e lenders aving steady inflow of funds )e.g. 2I., 3%I* look at t e call market as an outlet for deploying funds on s ort term basis

6. 3o(t. 1ecurities Market ( 3o(t. 1ecurities Market 43I5T--63-6 MA78-T)

T#e +ilt ed+ed $arket is t#e $arket is +o(ern$ent securities or t#e securities +uaranteed (as to 0ot# principle and interest) 0y t#e +o(ern$ent. Since t e government cannot default on its payment obligations, t e government securities are risk free and ence are known as gilt-edged )w ic means Cof t e best ,ualityD*. 1. It is a risk free market and returns are guaranteed. 'ccordingly t ere is no uncertainty regarding yield, payment on time, etc. and t ere is no scope for speculation and manipulation E* of t e market. !. % e government securities market consists of two parts - t e new issues market and t e secondary market. Since it is t e ?eserve +ank of India t at manages entirely t e public debt operations of t e .entral as well as t e State governments, it is responsible for all t e new issues of government loans. % e secondary market deals in old issues of government loans and operates largely t roug a few large stockbrokers w o keep in touc wit t e ?eserve +ank and ot er prospective buyers and sellers. -. ?eserve +ank of India plays a dominant role in t e government securities market. 's noted by S.+. 1upta, =t ere are only brokers or investors in t e market and no dealers or ;obbers )ot er t an t e ?+I* w o would make a market in government loans by standing ready to buy and sell any amount of government securities on t eir own account.= >. 1overnment securities are t e most li,uid debt instruments. F. % e transactions in t e government securities market are very large and eac transaction may run into several crores of rupees.

9. Capital Market:
% e capital market is t e place w ere t e s ort, medium-term and long-term financial needs of business and ot er undertakings are met by financial institutions w ic supply medium and long-term resources to borrowers. .apital market is a market for financial assets w ic ave a long or indefinite maturity. 1enerally it deals wit long term securities aving a maturity period of above one year. .apital market may be furt er divided into t ree parts, i.e. )i* Industrial security market )ii* 1ovt. securities market )iii* 2ong term loan market .apital market serves as a important source for t e productive use of economyDs savings and investment. % ese savings and investments facilitate capital formation and t roug t is facilitates increase in production and productivity in t e economy. ' capital market t us serves as an important link between t ose w o saves and t ose w o aspire to invest t eir savings. Capital $arkets : Types

(i) Industrial 1ecurity Market G It is market w ere industrial concerns raise t eir capital or debt by issuing instruments like e,uity ares or ordinary s ares, preference s ares, debentures or bonds. % is market can be sub divided into/ )a* 0rimary Market or new issue market )b* Secondary Market or stock 8xc ange /ri$ary Market is a market for new issues and ence it is called new issue market. It deals wit securities w ic are issued to t e public for t e first time. % ere are t ree ways t roug w ic capital is raised in primary market. % ese are/ - 0ublic issue - ?ig t Issue - 0rivate placement 1econdary $arket is a market for secondary sale of securities i.e. securities w ic already passed t roug t e new issue market are traded in t is secondary market. 1enerally, suc securities are ,uoted in stock exc ange and it provides a continuous( and regular market for buying and selling of securities. (ii) 3o(t. 1ecurity Market G It is a market w ere 2ong term 1ovt securities are traded w ic are issued by central 1ovt, State 1ovt, Semi 1ovt aut orities like .ity .orporations, 0ort %rusts, Improvement %rusts, State 8lectricity +oards, 'll India and State level financial institutions and public sector organi&ations#enterprises are dealt in t is market. 1ovt. Securities are in many forms suc as / - Stock .ertificates or inscribed stock - 0romissory <otes - +earer bonds. 1ovt securities are sold t roug public debt office of ?+I. Interest on t ese securities influences price and yield in market. )iii* 5on+ Ter$ loan $arket G .ommercial banks and development banks play a significant role in t is market by supplying long term loans to corporate customers. 2ong term loan market may furt er be classified into/ - %erm loan market - Mortgage Market - Financial guarantee Market. Ter$ 5oan Market : In India many industrial finance institutions ave been created by .entral and State 1ovts., w ic provide medium and long term loans to corporate customers. Institutions like I5+I, IF.I, I.I.I and ot er state financial corporations come in t is category. Mort+a+e Market : ?efers to t ose centres w ic supply mortgage loan mainly to individual customers against security of immovable property like real estate. Financial +uarantee Market : ?efers to centres w ere finance is provided against t e guarantee of reputed person in financial circle. % is guarantee may be in t e form of )i* 0erformance guarantee or )ii* Financial guarantee. 0erformance guarantee covers t e payment of earnest money retention money, advance payments and non compilation of contracts etc. % e financial guarantee covers only financial contracts. Functions and i$portance o Capital Market .apital market plays an important role in mobili&ing resources, and diverting t em in productive c annels. In t is way, it facilitates and promotes t e process of economic growt in t e country. Harious functions and significance of capital market are discussed below/ !. 5ink 0et'een 1a(ers and In(estors: % e capital market functions as a link between savers and investors. It plays an important role in mobili&ing t e savings and diverting t em in productive investment. In t is way, capital market plays a vital role in transferring t e financial resources from surplus and wasteful areas to deficit and productive areas, t us increasing t e productivity and prosperity of t e country.

%. -ncoura+e$ent to 1a(in+: $it t e development of capital, market, t e banking and non-banking institutions provide facilities, w ic encourage people to save more. In t e less- developed countries, in t e absence of a capital market, t ere are very little savings and t ose w o save often invest t eir savings in unproductive and wasteful directions, i.e., in real estate )like land, gold, and ;ewellery* and conspicuous consumption. &. -ncoura+e$ent to In(est$ent: % e capital market facilitates lending to t e businessmen and t e government and t us encourages investment. It provides facilities t roug banks and non-banking financial institutions. Harious financial assets, e.g., s ares, securities, bonds, etc., induce savers to lend to t e government or invest in industry. $it t e development of financial institutions, capital becomes more mobile, interest rate falls and investment increases. 4. /ro$otes -cono$ic 3ro't#: % e capital market not only reflects t e general condition of t e economy, but also smoot ens and accelerates t e process of economic growt . Harious institutions of t e capital market, like non-banking financial intermediaries, allocate t e resources rationally in accordance wit t e development needs of t e country. % e proper allocation of resources results in t e expansion of trade and industry in bot public and private sectors, t us promoting balanced economic growt in t e country. ). 1ta0ility in 1ecurity /rices: % e capital market tends to stabili&e t e values of stocks and securities and reduce t e fluctuations in t e prices to t e minimum. % e process of stabili&ation is facilitated by providing capital to t e borrowers at a lower interest rate and reducing t e speculative and unproductive activities. 6. Bene its to In(estors: % e credit market elps t e investors, i.e., t ose w o ave funds to invest in longterm financial assets, in many ways/ )a* It brings toget er t e buyers and sellers of securities and t us ensure t e marketability of investments, )b* +y advertising security prices, t e Stock 8xc ange enables t e investors to keep track of t eir investments and c anneli&e t em into most profitable lines, )c* It safeguards t e interests of t e investors by compensating t em from t e Stock 8xc ange .ompensating Fund in t e event of fraud and default.

6i erence 0et'een Money Market and Capital Market

Money market is distinguis ed from capital market on t e basis of t e maturity period, credit instruments and t e institutions/ !. Maturity /eriod: % e money market deals in t e lending and borrowing of s ort-term finance )i.e., for one year or less*, w ile t e capital market deals in t e lending and borrowing of long-term finance )i.e., for more t an one year*. %. Credit Instru$ents: % e main credit instruments of t e money market are call money, collateral loans, acceptances, bills of exc ange. 4n t e ot er and, t e main instruments used in t e capital market are stocks, s ares, debentures, bonds, securities of t e government. &. "ature o Credit Instru$ents: % e credit instruments dealt wit in t e capital market are more eterogeneous t an t ose in money market. Some omogeneity of credit instruments is needed for t e operation of financial markets. %oo muc diversity creates problems for t e investors. 4. Institutions: Important institutions operating in t eE money market are central banks, commercial banks, acceptance ouses, non-bank financial institutions, bill brokers, etc. Important institutions of t e capital market are stock exc anges, commercial banks and non-bank institutions, suc as insurance companies, mortgage banks, building societies, etc.

). /urpose o 5oan: % e money market meets t e s ort-term credit needs of business( it provides working capital to t e industrialists. % e capital market, on t e ot er and, caters t e long-term credit needs of t e industrialists and provides fixed capital to buy land, mac inery, etc. 6. 7isk: % e degree of risk is small in t e money market. % e risk is muc greater in capital market. % e maturity of one year or less gives little time for a default to occur, so t e risk is minimi&ed. ?isk varies bot in degree and nature t roug out t e capital market. 9. Basic 7ole: % e basic role of money market is t at of li,uidity ad;ustment. % e basic role of capital market is t at of putting capital to work, preferably to long-term, secure and productive employment. ;. 7elation 'it# Central Bank: % e money market is closely and directly linked wit central bank of t e country. % e capital market feels central bankEs influence, but mainly indirectly and t roug t e money market. <. Market 7e+ulation: In t e money market, commercial banks are closely regulated. In t e capital market, t e institutions are not muc regulated.

B. 5ebt Market/
It is a market meant for trading )i.e. buying or selling* fixed income instruments. Fixed income instruments could be securities issued by .entral and State 1overnments, Municipal .orporations, 1ovt. +odies or by private entities like financial institutions, banks, corporates, etc. % e 0ond $arket )also de0t $arket or credit $arket* is a financial market w ere participants can issue new debt, known as t e primary market, or buy and sell debt securities, known as t e secondary market. % is is usually in t e form of bonds, but it may include notes, bills, and so on. % e primary goal of t e bond market is to provide a mec anism for long term funding of public and private expenditures. Maturity is t e date on w ic t e investor is repaid t e principal by t e issuer. % e tenure for t e maturity of an instrument can range from one day to -@ years. 1enerally, for a longer t e time period towards maturity t e issuer pays a ig er interest rate on t e instrument. Instruments wit a maturity under -I> days are termed as s ort-term instruments. 5ebt markets are vital to t e sustained growt of any economy since t ey offer efficient mobili&ation and allocation of financial resources. 5ebt instruments are used to finance developmental activities undertaken by t e 1overnment. % ey also aid in managing t e li,uidity in t e economy. +orrowings from t e debt market allow t e 1overnment to reduce its dependence on external sources of funding. It also reduces t e pressure on institutional financing to fund public sector or private sector pro;ects. % e issue " trade of securities in India are regulated by eit er ?+I or S8+I. 1overnment securities and bonds, instruments issued by banks and financial institutions are regulated by ?+I w ile issues of nongovernment securities )i.e. issue by corporates* are regulated by S8+I. % e corporate debt market can be classified into 0rimary market and Secondary market. In t e primary market, corporate debt is via private placements like corporate bonds placed wit w olesale investors like banks, financial institutions, mutual funds, etc. % e Secondary market for corporate debt is available on platforms offered by various exc anges in t e country. % e secondary debt market in India can be broadly categori&ed into G =#olesale 6e0t Market : comprising of investors like +anks, financial institutions, ?+I, insurance companies, Mutual funds, corporates and FIIs. 7etail 6e0t Market : comprising of investors like individuals, pension funds, private trusts, <+F.s and ot er legal entities.

A. 0rimary and Secondary Market/

/ri$ary Market is a market for new issues and ence it is called new issue market. It deals wit securities w ic are issued to t e public for t e first time. % ere are t ree ways t roug w ic capital is raised in primary market. % ese are/ - 0ublic issue

- ?ig t Issue - 0rivate placement 1econdary $arket is a market for secondary sale of securities i.e. securities w ic already passed t roug t e new issue market are traded in t is secondary market. 1enerally, suc securities are ,uoted in stock exc ange and it provides a continuous( and regular market for buying and selling of securities.

1@. Interlinking Financial Market-Indian and 1lobal Financial Markets/

Inte+ration % e term 6integration7 refers to t e establis ment of close connections or effective linkages between different constituents and between different parts of t e financial system. Financial integration is t e opposite of t e maturity wise, geograp ical, institutional, seasonal, instrumental, segmentation or .ompartmentali&ation of t e financial markets. % e integration process as elped t e financial markets bot at national and international levels to en ance t eir efficiency and it as also facilitated in globali&ation of financial services. % e flow of foreign capital from t e industriali&ed countries to t e developing countries as been t e significant outcome of t is integration process. 3lo0al Inte+ration o Financial Markets In terms of international trade and financial flows, Indian economy is to a very great extent an open economy, t oug t e extent of its openness may not be as great as in countries like 3S', 3J, 1ermany, Kapan, 0 ilippines. % e foreign exc ange markets are cleared at a conversion price, i.e. at t e exc ange rate. % e foreign exc ange rates are an important part of financial analysis. % oug t e exc ange rate is apparently determined by t e supply of and demand for foreign exc ange, t e complex forces of exports and imports lie be ind t e w ole process of exc ange rate determination. % e international aspects of savings and investments flows are reflected in t e volume of capital flows between nations. % e world economy as witnessed significant c anges in recent years. India as already opened up its economic frontiers and presently expects increasing gains from t e new world trade order and t e world finance system. Since 1AA@, t e global economy as emerged very swiftly re,uiring significant c anges. % e openness of t e economy is also apparent in t e pro;ections of t e 8ig t 0lan. $ ile exports are expected to grow by 1-.IL p.a. in volume terms to reac a level of 3S M--.FF billion by t e year 1AAI-AN, imports are pro;ected to increase by B.>L in volume terms. % e trade policy reforms ave been made part of overall reform process for e reali&ation of aforesaid ob;ectives. % e 1'%% played a significant role in facilitating t e rapid expansion in global trade t roug a succession of rounds w ic culminated in t e 3ruguay ?ound and resulted in t e transformation of 1'%% into $orld %rade 4rgani&ation. % e 3ruguay ?ound as been t e most ambitious and compre ensive multilateral trade negotiations in istory. 5uring t e 1AAI-1AA>, international transaction sin good and non-factor services as a proportion of 150 en ance from --L to >-L for t e developing world as a w ole. % e 1eneral 'greement on %rade in services is t e first multilaterally agreed and legally enforceable rules to cover international trade in services. S are of services in global trade as increased to over !!L in 1AA> against 1FL in 1AB@. % e way t e Indian .orporate sector reacted to t e domestic liberali&ation process as well as to t e 3ruguay ?ound results disclose t at a large segment is ,uite conscious t at t is liberali&ation process is desirable, possibly also irreversible and t e world trade liberali&ation t roug t e 3ruguay ?ound can be a position factor t at will facilitate t e ad;ustments needed to be done at t e corporate level in response to t e domestic reforms process. % us global integration of financial markets resulted from de-regulatory measures, tec nological and information explosion and financial innovations. % e Indian .orporate Sector as appreciated t e concept of globali&ation of economy and as been initiating measures to emerge as Indian multinationals. % e measures include improved ,uality products, establis ment of overseas distribution and marketing c annels, capacity utili&ation, cost consciousness, strategic alliances for bot domestic and international operations and so fort .

Module - II: Financial Institutions

!. Financial Institutions % e financial institutions in any country are significant financial and commercial organi&ations responsible for providing proper facilitation to t e flow of money and finances t roug t e economy, t roug acting as ma;or and main financial intermediaries between t e potential lenders or investors and t e borrowers of all categories. In most of t e countries all across t e world, t ese financial institutions operate under eavily and stringently regulated environment, usually by t e governments, because of being magnificent and critical part of countryEs economy. +y dint of t ese facts and privileges, t e financial institutions of all over t e world, t erefore, deserve our special attention and selective legal services.

!.!: Broad Cate+ories

% e structure of financial institutions )FIs* in India is widely diversified and includes <ational and State level development financial institutions, insurance corporations and investment institutions. For purposes of classification, t e financial institutions can be classified into t ree broad eads/ )a* 'll-India Financial Institutions, )b* State-level Institutions )SF.s and SI5.s*, and )c* 4t er Institutions )8.1. and 5I.1.*. 'll-India Financial Institutions can be furt er reclassified under four broad eads G 'll-India 5evelopment +anks )I5+I, I.I.I, SI5+I, II+I and IF.I*( Speciali&ed-Financial Institutions )8OIM +ank, ?.%., I.I.I Henture, %F.I and I5F.*( Investment Institutions )3%I, 2I. and 1I. and its subsidiaries*( and ?efinance Institutions )<'+'?5 and <:+*. In t e case of investment institutions, 3%I, being a mutual fund, is discussed under t e section on capital markets w ile for t e 2I. and t e 1I. and its subsidiaries.

1pecial C#aracteristics 1. %o reduce transaction costs by speciali&ing in t e issuance of standardi&ed securities. !. %o reduce t e information costs of screening and monitoring borrowers. % ey curb asymmetries, elping resources flow to most productive uses. -. %o give savers ready access to t eir funds. >. Financial intermediation and leverage ave s ifted away from traditional banks and toward ot er financial institutions less sub;ect to government regulations. F. +rokerages, insurers, edge funds, etc. I. 0rovide services t at compete wit banks but do not accept deposits. N. %ake on more risk t an traditional banks and are less. B. ?apid growt in some financial instruments made it easier to conceal leverage and risk-taking.
%. Money Market Institutions 4/A7TICI/A"T1 I" M*"-> MA78-T % e ma;or participants w o supply t e funds and demand t e same in t e money market are as follows/ i* 7eser(e Bank o India: ?eserve +ank of India is t e regulator over t e money market in India. 's t e .entral +ank, it in;ects li,uidity in t e banking system, w en it is deficient and contracts t e same in opposite situation. ii* Banks: .ommercial +anks and t e .o-operative +anks are t e ma;or participants in t e Indian money market. % ey mobili&e t e savings of t e people t roug acceptance of deposits and lend it to business ouses for t eir s ort term working capital re,uirements. $ ile a portion of t ese deposits is invested in medium and long-term 1overnment securities and corporate s ares and bonds, t ey provide s ort-term funds to t e 1overnment by investing in t e %reasury +ills. % ey employ t e s ort-term surpluses in various money market instruments. iii* 6iscount and Finance 2ouse o India 5td. (6F2I): 5F:I deals bot ways in t e money market instruments. :ence, it as elped in t e growt of secondary market, as well as t ose of t e money market instruments. iv* Financial and In(est$ent Institutions: % ese institutions )e.g. 2I., 3%I, 1I., 5evelopment +anks, etc.* ave been allowed to participate in t e call money market as lenders only. () Corporates: .ompanies create demand for funds from t e banking system. % ey raise s ort-term funds directly from t e money market by issuing commercial paper. Moreover, t ey accept public deposits and also indulge in inter corporate deposits and investments.

(i) Mutual Funds: Mutual funds also invest t eir surplus funds in various money market instruments for s ort periods. % ey are also permitted to participate in t e .all Money Market. Money Market Mutual Funds ave been set up specifically for t e purpose of mobili&ation of s ort-term funds for investment in money market instruments.

&. Capital Market Institutions

% ese institutions may furt er be classified into investing institutions and development banks on t e basis of t e nature of t eir activities and t e financial mec anism adopted by t em. Investing institutions comprise t ose financial institutions w ic garner t e savings of t e people by offering t eir own s ares and stocks, and w ic provide long-term funds, especially in t e form of direct investment in securities and underwriting capital issues of business enterprises. % ese institutions include investment banks, merc ant banks, investment companies and t e mutual funds and insurance companies. 5evelopment banks include t ose financial institutions w ic provide t e sinews of development, i.e. capital, enterprise and know- ow, to business enterprises so as to foster industrial growt . 4. Financial 1er(ices Institutions? Functions and structure introduced: Financial institutions or institutions offer various types of transformation services. % ey issue claims to t eir customers t at ave c aracteristics different from t ose of t eir own assets. For example, banks accept deposits as liability and convert t em into assets suc as loans. % is is known as 6liability-asset transformation7 function. Similarly t ey c oose and manage portfolios w ose risk and return t ey alter by applying resources to ac,uire better information and to reduce or overcome transaction costs. % ey are able to do so t roug economies of scale in lending and borrowing. % ey provide large volumes of finance on t e basis of small deposits or unit capital. % is is called 6si&e-transformation7 function. Furt er, t ey distribute risk t roug diversification and t ereby reduce it for savers as in t e case of mutual funds. % is is called 6risk-transformation7 function. Finally t ey offer savers alternate forms of deposits according to t eir li,uidity preferences, and provide borrowers wit loans of re,uisite maturities. % is is known as 6maturity-transformation7 function. ' financial system also ensures t at transactions are effected safely and swiftly on an on-going basis. It is important t at bot buyers and sellers of goods and services s ould ave t e confidence t at instruments used to make payments will be accepted and onored by all parties. % e financial system ensures t e efficient functioning of t e payment mec anism. In s ort, financial markets can be said to perform proximate functions suc as/ 1. 8nabling economic units to exercise t eir time preference, !. Separation, distribution, diversification, and reduction of risk, -. 8fficient operation of t e payment mec anism, >. %ransmutation or transformation of financial claims so as to suit t e preferences of bot savers and borrowers, F. 8n ancing li,uidity of financial claims t roug securities trading, and I. 0ortfolio management.

