Professional Documents
Culture Documents
) Degree Course
Third Semester Study
Material for the Subject
FINANCIAL MARKETS
AND SERVICES
Prepared by Subject
Faculty Dr. T. S. Agilla
Assistant Professor in
Commerce Tamil Nadu
National Law School,
Tiruchirappalli 620
009.
Unit - I
Financial system
Provision of Liquidity
The major function of the financial system is the provision of money and
monetary assets for the production of goods and services. There should
not be any shortage of money for productive ventures.
Liquidity
The term liquidity refers to cash or money and other assets which can be
converted into cash readily without loss.
RBI is the leader of the financial system and hence it has to control the
money supply and creation of credit by banks and regulate all the financial
institutions in the country. RBI develops sound financial system.
2.Mobilisation of savings
Financial system influences both the quality and the pace of economic
development
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Financial concepts
following concepts.
1.Financial Assets
2.Financial Intermediaries
3.Financial Market
5.Financial Instruments.
Financial Assets:
For instance, A buys equity shares and these shares are financial assets
since they earn income in future.
The capital amount (is raised) gathered by way of issuing shares will be
utilized for production work.
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Many physical assets are useful for consumption only.
It is interesting to note that the objective of investment decides the nature of the
assets.For instance if a building is bought for residence purpose, it becomes a
physical asset.If the same is bought for hiring it becomes a financial asset.
Classification of Financial Assets.
Marketable Assets
Non Marketable Assets - On the other hand if the assets cannot be transferred
easily, they come under this category.Examples-Bank Deposits, Provident Funds
Pension fund, National savings certificate Insurance policy etc.
Debt Assets
Stock Assets
Money or cash assets- In India all coins and currency notes are issued by the
R.B.I and the Ministry of Finance Government of India [Cash assets include
anything you own such as savings, shares, stocks, loan to other].Commercial
banks can also create money by means of creating credit. When loans are
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sanctioned liquid cash is not granted Instead of that an account is opened in the
borrowers name and a deposit is created .It is also a kind of money asset.
2.Debt Asset. Debt asset is issued by a variety of organizations for the purpose of
raising their debt capital.Debt capital is a fixed repayment schedule with regard to
interest and principal.Different ways of raising debt capital is as follows issue of
debentures, raising of term loans, working capital advance etc..
Equity
Preference
Equity- Equity shareholders are the real owners of the business and they enjoy
the fruits of ownership and at the same time bears the risks as well.
Financial Intermediaries
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institutions like financial corporations and investing institutions like
development Banks, Insurance, UTI, Companies [LIC and GIC],
Agriculture financing institutions, Government P.F, NSC, IRBI, Exim Bank,
NBI Company.
Unit-I
Financial Markets
1. Unorganized Markets
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In these unorganized markets there are a number of money lenders,
indigenous bankers, traders (who lend and collect deposits from the
public) private finance companies (Indigenous bankers are private firms
or individuals who operate as banks and receive deposits and give
loans), Chit funds etc whose activities are not controlled by the RBI.
The RBI has already taken some steps to bring private finance
companies and chit funds under its strict control by issuing Non
banking financial companies Reserve Bank Direction 1998.
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2). Organised Markets
Capital Market
Money Market
2. Secondary market
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Public Issue
Right Issue
Private Placement.
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Electricity Boards, all India and State level institutions and public sector
enterprises are dealt in this market.
The secondary market for these securities is very narrow since most of the
investors tend to retain these securities until maturity. Example -stock
certificates, promissory notes, Bearer bond.
Mortgage Market
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2. Mortgages market:
The mortgages market refers to those centers which supply mortgage loan
mainly to individual customers. A mortgage loan is a loan against the security of
immovable property.LIC & HUDC [Housing and urban development corporation]
play a dominant role in financing residential projects.
Financial Guarantees market:
MONEY MARKET
Money market is a market for dealing with financial assets and securities
which have a maturity period of up to one year.It is a market for purely
short term funds.
The money market may be out divided into four. They are:
1)Call Money Market- The call money market is a market extremely short
period loans say one day to fourteen days, so it is highly liquid. Call money
market is for inter-bank lending and borrowing. The loans are repayable on
demand at the option of either the lender or the borrower.
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In India call money markets are associated with the presence of stock
exchange and hence they are located in major industrial towns.The Special
feature of this market is that the interest rate varies from day today and even
from hour to hour and centre to centre.[Bill of exchange or trade bill is an
instrument containing an unconditional order signed by the maker, directing a
certain person to pay a sum of money to the bearer of the instrument]. It is
very sensitive to changes in demand and supply of call loans.
Treasury Bills Market - It is a market for treasury bills which have short
term maturity. A treasury bill is a promissory note or a finance bill issued
by the government. [They were issued for 91 days but now they there
are issuance for 182 and 364days]. It is highly liquid because its
repayment is guaranteed by the Government.[These treasury bills are
floated through auction and conducted by RBI]. It is an important
instrument for short term borrowing of the Government [RBI as the
leader and controller of money market buys and sells treasury bills].
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2. Adhoc Treasury Bills - Adhoc treasury bills are issued in favour of
the RBI only. Adhocs are not marketable in India but holders of these
bills can sell them back to RBI.
Commercial banks provide short term loans in form of cash credit and
overdraft over graft facility is mainly given to business people whereas
cash credit is given to industrialists. Over draft is given in the current
account itself. Cash credit is for a period of one year and it is
sanctioned in a separate account.
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The interests rates are administered and controlled. The interest rate
structure for bank deposits and bank credit is determined by the RBI.
Money market instruments which deals in the money market are of short
term nature .Their maturity period varies between 14 and 364 days.
Examples are Treasury or short term financial bills - Issued by the Government
they are highly liquid and risk free as they are guaranteed by the Government.
Finance Bills - These bills are payable immediately after the expiry of
time period mentioned in the bill.
Commercial Papers(CPs)
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Certificate of Deposits (CDs)
Preferable Shares
No Par Stock
Debentures.
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Unit - I
Financial Services
Introduction
.financial services are regarded as the fourth element of the financial system.
Following are the objectives of financial services that are generally offered
to financial companies.
Fund Raising - Financial Services help to raise the required funds from a
host of investors, individuals, institutions and corporate for this purpose,
various instruments of finance are used.
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Funds Deployment - In array of financial services are available in financial
markets which help the players to ensure an effective deployment of the
funds raised.Financial services assist in the decision making regarding the
financial mix. Services such as bill discounting of factoring of debtors, parking
of short term funds in the money market, credit rating e-commerce and
securitization of debts are provided by financial services firms in order to
ensure efficient management of funds.
Regulation -There are agencies that are involved in the regulation of the financial
service activities. In India, agencies such as the Securities and Exchange Board of
India (SEBI), Reserve Bank of India (RBI) and the department of banking and
Insurance of the Government of India through many legislations regulate the
functions of the financial services institutions. E
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It is to be noted that a number of developed and developing countries
which have a highly efficient financial market, have witnessed a greater
rate of savings and investments.
1. Leasing Companies
2. Mutual funds
Mutual funds are trusts that pool the savings of innumerable small investors
for the purpose of making investment in various financial instruments capital
market and money marketto provide reasonable return
3. Merchant Bankers
institutions providing them must gain good and confidence of its clients.
Quality and innovativeness of services are the focal points for building
credibility and gaining the trusts of the clients.
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Customer Orientation - The institutions proving the financial services
study the needs of the customers in detail based on the results of the
study they come out with innovative financial strategies that give due
regard to costs, liquidity and maturity considerations for various financial
products this way financial services are customer orientated.
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Fund or Asset based financial services
Lease Financing
Insurance services
4. Other Constituents- The financial services sector has the following three
major elements:
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Instruments- These include public issue of shares, debentures, fixed
deposit certificates etc.
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Fund-Based Activities
A part from the provision of finance, the customers, both individual and
corporation expect more from financial services sector so it has come forward to
render a large variety of services such as management capital issues, making
arrangements for the placement of capital and debt instruments and
arrangements of funds from financial institutions etc.It also undertakes the
responsibility of getting all government and other clearness.
In addition to the above activities this sector does a large number of other
services to their clients. For example, rendering project advisory services,
plan mergers and acquisitions and guiding in capital restructuring.
The people should be able to invest in a wide range of securities which fit
their return expectations.
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Capital borrowers and investors should have easy and timely access to
capital markets.
10. The participants in the financial service industry should have the ability
to enter and exit with minimal costs and offer products and services and
offer products and services that the market may need.
Government
The Reserve Bank of India (RBI) is the apex institution in the Indian Financial
system. It has wide powers to control the money and capital markets. It ensures
the efficient functioning of the financial system by keeping a watch on the
development and disturbances in. It influences the operations of the financial
system through regulation on the banking system.
The Securities and Exchange Board of India (SEBI) was set up in 1988 as
a non-statutory body. In January 1992, it was made a statutory body. The
objectives of SEBI are to
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Unit - I
CREDIT CARD
The innovation of credit card is one among the many services provided
by the modern banker.
The forerunner of todays payment card was the shoppers plate which
was introduced in USA in the 1920s. It was an early version of the
modern store card. It could be used in the shops which issued it and
offered shoppers a basic form of credit-buy now pay latter.