). 1tock -.c#an+es:
6Stock 8xc ange means any body or individuals w et er incorporated or not, constituted for t e purpose of assisting, regulating or controlling t e business of buying, selling or dealing in securities7. It is an association of member brokers for t e purpose of self-regulation and protecting t e interests of its members. It can operate only if it is recogni&ed by t e 1overnment under t e Securities .ontracts )?egulation*'ct, 1AFI. % e recognition is granted under Section - of t e 'ct by t e .entral 1overnment, Ministry of FinanceStock 8xc ange 5ivision.

% e 0owers of t e .entral 1overnment under t e 'ct are far-reac ing and include t e following in particular/ )1* 1rant and wit drawal of recognition, approval or c ange of byelaws. )!* .all for periodical returns from t e Stock 8xc ange. )-* 5irect en,uiries on t e members or on t e Stock 8xc ange. )>* 2iability of t e 8xc ange to submit annual reports. )F* 5irecting t e Stock 8xc ange to make certain rules. )I* Supersede t e 1overning +oard of t e 8xc ange. )N* Suspend t e 1overning +oard of t e 8xc ange. )B* Impose any ot er conditions or regulations for trading. Constitution: ' 1overning +oard comprising of A elected director )one t ird of t em retire every year by rotation*, an 8xecutive 5irector, t ree 1overnment nominees, a ?eserve +ank of India nominee and five public representatives, is t e apex body w ic regulates t e 8xc ange and decides its policies. ' 0resident, a Hice0resident and an onorary %reasurer are annually elected from among t e elected directors, by t e 1overning +oard following t e election of directors. % e 8xecutive 5irectors as t e . ief 8xecutive 4fficer is responsible for t e day-to-day administration of t e 8xc ange. 8arliest records of securities trading in India are available from t e end of t e eig teent century. +efore 1BF@, t ere was business conducted in Mumbai in s ares of banks and t e securities of t e 8ast India .ompany w ic were considered as securities for buying, selling and exc ange. % e s ares of t e .ommercial +ank, Mercantile +ank and +ank of +ombay were some of t e prominent s ares traded. % e business was conducted under sprawling banyan tree in front of t e %own :all, w ic is now in t e :orniman .ircle 0ark. In 1BF@, t e .ompanies 'ct was passed and t at eralded t e commencement of ;oint stock companies in India, It was t e 'merican civil war t at elped Indians to establis broking business. % e leading broker, S ri 0remc and ?oyc and was responsible for developing conventions and procedures. In 1BN>, t e 5alal Street became t e prominent place of meeting of t e brokers to conduct t eir business. % e brokers organi&ed and 'ssociation on At Kuly 1BNF known as t e <ative S are +rokers 'ssociation to protect c aracter, status and interest of t e <ative +rokers and t at was t e foundation of t e Stock 8xc ange, Mumbai. % e 8xc ange was establis ed wit -1B members. % e number increased to --- in 1BAI and a present, it is I>1. % e members ip fee as increased gradually from ?s. 1 in 1BBN to ?s. 1,@@@.- in 1BAI, ?s. >B,@@@#- in 1A!@, ?s. N.F1 lak s in 1ABI and ?s. FF lak s at present. In 1AF@, Stock 8xc anges became an exclusively .entral 1overnment sub;ect following adoption of t e .onstitution of India. In 1AFI, t e Securities .ontracts )?egulation* 'ct was passed. In 1AA!, t e Securities and 8xc ange +oard of India 'ct was passed t oug t e Securities 8xc ange +oard of India )S8+I* came into existence in 1ABB. In t e last t ree years, S8+I as been empowers by t e .entral 1overnment to regulate and develop capital markets in India. In 1AA!, t e 4ver t e .ounter 8xc ange of India )4%.8I* came into existence w ere e,uities of small .ompanies are listed. In 1AA>, birt of t e <ational Stock 8xc ange took place, in 1AAF, t e 8xc ange rapidly computeri&ed its trading operations and t us t e open cut-cry system of s are trading was replaced by screen based trading in t e Stock 8xc ange, Mumbai. In Kanuary 1AAI, t e revised carry forward system was introduced. In September 1AAN, +S8 4n-2ine %rading System network went nationwide. % e recogni&ed stock exc anges at Mumbai, ' madabad, Indore are voluntary non-profit-making associations, w ile t e .alcutta, 5el i, +angalore, .oc in, Janpur, 2ud iana, 1uwa ati and Janara Stock 8xc anges are ;oin-stock companies limited by s ares and t e Mumbai, :yderabad and 0une stock 8xc anges are companies limited by guarantee. Since t e ?ules of 'rticles of 'ssociation defining t e constitution of t e recogni&ed stock exc anges are approved by t e .entral 1overnment, t ere is an uniformity in t eir organisation.

Control: % e governing body of a recogni&ed stock exc ange as wide governmental and administrative powers and is t e decision G taking body. It as t e power, sub;ect to governmental approval, to make, amend and suspend t e operation of t e rules, byelaws and regulations of t e exc anges. It also as complete ;urisdiction over all members and in practice, its power of management and control are almost absolute. 3nder t e constitution, t e governing body as t e power to admit and expel members, to warn, censure, fine and suspend members and t eir partners, attorneys, remisiers, aut ori&ed clerks and employees, to approve t e formation and dissolution of partners ips and appointment of attorney, remisiers and aut ori&ed clerks, to enforce attendance and information, ad;udicate disputes and impose penalties, to determine t e mode and conditions of stock exc ange business and regulate stock exc ange trading all its aspects and generally to supervise, direct and control all matters and activities affecting t e stock exc ange. % e organisation of Mumbai Stock 8xc ange is typical. % e members on roll elect 1I members to be 5irectors on t e 1overning +oard, w o in turn elect a 0resident. Hice-0resident and %reasurer. % e 8xecutive 5irector is appointed by t e government on t e recommendation of t e 1overning +oard to t e . ief 'dministrator of t e 8xc ange. % ere are also t ree representatives from t e 1overnment, t ree from t e public and one from t e ?+I on t e +oard to represent t eir interests. 's per t e S8+I guidelines, t e 8xc anges ave agreed to ave F@L representation to non-members on t e 1overning +oard. F@"CTI*"1 *F A 1T*C8 -AC2A"3% e functions of stock exc ange can be enumerated as follows/ !. /ro(ides ready and continuous $arket: +y providing a place w ere listed securities can be boug t and sold regularly and conveniently, a stock exc ange ensures a ready and continuous market for various s ares, debentures, bonds and government securities. % is lends a ig degree of li,uidity to oldings in t ese securities as t e investor can encas t eir oldings as and w en t ey want. %. /ro(ides in or$ation a0out prices and sales: ' stock exc ange maintains complete record of all transactions taking place in different securities every day and supplies regular information on t eir prices and sales volumes to press and ot er media. In fact, now-a-days, you can get information about minute to minute movement in prices of selected s ares on %H c annels like .<+., Pee <ews, <5%H and :eadlines %oday. % is enables t e investors in taking ,uick decisions on purc ase and sale of securities in w ic t ey are interested. <ot only t at, suc information elps t em in ascertaining t e trend in prices and t e wort of t eir oldings. % is enables t em to seek bank loans, if re,uired. &. /ro(ides sa ety to dealin+s and in(est$ent: %ransactions on t e stock exc ange are conducted only amongst its members wit ade,uate transparency and in strict conformity to its rules and regulations w ic include t e procedure and timings of delivery and payment to be followed. % is provides a ig degree of safety to dealings at t e stock exc ange. % ere is little risk of loss on account of non-payment or non-delivery. Securities and 8xc ange +oard of India )S8+I* also regulates t e business in stock exc anges in India and t e working of t e stock brokers. <ot only t at, a stock exc ange allows trading only in securities t at ave been listed wit it( and for listing any security, it satisfies itself about t e genuineness and soundness of t e company and provides for disclosure of certain information on regular basis. % oug t is may not guarantee t e soundness and profitability of t e company, it does provide some assurance on t eir genuineness and enables t em to keep track of t eir progress. 4. 2elps in $o0ili,ation o sa(in+s and capital or$ation: 8fficient functioning of stock market creates a conducive climate for an active and growing primary market. 1ood performance and outlook for s ares in t e stock exc anges imparts buoyancy to t e new issue market, w ic elps in mobili&ing savings for investment in industrial and commercial establis ments. <ot only t at, t e stock exc anges provides li,uidity and profitability to dealings and investments in s ares and debentures. It also educates people on w ere and ow to invest t eir savings to get a fair return. % is encourages t e abit of saving, investment and risk-taking among t e common people. % us it elps mobili&ing surplus savings for investment in corporate and government securities and contributes to capital formation. ). Baro$eter o econo$ic and 0usiness conditions: Stock exc anges reflect t e c anging conditions of economic ealt of a country, as t e s ares prices are ig ly sensitive to c anging economic, social and

political conditions. It is observed t at during t e periods of economic prosperity, t e s are prices tend to rise. .onversely, prices tend to fall w en t ere is economic stagnation and t e business activities slow down as a result of depressions. % us, t e intensity of trading at stock exc anges and t e corresponding rise on fall in t e prices of securities reflects t e investorsD assessment of t e economic and business conditions in a country, and acts as t e barometer w ic indicates t e general conditions of t e atmosp ere of business. 6. Better Allocation o unds: 's a result of stock market transactions, funds flow from t e less profitable to more profitable enterprises and t ey avail of t e greater potential for growt . Financial resources of t e economy are t us better allocated. 6. /rudential "or$s: 1-BI : Market 7e+ulator and In(estorsB /rotector S8+I is re,uired to create a proper and conducive atmosp ere re,uired for raising money from t e capital market. % e atmosp ere includes t e rules, regulations, trade practices, customs and relations among institutions, brokers, investors and companies. it s all endeavor to restore t e trust of investors and particularly to safeguard t e interest of t e small investors. % is can be ac ieved by meeting t e needs of t e persons connected wit t e security market and establis ing proper coordination among t e t ree main groups directly connected wit its operations, namely, )a* investors, )b* corporate sectors and )c* intermediaries. S8+I is expected to educate investors and make t em aware of t eir rig ts in clear and specific terms. It s all provide investors wit information and see t at t e market maintains li,uidity, safety and profitability of t e securities w ic are crucial for any investments. S8+I s all create a proper investments climate and enable t e corporate sector to raise industrial securities easily, efficiently and at affordable minimum cost. S8+I s all develop a proper infrastructure so t at t e market automatically facilitate expansion and growt of business to middlemen like brokers, ;obbers, commercial banks, merc ant bankers, mutual funds, etc, % us, it will ensure t at t ey provide efficient service to t eir constituents, namely, investors and t e corporate sector at a competitive price. S8+I s all make more effective t e law in t e existing status as far as t ey relate to t e industrial securities, mutual funds, investments in 3nits, 2I. savings plan. . it-Fund companies and securities issued by ousing#industrial societies and corporations wit t e purpose of making investments in ousing#industrial pro;ects. S8+I s all create t e framework for more open, orderly, and unpre;udiced conduct in relation to takeover and mergers in t e corporate sector to ensure fair and e,ual treatment to all t e security olders, and to facilitate suc takeovers and mergers in t e interest of efficient by prescribing a mec anism for more orderly conduct.

9. 1-BI 7e+ulations (7-3@5ATI*"1 *F 1T*C8 -AC2A"3-1) 's indicated earlier, t e stock exc anges suffer from certain limitations and re,uire strict control over t eir activities in order to ensure safety in dealings t ereon. :ence, as early as 1AFI, t e Securities .ontracts )?egulation* 'ct was passed w ic provided for recognition of stock exc anges by t e central 1overnment. It as also t e provision of framing of proper bylaws by every stock exc ange for regulation and control of t eir functioning sub;ect to t e approval by t e 1overnment. 'll stock exc anges are re,uired submit information relating to its affairs as re,uired by t e 1overnment from time to time. % e 1overnment was given wide powers relating to listing of securities, make or amend bylaws, wit draw recognition to, or supersede t e governing bodies of stock exc ange in extraordinary#abnormal situations. 3nder t e 'ct, t e 1overnment promulgated t e Securities ?egulations )?ules* 1AFN, w ic provided inter alia for t e procedures to be followed for recognition of t e stock exc anges, submission of periodical returns and annual returns by

recogni&ed stock exc anges, in,uiry into t e affairs of recogni&ed stock exc anges and t eir members, and re,uirements for listing of securities. 7*5- *F 1-BI 's part of economic reforms programme started in Kune 1AA1, t e 1overnment of India initiated several capital market reforms, w ic included t e abolition of t e office of t e .ontroller of .apital Issues )..I* and granting statutory recognition to Securities 8xc ange +oard of India )S8+I* in 1AA! for/ )a* protecting t e interest of investors in securities( )b* promoting t e development of securities market( )c* regulating t e securities market( and )d* matters connected t ere wit or incidental t ereto. S8+I as been vested wit necessary powers concerning various aspects of capital market suc as/ regulating t e business in stock exc anges and any ot er securities market( registering and regulating t e working of various intermediaries and mutual funds( promoting and regulating self regulatory organisations( promoting investors education and training of intermediaries( pro ibiting insider trading and unfair trade practices( regulating substantial ac,uisition of s ares and take over of companies( calling for information, undertaking inspection, conducting in,uiries and audit of stock exc anges, and intermediaries and self regulation organisations in t e stock market( and performing suc functions and exercising suc powers under t e provisions of t e .apital Issues ).ontrol* 'ct, 1A>N and t e Securities .ontracts )?egulation* 'ct, 1AFI as may be delegated to it by t e .entral 1overnment. 's part of its efforts to protect investorsD interests, S8+I as initiated many primary market reforms, w ic include improved disclosure standards in public issue documents, introduction of prudential norms and simplification of issue procedures. .ompanies are now re,uired to disclose all material facts and risk factors associated wit t eir pro;ects w ile making public issue. 'll issue documents are to be vetted by S8+I to ensure t at t e disclosures are not only ade,uate but also aut entic and accurate. S8+I as also introduced a code of advertisement for public issues for ensuring fair and trut ful disclosures. Merc ant bankers and all mutual funds including 3%I ave been broug t under t e regulatory framework of S8+I. ' code of conduct as been issued specifying a ig degree of responsibility towards investors in respect of pricing and premium fixation of issues. %o reduce cost of issue, underwriting of issues as been made optional sub;ect to t e condition t at t e issue is not under-subscribed. In case t e issue is under-subscribed i.e., it was not able to collect A@L of t e amount offered to t e public, t e entire amount would be refunded to t e investors. % e practice of preferential allotment of s ares to promoters at prices unrelated to t e prevailing market prices as been stopped and private placements ave been made more restrictive. 'll primary issues ave now to be made t roug depository mode. % e initial public offers )I04s* can go for 0ook 0uildin+ for w ic t e price band and issue si&e ave to be disclosed. .ompanies wit demateriali&ed s ares can alter t e par value as and w en t ey so desire. 's for measures in t e secondary market, it s ould be noted t at all statutory powers to regulate stock exc anges under t e Securities .ontracts )?egulation* 'ct ave now been vested wit S8+I t roug t e passage of securities law )'mendment* 'ct in 1AAF. S8+I as duly notified rules and a code of conduct to regulate t e activities of intermediaries in t e securities market and t en registration in t e securities market and t en registration wit S8+I is made compulsory. It as issued guidelines for composition of t e governing bodies of stock exc anges so as to include more public representatives. .orporate members ip as also been introduced at t e stock exc anges. It as notified t e regulations on insider trading to protect and preserve t e integrity of stock markets and issued guidelines for mergers and ac,uisitions. S8+I as constantly reviewed t e traditional trading systems of Indian stock exc anges and tried to simplify t e procedure, ac ieve transparency in transactions and reduce t eir costs. %o prevent excessive speculations and volatility in t e

market, it as done away wit badla system, and introduced rolling settlement and trading in derivatives. 'll stock exc anges ave been advised to set-up .learing .orporation # settlement guarantee fund to ensure timely settlements. S8+I organi&es training programmes for intermediaries in t e securities market and conferences for investor education all over t e country from time to time. ;. 1ensiti(e Indices/ Security market Index measures t e be aviour of t e security prices and t e stock market. Indicators represent t e entire stock market and its segments w ic measure t e movement of t e stock market. % e most popular index in India are t e +ombay stock exc ange sensitivity Index )+S8 Sensex or +S8 G 1@@* and t e <ational Stock 8xc ange <ifty. % e two prominent Indian market indexes are Sensex and <ifty. Sensex is t e oldest market index for e,uities( it includes s ares of -@ firms listed on t e +S8, w ic represent about >FL of t e indexEs free-float market capitali&ation. It was created in 1ABI and provides time series data from 'pril 1ANA, onwards. 'not er index is t e S"0 .<O <ifty( it includes F@ s ares listed on t e <S8, w ic represent about I!L of its free-float market capitali&ation. It was created in 1AAI and provides time series data from Kuly 1AA@, onward.
/urpose o Inde. Security Index is elpful to s ow t e economic ealt and analy&ing t e movement of price of various securities listed into t e stock exc ange. :elpful to evaluate t e ?isk G return portfolio analysis. :elpful to measure t e growt of t e secondary market. Index can be used to compare a given s are prices be aviour wit its movement. It is elpful to t e investor to make t eir Investment decision. Funds can be allocated more rationally between stocks wit knowledge of t e relations ip of price of individual wit t e movements in t e market. Market indices act as sensitive barometer of t e c anges in trading pattern in t e stock market.

Factors t#at in luence t#e construction o Inde. nu$0ers Selecting t e s ares for inclusion in t e index making.
5etermine t e relative importance of eac s are included in t e sample weig ting 'verage t e included s are into single s are measure.

1a$ple 5ist o Indices +S8- S8<S8O +S81@@ Index +S8!@@ 5ollex +S8 F@@ and Sectoral Indices I<54 text S"0 .<O F@ .<O <ifty Kunior 4%.8I G .omposite Index

<. 1er(ices +i(en 0y 1tock -.c#an+e to In(estors: 1tock e.c#an+e pro(ides liCuidity: )i.e. easy convertibility to cas * to investment in securities. 'n investor can sell is securities at any time because of t e ready market provided by t e stock exc ange. Stock exc ange provides easy marketability to corporate securities. /ro(ides collateral (alue to securities / Stock exc ange provides better value to securities as collateral for a loan. % is facilitates borrowing from a bank against securities on easy terms. * ers opportunity to participate in t#e industrial +ro't# / Stock exc ange provides capital for industrial growt . It enables an investor to participate in t e industrial development of t e country.

-sti$ates t#e 'ort# o securities/ Stock exc ange provides t e facility of knowing t e wort )i.e true market value* of investment due to ,uotations )i.e. price list* and reports publis ed regularly by t e exc ange. % is type of information guides investors as regards t eir future investments. % ey can purc ase or sell securities as per t e price trends )i.e. latest price value* in t e market. * ers sa ety in corporate in(est$ent/ 'n investor can invest is surplus money )i.e. extra money* in t e listed securities wit reasonable safety. % e risk in suc investment is reduced considerably due to t e supervision of stock exc ange aut orities on listed companies. Moreover, securities are listed only w en t e exc ange aut orities are satisfied as regards legality and solvency of company concerned. Suc scrutiny )detailed c ecking* avoids listing, of securities of unsound companies )i.e. companies wit bad financial status*. 1er(ices +i(en 0y 1tock -.c#an+e to Co$panies: =idens $arket or securities / Stock exc ange widens t e market for t e listed securities and enables t e companies to collect capital for promotion, expansion and moderni&ation purpose. It indirectly provides financial support to companies # corporations. Creates +ood'ill and reputation/ Stock exc ange en ances t e goodwill and t e reputation of t e companies w ose securities are listed. 2isting acts as a c aracter certificate given to a company. It gives prestigious position to company. Facilitates air pricin+ o listed securities / % e market price of listed securities tends to be slig tly ig er in relation to earnings and property values. /ro(ides 0etter response ro$ in(estors/ 2isted securities get better response from t e investor due to safety and security. 2isting of securities is a uni,ue service w ic stock exc anges offer to companies. It is a moral support given to stable companies. Facilitates Cuick sellin+ o securities / Stock exc ange enables companies to sell t eir securities easily and ,uickly. % is is natural as investors always prefer to invest money in listed securities. !0. 3rie(ance 7edressal Measures: (In(estor 3rie(ance 7edressal) Securities and 8xc ange +oard of India )S8+I* as been establis ed wit t e prime mandate to protect t e interest of investors in securities. It is also mandated to promote t e development of and to regulate t e securities market. 'n investor en;oys investing, if e knows ow to invest( e as full knowledge of t e market( t e market is safe and t ere are no miscreants( and % ere are arrangements to redress t e grievances. 'ccordingly, S8+IDs investor protection strategy as four elements. First, build t e capacity of investors t roug education and awareness to enable an investor to take informed investment decisions. S8+I endeavors to ensure t at t e investor learns investing, t at is, e obtains and uses information re,uired for investing, evaluates various investment options to suit is specific goals, ascertains is rig ts and obligations in a particular investment, deals t roug registered intermediaries, takes necessary precautions, seeks elp if e gets into any problem, etc. %owards t is end, S8+I as been organi&ing investor education and awareness works ops directly, and t roug investor associations and market participants, and also been encouraging market participants to organi&e similar programmes. It maintains an updated, compre ensive web site for education of investors. It publis es various kinds of cautions t roug media. It responds to t e ,ueries of investors t roug telep one, e-mails, letters, and in person for t ose w o visit S8+I office.