In India, the central Bank of India was the first bank to introduce credit card
known as central card in the middle of 1981.The Grindlays Bank was the first
foreign bank in India to make a credit card available to its customers. It has over
280 million card holders across the globe and 28,000 establishments through
India and Nepal that accept the Visa cards.
The Citibank the world largest bank card company with over 30 million card
holders has added another 65,000 members to its Network in India, by taking
over the countrys oldest credit card franchise the Diners club, with the approval
of the Reserve Bank of India.The Bank of India, Bank of Baroda, Dena Bank,
Andhra Bank, Canara Bank, Vijaya Bank and Union Bank of India also have
launched new credit card facility. The State Bank of India introduced a different
type of card known as State Bank Card in 1987.
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What is a credit Card?
Credit cards are designed to avoid the use of either cash or cheque and
also to give some measure of credit to the card holders. They can be used
only in those establishments which have agreed to accept them. They may
be used instead of making payment for cash for goods and services.
The credit card organizer makes the payment to the establishments concerned
and once a month sends a statement to the credit card holder for all his
purchases in the previous month.A credit card is referred to as plastic money.
Visa / Master Card logo and 3D hologram for card security and to
identify the associated franchise.
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Cirrus / plug logo can be used at any ATM which carries logo as that on
the back of the card.
The card is the property of the bank and must be surrendered to the
designated office of the bank on demand.
If the card limit is exceeded the card member shall immediately reduce
the over limit debit balance.
The card member should sign the card immediately upon receipt.
The issue and use of card will be subject to RBIs Regulations in force
Voluntary charges
Involuntary charges
Compare the signature with card holder - Then the merchant will
compare the signature of the cardholder with the specimen signature.
On receipt of the copy of the charge slip and the summation sheet, the
bank reimburses the amount after deducting its commission.
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Charge :
If the total amount due as per the latest statement is paid in fullon or before the
payment due date, no finance charges are levied on the account.If the cardholder
maintains a savings current account with the bank he could pay his credit card
through the account. The cardholder can authorize the bank to directly debit his
account.If the cardholder maintains a savings current account with the bank he
could pay his credit card through the account the cardholder can authorize the
bank to directly debit his account.
Global acceptance- As the credit cards are most widely accepted for
making purchase anywhere in the world at any establishment.
Global ATM Access- Within India, the card holders can have any time
cash with draw from the banks ATM in all major cities.
When travelling abroad the cardholder can access cash from any of the
ATM bearing logo VISA/Master Card.
The credit card system can provide a wide range of products and services
to the user.Depending on the money of the customer and trade competition
banks issue different types of cards is given below :
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Based on Mode of Credit Recovery
A limit is set on the amount of money one can spend on the card for a
particular period. The card holder has to pay a minimus. Percentage of
outstanding credit at the end of a particular period with interest varying from
30 to 36 percent per annum is charged on the outstanding amount.
2. Charge Card
Standard Card- Credit card that are regularly issued by all card issuing
banks are called Standard Cards.It is possible for a card holder to make
purchase without having to pay cash immediately. Some banks issue
standard cards under the brand name classic cards. These cards are
generally issued to salaried people.
Business Card- Business cards also known as Executive cards are issued to
small partnership firms, solicitors firms of chartered accountants, tax
consultants and others, for use by executive on their business trips.
This card enjoys higher credit limits and more privileges than the standard
cards.These cards are issued in the names of the executives of the firms.
Elite- most powerful, rich or talented people within a society.
Gold Card- The gold card offers high value credit for the elite. It offers many
additional benefits and facilities such as higher credit limits more cash
advance limits, etc that are not available with standard or executive cards.
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Based on Geographical Validity
Domestic Card- Cards that are valid only in India and Nepal are called
domestic cards. All transactions will be in rupees. These cards are
issued by most of the banks in India.
1. Proprietary cards- Cards that are issued by the bank themselves, without any
tie up are called proprietary cards.A bank issues such cards under its own brand.
Examples include SBI card, can card of Canara bank etc.
2. Master Card- This type of credit card issued under the umbrella of
VISA Card- This is a type of credit card, which can be issued by a bank
having tie-up with VISA International USA. The banks that issue VISA
cards are said to have a franchise of VISA International.
Domestic Tie-Up Card- These are cards issued by a bank having a tie up with
domestic credit card brands such as Cancard and Indcard. For example, Indian
overseas bank has a tie up with Cancard.These banks issue cards to users
through the original banks. However they can have their bank name engrave on
the card.Credit is available on similar lines to the original card.
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Based on the Issuer Category:
1.Individual cards- These are the non-corporate cards that are issued to
individuals. Generally all brands to credit cards issue individual cards.
2.Corporate Cards- These are credit cards issued to corporate and business
firms. The executives and top officials of the firm use these cards. The card
bears the name of the firm and the bill are paid by the firm.
Innovative Cards
Credit cards have evolved into a variety of innovative cards such as the
following.
ATM Cards
Debit Card
A debit card like an ATM card directly accesses a customers accounts. The
card directly debits a designated savings Bank Account.
The debit card details are fed through a terminal at the merchant establishment and
the card holder is asked to key in a pin code allotted by the card issuer. On
completion of the transaction the amount is immediately debited in the cardholders
account and transferred to the account of merchant establishment.
Prepaid Cards
Prepaid cards are known as stored value cards, are cards with stored value paid in
advance by the holder. The card issuer and service provider are identical.
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They are also limited purpose prepaid cards which can be used for a
limited number of well defined purpose.
These cards are uniquely fixed to the retailer issuing the card and can
be used in that retailer stores & bank on the basis of a contract
agreement with the retailer extends credit under this type of card.
Smart Cards
1.Memory Card
1.Memory Cards- Memory cards are static they store information and
value and are not programmable it is not reloadable phone cards and
other prepaid cards are example.
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2. Micro Processor Cards- Micro Processor Cards have internal memory,
have high storage capabilities and the data stored in the chip is dynamic
and reloadable.
Smart cards hold a promising future because they offer multiple advantages
to merchants consumers and banks.
Chip Card- A chip card is a plastic card with an embedded integrated circuit or a
micro chip as opposed to magnetic strips on conventional card. The chip can be used
on existing debit and credit cards as well as on emerging products like store valued
cards, inserting the card is what is called a pin pad effects the transaction and the
value on it reduces accordingly. These cards are reloadable and disposable. The idea
is to do away with the trouble of carrying cash.
Co-branded card- The times card a cobranded card is the first of its kind
form a publishing house in the Asian subcontinent. There is a co-branded
credit card of Times of India Group and Citibank Master Card. The co-
branding concept has caught in the credit card industry the world over
during the last five year.
Bill Raising- Merchant establishment raises the bill for the purchase and
sends it to the credit card issuing bank for payment.
Bill to card holder- Issuing bank raises bill on the credit cardholder and
sends it for payment.
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6. Card Payment- Credit cardholder makes the payment to the issuing bank.
Are the associations actively involved in the grouping Indian Credit Card
Industry. The two associations are owned by member banks and governed
by separate board of directors.Most banks are members of both the
organizations and therefore issue both types of cards.
Functions of Associations
Merchant transactions
Licensing
Latest information indicates the Master Card International has 23,000 and Visa
Card International has 21,000 member financial institutions around the globe.
American Express is another major play in the global marker.
The cardholder can use the card within the validity period only. A new card is sent
once in every 2 to 3 years before the expiry of the old card.The fees and eligibility
criteria for credit cards vary from bank to bank.The cost of obtaining credit card is
cheaper among the Indian Banks as compared to foreign banks.
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Benefits of Credit Cards
Benefits to cardholders
Credit Facility- Credit cards offer a convenient mode of credit to customers. The
credit card enables the cardholder to avail the credit facility sanctioned by the card
issuing company. The customer can either pay the amount of credit in full or can opt.
for repaying it in flexible monthly installments.
Benefits to Merchants
Enhanced Sales- The credit card mechanism makes the buying process
convenient and easy. This in turn helps boost up the sales of business
concerns as it increase purchase power.
Easy Validation- The electronic system which is the back bone of credit
card operation, allows for easy verification greatly facilitates sale
transactions by merchants.
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3. No Risk As there is no direct contact of the merchant establishment
with collection of payments on credit cards, there is no risk to the merchant
in accepting credit facility.
Market Expansion- Credit cards can be used by banks to increase their market
presence. Example ATM which can be established in a place like supermarket, is
accessible to the consumer directly for financial transactions.
DEBIT CARD
Debit Card
Mechanism
While using a debit card at retail outlets the customer punches in a personal
identification number and the money is immediately debited to the concerned
bank account electronically.Unlike ATM cards, where the facility of cash
withdrawal can be availed only at specified locations in person, the debit card
allows the customer to use the card with case at any location and the money is
deducted directly from a customers bank account electronically.
Shopkeeper swipes the card on the terminal and keys in the purchase amount.
Customer obtains a copy of the transaction receipt and the card after
completion of the transaction.
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Unit - I
SMART CARDS
Features
Like other computers, the smart card can be programmed to carry out any
task within its processing power and memory capacity.Following are the
features and practical applications of smart cards.
Financial usage- Smart cards can be used in such transactions replacements for other
instruments of payment etc.Some of the areas of applications are paying for TV,
Telephone/ electricity road tolls, ATM cash vending etc.
It is expected that financial credit cards and debit cards are likely to gradually get
converted to the more useful smart cards in the near future. Smart cards will
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help prevent the increasing number of frauds found in the traditional
financial cards.