Second, make available every detail relevant for investment in public domain. S8+I as adopted disclosure based regulatory regime. 3nder t is framework, issuers and intermediaries disclose relevant details about t emselves, t e products, t e market and t e regulations so t at t e investor can take informed investment decisions based on suc disclosures. S8+I as prescribed and monitors various initial and continuous disclosures. % ird, ensure t at t e market as systems and practices w ic make transactions safe. S8+I as taken various measures, suc as, demateriali&ation of securities( screen based trading system, %Q! rolling settlement, etc. % e demateriali&ation of securities eliminated a large number of investor grievances emanating from servicing of paper based securities suc as bad delivery of s ares, delay#non-transfer of s ares, etc. % is facilitated migration from account period settlement to %Q! rolling settlement w ic reduced settlement risk substantially. Fourt , elp an investor in problem. S8+I as a compre ensive mec anism to facilitate redressal of investor grievances against intermediaries and listed companies. It follows up wit t e companies and intermediaries w o do not redress investorsD grievances, by sending reminders to t em and aving meetings wit t em. It takes appropriate enforcement actions )ad;udication, prosecution proceedings, directions, etc.*, as provided under t e law w ere progress in redressal of investor grievances is not satisfactory. It as provided for a compre ensive arbitration mec anism in stock exc anges and depositories for resolution of disputes of t e investors wit brokers and depository participants. It as instituted investor protection funds at 8xc anges to compensate investors w ere a broker is declared a defaulter. 5epository indemnifies investors for loss due to negligence of depository or depository participant. ?ecently, S8+I as reali&ed a receipt of unlawful gain of about ?s. -@ crore and so far disbursed about ?s. !> crore among t e investors w o lost out in t e I04 irregularities. $ ile S8+I as been taking various measures for t e investor protection, t is memorandum focuses on t e investor grievance redressal mec anism available in S8+I, its performance, measures taken in recent years for expediting t e redressal of investorsD grievances, difficulties in t e existing system and improvements planned. 7edressal o In(estorsB 3rie(ances

% e 4ffice of Investor 'ssistance and 8ducation )4I'8* acts as t e single window interface, interacting wit investors seeking assistance of S8+I. Investors can submit grievances eit er by post or and delivery at any of t e S8+I office or by electronic mode )web or e-mail*. 'll grievances received by S8+I )excluding t ose w ic refer#pertain to investigation* are individually acknowledged wit uni,ue number, w ic facilitates tracking. 5edicated investor elpline telep one numbers )@!!-!I>>A1BB " !I>>A1AA* are available for investors seeking general guidance pertaining to securities markets and to provide assistance in filing grievances. 5edicated personnel manning t e elpline also guide t e investors in filing up t e grievance submission forms as well as in determining t e appropriate aut ority for t eir first recourse. 1uidance is also provided to approac t e appropriate aut ority if t eir grievance is outside t e purview of S8+I. 3rie(ances a+ainst listed co$panies: % e grievances lodged by investors are taken up wit t e respective listed company and are continuously monitored. % e company is re,uired to respond in prescribed format in t e form of 'ction %aken ?eport )'%?*. 3pon t e receipt of '%?, t e status of grievances is updated. $ ere t e response of t e company is insufficient # inade,uate, follow up action is initiated.

3rie(ances a+ainst stock 0rokers and depository participants: 1rievances pertaining to stock brokers and depository participants are taken up wit concerned stock exc ange and depository for redressal and monitored by t e concerned department t roug periodic report obtained from t em. 3rie(ances a+ainst ot#er inter$ediaries: 1rievances pertaining to ot er intermediaries are taken up wit t em directly for redressal and are continuously monitored by concerned 5epartment of S8+I. I$pro(e$ents planned

S8+I is in t e process of upgrading t e investor grievance redressal mec anism. % e upgraded mec anism S.4?8S )S8+I .omplaints ?edress System* would be a web-based, centrali&ed grievance redress system for S8+I. % e salient features of t e new system are/ .entrali&ed grievances tracking system for t e entire S8+I. 1rievance pertaining to any of t e ?egional 4ffices of S8+I can be lodged from anyw ere. 'll grievances and 'ction %aken ?eport to be in electronic mode 'ction taken and t e current status of t e grievance can be accessed online by t e investors. Facility for online updation of 'ction %aken ?eports. S.4?8S will reduce grievance process time at S8+I since p ysical movements of grievances are not re,uired. Similarly t e grievance redressal time will be reduced since t e entire process is in electronic mode, including action taken report submitted by t e company#intermediary. % e problems arising from loss#misplacement of grievance records would be eliminated since grievances are available in electronic format. Similarly, t e problem of p ysical storage, maintenance and redressal as also been addressed due to t e proposed conversion of p ysical grievances into electronic mode. 8ac grievance will be treated as resolved #closed only after S8+IDs satisfaction. 's investors can track t eir grievance redressal status online, multiple correspondences from investors to know t e status of t eir grievances are avoided. % e software for t e new system is being developed by t e <ational Informatics .entre )<I.*, Ministry of Information %ec nology, <ew 5el i. 0resentation on S.4?8S was given to representatives of Stock 8xc anges, 5epositories, Stock +rokers, ?egistrars and 5epository 0articipants to create awareness and get suggestions# comments from t e participants. Feedback and suggestions were obtained from t e various departments of S8+I on S.4?8S. 's a compre ensive list of listed companies is currently not available wit S8+I, it is essential to ave t is list for lodging grievances against t em on S.4?8S. In view of t e above, a separate database is being developed based on t e data obtained from Stock 8xc anges. Formats for various categories of grievances received by S8+I, 'ction %aken ?eports by t e companies #intermediaries and flow of grievances wit in S8+I, its regional offices and intermediaries ave been developed. ' demonstration on S.4?8S was given to t e division c iefs and dealing officers of various departments of S8+I on t e modules developed vi&. ow to lodge a grievance, t e 'ction taken report format, etc. ' similar demonstration was also given to Stock 8xc anges, 5epositories, ?%'s and companies forming part of <IF%R and S8<S8O.

Subse,uent to t e demonstration, parallel processing in S.4?8S as commenced for grievances against stock brokers and depository participants since September 1F, !@1@ and for <IF%R and S8<S8O companies from 5ecember 1!, !@1@ for testing t e software. % e development of various ,uery modules, MIS reports and standardi&ed letters to be issued to t e complainants for different status of grievances are in progress. % is memorandum is submitted for information of and guidance from t e +oard.

Financial 1er(ices Institutions/

!!. Clearin+ Corporation o India 5i$ited (CCI5) % e ..I2 is t e clearing agency for 1overnment securities. It acts as a .entral .ounter 0arty )..0* for all transactions in 1overnment securities by interposing itself between two counterparties. In effect, during settlement, t e ..0 becomes t e seller to t e buyer and buyer to t e seller of t e actual transaction. 'll outrig t trades undertaken in t e 4%. market and on t e <5S-4M platform are cleared t roug t e ..I2. 4nce ..I2 receives t e trade information, it works out participant-wise net obligations on bot t e securities and t e funds leg. % e payable # receivable position of t e constituents )gilt account olders* is reflected against t eir respective custodians. ..I2 forwards t e settlement file containing net position of participants to t e ?+I w ere settlement takes place by simultaneous transfer of funds and securities under t e C5elivery versus 0aymentD system. ..I2 also guarantees settlement of all trades in 1overnment securities. % at means, during t e settlement process, if any participant fails to provide funds# securities, ..I2 will make t e same available from its own means. For t is purpose, ..I2 collects margins from all participants and maintains CSettlement 1uarantee FundD.

1!. 5iscount and Finance :ouse of India 2td/

5IS.43<% " FI<'<.8 :43S8 4F I<5I' )5F:I* 5:FI as been set up as a speciali&ed money market institution wit t e ob;ect of providing li,uidity to money market instruments and to develop a secondary market. % e 5F:I is a ;oint stock company owned by ?+I, public sector banks and 'll India Financial Institutions w ic ave contributed towards its paid up capital of ?s.1F@ crores. Main unctions o 6F2I - %o discount, rediscount, buy, sell, underwrite or ac,uire or sell marketable securities and negotiable instruments. - %o undertake buy back arrangements in trade and %reasury +ills. - %o carry on business as a lender, borrower broker or as a broking ouse in t e inter-bank call money market. - %o promote development of s ort term money market. - %o advise banks, govt, financial institutions or business ouses in evolving sc emes of growt , development and expansion of money market % e operations of 5F:I aimed at imparting greater flexibility to banks in t eir fund management. It participates in call, notice and term market as a borrower and lender. It also purc ases and sells %+s at auction, commercial bills, commercial papers and certificate of deposits. 'll transactions are done t roug exc ange of c e,ues drawn on ?+I to facilitate same day settlement.

!&. "ational 1ecurities 6epository 5td <S52, t e first and largest depository in India, establis ed in 'ugust 1AAI and promoted by institutions of national stature responsible for economic development of t e country as since establis ed a national infrastructure of international standards t at andles most of t e securities eld and settled in demateriali&ed form in t e Indian capital market.

'lt oug India ad a vibrant capital market w ic is more t an a century old, t e paper-based settlement of trades caused substantial problems like bad delivery and delayed transfer of title till recently. % e enactment of 5epositories 'ct in 'ugust 1AAI paved t e way for establis ment of <S52, t e first depository in India. % is depository promoted by institutions of national stature responsible for economic development of t e country as since establis ed a national infrastructure of international standard t at andles most of t e trading and settlement in dematerialised form in Indian capital market. 3sing innovative and flexible tec nology systems, <S52 works to support t e investors and brokers in t e capital market of t e country. <S52 aims at ensuring t e safety and soundness of Indian marketplaces by developing settlement solutions t at increase efficiency, minimise risk and reduce costs. 't <S52, we play a ,uiet but central role in developing products and services t at will continue to nurture t e growing needs of t e financial services industry. In t e depository system, securities are eld in depository accounts, w ic is more or less similar to olding funds in bank accounts. %ransfer of owners ip of securities is done t roug simple account transfers. % is met od does away wit all t e risks and assles normally associated wit paperwork. .onse,uently, t e cost of transacting in a depository environment is considerably lower as compared to transacting in certificates

Basic 1er(ices
3nder t e provisions of t e 5epositories 'ct, <S52 provides various services to investors and ot er participants in t e capital market like, clearing members, stock exc anges, banks and issuers of securities. % ese include basic facilities like account maintenance, dematerialisation, rematerialisation, settlement of trades t roug market transfers, off market transfers " inter-depository transfers, distribution of non-cas corporate actions and nomination# transmission. % e depository system, w ic links t e issuers, depository participants )50s*, <S52 and .learing .orporation# .learing ouse of stock exc anges, facilitates olding of securities in dematerialised form and effects transfers by means of account transfers. % is system w ic facilitates scripless trading offers various direct and indirect services to t e market participants. !4. 1ecurities Tradin+ Corporation o India 5td: S%.I was set up as a subsidiary of ?eserve +ank of India in May 1AA> wit t e ob;ective of fostering an active secondary market in 1overnment of India Securities and 0ublic Sector bonds. Securities %rading .orporation of India 2td )S%.I* was establis ed in 1AA> as a subsidiary of ?+I wit t e ob;ective of developing an active secondary market for 1oI securities and public sector bonds. In 1AAI, S%.I was aut ori&ed by ?+I as one of t e first 0rimary 5ealers in India. In 1AAN, ?+I divested a part of its olding in S%.I w ic reduced its s are olding to 1>.>1L. In !@@!, ?+I sold its remaining s are olding in S%.I to t e existing s are olders. 5uring !@@N, t e company ived off it is primary dealers ip business to its subsidiary S%.I 0rimary 5ealer 2td. S%.I is a registered Systemically Important-<on 5eposit taking <+F.. S%.IDs primarily undertakes investment and loan activities. 3nder its loan business S%.I grants loans to its customers against t e collateral of e,uity s ares and undertakes funding for subscription of s ares offered by companies under I04s. 3nder investment activities, t e company runs a proprietary book in e,uity trading, fixed income securities and commodities futures trading. % e company provides financial services for individuals, :<Is, firms and corporates. !). Credit 7atin+ Institutions. Credit 7atin+: Meanin+ .redit rating is a codified rating assigned to an issue by aut ori&ed credit-rating agencies like .?ISI2, .'?8 and I.?'. % ese agencies ave been promoted by well-establis ed financial Institutions like I5+I, I.I.I. 3nit %rust of India and reputed banks#finance companies, .redit-rating is a relative ranking arrived at by a

systematic analysis of t e strengt s and weaknesses of a company and debt instrument issued by t e company, based on financial statements, pro;ect analysis, creditwort iness factors and future prospectus of t e pro;ect and t e company appraised at a point of time. *0Decti(es o Credit 7atin+ .redit rating alms to )i* provide superior information to t e investors at a low cost( )ii* provide a sound basis for proper risk-return structure( )iii* sub;ect borrowers to a ealt y discipline, and )iv* assist in t e framing of public policy guidelines on institutional investment. % us, credit rating financial services represent anSexercise in fait building for t e development of a ealt y financial System. Credit 7atin+ In or$ation 1er(ices o India 5i$ited (C7I1I5) .?ISI2 was set up by I.I.I and 3%I in 1ABB. .?ISI2 rates debentures, fixed deposits, commercial paper, preference s ares and structured obligations. % e rating met odology followed by .?ISI2 involves and analysis of t e following factors/ )i* +usiness 'nalysis )a* Industry risk, including analysis of t e structure of t e industry, t e 5emand -supply position, a study of t e key success factors, t e nature and basis of competition, t e impact of government policies, cyclic and seasonality of t e industry. )b* Market position of t e company wit in t e industry including market s ares, product and customer diversity, competitive advantages, selling and distribution arrangements. )c* 4perating efficiency of t e company like locational advantages, labour relations ips, tec nology, manufacturing efficiency as compared to competitors. )d* 2egal position including t e terms of t e prospectus, trustees and t eir responsibilities an systems for timely payments. )ii* Financial 'nalysis )a* 'ccounting ,uality like any overstatement or understatement of profits, auditors ,ualifications in t eir reports, met ods of valuation of inventory, depreciation policy )b* 8arnings protection in terms of future earning growt for t e company and future profitability. )c* 'de,uacy of cas flows to meet debt servicing re,uirements in addition to fixed and working capital needs. 'n opinion would be formed on t e sustainability of cas flows in t e future and t e working capital management of t e company. )d* Financial flexibility including t e companyDs ability to source finds from ot er sources like group companies, ability to defer capital expenditure and alternative financing plans in times of stress. )iii* Management 8valuation/ % e ,uality and ability of t e management would be ;udged on t e basis of t e past track record, t eir goals, p ilosop ies and strategies t eir ability to overcome difficult situations, etc. In addition to ability to repay, an assessment would be made of t e managementDs willingness to pay debt. % is would involve an opinion of integrity of t e management. )iv* ?egulatory and competitive environment and regulatory framework of t e financial system would be examined keeping in view t eir likely impact on t e company. %rends in regulation # deregulation are also examined keeping in view t eir likely impact on t e company. )v* Fundamental 'nalysis a* .apital ade,uacy, i.e. t e true net work as compared to t e volume of business and risk profile assets. b* 'sset ,uality including t e companyDs credit risk management, systems for monitoring credit, exposure to individual borrowers and management of problem credits. c* 2i,uidity management. .apital structure, term matc ing of assets and liabilities and policy on li,uid assets in relation to financial commitments would be some of t e areas examined.

d* 0rofitability and financial position in terms of past istorical profits, t e spread of funds deployed and accretion to reserves. e* 8xposure to interest rate c anges and tax law c anges. % e rating process begins at t e re,uest of t e company. ' professionally ,ualified team of analysis visits t e companyDs plants and meets wit different levels of t e management including t e .84. 4n completion of t e assignment, t e team interacts wit a back-up team t at as separately collected additional industry information and prepares a report. % is report is placed before an internal committee and t ere is an open discussion to arrive at t e rating. % e rating is presented to an external committee w ic t en takes t e final decision w ic is communicated to t e company. S ould t e company volunteer any furt er information at t at point w ic could affect t e rating is passed on to t e external committee. % erefore, t e company as t e option to re,uest for a review of rating. .?ISI2 publis es t e .?ISI2 ratings in S.'< w ic is a ,uarterly publication in :indi and 1u;arat i besides 8nglis . .?ISI2 can rate mutual funds, banks and c it funds. ?ating of mutual funds as assumed importance after t e poor performance of mutual fund industry in 1AAF to 1AAI. .?ISI2 Hentured into mutual fund rating market in 1AAN. It may also start rating real estate developers and governments. .?ISI2 is e,uipped to do e,uity grading. C7I1I5 7atin+ 1y$0ols 6e0enture ''' :ig est Safety '' :ig safety ' 'de,uate safety +++ Moderate safety ++ Inade,uate safety + :ig risk . Substantial risk 5 5efault )5ebentures rated 657 are in default and in arrears of interest or principal payment or are expected to default on maturity. Suc debentures are extremely speculative and returns from t ese debentures may be reali&ed only on reorgani&ation or li,uidation*, .risil may apply plus or minus signs for ratings from '' to 5 to reflect comparative standing wit in t e category. For rating preference s ares, t e letters pf are prefixed to t e debentures rating symbols, e.g. pf''' )%riple '* Fi.ed 6eposit /ro+ra$ F''' :ig est Safety F'' :ig Safety F' 'de,uate safety F+ Inade,uate safety F. :ig risk F5 5efault or likely to be in default 1#ort : ter$ Instru$ents 0-1 Hery Strong degree of safety 0-! Strong degree of safety 0-- ade,uate degree of safety 0-> inade,uate degree of safety 1tructured *0li+ations ''' )S4* :ig est Safety

'' )S4* :ig er Safety ' )S4* 'de,uate safety +++ )S4* Moderate safety ++ )S4* Inade,uate safety +)S4* :ig risk .)S4* Substantial risk 5)S4* 5efault In(est$ent In or$ation and Credit 7atin+ A+ency (IC7A) I.?' w ic was promoted IF.I in 1AA1 carries out rating of debt instruments of manufacturing companies, finance companies and financial institutions. % e factors t at I.?' takes into consideration for rating depend on t e nature of borrowing entity. % e in erent protective factors, marketing strategies, competitive edge, level of tec nological development, operational efficiency, competence and effectiveness of management, uman resource development policies and practices, edging of risks, trends in cas flows and potential li,uidity, financial flexibility, asset ,uality and past record of servicing of debt as well as government policies affecting t e industry and unit arc examined. I.?' commences work at t e re,uest of t e prospective issuer. ' team of analysts collect data by going t roug t e companyDs books, interviewing executives and from t e in- ouse researc and data base of I.?'. I.?' offers t e company on opportunity to get t e instrument rated confidentially and also an option regarding t e use of t e rating. If, t e company decided to use t e rating. I.?' monitors it until redemption#repayment. In t e case of misstatement by t e company I.?' can disclose t e correct position. IC7A 7atin+ 1y$0ols 5on+-ter$ includin+ de0entures? 0onds and pre erences s#ares 2''' :ig est Safety 2'' :ig Safety 2' 'de,uate Safety 2+++ Moderate Safety 2++ Inade,uate safety 2+ ?isk prone 2. Substantial risk 25 5efault Mediu$ : ter$ includin+ i.ed deposits M''' :ig est Safety M'' :ig Safety M' 'de,uate safety M+ Inade,uate safety M. ?isk prone M5 5efault '-1 :ig est Safety '-! :ig Safety '-- 'de,uate safety '-> ?isk prone '-F 5efault Credit Analysis and 7esearc# in -Cuity 5i$ited (CA7-) .redit 'nalysis and ?esearc in 8,uity 2imited is t e t ird rating agency promoted by I5+I ;ointly wit investment institution, banks and finance companies in 1AA-. % ey include .anara +ank, 3nit %rust of India, .redit .apital Henture Fund )India* 2imited, )since taken over by Infrastructure 2easing and Financial

Services 2td.*. Sundaram Finance 2imited, % e Federal +ank 2imited t e Hysya +ank 2imited, First 2easing .ompany of India 2imited, I%. .lassic Finace, Jolak Ma indra Finance among ot ers. .'?8 commenced its rating operations in 4ctober, 1AA-. .redit rating by .'?8 covers all types of debt instruments suc as debentures, fixed deposits, commercial paper and structured obligations. It also undertakes credit analysis of companies for t e use of bankers, ot er lenders and business enterprises. CA7-Bs 7atin+ 1y$0ols For lon+-ter$ and $ediu$-ter$ instru$ents .'?8 ''' +est ,uality investments.

.'?8 ''' )F5*#).5*#)S4* 5ebt service payments protected by stable .as flows wit good margin .'?8 '' )F5*#).5*#)S4* :ig ,uality but rated lower because of Somew at lower margin of protection .'?8 ' 3pper medium grade.

.'?8 '' )F5*#).5*#)S4* Safety ade,uate .'?8 +++ )F5*#).5*#)S4* Sufficient safety. +ut adverse c anges in assumptions likely to weaken t e debt servicing capabilities .'?8 ++ )F5*#).5*#)S4* payments. .'?8 . )F5*#).5*#)S4* .'?8 5 )F5*#).5*#)S4* Speculative instruments. Inade,uate protection for interest and principal :ig est investment risk. 2owest category , 2ikely to be in default soon

In order of increasing risk, t e ratings for s ort-term instruments are 0?-1,0?-!, 0?-- and 0?-F and .'?8 -1, .'?8 -!, .'?8 --, .'?8 G >, and .'?8 G F for credit analysis of companies. 6u and /#elps Credit 7atin+ A+ency o India 5td.? (6C7) 5.? )India* set up in 1AAI is one of t e credit rating agencies for rating t e non-banking financial companies )for fixed deposits*. % e minimum investment grade credit rating to be assigned by t is company w ic will be acceptable to t e ?+I as been fixed at Ind-+++. Since t e criteria used by 5.? )India* for rating fixed deposits of <+F.s are not available, t e factors specific to financial companies may be noted.

Financial Instru$ents/
!6. C*MM-7CIA5 /A/-7 (C/) ' .0 is unsecured promissory note issued wit a fixed maturity, issued by a company approved by ?+I negotiable by endorsement and delivery, issued in bearer form and issued at suc discount on t e face value as may be determined by issuing company. .ommercial paper are s ort term, unsecured promissory notes issued at a

discount to face value by well- known companies t at are financial strong and carry a ig credit rating . % ey are sold directly by t e issuers to investor, or else placed by borrowers t roug agents like merc ant banks and security ouses t e flexible maturity at w ic t ey can be issued are one of t e main attraction for borrower and investor since issues can be adapted to t e needs of bot . % e .0 market as t e advantage of giving ig ly rated corporate borrowers c eaper fund t an t ey could obtain from t e banks w ile still

providing institutional investors wit to remain financially strong.

ig er interest earning t an t ey could obtain form t e banking system

t e issue of .0 imparts a degree of financial stability to t e systems as t e issuing company as an incentive

Features o C/ are: S ort term money market instrument wit a fixed maturity. 3nsecured corporate debt Issued at discount in interest bearing form Issuer promises to pay buyer some fixed amount on future period. Issued directly by a company to investor or t roug bank#merc ant banker. % ey are negotiable by endorsement and delivery. % ey are issued in multiple of ?s F lak s. % e maturity varies between 1F days to a year. <o prior approval of ?+I is needed for .0 issued. % e tangible net wort issuing company s ould not be less t an > lak s % e company fund based working capital limit s ould not less t an ?s 1@ crore. % e issuing company s all ave 0! and '! rating from .?ISI2 and I.?'. In(estors in C/s are: Individuals, banks, corporate,s <?Is, 0ublic sector units. Issued 0y / 0rivate sector companies, public sector companies, non banking finance companies)<+F.s*. In India, .0s were introduced w.e.f. 1.1.1AA@. % e issuing company as to fulfill conditions prescribed by ?+I. 4nly very financially sound companies are permitted to issue .0s. 0eriods G % e .0s are used for a minimum period of N days wit a maximum period of I mont s and a grace period on maturity. A$ount G .0s are issued in t e multiples of ?s.!F lacs and a investor as to invest minimum amount of ?s.1 crore. Issuin+ co$pany / as to comply wit provisions of Indian companies 'ct, Income %ax 'ct , negotiable instruments 'ct and guidelines prescribed by ?+I in t is regard. Ad(anta+es / Simple to issue, flexibility, easy to raise funds, ig return. !9. C-7TIFICAT- *F 6-/*1IT (C6) .5s are s ort term deposit instruments issued by banks and financial institutions wit a maturity period ranging from - mont s to one year. % ese .5s are in t e form of promissory note and are transferable from one party to anot er. 5ue to t eir negotiable nature, t ey are also known as negotiable certificate of deposit. .5s are available for subscription by individuals, corporations, trusts, associations etc. % ey are issued at discount to face value repayable on a fixed date wit out grace days and are sub;ect to stamp duty. +anks ave to maintain .?? " S2? on t e issue price of .5s. % e ?+I as issued detailed guidelines on issue of .5s according to w ic .5 could be in t e multiple of ?s. F lacs, t ey are freely transferable by endorsement and delivery after >F days of issue to a primary investor. % ree financial institutions i.e. Industrial 5ev. +ank of India, Industrial .redit " Investment .orporation of India and Industrial Finance .orporation of India ave been permitted by ?+I to issue .5s for more t an one year upto -years. In 1AA!, ?+I also permitted Industrial ?econstruction +ank of India to issue .5s upto a limit of ?s.1@@ crores. Ad(anta+es o C6s : - Most convenient instrument to earn ig er return. - 4ffer maximum li,uidity as t ey are transferable by endorsement and delivery. - It is an ideal instrument for banks wit s ort term surplus funds to invest at attractive rates.

F-AT@7-1 *F C6 1. 'll sc eduled bank ot er t an ??+ and sc eduled cooperative bank are eligible to issue .5s. !. .5s can be issued to individuals, corporation, companies, trust, funds and associations. <?I can subscribe to .5s but only on a non- repatriation basis. -. % ey are issued at a discount rate freely determined by t e issuing bank and market. >. % ey issued in t e multiple of ?s F lak sub;ect to minimum si&e of eac issue of ?s is 1@ lak . F. % e bank can issue .5s ranging from - mont t 1 year, w ereas financial institution can issue .5s ranging from 1 year to - years. !;. Treasury Bill (TB) G %reasury bills are t e main financial instruments of money market. % ese bills are issued by t e government. % e borrowings of t e government are monitored " controlled by t e central bank. % e bills are issued by t e ?+I on be alf of t e central government. % e ?+I is t e agent of 3nion 1overnment. % ey are issued by tender or tap. % e bills were sold to t e public by tender met od up to 1AIF. % ese bills were put at weekly auctions. ' treasury bill is a particular kind of finance bill. It is a promissory note issued by t e government. 3ntil 1AF@ t ese bills were also issued by t e state government. 'fter 1AF@ onwards t e central government as t e aut ority to issue suc bills. % ese bills are greater li,uidity t an any ot er kind of bills. % ey are of two kinds/ a* ad oc, b* regular. %reasury bill represents s ort term borrowing of t e 1ovt. %.+. is not ing but a promissory note issued by 1ovt under discount for a specified period stated t erein. % e 1ovt. promises to pay t e specified amount mentioned t erein to t e bearer of instrument on t e due date. %+s are issued by t e ?+I on be alf of 1ovt. for meeting t e temporary 1ovt deficits. % e rate of discount on a %.+. is fixed by ?+I. . % e rate of discount is lowest because of s ort term maturity, ig degree of li,uidity and security. Institutional investors like commercial banks, 5iscount Finance ouse of India )5F:I* and State %rading .orporation of( India )S%.I* maintain subsidiary ledger account )S12* wit ?+I t roug w ic purc ase and sale of %+s are automatically recorded t roug S12 'ccount. 5F:I is actively participated in t e auction of %+s on be alf of investors. Harious participants in %+ market are ?+I, S+I, .ommercial banks, State 1ovts, 5F:I, S%.I, 2I., 1I., <abard etc. Jey advantages of %+s are / Safety, li,uidity, ideal s ort term investment, ideal for fund management meets S2? re,uirements of banks as per ?+I decision, non-inflationary investment. Ad #oc treasury 0ills are issued to t e state governments, semi government departments " foreign ventral banks. % ey are not marketable. % e ad oc bills are not sold to t e banks " public. % e regular treasury bills are sold to t e general public " banks. % ey are freely marketable. % ese bills are sold by t e ?+I on be alf of t e central government. % e treasury bills can be categori&ed as follows/1* 1> days treasury bills/% e 1> day treasury bills as been introduced from 1AAI-AN. % ese bills are non-transferable. % ey are issued only in book entry system t ey would be redeemed at par. 1enerally t e participants in t is market are state government, specific bodies " foreign central banks. % e discount rate on t is bill will be decided at t e beginning of t e year ,uarter. !* !B days treasury bills/-

% ese bills were introduced in 1AAB. % e treasury bills in India issued on auction basis. % e date of issue of t ese bills will be announced in advance to t e market. % e information regarding t e notified amount is announced before eac auction. % e notified amount in respect of treasury bills auction is announced in advance for t e w ole year separately. ' uniform calendar of treasury bills issuance is also announced. -* A1 days treasury bills/% e A1 days treasury bills were issued from Kuly 1AIF. % ese were issued tap basis at a discount rate. % e discount rates vary between !.F to >.IL 0.a. from Kuly 1AN> t e discount rate of >.IL remained unc arged t e return on t ese bills were very low. :owever t e ?+I provides rediscounting facility freely for t is bill. >* 1B! days treasury bills/% e 1B! days treasury bills was introduced in <ovember 1ABI. % e c akravart y committee made recommendations regarding 1B! day treasury bills instruments. % ere was a significant development in t is market. % ese bills were sold t roug mont ly auctions. % ese bills were issued wit out any specified amount. % ese bills are tailored to meet t e re,uirements of t e olders of s ort term li,uid funds. % ese bills were issued at a discount. % ese instruments were eligible as securities for S2? purposes. % ese bills ave rediscounting facilities. F* -I> days treasury bills/% e -I> treasury bills were introduced by t e government in 'pril 1AA!. % ese instruments are issued to stabili&e t e money market. % ese bills were sold on t e basis of auction. % e auctions for t ese instruments will be conducted for every fortnig t. % ere will be no indication w en t ey are putting auction. % erefore t e ?+I does not provide rediscounting facility to t ese bills. % ese instruments ave been instrumental in reducing, t e net ?+I credit to t e government. % ese bills ave become very popular in India. !<. Co$$ercial Bills +ills of exc ange are negotiable instruments drawn by t e seller )drawer* on t e buyer )drawee* for t e value of t e goods delivered to im. Suc bills are called trade bills. $ en trade bills are accepted by commercial banks, t ey are called commercial bills. If t e seller wis es to give some period for payment, t e bill would be payable at a future date )usance bill*. 5uring t e currency of t e bill, if t e seller is in need of funds, e may approac is bank for discounting t e bill. 4ne of t e met ods of providing credit to customers by bank is by discounting commercial bills at a prescribed discount rate. % e bank will receive t e maturity proceeds )face value* of discounted bill from t e drawee. In t e meanw ile, if t e bank is in need of funds, it can rediscount t e bill already discounted by it in t e commercial bill rediscount market at t e market related rediscount rate.

%0. 3o(ern$ent securities (3ilt ed+ed 1ecurities) are instruments issued by 1overnment of India to raise money. 1 Secs pays interest at fixed rate on specific dates on alf-yearly basis. It is available in wide range of maturity, from s ort dated )one year* to long dated )up to t irty years*. Since it is sovereign borrowing, it is free from risk of default )credit risk*. Rou can subscribe to t ese bonds t roug ?+I or buy it in stock exc ange. %!. -Cuity 1#ares )instrument of owners ip* 8,uity s ares are instruments issued by companies to raise capital and it represents t e title to t e owners ip of a company. Rou become an owner of a company by subscribing to its e,uity capital )w ereby you will be allotted s ares* or by buying its s ares from its existing owner)s*. 's a s are older, you bear t e entrepreneurial risk of t e business venture and are entitled to benefits of owners ip like s are in t e distributed profit )dividend* etc. % e returns earned in e,uity depend upon t e profits made by t e company, companyDs future growt etc. %%. 6e$aterialisation: 5ematerialisation is t e process of converting t e p ysical form of s ares into electronic form. 0rior to dematerialisation t e Indian stock markets ave faced several problems like delay in t e transfer of certificates, forgery of certificates etc. 5ematerialisation elps to overcome t ese problems as well as reduces t e transaction time as compared to t e p ysical segment. % e article discusses t e procedures, advantages and problems of dematerialisation. % e Indian Stock markets ave seen a ma;or c ange wit t e introduction of depository system and scrip less trading mec anism. % ere were various problems like inordinate delays in t e transfer of s are certificates, delay in receipt of securities and inade,uate infrastructure in banking and postal segments to andle a large volume of application and storage of s are certificates .%o overcome t ese problems p ysical dealing in securities s ould be eliminated . % e Indian stock market introduced t e system of dematerialisation recogni&ing t e need for scrip less trading. 'ccording to t e 5epositories 'ct, 1AAI, an investor as t e option to old s ares eit er in p ysical or electronic form .% e process of converting t e p ysical form of s ares into electronic form is called dematerialisation or in s ort demats. % e converted electronic data is stored wit t e depository from w ere t ey can be traded. It is similar to a bank w ere an investor opens an account wit any of t e depository participants. 5epository participant is a representative of t e depository .% e 50 maintains t e investors securities account balances and intimates im about t e status of oldings. /rocedure or con(ertin+ t#e p#ysical s#ares into electronic or$: %o convert t e s ares into electronic form t e investor s ould open an account wit any of t e depository participants. For opening an account t e investor as to fill up t e account opening form. 'n account number )client I5* will be allotted after signing t e agreement w ic defines t e rig ts and duties of t e 50 and t e investor wis ing to open t e account. % e client I5 along wit t e 50 I5 gives a uni,ue identification in t e depository system. 'ny number of depository accounts can be opened. 'fter opening an account wit t e 50 t e investor s ould surrender t e p ysical certificates eld in is name to a depository participant. % ese certificates will be sent to t e respective companies w ere t ey will be cancelled after demateriali&ation and will credit t e investors account wit t e 50. % e securities on dematerialisation will appear as balances in t e depository account. % ese balances can be transferred like t e s ares eld in p ysical form. 5ematerialised s ares are in t e fungible form and do not ave any distinctive or certificate numbers .% e securities in t e demat can again be converted into p ysical form w ic is called as rematerialisation. 1a ety to t#e in(estor E Securities 8xc ange +oard of India )S8+I* as laid down certain rules and regulations for getting registered

as a depository participant. $it t e recommendation of t e 5epository and S8+IEs own independent evaluation a 50 will be registered under S8+I. E % e investors account will be credited#debited by t e 50 only on t e basis of valid instruction from t e client. E % e system driven mandatory reconciliation is done between t e 50 and <S52. E 0eriodic inspections of bot 50 and ?"% agent are conducted by <S52 E % e data interc ange between <S52 and its business partners is protected by standard protection measures suc as encryption E <o direct communication links exist between two business partners and all communications are routed t roug <S52. E ' statement of account is received periodically by t e investors. <S52 sends statement of account to a random sample of investors a s a counter c eck. E % e investor as t e rig t to approac <S52 if t e grievances of t e investors are not resolved by t e concerned 50. Ad(anta+es o de$aterialisation E % ere is no risk due to loss on account of fire, t eft or mutilation. E % ere is no c ance of bad delivery at t e time of selling s ares as t ere is no signature mismatc . E %ransaction costs are usually lower t an t at in t e p ysical segment. E % e bonus #rig ts s ares allotted to t e investor will be immediately credited into is account. E S are transactions like sale or purc ase and transfer#transmission etc. can be effected in a muc simpler and faster way. /ro0le$s o 6e$aterialisation. 0rior to demateriali&ation t ere was almost a gap of t ree mont s between application date and listing of s ares .5ematerialisation as reduced t is gap to a great extent. +ut ,uick money brings wit itself a ost of problems. .urrent regulations pro ibit multiple bids or applications by a single person.+ut t e investors open multiple demat accounts and make multiple applications to subscribe to I04Es in t e ope of getting allotment. % e recent I04 allotment scam proves t at even a ig ly automated system is not t e solution to prevent malpractices, if t ere is laxity. % e scam of Res bank and I5F. reveal t at t e investor banker as failed to weed out multiple applications eit er direct or benami. <ot only t e investor banker t e 50 and t e depository failed to detect t e large number of demat accounts opened wit t e same address but different names. 2ack of coordination between banks, 50Es, brokers depositories, registrars and investment bankers and clarity of t eir roles as given rise to suc problems. 7e$edial $easures E %o prevent t e sprouting of fictitious demat accounts at 50Es t e allotment of s ares s ould be c ecked t oroug ly.