Contact Smart Cards- Contact smart cards have microelectronic chips embedded in
the card. These chips have connections to metallic contact pads on the surface of the
card. The contact pads are used for reading and writing card.
Contactless card- A contactless card does not require the use of external contacts
and is used for transferring data between a smart card and a read write device. The
card is able to operate at a distance from the read / write unit.
Super Smart Card- the super smart card incorporates a keyboard and a
liquid crystal display (LCD). It functions more like a stand alone terminal
and does not need a separate read/write unit.
Security Features
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b) Personal Identification Security
Personal identification security links the card to its rightful owner. The most
commonly used method for identifying the rightful owner is the PIN (Personal
Identification Number). However various other methods are as follows.
Vein Recognition- This method like previous one uses the unique vein
structure of the human body to identify individuals.
The vein check system uses a simple infrared scanning and encoding techniques to
locate the number, position and size of subcutaneous vessels.
Communication strategy
The third category of security features offered by the smart card related to
communication.
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Visual Identification
All cards used with visual identification while communicate with another
device.
Provides integrity and validity of messages. The smart card with its
Financial Application
Smart cards have potentially wide applications in banking insurance,
wholesale and retail business some of the principal uses of smart cards in
these areas are as follows :
Smart cards have their wide usage in debit and credit cards. This is account of
the security features built into smart cards. They can ideally be used as a debit or
a credit card because of the protection they extend against fraud.
2. Electronic Cheque
Smart cards can be used during Electronic Funds Transfer at the point of sale
(EFTPOS). At a retailers checkout the card is placed in the reader, where it
automatically goes through the authentication sequences.
Payment authorization with the customer PIN is easily done. The card
holder bank account is automatically debited the retailer account credited
and record of the transactions stored in the card.
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3. Electronic Cash
Smart card facilitate loading of funds into a card for use as cash. This
electronic cash can then be used for making purchases without the need for
authorization of a PIN. In such a case, the retailer presents this information
to the bank for his account to be credited.
4. Electronic Token
Smart cards allow the storing of prepaid electronic units of time or electronic
tickets,etc for a specific service or item Magnetic stripe cards are often used with
public telephone parking meters and vending machines.
5. Cash Management services
Smart cards are used by banks for providing corporate cash management
services to major clients. The cards can act as secure keys to the banks
mainframe computers allowing major account holders to view and
automatically transact their accounts.
Evolution
1. Attributed to development of two products:
The micro computer chip contains both processing and data storage capacity.
In 1969 magnetic stripes were first added to the embossed cards to ensure
that the cards could be used worldwide.
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5. ISO laid Standards:
Dr. KunitakaArimura of Japan was granted a patent for smart cards and today all
smart cards made in Japan have to be licensed by the Arimura Institute.
9. Other Companies:
Various other companies like smart card International, Philips Honey well
bull and GEC started using Intel chips in smart cards.
In Japan and the USA, the smart card was taken a stage further with the
design concept of a small card having a display and keyboard. This
concept came to be known as the super smart card.
In 1989, the ISO set up a working group to set standard for smart cards.
The standards cover items such as the contact position interface
protocol information content and control.
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Unit II
Investment
Meaning
For instance when you purchase the shares of a company, you spend
money today because you expect the shares toappreciate in value and
to pay out a dividend.
The most common financial needs that require regular investing are:
Creating a contingency fund for medical and other emergencies. All of these
needs may arise during the lifetime of any person.
Creating a fund for meeting this needs is essential for living a stress
free life.The quality of your life will improve when you have the
confidence that the money required to meet any major expenditure will
be available when the need arises.
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Key Aspects of Investing
Time- Time is another key aspect all investments, whether bonds, fixed
deposits, fixed-income instruments or stocks, require a certain period of
time to generate returns.
Liquidity- Yet another aspect is liquidity. If you cannot get your money
back easily when you need it most, it will defeat the very purpose of
savings and investment.
Rate of Return
Risk involved
Liquidity
Convenience
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Various Options available for Investment or Various Investment
Alternatives:
All the modes of investment differ from each other in one or more of these
features.These features can also be used to evaluate whether a particular
investment product is suitable for you or fulfills your financial needs.
1. Bank Deposits
These are high on liquidity and convenience. The risk involve is negligible,
the return is also moderate only a few tax concessions are available.
2. Equity shares
3. Mutual Funds
Tax benefits are high, life insurance policies rank high on convenience,
but the returns are modest. Liquidity and risk are low.
5. Company Deposits
These provide higher returns but are also high on risk. No tax
concessions are available Liquidity and convenience are also low.
Returns and risk are both high with no tax concessions available these
are low on liquidity and convention.