E % e concerned 50 s ould strictly enforce t e Jnow your client )JR.* norms rat er t an relying on bank documents and verification of brokers. E 50Es s ould be asked to give mont ly figure of accounts opened for t e public. E .oordination and .lear definition of roles is important to weed out manipulations. % oug dematerialisation as several benefits t e recent scam as t e potential to adversely affect t e confidence of retail investors in t e capital market .%o reap t e benefits of dematerialisation S8+I, as a regulator as to place a system t at is alert and vigilant against un;ust gains. %&. /re erred 1tock 4 /re erence s#ares entitle you to receive dividend at a fixed rate. Importantly, t is dividend ad to be paid to you before dividend can be paid to e,uity s are olders. In t e event of li,uidation of t e company, your claim to t e companyDs surplus will be ig er t an t at of t e e,uity olders, but owever, below t e claims of t e companyDs creditors, bond olders # debenture olders. T Cu$ulati(e /re erence 1#ares/ ' type of preference s ares on w ic dividend accumulates if remains unpaid. 'll arrears of preference dividend ave to be paid out before paying dividend on e,uity s ares. T Cu$ulati(e Con(erti0le /re erence 1#ares: ' type of preference s ares w ere t e dividend payable on t e same accumulates, if not paid. 'fter a specified date, t ese s ares will be converted into e,uity capital of t e company. T /articipatin+ /re erence 1#ares gives you t e rig t to participate in profits of t e company after t e specified fixed dividend is paid. 0articipation rig t is linked wit t e ,uantum of dividend paid on t e e,uity s ares over and above a particular specified level. %4. 6e0entures )loan instruments* a. Corporate de0t T 6e0entures are instrument issued by companies to raise debt capital. 's an investor, you lend you money to t e company, in return for its promise to pay you interest at a fixed rate )usually payable alf yearly on specific dates* and to repay t e loan amount on a specified maturity date say after F#N#1@ years. <ormally specific asset)s* of t e company are eld ) secured* in favour of debenture olders. % is can be li,uidated, if t e company is unable to pay t e interest or principal amount. 3nlike loans, you can buy or sell t ese instruments in t e market. Types o de0entures t at are offered are as follows/ <on convertible debentures )<.5* G %otal amount is redeemed by t e issuer 0artially convertible debentures )0.5* G 0art of it is redeemed and t e remaining is converted to e,uity s ares as per t e specified terms Fully convertible debentures )F.5* G $ ole value is converted into e,uity at a specified price T Bonds are broadly similar to debentures. % ey are issued by companies, financial institutions, municipalities or government companies and are normally not secured by any assets of t e company. Types o 0onds 7e+ular Inco$e Bonds provide a stable source of income at regular, predetermined intervals Ta.-1a(in+ Bonds offer tax exemption up to a specified amount of investment, depending on t e sc eme and t e 1overnment notification. 8xamples are/ T Infrastructure +onds under Section BB of t e Income %ax 'ct, 1AI1 T <'+'?5# <:'I#?8. +onds under Section F>8. of t e Income %ax 'ct, 1AI1 T ?+I %ax ?elief +onds %). =A77A"T1

' warrant is a security issued by a company granting t e older of t e warrant t e rig t to purc ase a specified number of, s ares at a specified price any time prior to an expirable date. $arrants may be issued wit debentures or e,uity s ares. % e specific rig ts are set out in t e warrant. % e main features-of a warrant are number of s ares entitled, expiry date and state price # exercise price. 8xpiry date of warrants, generally in 3S', is F to 1@ years from t e original issue date. % e exercise price is 1@ to -@ percent above t e prevailing market price. % e $arrants ave a secondary market. % e minimum value of a warrant represents t e exc ange value between t e current price of t e s are and t e s ares purc ased at t e exercise price. $arrants ave no flotation costs and w en t ey are exercised t e firm receives additional funds at a price lower t an t e current market, yet about t ose prevailing at issue time. <ew or growing firms and venture capitalists issue warrants. % ey are also issued in mergers and ac,uisitions. $arrants are called sweeteners and ave been issued in t e recent past by several companies in India. 5ebentures issued wit warrants, like convertible debentures, carry lower coupon rates. %6. A67s and 367s: AM-7ICA" 6-/*1IT*7> 7-C-I/T1 (A67): 5epository ?eceipts issued by a company in 3S' are known as '5?s. Suc receipts are issued in accordance wit provisions stipulated by Securities and 8xc ange .ommission of 3S'. '5?s are dollar dominated and are traded in t e same way as are t e securities of companies of 3S'. '5? is a dollar denominated negotiable certificate, it represents a non-3S companyDs publicly traded e,uity. It was devised in t e last 1A!@s to elp 'mericans invest in overseas securities and assist non-3S companies wis ing to ave t eir stock traded in t e 'merican Markets. '5?s are divided into - levels based on t e regulation and privilege of eac companyDs issue. A67 5-F-5 : I: It is often step of an issuer into t e 3S public e,uity market. % e issuer can enlarge t e market for existing s ares and t us diversify to t e investor base. In t is instrument only minimum disclosure is re,uired to t e sec and issuer need not comply wit t e 3S 1''0 )1enerally 'ccepted 'ccounting 0rinciples*. % is type of instrument is traded in t e 3S 4%. Market. e issuer is not allowed to raise fres capital or list on any one of t e national stock exc anges. A67 5-F-5 : II: % roug t is level of '5?, t e company can enlarge t e investor base for existing s ares to a greater extent. :owever, significant disclosures ave to be made to t e S8.. % e company is allowed to 2ist on t e 'merican Stock 8xc ange )'M8O* or <ew Rork Stock 8xc ange )<RS8* w ic implies t at company must meet t e listing re,uirements of t e particular exc ange. A67 5-F-5 : III: % is level of '5? is used for raising fres capital t roug 0ublic offering in t e 3S .apital wit t e 8. and comply wit t e listing re,uirements of 'M8O#<RS8 w ile following t e 3S-1''0. 3lo0al 6epository 1yste$ (367Bs): ' depository receipt is basically a negotiable certificate denominated in 3S dollars t at represent non 3.S. companyDs publicly traded local currency ) Indian rupee * e,uity s ares. 15?, a negotiable certificate usually represents companyEs traded e,uity#debt. % e underlying s ares correspond to t e 15?s in a fixed ratio say 1 15?91@ s ares. 15?s are essentially e,uity instruments created by overseas depository banks )45+* w ic are aut ori&ed by t e issuing companies in India to issue 15?s to non-resident investors, outside India to facilitate investment in t e s ares of issuing companies eld wit t e nominated custodian banks in India. %9. 6eri(ati(es- *ptions and Futures: 6-FI"ITI*" *F 6-7IFATIF-1:

5erivative is a product w ose value is derived from t e value of one or more basic variables called bases )underling asset, index, or reference rate*, in a contractual manner. % e underlying asset can be e,uity, forex, commodity or any ot er asset. For example w eat farmers may wis to sell t eir arvest at a future date to eliminate t e risk of a c ange in prices by t at date. Suc a transaction is an example of a derivative. % e price of t is derivative is driven by t e spot price of w eat w ic is t e 6underlying7. Types o deri(ati(es % e most commonly used derivatives contracts are forwards, futures and options and since t is pro;ect revolves around futures and options, it will be discussed in greater detail later on. For now we take a brief look at t e various derivatives contracts t at ave come to be used. F4?$'?5S/ ' forward contract is a customi&ed contract between two entities, w ere settlement takes place on a specific date in t e future at todayDs pre-agreed price. F3%3?8S/ ' futures contract is an agreement between two parties to buy or sell an asset at a certain time in t e future at a certain price. In simpler words, futures are forward contracts ,uoted in an exc ange. 40%I4<S/ 4ptions are of two types/ - .alls and 0uts. .alls give t e buyer t e rig t but not t e obligation to buy a given ,uantity of t e underlying asset at a given price on or before a given future date. 0uts give t e buyer t e rig t, but not t e obligation to sell a given ,uantity of t e underlying asset at a given price on or before a given date. $'??'<%S/ 4ptions generally ave lives of up to one year, t e ma;ority of options traded on options exc anges aving a maximum maturity of nine mont s. 2onger dated warrants are called warrants and are generally traded over t e counter. 28'0S/ % e acronym 28'0S mean 2ong-%erm 8,uity 'nticipation Securities. % ese are options aving a maturity of up to t ree years. +'SJ8%S/ +asket options are options on portfolios of underlying assets. % e underlying asset is usually a moving average or a basket of assets. 8,uity index options are a form of basket options. S$'0S/ Swaps are private agreements between two parties to exc ange cas commonly used swaps are/ )'* I<%8?8S% ?'%8 S$'0S/ % ese entail swapping only t e interest related cas flows between t e parties in t e same currency. )+* .3??8<.R S$'0S/ % ese entail swapping bot principal and interest between t e parties, wit t e cas flows in one direction being in a different currency t an t ose in t e opposite direction. flows in t e future according to prearranged formula. % ey can be regarded as portfolios of forward contracts. % e two

 S$'0%I4<S/ Swaptions are options to buy or sell a swap t at will become operative at t e expiry of t e options. % us a swaption is an option on a forward swap. ?at er t an ave calls and puts, t e swaptions market as receiver swaptions and payer swaptions. ' receiver swaption is an option to receive fixed and pay floating. ' payer swaption is to pay fixed and receive floating. F*7=A76 C*"T7ACT I"T7*6@CTI*": ' forward contract, as it occurs in bot forward and futures markets, always involves a contract initiated at one time( performance in accordance wit t e terms of t e contract occurs at a subse,uent time. It is a simple derivative t at involves an agreement to buy# sell an asset on a certain future date at an agreed price. % is is a contract between two parties, one of w ic takes a long position and agrees to buy t e underlying asset on a specified future date for a certain specified price. % e ot er party takes a short position, agreeing to sell t e asset at t e same date for t e same price. For example, w en one orders a car, w ic is not in stock, from a dealer, e is buying a forward contract for t e delivery of a car. % e price and description of t e car are specified. % e mutually agreed price in a forward contract is known as t e delivery price. % e delivery price is c osen in suc a way t at t e value of t e forward contract to bot t e parties is &ero, so t at it costs not ing to take eit er a long or a s ort position. 4n maturity, t e contract is settled so t at t e older of t e s ort position delivers t e asset to t e older of t e long position, w o in turn pays a cas amount e,ual to t e delivery price. % e value of a forward contract is determined, c iefly by t e market price of t e underlying asset. Forward contracts are being used in India on a large scale in t e foreign exc ange market to edge t e currency risk. Forward contracts, being negotiated by t e parties on one to one basis, offer t em tremendous flexibility to articulate t e contract in terms of price, ,uantity, ,uality )in case of commodities*, delivery time and place. From t e simplicity of t e contract and its obvious usefulness in resolving uncertainty about t e future, it is not surprising t at forward contracts ave ad a very long istory. T2- F*7=A76 /7IC% e forward price of a contract is t e delivery price, w ic would render a &ero value to t e contract. Since upon initiation of t e contract, t e delivery price is so c osen t at t e value of t e contract is nil, it is obvious t at w en a forward contract is entered into, t e delivery price and forward price are identical. 's time passes t e forward price could c ange but t e delivery price would remain unc anged. 1enerally, t e forward price

at any given time varies wit t e maturity of t e contract so t at t e forward price of a contract to buy or sell in one mont would be typically different from t at of a contract wit time of t ree mont s or six mont s to maturity. F@T@7-1 C*"T7ACT I"T7*6@CTI*" ' futures contract is a type of forward contract wit ig ly standardi&ed and closely specified contract terms. 's in all forward contracts, a futures contract calls for t e exc ange of some good at a future date for cas , wit t e payment for t e good to occur at a future date. % e purc aser of a futures contract undertakes to receive delivery of t e good and pay for it, w ile t e seller of a future promises to deliver t e good and receive payment. % e price of t e good is determined at t e initial time of contracting. In a crude sense, futures markets are an extension of forward markets. % ese markets, being organi&ed# standardi&ed, are very li,uid by t eir own nature. % erefore, li,uidity problem, w ic persists in t e forward market, does not exist in t e futures market. In futures market, clearing corporation# ouse becomes t e counter-party to all t e trades or provides t e unconditional guarantee for t eir settlement i.e. assumes t e financial integrity of t e entire system. In ot er words, we may say t at in futures market, t e credit risk of t e transactions is eliminated by t e exc ange t roug t e clearing corporation# ouse. */TI*"1 I"T7*6@CTI*" T* */TI*"1 $e now come to t e next derivative product t at is traded, namely 4ptions. 4ptions are fundamentally different from forward and future contracts. 'n option gives t e older of t e option t e rig t to do somet ing. % e older need not exercise t is rig t. In contrast, in a forward or futures contract, t e two parties are committed and ave to fulfill t is commitment. 'lso it costs not ing )except margin re,uirement* to enter into a futures contract w ereas t e purc ase of t e option re,uires an upfront payment called t e option premium. T>/-1 *F */TI*" C*"T7ACT1: !. CA55 */TI*":

' call option gives t e buyer t e rig t to purc ase a specified number of s ares of a particular company from t e option writer )seller* at a specified price )called t e exercise price* up to t e expiry of t e option. In ot er words t e option buyer gets a rig t to call upon t e option seller to deliver t e contracted s ares anytime up to t e expiry of t e option. % e contract t us is only a one-way obligation, i.e. t e seller is obliged to deliver t e contracted s ares w ile t e buyer as t e c oice to exercise t e option or let t e contract lapse. % e buyer is not obliged to perform.

/*1ITI*" 37A/2:

Intrinsic (alue 2ines

Q Q 0remium b 0remium U b Stock 0rice

1tock /rice U
Intrinsic value 2ines

(a) Buy A Call

(0) =rite a Call

'n option buyer starts wit a loss e,uivalent to t e premium paid. :e as to carry on wit t e loss till t e stock market price e,uals t e exercise price as s own in )a*. % e intrinsic value of t e option up to t is price remains &ero, and t us runs along t e O-axis. 's t e stock price increases furt er, t e loss starts reducing and gets wiped out as soon as t e increase e,uals t e premium, represented on t e grap by point CbD, also called t e break even point. % e profitability line starts climbing up at an inclination of >F degrees after crossing t e O-axis at b and from t ereon moves into t e positive side of t e grap . % e inclined line beyond t e point C bD indicates t at t e option ac,uires intrinsic value and is, t us referred to as t e intrinsic value line. % e position grap )b* represents t e profitability status of t e writer w o does not own t e stock i.e. naked or an uncovered writer. % e grap is logically t e inverse of t at for t e option buyer. !. /@T */TI*" ' put option gives a buyer t e rig t to sell a specified number of s ares of a particular stock to t e option of t e writer at a specific price )called exercise price* any time during t e currency of t e option. % e seller of a put option as t e obligation to take delivery of underlying asset. $ en put position is opened, t e buyer pays premium to t e put seller. If t e price of underlying asset rises above t e strike price and stays t ere, t e put will expire wort less. % e seller of put will keep t e premium as is profit and t e put buyer will ave a cost to purc ase rig t.

0ut buyers are bearis , t ey believe t at t e price of t e underlying asset will fall and t ey may not be able to sell t e asset at a ig er price. 0ut sellers are bullis , as t ey believe t at t e price of t e underlying asset will rise. /osition 3rap#:

Intrinsic Halue 2ine Q

Stock 0rice U 0remium

1=A/1: Swap can be defined as a financial transaction in w ic two counter parties agree to exc ange streams of payments, or cas flows, over time. %wo types of swaps are generally seen i.e. interest rate swaps and currency swaps. %wo more swaps being introduced are commodity swaps and t e tax rate swaps, w ic are seen to be an extension of t e conventional swaps. ' swap results in reducing t e borrowing cost of bot parties.

Module - III: Indian Financial Institutions

!. Co$$ercial Banks- .ommercial +anks are banking institutions t at accept deposits and grant s ort-term loans and 'dvances to t eir customers wit a profit motive. In addition to giving s ort-term loans, commercial banks also give Medium-term and long-term loan to business enterprises. <ow-a-days some of t e commercial +anks are also providing ousing loan on a long-term basis to individuals.
%. 7ole o Co$$ercial Banks to'ards econo$y: .ommercial banks play an important and active role in t e economic development of a country. If t e banking system in a country is effective, efficient and disciplined it brings about a rapid growt in t e various sectors of t e economy. % e following is t e significance of commercial banks in t e economic development of a country/ 1. +anks promote capital formation !. Investment in new enterprises -. 0romotion of trade and industry >. 5evelopment of agriculture F. +alanced development of different regions I. Influencing economy activity

 N. Implementation of Monetary policy B. Moneti&ation of t e economy A. 8xport promotion cells !. Banks pro$ote capital or$ation: .ommercial banks accept deposits from individuals and businesses, t ese deposits are t en made available to t e businesses w ic make use of t em for productive purposes in t e country. % e banks are, t erefore, not only t e store ouses of t e countryDs wealt , but also provide financial resources necessary for economic development. %. In(est$ent in ne' enterprises: +usinessmen normally esitate to invest t eir money in risky enterprises. % e commercial banks generally provide s ort and medium term loans to entrepreneurs to invest in new enterprises and adopt new met ods of production. % e provision of timely credit increases t e productive capacity of t e economy. &. /ro$otion o trade and industry: $it t e growt of commercial banking, t ere is vast expansion in trade and industry. % e use of bank draft, c eck, bill of exc ange, credit cards and letters of credit etc as revolutioni&ed bot national and international trade. 4. 6e(elop$ent o a+riculture: % e commercial banks particularly in developing countries are now providing credit for development of agriculture and small scale industries in rural areas. % e provision of credit to agriculture sector as greatly elped in raising agriculture productivity and income of t e farmers. ). Balanced de(elop$ent o di erent re+ions: % e commercial banks play an important role in ac ieving balanced development in different regions of t e country. % ey elp in transferring surplus capital from developed regions to t e less developed regions. % e traders, industrialists etc of less developed regions are able to get ade,uate capital for meeting t eir business needs. % is in turn increases investment, trade and production in t e economy. 6. In luencin+ econo$ic acti(ity: % e banks can also influence t e economic activity of t e country t roug its influence on a. 'vailability of credit b. % e rate of interest If t e commercial banks are able to increase t e amount of money in circulation t#rou+# credit creation or by lowering t e rate of interest, it directly affects economic development. ' low rate of interest can encourage investment. % e credit creation activity can raise aggregate demand w ic leads to more production in t e economy. 9. I$ple$entation o Monetary policy: % e central bank of t e country controls and regulates volume of credit t roug t e active cooperation of t e banking system in t e country. It elps in bringing price stability and promotes economic growt wit in t e s ortest possible period of time. ;. Moneti,ation o t#e econo$y: % e commercial banks by opening branc es in t e rural and backward areas are reducing t e exc ange of goods t roug barter. % e use of money as greatly increased t e volume of production of goods. % e non moneti&ed sector )barter economy* is now being converted into moneti&ed sector wit t e elp of commercial banks. <. -.port pro$otion cells: In order to increase t e exports of t e country, t e commercial banks ave establis ed export promotion cells. % ey provide information about general trade and economic conditions bot inside and outside t e country to its customers. % e banks are t erefore, making positive contribution in t e process of economic development. Co$$ercial 0anks en+a+e in t#e ollo'in+ acti(ities:

0rocessing of payments by way of telegrap ic transfer, internet banking or ot er means Issuing bank drafts and bank c e,ues 'ccepting money on term deposit 2ending money by way of overdraft, installment loan or ot erwise 0roviding documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and ot er forms of off balance s eet exposures Safekeeping of documents and ot er items in safe deposit boxes .urrency exc ange Sale, distribution or brokerage, wit or wit out advice, of insurance, unit trusts and similar financial products as a 6financial supermarket7.

&. 7ole o co$$ercial 0anks to'ards custo$ers: BA"8-7 A1 A T7@1T- Main relation between +anker and .ustomer G 5ebtor and .reditor Vreversal w en bank grants 45 facilitiesW 7e$ittances $ade to 0ank to purc ase s ares, before buying stipulated no. of s ares, bank failed- unspent money bank olding in trust Banker recei(ed $oney ro$ one party on be alf of anot er )later not a customer*, bank en,uired about purpose and intimated money meanw ile being kept in suspense, banker is a trustee Banker $ust not 0e party to appropriation of funds inconsistent wit t e c aracter in w ic customer olds t em A1 A" A3-"T =#en created +uying and selling securities of customer .ollection of c e,ues, dividends, +#8 or 0#< 'cting as %rustee, 'ttorney, 8xecutor, correspondent or a representative Banker in iduciary capacity for moneys received for a specific purposed, erroneously credited to suspense account +anker as an agent bound to carry out directions of is principal conduct business of agency wit suc skill as is generally possessed by persons engaged in similar business A1 A BAI5- X1a e custody G acility offered by t e bank Bank is under no o0li+ation to accept t e property of t e customer for safe custody, it is not primary function of bank =ron+ deli(ery o t#e articles kept wit banker for safe custody to an unaut ori&ed person is conversion )putting goods for ones own use* +anks take c arge of goods, articles, securities as bailee not as trustee or agent 6istinction 0et'een 0ail$ent and A+ency G bailee does not represent bailor, bailee as no power to make contracts on bailerDs be alf :e cannot make t e bailor liable, for any acts e does A1 A" A6FI1*7 +anks are speciali&ed agencies of t e financial sector, persons seek banks advice on o $ealt management o 0ro;ect appraisal o 2oan syndication o Financial engineering o 0ortfolio management

 In case of securities market operations, registration and olding of valid certificate from S8+I, a prior condition 2essor-2essee ?elations ip- w en owns a building and lets it out to a customer 4. Broad Functions o Co$$ercial Banks % e broad functions of a commercial bank can be segregated into t ree main areas/ )i* 0ayment System )ii* Financial Intermediation )iii* Financial Services. )i* 0ayment System +anks are at t e core of t e payments system in an economy. ' payment refers to t e means by w ic financial transactions are settled. ' fundamental met od by w ic banks elp in settling t e financial transaction process is by issuing and paying c e,ues issued on be alf of customers. Furt er, in modern banking, t e payments system also involves electronic banking, wire transfers, settlement of credit card transactions, etc. In all suc transactions, banks play a critical role. )ii* Financial Intermediation % e second principal function of a bank is to take different types of deposits from customers and t en lend t ese funds to borrowers, in ot er words, financial intermediation. In financial terms, bank deposits represent t e banksE liabilities, w ile loans disbursed, and investments made by banks are t eir assets. +ank deposits serve t e useful purpose of addressing t e needs of depositors, w o want to ensure li,uidity, safety as well as returns in t e form of interest. 4n t e ot er and, bank loans and investments made by banks play an important function in c anneling funds into profitable as well as socially productive uses. )iii* Financial Services In addition to acting as financial intermediaries, banks today are increasingly involved wit offering customers a wide variety of financial services including investment banking, insurance-related services, government-related business, foreign exc ange businesses, wealt management services, etc. Income from providing suc services improves a bankEs profitability. Main unctions o a Co$$ercial 0ank % e main functions of commercial banks are accepting deposits from t e public and advancing t em loans. :owever, besides t ese functions t ere are many ot er functions w ic t ese banks perform. 'll t ese functions can be divided under t e following eads/ 1. 'ccepting deposits !. 1iving loans -. 4verdraft >. 5iscounting of +ills of 8xc ange F. Investment of Funds I. 'gency Functions N. Miscellaneous Functions 1. Acceptin+ 6eposits: % e most important function of commercial banks is to accept deposits from t e public. Harious sections of society, according to t eir needs and economic condition, deposit t eir savings wit t e banks. For example, fixed and low income group people deposit t eir savings in small amounts from t e points of view of security, income and saving promotion. 4n t e ot er and, traders and businessmen deposit t eir savings in t e banks for t e convenience of payment. % erefore, keeping t e needs and interests of various sections of society, banks formulate various deposit sc emes. 1enerally, t ere ire t ree types of deposits w ic are as follows/