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7. Post office Deposit Schemes:
Returns are moderate but risk is low. Various tax concessions are
available but liquidity is low.
Potential exists for high returns with good quality. With only a few tax
concessions available, the risk is moderate to high convenience is medico.
9. Real Estate:
High on returns with high risk, but liquidity is low. Tax concessions are
available for self occupies houses convenience is low.
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UNIT II
SECURITIES
These are securities directly issued by the companies Ex. Shares and
debentures issued directly to the public.
2. Secondary Securities
Kinds of Issues
Public Issues
Rights Issues
Public issuers can be further classified into initial public offerings and further
public offerings. In Public offering, the issuer makes a offer for new investors
to enter its shareholding family.The issuer company makes detailed
disclosures as per the DIP [Disclosures and Investor protection] guidelines in
its offer document and offers it for subscription.
A company proposing to issue capital to public through the online system of the
stock exchange for offer of securities can do so by complying with the requirements
under IIA of DIP guidelines. It is known as e-IPO.
Rights Issue is a kind of public issue of securities where a listed company, proposes
to issue fresh securities to its existing shareholders. The rights are normally offered
in a particular rating to the number of securities held prior
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to the issue.This route is best suited for companies who would like to raise
capital without diluting stake of its existing shareholder.
Unlisted Company
Listed Company
SECURITIES MARKET
Primary Market
Secondary Market
1. Primary Market
2. Secondary Market
Secondary market provides a platform for sale of the already issued and
listed securities.
It is a market for a long term capital where the securities are sold for the
first time. Hence it is also called new issue market (NIM).
Funds are collected and securities are issued directly by the company to
the investors.
3.Primary issues are carried out by the companies for the purpose of
inception and functioning of business.
1.Company need not repay the money raised from the market.
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2.Money has to be repaid only in the case of winding up or buy back of shares.
4.Better performance of the company enhances the value for the shareholders.
7.If the company performs well the image of the company brightens.
Issuers The listed and unlisted issue securities both of these have to
fulfill conditions laid down by the SEBI to issue equity shares.
The company has net tangible assets of at least Rs.3 crore in each of the
preceding three full years (of twelve month each) of which not more than
50 percent is held in monetary of assets.
If more than 50 percent of the net of the net tangible assets are held in
monetary assets,the company has to make firm commitments to deploy
such assets monetary assets in its business projects.
*In case the company has changed its name within the last one year at least 50
percent of the revenue for the preceding of one full year is earned by the
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company from the activity suggested by the new name and the aggregate of
the proposed and all the previous issues made in the same financial year in
forms of size ( offer through offer document + firm allotment + promoters
contribution through the offer document ,does not exceed five times its pre-
issue net worth as per the credited balance sheet of the last financial year.
The aggregate of the proposed issue and all the previous issues made in
the same financial year in terms of size (offer through offer document +
firm allotment + promoters contribution through the offer document), the
revenue accounted for by the activity suggested by the new name is not
less than 50 percent of the total revenue in the preceding one full year
period.
Banking Companies
Investor
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Reservations
Classification of investors :
Retail Investors
Mutual funds banks financial institutions like LIC and foreign investors, fall under
the category of QIB. Earlier QIB were not required to submit any money along
with their bids and this had led to some manipulative practices.
However SEBI has recently changed the provisions and now QIBs have
to pay margin not the full amount at the time of bidding in the book
building of an issue.
The following are specified as QIBs by the SEBI public financial institutions
defined in the section 4 of the companies Act.
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Insurance companies registered with the insurance regulatory and
development Authority (IRDA)
Non-Institutional Investors
Retail Investors- They are defined in terms of the value of the primary issue
applied by them. The value of the applied shares should not exceed Rs.1 lakh.
Under this category only individuals both resident and NRIs along with
HUFs are allowed to bid.
The intermediaries have to be registered with SEBI and must have a valid
certificate from SEBI to act as intermediaries.
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Following are the intermediaries who are involved in the new issue market /
primary market:
The period during which the agreement will remain in force. The amount
of the underwriting obligation.
The maximum period within which the underwriter will have to subscribe
to the offer the companys intimation.
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The rate and amount of commission or brokerage chargeable by the
underwriter.
Bankers to the Issue - Banks which accept application forms and money on
behalf of the public are called bankers to the issue. The collected money is
transferred to the escrow accounts as per the provision of the companies Act.
The bankers to the issue have to keep the funds in the escrow account
on behalf of the holders.These funds are not available to the company till
the issue is completed and allocation is made commission is paid to the
bankers to the issue.
Registrar to the Issue- The Company appoints the registrars to the issue in
consultation with the lead manager some merchant bankers carry on the
activities of the registrars to an issue as well as of the share transfer agents.