)i* Current 6eposits: % e depositors of suc deposits can wit draw and deposit money w enever t ey desire. Since banks ave to keep t e deposited amount of suc accounts in cas always, t ey carry eit er no interest or very low rate of interest. % ese deposits are called as 5emand 5eposits because t ese can be demanded or wit drawn by t e depositors at any time t ey want. Suc deposit accounts are ig ly useful for traders and big business firms because t ey ave to make payments and accept payments many times in a day. )ii* Fi.ed 6eposits: % ese are t e deposits w ic are deposited for a definite period of time. % is period is generally not less t an one year and, t erefore, t ese are called as long term deposits. % ese deposits cannot be wit drawn before t e expiry of t e stipulated time and, t erefore, t ese are also called as time deposits. % ese deposits generally carry a ig er rate of interest because banks can use t ese deposits for a definite time wit out aving t e fear of being wit drawn. )iii* 1a(in+ 6eposits: In suc deposits, money upto a certain limit can be deposited and wit drawn once or twice in a week. 4n suc deposits, t e rate of interest is very less. 's is evident from t e name of suc deposits t eir main ob;ective is to mobili&e small savings in t e form of deposits. % ese deposits are generally done by salaried people and t e people w o ave fixed and less income. !. 3i(in+ 5oans: % e second important function of commercial banks is to advance loans to its customers. +anks c arge interest from t e borrowers and t is is t e main source of t eir income. +anks advance loans not only on t e basis of t e deposits of t e public rat er t ey also advance loans on t e basis of depositing t e money in t e accounts of borrowers. In ot er words, t ey create loans out of deposits and deposits out of loans. % is is called as credit creation by commercial banks. Modern banks give mostly secured loans for productive purposes. In ot er words, at t e time of advancing loans, t ey demand proper security or collateral. 1enerally, t e value of security or collateral is e,ual to t e amount of loan. % is is done mainly wit a view to recover t e loan money by selling t e security in t e event of non-refund of t e loan. 't limes, banks give loan on t e basis of personal security also. % erefore, suc loans are called as unsecured loan. +anks generally give following types of loans and advances/ )i* Cas# Credit: In t is type of credit sc eme, banks advance loans to its customers on t e basis of bonds, inventories and ot er approved securities. 3nder t is sc eme, banks enter into an agreement wit its customers to w ic money can be wit drawn many times during a year. 3nder t is set up banks open accounts of t eir customers and deposit t e loan money. $it t is type of loan, credit is created. )iii* 6e$and loans: % ese are suc loans t at can be recalled on demand by t e banks. % e entire loan amount is paid in lump sum by crediting it to t e loan account of t e borrower, and t us entire loan becomes c argeable to interest wit immediate effect. )iv* 1#ort-ter$ loan: % ese loans may be given as personal loans, loans to finance working capital or as priority sector advances. % ese are made against some security and entire loan amount is transferred to t e loan account of t e borrower. -. *(er-6ra t: +anks advance loans to its customerDs upto a certain amount t roug over-drafts, if t ere are no deposits in t e current account. For t is banks demand a security from t e customers and c arge very ig rate of interest. >. 6iscountin+ o Bills o -.c#an+e: % is is t e most prevalent and important met od of advancing loans to t e traders for s ort-term purposes. 3nder t is system, banks advance loans to t e traders and business firms by discounting t eir bills. In t is way, businessmen get loans on t e basis of t eir bills of exc ange before t e time of t eir maturity.

F. In(est$ent o Funds: % e banks invest t eir surplus funds in t ree types of securitiesY1overnment securities, ot er approved securities and ot er securities. 1overnment securities include bot , central and state governments, suc as treasury bills, national savings certificate etc. 4t er securities include securities of state associated bodies like electricity boards, ousing boards, debentures of 2and 5evelopment +anks units of 3%I, s ares of ?egional ?ural banks etc. I. A+ency Functions: +anks function in t e form of agents and representatives of t eir customers. .ustomers give t eir consent for performing suc functions. % e important functions of t ese types are as follows/ )i* +anks collect c e,ues, drafts, bills of exc ange and dividends of t e s ares for t eir customers. )ii* +anks make payment for t eir clients and at times accept t e bills of exc ange/ of t eir cus tomers for w ic payment is made at t e fixed time. )iii* +anks pay insurance premium of t eir customers. +esides t is, t ey also deposit loan installments, income-tax, interest etc. as per directions. )iv* +anks purc ase and sell securities, s ares and debentures on be alf of t eir customers. )v* +anks arrange to send money from one place to anot er for t e convenience of t eir customers. N. Miscellaneous Functions: +esides t e functions mentioned above, banks perform many ot er functions of general utility w ic are as follows/ )i* +anks make arrangement of lockers for t e safe custody of valuable assets of t eir custom ers suc as gold, silver, legal documents etc. )ii* +anks give reference for t eir customers. )iii* +anks collect necessary and useful statistics relating to trade and industry. )iv* For facilitating foreign trade, banks undertake to sell and purc ase foreign exc ange. )v* +anks advise t eir clients relating to investment decisions as specialist )vi* +ank does t e under-writing of s ares and debentures also. )vii* +anks issue letters of credit. )viii* 5uring natural calamities, banks are ig ly useful in mobili&ing funds and donations.

)ix* +anks provide loans for consumer durables like .ar, 'ir-conditioner, and Fridge etc. 7e+ulations:

BANKING REGULATIONS ACT 1949

% e +anking ?egulation 'ct was passed as t e +anking .ompanies 'ct 1A>A and came into force wef 1I.-.>A. Subse,uently it was c anged to +anking ?egulations 'ct 1A>A wef @1.@-.II. Summary of some important sections is provided ereunder. % e section no. is given at t e end of eac item. For details, kindly refer t e bare 'ct.

+anking means accepting for t e purpose of lending or investment of deposits of money from public repayable on demand or ot erwise and wit drawable by c e,ue, drafts order or ot erwise )F )i* )b**. +anking company means any company w ic transacts t e business of banking )F)i*)c* %ransact banking business in India )F )i* )e*. 5emand liabilities are t e liabilities w ic must be met on demand and time liabilities means liabilities w ic are not demand liabilities )F)i*)f* Secured loan or advances means a loan or advance made on t e security of asset t e market value of w ic is not at any time less t an t e amount of suc loan or advances and unsecured loan or advances means a loan or advance not secured )F)i*) *. 5efines business a banking company may be engaged in like borrowing, lockers, letter of credit, traveler c e,ues, mortgages etc )I)1*. States t at no company s all engage in any form of business ot er t an t ose referred in Section I)1* )I)!*. For banking companies carrying on banking business in India to use at least one word bank, banking, banking company in its name )N*. ?estrictions on business of certain kinds suc as trading of goods etc. )B* 0ro ibits banks from olding any immovable property owsoever ac,uired except as ac,uired for its own use for a period exceeding N years from ac,uisition of t e property. ?+I may extend t is period by five years )A* 0ro ibitions on employments like . airman, 5irectors etc )1@* 0aid up capital, reserves and rules relating to t ese )11 " 1!* +anks not to pay any commission, brokerage, discount etc. more t an !.FL of paid up value of one s are )1-* 0ro ibits a banking company from creating a c arge upon any unpaid capital of t e company. )1>* Section 1>)'* pro ibits a banking company from creating a floating c arge on t e undertaking or any property of t e company wit out t e ?+I permission. 0ro ibits payment of dividend by any bank until all of its capitali&ed expenses ave been completely written off )1F* %o create reserve fund and !@L of t e profits s ould be transferred to t is fund before any dividend is declared )1N )1** .as reserve - <on-sc eduled banks to maintain -L of t e demand and time liabilities by way of cas reserves wit itself or by way of balance in a current account wit ?+I )1B* 0ermits banks to form subsidiary company for certain purposes )1A* <o banking company s all old s ares in any company, w et er as pledgee, mortgagee or absolute owners of any amount exceeding -@L of its own paid up s are capital Q reserves or -@L of t e paid up s are capital of t at company w ic ever is less. )1A)!*. ?estrictions on banks to grant loan to person interested in management of t e bank )!@* 0ower to ?eserve +ank to issue directive to banks to determine policy for advances )!1* 8very bank to maintain a percentage of its demand and time liabilities by way of cas , gold, unencumbered securities !FL->@L as on last Friday of !nd preceding fortnig t )!>*. ?eturn of unclaimed deposits )1@ years and above* )!I* 8very bank as to publis its balance s eet as on Marc -1st )!A*. +alance s eet is to be got audited from ,ualified auditors )-@ )i** 0ublis balance s eet and auditors report wit in - mont s from t e end of period to w ic t ey refer. ?+I may extend t e period by furt er t ree mont )-1* 0revents banks from producing any confidential information to any aut ority under Indl 5isputes 'ct. )->'* ?+I aut ori&ed to undertake inspection of banks )-F*. 'mendment carried in t e 'ct during 1AB- empowers .entral 1ovt to frame rules specifying t e period for w ic a bank s all preserve its books )>F-y*, nomination facilities )>FP' to PF* and return a paid instrument to a customer by keeping a true copy )>FP*.

.ertain returns are also re,uired to be sent to ?+I by banks suc as mont ly return of li,uid assets and liabilities )!>--*, ,uarterly return of assets and liabilities in India )!F*, return of unclaimed deposits i.e. 1@ years and above )!I* and mont ly return of assets and liabilities )!N-1*.

). /u0lic 1ector Banks % ese are banks w ere ma;ority stake is eld by t e 1overnment of India or ?eserve +ank of India. 8xamples of public sector banks are/ State +ank of India 0ublic sector banks are t ose in w ic t e ma;ority stake is eld by t e 1overnment of India )1oI*. 0ublic sector banks toget er make up t e largest category in t e Indian banking system. % ere are currently !N public sector banks in India. % ey include t e S+I and its I associate banks )suc as State +ank of Indore, State +ank of +ikaner and Kaipur etc*, 1A nationalised banks )suc as 'lla abad +ank, .anara +ank etc* and I5+I +ank 2td. 0ublic sector banks ave taken t e lead role in branc expansion, particularly in t e rural areas. 6. /ri(ate 1ector Banks In case of private sector banks ma;ority of s are capital of t e +ank is eld by private individuals. % ese banks are registered as companies wit limited 2iability. In t is type of banks, t e ma;ority of s are capital is eld by private individuals and corporates. <ot all private sector banks were nationali&ed in 1AIA, and 1AB@. % e private banks w ic were not nationali&ed are collectively known as t e old private sector banks and include banks suc as % e Kammu and Jas mir +ank 2td., 2ord Jris na +ank 2td etc. 8ntry of private sector banks was owever pro ibited during t e post-nationali&ation period. In Kuly 1AA-, as part of t e banking reform process and as a measure to induce competition in t e banking sector, ?+I permitted t e private sector to enter into t e banking system. % is resulted in t e creation of a new set of private sector banks, w ic are collectively known as t e new private sector banks. 's at end Marc , !@@A t ere were N new private sector banks and 1F old private sector banks operating in India. For example/ % e Kammu and Jas mir +ank 2td., +ank of ?a;ast an 2td., 5evelopment .redit +ank 2td, 2ord Jris na +ank 2td., + arat 4verseas +ank 2td.,1lobal %rust +ank, Hysya +ank, etc. 9. Forei+n Banks Foreign banks ave t eir registered and ead offices in a foreign country but operate t eir branc es in India. % e ?+I permits t ese banks to operate eit er t roug branc es( or t roug w olly-owned subsidiaries. % e primary activity of most foreign banks in India as been in t e corporate segment. :owever, some of t e larger foreign banks ave also made consumer financing a significant part of t eir portfolios. % ese banks offer products suc as automobile finance, ome loans, credit cards, ouse old consumer finance etc. Foreign banks in India are re,uired to ad ere to all banking regulations, including priority-sector lending norms as applicable to domestic banks. In addition to t e entry of t e new private banks in t e mid-A@s, t e increased presence of foreign banks in India as also contributed to boosting competition in t e banking sector. % ese banks are registered and ave t eir ead,uarters in a foreign country but operate t eir branc es in our country. Some of t e foreign banks operating in our country are :ong Jong and S ang ai +anking .orporation ):S+.*, .itibank, 'merican 8xpress +ank, Standard " . artered +ank, 1rindlayDs +ank, etc. % e number of foreign banks operating in our country as increased since t e financial sector reforms of 1AA1 6e(elop$ent Banks: 5evelopment banks are uni,ue financial institution t at act as catalytic agents in promoting balanced development of t e country and t ereby aid in t e economic growt of t e country. 5evelopment +ank is a financial institution dedicated to fund new and upcoming businesses and economic development pro;ects by e,uity capital or loan capital. 5evelopment banks are t ose financial institutions engaged in t e promotion and development of industry, agriculture and ot er key sectors. Definition

6' development bank is like a living organism t at reacts to t e social-economic environment and its success depends on reacting most aptly to t at environment7 6e(elop$ent Banks in India: 1. % e Industrial finance corporation of India )IF.I*-1A>B. !. % e industrial 5evelopment +ank of India )I5+I*-1AI>. -. % e Industrial ?econstruction +ank of India )I?+I*-1AN1. >. % e Industrial .redit and Investment .orporation of India )I.I.I*-1AFF 8tc.

Features o a de(elop$ent 0ank.

' development bank as t e following features or c aracteristics/ 1* ' development bank does not accept deposits from t e public like commercial banks and ot er financial institutions w o entirely depend upon saving mobili&ation. !* It is a speciali&ed financial institution w ic provides medium term and long-term lending facilities. -* It is a multipurpose financial institution. +esides providing financial elp it undertakes promotional activities also. It elps enterprises from planning to operational level. >* It provides financial assistance to bot private as well as public sector institutions. F* % e role of a development bank is of gap filler. $ en assistance from ot er sources is not sufficient t en t is c annel elps. It does not compete wit normal c annels of finance. I* 5evelopment banks primarily aim to accelerate t e rate of growt . It elps industriali&ation specific and economic development in general N* % e ob;ective of t ese banks is to serve public interest rat er t an earning profits. B* 5evelopment banks react to t e socio-economic needs of development.
;. 7ole o de(elop$ent 0anks in t#e Indian econo$y Capital For$ation 1upport to t#e Capital Market Forei+n Currency 5oans Assistance to Back'ard Areas /ro$otion o "e' -ntrepreneurs I$pact on Corporate Culture

A. Industrial Finance Corporation o India (IFCI) 't t e same time raw industrial units were to be set up for industriali&ing t e country. 1overnment of India came forward to set up t e Industrial Finance .orporation of India )IF.I* in Kuly 1A>B under a Special 'ct. % e Industrial 5evelopment +ank of India, sc eduled banks, insurance companies, investment trusts and cooperative banks are t e s are olders of IF.I. % e 1overnment of India as guaranteed t e repayment of capital and t e payment of a minimum annual dividend. Since Kuly I, 1AA-, t e corporation as been converted into a company and it as been given t e status of a 2td. .ompany wit t e name Industrial Finance .orporations of India 2td. IF.I as got itself registered wit .ompanies 'ct, 1AFI. +efore Kuly I,

1AA-, general public was not permitted to old s ares of IF.I, only 1overnment of India, ?+I, Sc eduled +anks, Insurance .ompanies and .o-operative Societies were olding t e s ares of IF.I. Functions o IFCI IF.I is aut ori&ed to render financial assistance in one or more of t e following forms/ 1. !. -. >. F. I. 1ranting loans or advances to or subscribing to debentures of industrial concerns repayable wit in !F years. 'lso it can convert part of suc loans or debentures into e,uity s are capital at its option. 3nderwriting t e issue of industrial securities i.e. s ares, stock, bonds, @r debentures to be disposed off wit in N years. Subscribing directly to t e s ares and debentures of public limited companies. 1uaranteeing of deferred payments for t e purc ase of capital goods from abroad or wit in India. 1uaranteeing of loans raised by industrial concerns from sc eduled balls or state co-operative banks. 'cting as an agent of t e .entral 1overnment or t e $orld +ank in respect of loans sanctioned to t e industrial concerns. IF.I provides financial assistance to eligible industrial concerns regardless of t eir si&e. :owever, now-adays, it entertains applications from t ose industrial concerns w ose pro;ect cost is about ?s. ! crores because upto pro;ect cost of ?s. ! crores various state level institutions )suc as Financial .orporations, SI5.s and banks* are expected to meet t e financial re,uirements of viable concerns. $ ile approving a loan application, IF.I gives due consideration to t e feasibility of t e pro;ect, its importance to t e nation, development of t e backward areas, social and economic viability, etc. % e most of t e assistance sanctioned by IF.I as gone to industries of national priority suc as fertili&ers, cement, power generation, paper, industrial mac inery etc. % e corporation is giving a special consideration to t e less developed areas and assistance to t em as been stepped up. It as sanctioned nearly >A per cent of its assistance for pro;ects in backward districts. % e corporation as recently been participating in soft loan sc emes under w ic loans on confessional rates are given to units in selected industries. Suc assistance is given for moderni&ation, replacement and renovation of plant and e,uipment. IF.I introduced a sc eme for sick units also. % e sc eme was for t e revival of sick units in t e tiny and small scale sectors. 'not er sc eme was framed for t e self-employment of unemployed young persons. % e corporation as diversified not merc ant banking also. Financing of leasing and ire purc ase companies, ospitals, e,uipment leasing etc. were t e ot er new activities of t e corporation in t e last few years. /ro$otional Acti(ities % e IF.I as been playing very important role as a financial institution in providing financial assistance to eligible industrial concerns. :owever, no less important is its promotional role w ereby it as been creating industrial opportunities also. It as been taking up directly as well as indirectly( suc steps and activities are regarded necessary for t e acceleration of t e process of industriali&ation in t e country. % e promotional role of IF.I as been to fill t e gaps, eit er in t e institutional infrastructure for t e promotion and growt of industries, or in t e provision of t e muc needed guidance in pro;ect intensification, formulation, implementation and operation, etc. to t e new tiny, small-scale or medium scale entrepreneurs or in t e efforts at improving t e productivity of uman and material resources. )a* 6e(elop$ent o Back'ard Areas: : % e main t rust of all financial institutions as been to remover regional imbalances by promoting industriali&ation of backward areas. IF.I introduce a sc eme of confessional finance for pro;ects set up in backward areas. % e backward-districts were divided into t ree categories depending upon t e state of development t ere. 'll t ese categories were eligible for concessional finance. <early F@ per cent of total lending of IF.I as been to develop backward areas.

)b* /ro$otional 1c#e$es:- IF.I as been operating six promotional sc emes wit t e ob;ect of elping entrepreneurs to set up new units, broadening t e entrepreneurial base, encouraging t e adoption of new tec nology, tackling Ct e problem of sickness and promoting opportunities for self development and . self employment of unemployed persons etc. % ese sc emes are as suc / 1. 1u0sidy or Adoptin+ Indi+enous Tec#nolo+y:- % e pro;ects w ic use indigenously developed tec nology are entitled to a concession in t e form of subsidy covering interest payments due to IF.I during t e first t ree years of operations, extendable to five years. !. Meetin+ Cost o Market 1tudies: - % e entrepreneurs setting up medium si&ed industrial pro;ects for t e first time can avail NF per cent of t e cost of market survey#study sub;ect to a ceiling of ?s. 1F,@@@ provided it is andled by %ec nical .onsultancy 4rgani&ation. . -. Meetin+ Cost o Feasi0ility 1tudies/ G IF.I provides subsidy for t e fees paid for consultancy assignments relating to feasibility, pro;ect reports etc. % e amount allowable is B@ per cent of t e fees of ?s. N,F@@ w ic ever is less. % is limit is ?s. B,F@@ or 1@@ per cent of t e total fees w ic ever is less for andicapped or sc eduled caste persons. >. /ro$otin+ 1$all 1cale and Ancillary Industries: : For t e identification of products suitable for ancillary or furt er processing in small scale sector and preparation of feasibility reports a subsidy of ?s.@.1 million per annum for tec nical consultancy organi&ation is allowed. F. 7e(i(al o 1ick @nits: : % ere is a subsidy to t e extent of B@ per cent or ?s. F,@@@ )w ic ever is less* for t e fees c arged by a tec nical consultancy organi&ation for carrying out a diagnostic study or for t e implementation of re abilitation programme. % is facility is allowed to tiny units or units in small scale sector.D 1el -de(elop$ent and 1el e$ploy$ent 1c#e$e: - 'n unemployed person in t e age group of !1 to -F years may be allowed a soft loan for providing margin money for getting a loan from a bank or a financial institution. % e soft loan at interest free rate in first year and as confessional interest later on. % e amount available under t is sc eme is !FL of margin money sub;ect to ?s. F@@@. !0. Industrial 6e(elop$ent Bank o India % e Industrial 5evelopment +ank of India is t e apex financial institution in t e field of development banking in t e country. It was establis ed in Kuly, 1AI> wit t e twin ob;ectives of/ (a) meeting t e growing financial needs of rapid industriali&ation in t e country, and )b* coordinating t e activities and assisting t e growt of all institutions engaged in financing industries. It is an organi&ation wit sufficiently large financial resources w ic not only provides direct financial assistance to t e large and medium-large industrial units, but also elps t e small and medium industries indirectly by extending refinancing and re-discounting facilities to ot er industrial financing institutions. % us, t e primary aim of t e I5+I as been to integrate t e structure of industrial financing institutions and to fill t e gap between demand and supply of term finance in t e country. Initially, t e I5+I was set up as a w olly owned subsidiary of t e ?eserve +ank of India, but, in 1ANI, it was taken over by t e 1overnment of India and was made an autonomous institution.

Functions o Industrial 6e(elop$ent Bank o India Harious functions of or types of assistance to be provided by t e I5+I are as follows/ (i) 6irect Financial Assistance: % e I5+I provides direct financial assistance to t e industrial concerns in t e form of (a) granting loans and advances( and (b) subscribing to, purc asing or underwriting t e issues of stocks, bonds or debentures. (ii) Indirect Financial Assistance: % e I5+I provides indirect financial assistance to t e small and medium industrial concerns t roug ot er financial institution, suc as, State Finance .orporations, State Industrial 5evelopment .orporations, .ooperative banks, regional rural banks, commercial banks. % e 'ssistance to t ese institutions include :(a) refinancing of loans given by t e institutions( subscribing to t eir s ares and bonds( )c* rediscounting of bills. (iii) 6e(elop$ent Assistance: % e creation of t e 5evelopment 'ssistance Fund is t e special feature of t e I5+I. % e Fund is used to provide assistance to t ose industries w ic are not able to obtain funds in t e normal course mainly because of eavy investment involved or low expected rate of returns. % e financial resources of t e Fund mainly come from contributions made by t e government in t e form of loans, gifts, donations, etc( and from ot er sources. 'ssistance from t e Fund re,uires t e prior approval by t e government. (i() /ro$otional Function: +esides providing financial assistance, t e I5+I also undertakes various promotional activities suc as marketing and investment researc , tec no- economic surveys. It provides tec nical and administrative advice for promotion, expansion and better management of t e industrial concerns. Types o assistance 0y I6BI Harious types of assistance to be provided by t e I5+I are as follows/ (i) 6irect Financial Assistance: % e I5+I provides direct financial assistance to t e industrial concerns in t e form of (a) granting loans and advances( and (b)subscribing to, purc asing or underwriting t e issues of stocks, bonds or debentures. (ii) Indirect Financial Assistance: % e I5+I provides indirect financial assistance to t e small and medium industrial concerns t roug ot er financial institution, suc as, State Finance .orporations, State Industrial 5evelopment .orporations, .ooperative banks, regional rural banks, commercial banks. % e 'ssistance to t ese institutions include :(a) refinancing of loans given by t e institutions( subscribing to t eir s ares and bonds( )c* rediscounting of bills. (iiI) 6e(elop$ent Assistance: % e creation of t e 5evelopment 'ssistance Fund is t e special feature of t e I5+I. % e Fund is used to provide assistance to t ose industries w ic are not able to obtain funds in t e normal course mainly because of eavy investment involved or low expected rate of returns. % e financial resources of t e Fund mainly come from contributions made by t e government in t e form of loans, gifts, donations, etc( and from ot er sources. 'ssistance from t e Fund re,uires t e prior approval by t e government. (i() /ro$otional Function: +esides providing financial assistance, t e I5+I also undertakes various promotional activities suc as marketing and investment researc , tec no- economic surveys. It provides tec nical and administrative advice for promotion, expansion and better management of t e industrial concerns. !!. 1TAT- FI"A"CIA5 C*7/*7ATI*"1:

't t e beginning of t e fifties t e govt. found t at of ac ieving rapid industriali&ation separate institution s ould be set up t at cater exclusively to t e needs of t e small medium sector t erefore t e SF. was act passed by t e parliament in 1AF1 to enable t e state govt. establis SF. t e basic ob;ective for w ic t e SF. was set up was to provide financial assistance to small and medium scale industries estates. % e SF. provides finance in t e form of log term loan, by underwriting issue of s are and debentures and standing guarantee for loans raised from ot er institution and form t e general public. !%. "ational Bank o A+riculture and 7ural 6e(elop$ent ("ABA76) <ational +ank of 'griculture and ?ural 5evelopment )<'+'?5* was set up on Kuly 1!, 1AB! under 'ct of parliament as a central or apex institutions for financing agricultural and rural sectors. <ational +ank for 'griculture and ?ural 5evelopment )<'+'?5* is an apex development bank in India. It as been accredited wit 6matters concerning policy, planning and operations in t e field of credit for agriculture and ot er economic activities in rural areas in India7. <'+'?5 was establis ed by an act of 0arliament on 1! Kuly 1AB! to implement t e National Bank for Agriculture and Rural Development Act !" . It replaced t e 'gricultural .redit 5epartment )'.5* and ?ural 0lanning and .redit .ell )?0..* of ?eserve +ank of India and 'gricultural ?efinance and 5evelopment .orporation )'?5.*. It is one of t e premiere agencies to provide credit in rural areas. <'+'?5 is set up as an apex 5evelopment +ank wit a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, andicrafts and ot er rural crafts. It also as t e mandate to support all ot er allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. It provides s ort term finance assistance for period of 1B mont s to state co-operative banks, commercial banks, ??+s, and so on for wide range of activities in t e areas of production, trading, marketing and storage. It also gives loans up to !@ years of maturity to t e state government to enable t em to subscribe to t e s are capital of co-operative credit societies. <'+'?5 serves as an apex financing agency for t e institutions providing investment and production credit for promoting t e various developmental activities in rural areas. <'+'?5 takes measures towards institution building for improving absorptive capacity of t e credit delivery system, including monitoring, formulation of re abilitation sc emes, restructuring of credit institutions, training of personnel, etc. <'+'?5 co-ordinates t e rural financing activities of all institutions engaged in developmental work at t e field level and maintains liaison wit 1overnment of India, State 1overnments, ?eserve +ank of India )?+I*and ot er national level institutions concerned wit policy formulation and also undertakes monitoring and evaluation of pro;ects refinanced by it. <'+'?5Ds refinance is available to State .o-operative 'griculture and ?ural 5evelopment +anks )S.'?5+s*, State .o-operative +anks )S.+s*, ?egional ?ural +anks )??+s*, .ommercial +anks ).+s* and ot er financial institutions approved by ?+I. $ ile t e ultimate beneficiaries of investment credit can be individuals, partners ip concerns, companies, State-owned corporations or co-operative societies, production credit is generally given to individuals. "ABA76 pro(ides:

2ong term finance for minor irrigation facilities, plantations, orticulture, land development, farm mec ani&ations, animal usbandry, fis eries etc. S ort term loan assistance fir financing of seasonal agricultural operations, marketing of crops, purc ase#procurement#distribution of agricultural inputs etc.

Medium loan facilities for approved agricultural purposes( $orking capital refinance for andloom weavers ?efinance for financing government- sponsored programmes suc as I?50, ?o&gar Rogna etc. Besides t#is pi(otal role? "ABA76 also: 'cts as a coordinator in t e operations of rural credit institutions 8xtends assistance to t e government, t e ?eserve +ank of India and ot er organi&ations in matters relating to rural development 4ffers training and researc facilities for banks, cooperatives and organi&ations working in t e field of rural development :elps t e state governments in reac ing t eir targets of providing assistance to eligible institutions in agriculture and rural development 'cts as regulator for cooperative banks and ??+s 3eneral aspects o "ABA76: <'+'?5 s ould be a managing agency of 1overnment of India for public investments in rural India. It s ould be t e c ief overseer, grand planner for public investment and ensure t at eac rupee spent in rural India generates a net positive return for rural India. <'+'?5 s ould not resort to passive funding. <'+'?5 as to make t ings appen by organi&ing people and providing knowledge. % e strengt of <'+'?5 is its good networking capabilities. It can act as a coordinating agency for all t e developmental works taking place at t e grass roots level. % e greatest comparative advantage of <'+'?5 is its ability to decontaminate t e effects of subsidy and making public spending more efficient. It is a folly for <'+'?5 to become a .ommercial +ank. It is t e only institution w ic can andle public finance better t an t e government. !%. 7-3I*"A5 7@7A5 BA"81. ' beginning to set up t e ??+ was made in later alf of 1ANF in accordance wit t e recommendations of banking commission it was intended t at t e ??+ would operate exclusively in rural areas and would provide credit and ot er facility to small and marginal farmers, agricultural laborer, artisans, and small entrepreneurs. % ey now carry all types of banking business generally wit in one to five districts. % e ??+ can be set up provided by public sector bank sponsor t em. t e owners ip capital of t ese banks is eld by t e central govt. )F@ L* ,concerned state govt. )1F L*, and t e sponsor bank )-FL* . t ey are in effect owned by t e govt. and t ere is a little local participation in owners ip and administration of t ese bank also . furt er t ey ave a large number of branc es. !&. 1$all scale Industrial 6e(elop$ent Bank o India (1I6BI) % e 1$all scale Industrial 6e(elop$ent Bank o India (1I6BI) was set up in 4ctober 1ABA under t e 'ct of parliament as a w olly owned subsidiary of t e I5+I. It is t e central or apex or principal institution w ic

oversees, co-ordinates and furt er strengt ens various arrangements for providing financial and non-financial assistance to small-scale, tiny, and cottage industries. SI5+I ob;ectives are/

%o initiate steps for tec nological up gradation and moderni&ation of existing units %o expand c annels for marketing of SSI sector products in India and abroad %o promote employment-oriented industries in semi-urban areas and to c eck migration of population to big cities. It operates two funds/ Small Industries 5evelopment Fund and Small Industries 5evelopment 'ssistance Fund. % e operation of t e former and of <ational 8,uity Fund w ic were earlier looked by I5+I is now andled by t e SI5+I. Its financial assistance is c anneled t roug t e existing credit delivery system comprising <SI., SF.s, SI5.s, SSI5.s, commercial banks, co-operative banks and ??+s. % e total number of institutions eligible for assistance from SI5+I is A@@. It discounts and rediscounts bills arising from t e sale of mac inery to small units( extends seed capital#soft loan assistance t roug <ational 8,uity Fund and t roug seed capital sc emes of speciali&ed lending institutions( refinance loans( and provide services like factoring, 2easing and so on. % e union budget 1AAI-AN envisaged a number of measures to develop small-scale sector wit SI5+I as t e focal point. % ey include/

SI5+I will now refinance t e SF.s and commercial banks for moderni&ation pro;ects up to ?s F@ lak s from unutili&ed corpus of about ?s NF crore( SI5+IDs refinance ceiling of ?s F@ lak s for single window sc eme of SF.s etc. for composite loans will be doubled to ?s 1@@ lak s SI5+I will participate in venture capital funds set up by public sector institutions as well as private companies up to F@ percent of t e total corpus of t e fund, provided suc fund is dedicated to t e financing of small-scale industry(

SI5+I will provide refinance lending institutions w ic are now permitted to lend to SSI units seeking IS4 certification of ,uality. Since its inception SI5+I as provided assistance to t e entire SSIs sector including tiny, village, and cottage industries t roug suitable sc emes tailored to meet t e re,uirement of setting up of new products, expansions, diversifications, moderni&ation, and re abilitation. It as provided e,uity capital, domestic and foreign currency term loans, working capital finance, etc. SI5+I as entered into M43 wit many banks, governmental agencies, international agencies, ?"5 institutions, and industry associations for developing SSIs. *0Decti(es and unctions o 1$all Industries 6e(elop$ent Bank o India Small Industries 5evelopment +ank of India )SI5+I* was establis ed as w olly owned subsidiary of Industrial 5evelopment +ank of India )I5+I* under t e small Industries 5evelopment of India 'ct 1ABA. It is t e principal institution for promotion, financing and development of industries in t e small-scale sector. It also coordinates t e functions of institutions engaged in similar activities. For t is purpose, SI5+I as taken over t e responsibility of administrating Small Industries 5evelopment Fund and <ational 8,uity Fund from I5+I.

.apital. SI5+I started its operations from 'pril 1AA@ wit an initial aut orised capital of ?s. !F@ crore, w ic could be increased to ?s. 1@@@ crore. It also took over t e outstanding portfolio of I5+I relating to small scale sector eld under Small Industries 5evelopment Fund as on Marc -1,1AA@ wort over ?s. >@@@ crore. 40Decti(es o 1I6BI In t e setting up of SI5+I, t e main purpose of t e government was to ensure larger flow of assistance to t e small-scale units. %o meet t is ob;ective, t e immediate t rust of t e SI5+I was on t e following measures/ )i* initiating steps for tec nological upgradation and modernisation of existing units( )ii* expanding t e c annels for marketing t e products of t e small scale sector( and )iii* promotion of employment-oriented industries, especially in semi- urban areas to create more employment opportunities and t ereby c ecking migration of population to urban areas. Functions o 1I6BI SI5+I provides assistance to t e small-scale industries sector in t e country t roug t e existing banking and ot er financial institutions, suc as, State Financial .orporations, State Industrial 5evelopment .orporations, commercial banks, cooperative banks and ??+s. etc. % e ma;or functions of SI5+I are given below/ )i* It refinances loans and advances provided by t e existing lending institutions to t e small-scale units. )ii* It discounts and rediscounts bills arising from sale of mac inery to and manufactured by small-scale industrial units. )iii* It extends seed capital#soft loan assistance under <ational 8,uity Fund, Ma ila 3dyam <id i and Ma ila Hikas <id i and seed capital sc emes. )iv* It grants direct assistance and refinance loans extended by primary lending institutions for financing exports of products manufactured by small-scale units. )v* It provides services like factoring, leasing, etc. to small units. )vi* It extends financial support to State Small Industries .orporations for providing scarce raw materials to and marketing t e products of t e small-scale units. )vii* It provides financial support to <ational Small Industries .orporation for providing( leasing, ire purc ase and marketing elp to t e small-scale units. !4. I"6@1T7IA5 I"F-1TM-"T BA"8 *F I"6IA % e II+I first came into existence as a central government corporation wit t e name Industrial

?econstruction .orporation of India in 1AN1. Its basic ob;ective was to finance t e reconstruction and re abilitation of sick and closed industrial unit. Its name was c anged to Industrial reconstruction bank of India and it was made t e principal credit and reconstruction agency in t e country in 1ABF t roug t e ?+I act 1AB>. % e bank started co-ordinary similar work of t e institutions and banks preparing sc emes for reconstructions by reconstructing t e liabilities appraising sc emes of merger " amalgamation of sick

company and providing financial assistance for moderni&ation expansion, diversification and tec nological up gradation of sick units. In Marc 1ABN, in line wit t e ongoing policies of financial and economic reforms, I?+I was converted into a full-fledged development financial institution. It was renamed as Industrial Investment +ank of India ltd. 'nd was incorporated as company under t e companies act 1AFI. Its entire e,uity is finance for t e establis ment of new industrial pro;ect as well as for expansion diversification and moderni&ation of existing industrial enterprises. It provides financial assistance in t e form of term loans, subscription to debenture e,uity s ares and deferred payment guarantees. II+I is now also active ion merc ant banking and its services includes inter alia? structuring suitable instrument for public rig ts issues preparation of prospective offer documents and working as a lead manager it also offers its services for debt syndication and package of services for merger and ac,uisition.

!). "on-Bankin+ Financial Institutions 4 Co$panies

<on-+anking Financial .ompanies play an important and crucial role in broadening access to financial services, en ancing competition and diversification of t e financial sector. % ere are different types of institutions involved in financial services in India. % ese include commercial banks, financial institutions )FIs* and non-banking finance companies )<+F.s*. 5ue to t e financial sector reforms, <+F.s ave been emerged as an integral part of t e Indian financial system. <on-banking finance companies fre,uently act as suppliers of loans " credit facilities and accept deposits, operating mutual funds and similar ot er functions. % ey are competitive and complimentary to banks and financial institutions. <+F.s ave registered significant growt in recent years bot in terms of number and volume of business transactions )%able-!*. % e e,uipment leasing and ire purc ase finance companies finance productive assets. <+F.s role in financing consumer durables and automobiles are very aggressive. % e rapid growt in t e business of <+F.s urged for effective regulatory action to protect t e interests of investors. % e ?eserve +ank as started regulating t e activities of <+F.s wit t e twin ob;ectives of ensuring t at t ey sub serve t e financial system efficiently and do not ;eopardi&e t e interest of depositors. ?+I as identified as many as 1! categories of <+F.s. Five of t em are regulated by t e ?+I, . it funds ;ointly by t e ?+I and t e ?egistrar of . its and two )mutual benefit funds including nid is and micro finance companies* by t e 5epartment of .ompany 'ffairs, 1overnment of India. % e <ational :ousing +ank )<:+* regulates ousing finance companies. Stock +roking and Merc ant +anking .ompanies are regulated by t e Securities and 8xc ange +oard of India and insurance companies come under t e Insurance ?egulatory and 5evelopment 'ut ority. 6e inition o "on-0ankin+ Finance Co$pany? ' <on-+anking Financial .ompany )<+F.* is a company registered under t e .ompanies 'ct, 1AFI and is engaged in t e business of loans and advances, ac,uisition of s ares, securities, leasing, ire-purc ase, insurance business, and c it business. 6i erence 0et'een 0anks H "BFCs <+F.s are doing functions similar to t at of banks, owever t ere are a few differences/ 1* a <+F. cannot accept demand deposits, !* it is not a part of t e payment and settlement system and as suc cannot issue c e,ues to its customers, and -* deposit insurance facility of 5I.1. is not available for <+F. depositors unlike in case of banks.

6i erent types o "BFCs % ere are different categories of <+F.Es operating in India under t e supervisory control of ?+I. % ey are/ 1. <on-+anking Financial .ompanies )<+F.s* !. ?esiduary <on-banking Finance companies)?<+.s*. -. Miscellaneous <on-+anking Finance .ompanies )M<+.s* and ?esiduary <on-+anking .ompany is a class of <+F., w ic is a company and as as its principal business t e receiving of deposits, under any sc eme or arrangement or in any ot er manner and not being Investment, 2easing, :ire-0urc ase, 2oan .ompany. % ese companies are re,uired to maintain investments as per directions of ?+I, in addition to li,uid assets. % e functioning of t ese companies is different from t ose of <+F.s in terms of met od of mobili&ation of deposits and re,uirement of deployment of depositorsE funds. 0eerless Financial .ompany is t e example of ?<+.s. Miscellaneous <on-+anking Financial .ompanies are anot er type of <+F.s and M<+. means a company carrying on all or any of t e types of business as collecting, managing, conducting or supervising as a promoter or in any ot er capacity, conducting any ot er form of c it or kuri w ic is different from t e type of business mentioned above and any ot er business similar to t e business as referred above. Type o 1er(ices pro(ided 0y "BFCs <+F.s provide range of financial services to t eir clients. %ypes of services under non-banking finance services include t e following/ 1. :ire 0urc ase Services !. 2easing Services -. :ousing Finance Services >. 'sset Management Services F. Henture .apital Services I. Mutual +enefit Finance Services )<id i* % e above type of companies may be furt er classified into t ose accepting deposits or t ose not accepting deposits. 7ole and unction o "BFI % e role and importance of non-bank financial intermediaries is clear from t e various functions performed by t ese institutions. Ma;or functions of t e <+FIs are as follows/ 1. Financial Intermediation/ % e most important function of t e non-bank financial intermediaries is t e transfer of funds from t e savers to t e investors. Financial intermediation is economical and less expensive to bot small businesses and small savers, (a) It provides funds to small businesses for w ic it is difficult to sell stocks and bonds because of ig transaction costs, (b) It also benefits t e small savers by pooling t eir funds and diversifying t eir investments.