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Share Transfer Agents- They maintain the records of the holders of securities of the
company for and on behalf of the company. They also handle all matters related to
transfer and redemption of securities of the company.
The validity period of SEBIs observation letter is three months only. i.e. the
company has to open its issue within three months period.
SEBI does not recommend any issue nor does it take any responsibility either for the
financial soundness of any scheme or the project for which the issue is
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proposed to be made or for the correctness of the statements made or opinion
The lead manager certifies that the disclosures made in the offer
document are generally adequate and are in conformity with SEBI
guidelines for disclosures and investor protection in force for the time
being. This requirement is to facilitate investors to take an informed
decision for making investment in proposed issue.
SEBI does not associate itself with any issue/issuer and should in no
way be construed as a guarantee for the funds that the investor
proposes to invest through the issue.
Investors are generally advised to study all the material fact pertaining to the
issue including the risk factors before considering any investment they are
strongly warned against any tips or news through unofficial means.
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DIP Guidelines (Disclosure and Investor Protection)
2. SEBI framed its DIP guidelines in 1992. Many amendments have been
carried out in the same in line with the market dynamics and requirements.
These guidelines and amendments there on are issued by SEBI India under
Section 11 of the Securities and Exchange Board of India Act 1992.
Due diligence forms the basis of any such examination and the discussions
which the dead manager has with the company its directors and other
officers and other agencies.
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3.It also forms an independent verification of the statements concerning the
objects of the issue projected profitability price justification etc
6.Any non-compliances on their part attract penal action from SEBI in terms
of SEBI (Merchant Bankers) Regulations.
7.The draft offer document filed by Merchant Bankers is also placed on the
web sites for public comments.
8.Officials of SEBI at various levels examine the compliance with DIP Guide
Lines and ensure that all necessary material information is disclosed in the
draft offer documents.
1. The Central Listing Authority (CLA) functions have been detected under
regulations of SEBI, The central Listing Authority Regulations 2008, (CLA
st
regulations) issued on Aug 21 , 2003.
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3.To make recommendations to the Board on issues pertaining to the
protection of the interest of the investors in securities and development and
regulation of the securities market including the listing of agreements, listing of
conditions and disclosures to be made in offer documents.
5.SEBI as the regulator of the securities market, examines all the policy
matters pertaining to issues and will continue to do so even during the
existence of the CLA.
Documents of issue
Public issue of securities requires certain documents to be drafted and filed
with the SEBI and registrar of companies These documents include
prospectus, abridged prospectus etc..
1) Offer Document
Offer document means prospectus in case of a public issue or offer for sale
and letter of offer in case of a rights issue, which is filed with Registrar of
Companies (ROC) and Stock Exchange.
An offer document covers all the relevant information to help an investor to make
his/her investment decision.SEBI issues press releases every were regarding the
draft offer documents received and observations issued during the period.The
draft offer document are put upon the website under reports.
Document Section
The final offer documents that are filed with SEBI/ROC are also put up for
information under the same section.The hard copy may be obtained from the
office of SEBI located at Mumbai on payment of Rs.100.The final offer
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documents that are filed with SEBI/ROC can be down loaded from the
same section of the website.
It is the offer document in the draft stage. The draft offer documents are
filed with SEBI, at least 21 days prior to filing of the offer document with
ROC/Stock Exchanges.
3) Red-Herring Prospectus
4) Abridged prospectus
Lock-in Shares
The term Lock-in indicates a freeze on the shares SEBI (DIP) guidelines
have promoters mainly to ensure that the promoters or main persons who
are controlling the comp shall continue to hold some minimum percentage
in the company after the public issue.
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The requirements are detailed in Chapter IV of DIP guidelines depositors
& investors.
1. Cover Page
The cover page of the offer document covers full contact details of the
Issuer Company, least managers and registrar the nature, number price
and amount of instrument (securities) offered and issue size and the
particulars regarding listing.Other details such as credit rating, risks in
relation to the first issue etc. are disclosed if applicable.
2. Risk Factors
The issuers management gives its view on the internal and external risks
faced by the company. The company also makes a note on the forward
looking statement.This information is disclosed in the initial pages of the
document and it is also clearly disclosed in the abridged prospectus.
It is generally advised that the investors should go through all the risk
factors of the company before making an investment decision.
3. Introduction
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General information about the company the merchant bankers /
syndicate members to the issue, credit rating, debenture trustees (in
case of debt issue) monitoring agency, book building process in brief and
details of under writing agreements are given here.
5. About us
6. Financial statements
Financial statement changes in accounting policies in the last three years and
difference between the accounting policies and the Indian Accounting Policies.