!. 8conomic +asis of Financial Intermediation/ :andling of funds by financial intermediaries is more economical and more efficient t an t at by t e individual wealt owners because of t e fact t at financial intermediation is based on )a* t e law of large numbers, and )b* economies of scale in portfolio management. (i) 5a' o 5ar+e "u$0ers: Financial intermediaries operate on t e basis of t e statistical law of large numbers. 'ccording to t is law not all t e creditors will wit draw t eir funds from t ese institutions. Moreover, if some creditors are wit drawing cas , some ot ers may be depositing cas . 'gain, t e financial intermediaries also receive regular interest payments on loans or investments made by t em. 'll t ese factors enable t e financial intermediaries to keep in cas only a small fraction of t e funds provided by t e creditors and lend or invest t e rest. (ii) -cono$ies o 1cale: 2arge si&e of t e asset portfolios enables t e financial intermediaries to reap various economies of scale in portfolio management. % e main economies are/ )a* reduction of risk t roug portfolio diversification/ )b*employment of efficient and professional managers( and )c* low administrative cost of large loans and )d* low costs of establis ment, information and transactions. -. Inducement to Save/ <on-bank financial intermediaries play an important role in promoting savings in t e country. Savers need stores of value to old t eir savings in. % ese institutions provide a wide range of financial assets as store of value and make available expert financial services to t e savers. 's stores of value, t e financial assets ave certain special advantages over t e tangible assets )suc as, p ysical capital, inventories of goods, etc.*. % ey are easily storable, more li,uid, more easily divisible, and less risky. In fact, saving- income ratio is positively related to bot financial institutions and financial assets( financial progress . induces larger savings out of t e same level of real income. >. Mobilisation of Saving/ Mobilisation of savings takes place w en t e savers old savings in t e form of currency, bank deposits, post office savings deposits, life insurance policies, bills, bondEs e,uity s ares, etc. <+FI provides ig ly efficient mec anism for mobilising savings. % ere are two types of <+F%s involved in t e mobilisation of savings( )a* 5epository Intermediaries, suc as savings and loan associations, credit unions, mutual saving banks etc. % ese institutions mobilise small savings and provide ig li,uidity of funds. )b* .ontractual Intermediaries, suc as life insurance companies, public provident funds, pension funds, etc. % ese institutions enter into contract wit savers and provide t em various types of benefits over t e long periods.

F. Investment of Funds/ % e main ob;ective of <+FIs is to earn profits by investing t e mobilised savings. For t is purpose, t ese institutions follow different investment policies. For example, savings and loan associations, mutual saving banks invest in mortgages, w ile insurance companies invest in bonds and securities. !6. Insurance Co$panies- /u0lic and /ri(ate: 2ife Insurance .orporation )2I.* is a government company. %ill t e year !@@@, t e 2I. was t e sole provider of life insurance policies to t e Indian public. :owever, t e Insurance ?egulatory " 5evelopment 'ut ority )I?5'* as now issued licenses to private companies to conduct t e business of life insurance. Some of t e ma;or private players in t e sector are/
+a;a; 'llian& 2ife Insurance .orporation +irla Sun2ife Insurance .o. 2td. :5F. Standard 2ife Insurance .o. 2td. I.I.I 0rudential 2ife Insurance .o. 2td. I<1 Hysya 2ife Insurance .o. 0vt. 2td. M'O <ew Rork 2ife Insurance .o. 2td. Met2ife India Insurance .o. 0vt. 2td. Jotak Ma indra 4ld Mutual 2ife Insurance .o. 2td. S+I 2ife Insurance .o. 2td. %'%' 'I1 2ife Insurance .o. 2td. 'M0 Sanmar 'ssurance .o. 2td. 'HIH' 2ife Insurance .o. 0vt. 2td. Sa ara India 2ife Insurance .o. 2td. S riram 2ife Insurance .o. 2td.

!9. I"F-1TM-"T /*5IC> /7I"CI/5-1 A"6 I"F-1TM-"T /*5IC> *F 5i e Insurance Co$panies: 1. !. Security of funds, and Maximi&ation of return of investment In(est$ent /olicy .entral 1ovt. marketable securities being not less t an !@L 2oans to :ousing +ank including above )1* being not less t an !FL State 1ovt. securities including 1ovt. 1uaranteed marketable securities, inclusive of )!* above being not less t an F@L Socially oriented sectors including public sector, co-operative sector ouse building by policy olders, own ouse sc eme, inclusive of )-* above not less t an NFL 0rivate corporate sector, loans to policy olders for construction and ac,uisition of immovable property !FL /7I"CI/5-1 A"6 I"F-1TM-"T /*5IC> o 3eneral Insurance Co$panies: 1. !. Security of funds, and Maximi&ation of return of investment In(est$ent /olicy .entral 1ovt. securities being not less t an !@L State 1ovt. securities and ot er government guaranteed securities, including )1* above, being not less t an -@L

2oans to :35.4#55'#1I.-:F and to state govtDs. For ousing and fire fig ting e,uipment, not less t an 1FL Market sector not more t an FFL

!9. 7e+ulatory Aut#ority: % e I?5 'ct as establis ed t e Insurance ?egulatory and 5evelopment 'ut ority )6I?5'7 or 6'ut ority7* as a statutory regulator to regulate and promote t e insurance industry in India and t o protect t e interests of olders of insurance policies. % e I?5 'ct also carried out a series of amendments to t e 'ct of 1A-B and conferred t e powers of t e .ontroller of Insurance on t e I?5'. % e members of t e I?5' are appointed by t e .entral 1overnment from amongst persons of ability, integrity and standing w o ave knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration etc. % e 'ut ority consists of a c airperson, not more t an five w ole-time members and not more t an four part-time members. /o'ers? 6uties and Functions o t#e Aut#ority % e 'ut ority as been entrusted wit t e duty to regulate, promote and ensure t e orderly growt of t e insurance and re-insurance business in India. In furt erance of t is responsibility, it as been conferred wit numerous powers and functions w ic include prescribing regulations on t e investments of funds by insurance companies, regulating maintenance of t e margin of solvency, ad;udication of disputes between insurers and intermediaries, supervising t e functioning of t e %ariff 'dvisory .ommittee, specifying t e percentage of premium income of t e insurer to finance sc emes for promoting and regulating professional organi&ations and specifying t e percentage of life insurance business and general insurance business to be undertaken by t e insurer in t e rural or social sector. Tari Ad(isory Co$$ittee % e %ariff 'dvisory .ommittee )6'dvisory .ommittee7* is a body corporate, w ic controls and regulates t e rates, advantages, terms and conditions offered by insurers in t e general insurance business. % e 'dvisory .ommittee as t e aut ority to re,uire any insurer to supply suc information or statements necessary for disc arge of its functions. 'ny insurer f ailing to comply wit suc provisions s all be deemed to ave contravened t e provisions of t e Insurance 'ct. 8very insurer is re,uired to make an annual payment of fees to t e 'dvisory .ommittee of an amount not exceeding in case of reinsurance business in India, one percent of t e total premiums in respect of facultative insurance accepted by im in India( and in case of any ot er insurance business, one percent of t e total gross premium written direct by im in India. Insurance Association o India? Councils and Co$$ittees 'll insurers and provident societies incorporated or domiciled in India are members of t e Insurance 'ssociation of India )6Insurance 'ssociation7* and all insurers and provident societies incorporated or domiciled elsew ere t an in India are associate members of t e Insurance 'ssociation. % ere are two councils of t e Insurance 'ssociation, namely t e 2ife Insurance .ouncil and t e 1eneral Insurance .ouncil. % e 2ife Insurance .ouncil, t roug its 8xecutive .ommittee, conducts examinations for individuals wising to ,ualify t emselves as insurance agents. It also fixes t e limits for actual expenses by w ic t e insurer carrying on life insurance business or any group of insurers can exceed from t e prescribed limits under t e Insurance 'ct. 2ikewise, t e 1eneral Insurance .ouncil, t roug its 8xecutive .ommittee, may fix t e limits by w ic t e actual expenses of management incurred by an insurer carrying on general insurance business may exceed t e limits as prescribed in t e Insurance 'ct. *$0uds$en % e 4mbudsmen are appointed in accordance wit t e ?edressal of 0ublic 1rievances ?ules, 1AAB, to resolve all complaints relating t o settlement of claims on t e par t of insurance companies in a cost-effective,

efficient and effective manner. 'ny person w o as a grievance against an insurer may make a complaint to an 4mbudsman wit in is ;urisdiction, in t e manner specified. :owever, prior to making a complaint, suc person s ould ave made a representation to t e insurer and eit er t e insurer as re;ected t e complaint or as not replied to it. Furt er, t e complaint s ould be made not later t an a year from t e date of r e;ection of t e complaint by t e insurer and s ould not be any ot er proceedings pending in any ot er court, .onsumer Forum or arbitrator pending on t e same sub;ect matter. % e 4mbudsmen are also empowered to receive and consider any partial or total repudiation of claims by an insurer, any dispute in regard to t e premium paid in terms of t e policy, any dispute on t e legal construction of t e policies in as muc suc a dispute relates to claims, delay in settlement of claims and t e non-issue of any insurance document to customers after receipt of premium. % e 4mbudsmen act as a counselor and mediator and make recommendations to bot par ties in t e event t at t e complaint is settled by agreement between bot t e parties. :owever, if t e complaint is not settled by agreement, t e 4mbudsman may pass an award of compensation wit in t ree mont s of t e complaint, w ic s all not be in excess of w ic is necessary to cover t e loss suffered by t e complainant as a direct conse,uence of t e insured peril, or for an amount not exceeding rupees two million )including exgratia and ot er expenses*, w ic ever is lower. 4mbudsman wit in is ;urisdiction, in t e manner specified. :owever, prior to making a complaint, suc person s ould ave made a representation to t e insurer and eit er t e insurer as re;ected t e complaint or as not replied to it. Furt er, t e complaint s ould be made not later t an a year from t e date of re;ection of t e complaint by t e insurer and s ould not be any ot er proceedings pending in any ot er court, .onsumer Forum or arbitrator pending on t e same sub;ect matter. % e 4mbudsmen are also empowered to receive and consider any partial or total repudiation of claims by an insurer, any dispute in regard to t e premium paid in terms of t e policy, any dispute on t e legal construction of t e policies in as muc suc a dispute relates to claims, delay in settlement of claims and t e non-issue of any insurance document to customers after receipt of premium. % e 4mbudsmen act as a counselor and mediator and make recommendations to bot par ties in t e event t at t e complaint is settled by agreement between bot t e parties. :owever, if t e complaint is not settled by agreement, t e 4mbudsman may pass an award of compensation wit in t ree mont s of t e complaint, w ic s all not be in excess of w ic is necessary to cover t e loss suffered by t e complainant as a direct conse,uence of t e insured peril, or for an amount not exceeding rupees two million )including exgratia and ot er expenses*, w ic ever is lower. 7e+istration o insurance co$panies 8very insurer seeking to carry out t e business of insurance in India is re,uired to obtain a certificate of registration from t e I?5' prior to commencement of business. % e pre-conditions for applying for suc registration ave been set out under t e 'ct of 1A-B, t e I?5 'ct and t e various regulations prescribed by t e 'ut ority. !. 3eneral 7e+istration 7eCuire$ents % e following are some of t e import ant general registration re,uirements t at an applicant would need to fulfill/ )a* % e applicant would need to be a company registered under t e provisions of t e Indian .ompanies 'ct, 1AFI. .onse,uently, any person intending to carry on insurance business in India would need to set up a separate entity in India. )b* % e aggregate e,uity participation of a foreign company )eit er by itself or t roug its subsidiary companies or its nominees* in t e applicant company cannot not exceed twenty six per cent of t e paid up

capital of t e insurance company. :owever, t e Insurance 'ct and t e regulations t ere under provide for t e manner of computation of suc twenty-six per cent. )c* % e applicant can carry on any one of life insurance business, general insurance business or reinsurance business. Separate companies would be needed if t e intent were t o conduct more t an one business. )d* % e name of t e applicant needs to contain t e words 6insurance company7 or 6'ssurance .ompany7. %. Capital 1tructure 7eCuire$ents % e applicant would need to meet wit t e following capital structure re,uirements/ )a* ' minimum paid up e,uity capital of rupees one billion in case of an applicant w ic seeks to carry on t e business of life insurance or general insurance. )b* ' minimum paid-up e,uity capital of rupees two billion, in case of a person carrying on exclusively t e business of reinsurance. In determining t e aforesaid capital re,uirement, t e deposits to be made and any preliminary expenses incurred in t e formation and registration of t e company would be included. ' 6promoter7 of t e company is not permitted to old, at any time, more t an twenty-six per cent of t e paid-up capital in any Indian insurance company. :owever, an interim measure as been permitted percentages ig er t an twenty six percent are permitted if t e promoters divest, in a p ased manner, over a period of ten years from t e date of commencement of business, t e s are capital eld by t em in excess of twenty six per cent. 'n applicant desiring to carry on insurance business in India is re,uired to make a re,uisition for a registration application t o t e I?5' in a prescribed format along wit all t e relevant documents. &. /rocedure or o0tainin+ a certi icate o re+istration % e applicant is re,uired to make a separate re,uisition for registration for eac class of business i.e. life insurance business consisting of linked business, non-linked business or bot , or general insurance business including ealt insurance business. % e I?5' may accept t e re,uisition on being satisfied of t e bonafides of t e applicant, t e completeness of t e application and t at t e applicant will carry on all t e functions in respect of t e insurance business including management of investments etc. In t e event t at t e aforesaid re,uirements are not met wit , t e 'ut ority may after giving t e applicant a reasonable opportunity of being eard, re;ect t e re,uisition. % ereafter, t e applicant may apply to t e 'ut ority wit in t irty days of suc re;ection for reconsideration of its decision. 'dditionally, an applicant w ose re,uisition for registration as been re;ected may approac t e 'ut ority wit a fres re,uest for registration application after a period of two years from t e date of re;ect ion, wit a new set of promoters and for a class of insurance business different t an t e one originally applied for. In t e event t at t e 'ut ority accepts t e re,uisition for registration application, it s all direct supply of t e application for registration to t e applicant. 'n applicant, w ose re,uisition as been accepted, may make an application along wit t e relevant documents evidencing deposit, capital and ot er re,uirements in t e prescribed form for grant of a certificate of registration. If, w en considering an application, it appears to t e 'ut ority t at t e assured rates, advantages, terms and conditions offered or t o be offered in connection wit life insurance business are in any respect not workable or sound, e may re,uire t at a statement t ereof to be submitted to an actuary appointed by t e insurer and t e 'ut ority s all order t e insurer to make suc modifications as reported by t e actuary.

'fter considerations of t e matters inter alias capital structure, record of performance of eac promoters and directors and planned infrastructure of t e company, t e 'ut ority may grant t e certificate of registration. % e 'ut ority would, owever, give preference in grant of certificate of registration to t ose applicants w o propose to carry on t e business of providing ealt covers to individuals or groups of individuals. 'n applicant granted a certificate of registration may commence t e insurance business wit in twelve mont s from t e date of registration. In t e event t at t e 'ut ority re;ects t e application for registration, t e applicant aggrieved by t e decision of t e 'ut ority may wit in a period of t irty days from t e date of communication of suc re;ection, appeal to t e .entral 1overnment f or reconsideration of t e decision and t e decision of t e .entral 1overnment in t is regard would be final. 4. 7ene'al o re+istration 'n insurer w o as been granted a certificate of registration s ould renew t e registration before t e -1 day of 5ecember eac year, and suc application s ould be accompanied by evidence of fees t at s ould be t e ig er ofZ[fifty t ousand rupees for eac class of insurance business, and Z[one fift of one per cent of tot al gross premium writ ten direct by an insurer in India during t e financial year preceding t e year in w ic t e application for renewal of certificate is re,uired to be made, or t e application for renewal of certificate is re,uired t o be made, or rupees fifty million w ic ever is less( )and in case of an insurer carrying on solely re-insurance business, instead of t e total gross premium written direct in India, t e total premium in respect of facultative re-insurance accepted by im in India s all be taken into account*.
st

% is fee may vary according to t e total gross premium writ ten direct in India, during t e year preceding t e year in w ic t e application is re,uired to be made by t e insurer in t e class of insurance business to w ic t e registration relates but s all not exceed one-fourt of one percent of suc premium income or rupees fifty million, w ic ever is less, or be less, in any case t an fifty t ousand rupees for eac class of insurance business. :owever, in t e case of an insurer carrying on solely re-insurance business, t e total premiums in respect of facultative re-insurance accept ed by im in India s all be taken into account. ). 1uspension o re+istration % e registration of an Indian insurance company or insurer may be suspended for a class or classes of insurance business, in addition to any penalty t at may be imposed or any action t at may be taken, for suc period as may be specified by t e 'ut ority, in t e following cases/ 1. conducts its business in a manner pre;udicial to t e interests of t e policy- olders( !. fails to furnis any information as re,uired by t e 'ut ority relating to its insurance business( -. does not submit periodical returns as re,uired under t e 'ct or by t e 'ut ority( >. does not co-operate in any in,uiry conducted by t e 'ut ority( F. indulges in manipulating t e insurance business( I. Fails to make investment in t e infrastructure or social sector as specified under t e Insurance 'ct. 6. Cancellation o certi icate o re+istration % e 'ut ority, in case of repeated defaults of t e grounds for suspension of a certificate of registration, may impose a penalty in t e form of cancellation of t e certificate. % e 'ut ority is compulsorily re,uired to cancel t e registration of an insurer eit er w olly or in so far as it relates to a particular class of insurance business, as t e case may be 1. if t e insurer fails to comply wit t e provisions relating t o deposits( or !. if t e insurer fails, at any time, to comply wit t e provisions relating t o t e excess of t e value of is assets over t e amount of is liabilities( or -. if t e insurer is in li,uidation or is ad;udged an insolvent( or

>. if t e business or a class of t e business of t e insurer as been transferred to any person or as been transferred to or amalgamated wit t e business of any ot er insurer( or F. if t e w ole of t e deposit made in respect of t e insurance business as been returned to t e insurer( I. if, in t e case of an insurer, t e standing contract is cancelled or is suspended and continues to be suspended for a period of six mont s, or N. if t e .entral 1overnment of India so directs/ In addition to t e above, t e 'ut ority as t e discretion to cancel t e registration of an insurer B. if t e insurer makes default in complying wit , or acts in contravention of , any re,uirement of t e Insurance 'ct or of any rule or any regulation or order made or, any direction issued t ere under, or A. if t e 'ut ority as reason to believe t at nay claim upon t e insurer arising in India under any policy of insurance remains unpaid for t ree mont s after final ;udgment in regular course of law, or 1@. if t e insurer carries on any business ot er t an insurance business or any prescribed business, or 11. if t e insurer makes a default in complying wit any direct ion issued or order made, as t e case may be, by t e 'ut ority under t e I?5' 'ct, 1AAA. 1!. If t e insurer makes a default in complying wit , or acts in contravention of, any re,uirement of t e .ompanies 'ct, or t e 2I. 'ct, or t e 1I. 'ct or t e Foreign 8xc ange Management 'ct, !@@@. % e order of cancellation s all take effect on t e date on w ic notice of t e order of cancellation is served on t e insurer. % ereafter, t e insurer would be pro ibited from entering into any new contracts of insurance, but all rig ts and liabilities in respect of contracts of insurance entered into by im before t e cancellation takes effect s all continue as if t e cancellation ad not taken place. % e 'ut ority may, after t e expiry of six mont s from t e date on w ic t e cancellation order takes effect, apply to t e .ourt for an order to wind up t e insurance company, or to wind up t e affairs of t e company in respect of a class of insurance business, unless t e registration of t e insurance company as been revived or an application for winding up as already been presented to t e .ourt. 9. 7e(i(al o re+istration % e 'ut ority as a discretion, w ere t e registration of an insurer as been cancelled, to revive t e registration, if t e insurer wit in six mont s from t e date on w ic t e cancellation took effect/ makes t e deposits, or complies wit t e provisions as to t e excess of t e value of is assets over t e amount of is liabilities, or as is standing contract restored, or as t e application accepted, or satisfies t e 'ut ority t at no claim upon im remains unpaid, or as complied wit any re,uirements of t e Insurance 'ct or t e I?5' 'ct, or any rule or regulation, or any order made t ere under or any direct ion issued under t ese 'cts, or % at e as ceased to carry on any business ot er t an insurance business or any prescribed business.