8. Mandatory disclosures
Under this heading the following information are covered. authority for the
issue prohibition by SEBI, eligibility of the company to enter the capital market,
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disclaimer, clause of the stock exchange listing, impersonation, minimum subscription
letters of allotment or refund orders, consents expert opinion, changes in the auditors
in the last three years, expenses of the issue, fees pay at to the lead managers, few
payable to the issue mgt. team, fees payable to the registrars, underwriting
commission, brokerage and selling commission etc.
9. Offer Information
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3.Collecting offer information:The document is prepared by an
independent specialized agency called merchant Bankers, which is
registered with SEBI. They are required to offer due diligence while
preparing an offer document.The draft offer document submitted to SEBI
is put on the website for public comment.
Demat Account - As per the requirement all the public issues of size in
excess of Rs.10 crores are to be made compulsorily in the demat
mode.Thus if an investor choose to apply for an issue that is being made
in a compulsory demat mode, he has to have a demat account and has
the responsibility to put the correct ID in the bid application forms.
QIBs are those institutional investors who are generally perceived to possess
expertise and financial muscle to evaluate and invest in the capital markets.
1956.
Mutual funds
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5. Multilateral and bilateral development financial institutions.
Any entities falling under the categories specified above are considered as
7. Issue open
Subscription list for public issues is kept open for atleast three working days
and not more than ten working days. in case of book-built issues, the minimum
and maximum period for which bidding will be open is three to seven working
days extended by three days in case of a revision in the price band.
8. Bid Revision
It is possible for the investor to change or revise the quantity or price in the
bid, using the form for changing/ revising the bid that is available along with
the application form However, the entire process of changing of revising the
bids shall be completed within the date of closure of the issue.
The syndicate member returns the counter foil with the signature, date and
stamp of the syndicate member. The investor can retain this as a sufficient
proof that the bids have been taken into account.Syndicate members are
mainly appointed to collect the entire old forms in a book built issue.
9. Allotment
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In case of book-built issues, the basis of allotment is finalized by the book
running lead managers within two weeks from the date of closure of the issue.
The registrar then ensures that the demat credit or refund as applicable
is completed within 15 days of the closure of the issue.
The listing on the stock exchanges is done within seven days from the
finalization of the issue.
10.Book-building
11. Listing
The listing on the stock exchanges is done within seven days from the
finalization of the issue. Ideally, it would be around three weeks after the
closure of the book built issue. In case of fixed price issue, it would be
around 37 days after the closure of the issue.
In case the investor does not receive any reply within a reasonable time,
investor may complain to SEBI, office of investors assistance.
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Any safety net scheme or buy back arrangement of the shares proposed in
any public issue shall be finalized by an issue company with the lead
merchant banker in advance and disclosed in the prospectus.
The securities and exchange Board of India has made IPO grading
mandatory and the new norm has been effective from 1 May 2007.
Generally, grades are assigned on a five point scale, where IPO grade 5
indicated the highest grading and IPO Grade 1 indicated the lowest grading
i.e., a higher score indicate stronger fundamentals.IPO grading represents
an independent opinion form an agency that is not connected with the
placement of the issue.IPO grading is a one-time exercise not subject to
subsequent surveillance.
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The Grading Process
It involves several steps, these are given below.
Site visits and discussions with the key operating personnel of the
company concerned are conducted by the rating agency.
Apart from the officials of the company the agency also meets its bankers,
auditors, merchant bankers and appraising authority (if any). If needed the
opinion of independent expert agencies on critical issues like technology
proposed to be used is also obtained.
The issuer comp. is required to disclose the assigned grade and also
publish it in the red herring prospectus, which is filed with SEBI and other
statutory authorities.
Grading Methodology
Industry prospectus
Competitive position
Financial performance
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5) Management quality
Prospectus
Offer of sale
Private placement
Book building
Prospectus
Offer of Sale
Private placement
Book-Building
Is a process adopted in initial public offering for efficient price discovery. The
investors bids the offer wither above or equal to the floor price.
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SEBI (Disclosure and Investor Protection) guidelines 2000 introduced a
new method of raising funds from the market by companies in the form
of QIP. It is a form of private placement.
SECONDARY MARKET
Trading of securities in the secondary market does not provide any funds
to the company.
Market Segments
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Whole sale Debt Market (WDM)
[ Speculation buying shares in the hope of being able to sell them again at
higher price and make profit ]
Wholesale Debt Market- Where state and central Government. securities, T-bills,
PSU-bonds (public security undertakings), corporate debentures, commercial
papers, certificate of deposits, mutual funds etc. are traded.
I. Investors
Investors
2. Institutional Investors
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3. Foreign Institutional Investors
1. Retail Investors
They are individual investors with a limited access to funds they invest
their surplus funds in securities to earn returns.
High net worth individual [HNI] is used to refer to individuals and families who
are affluent in their wealth holding and consequently have a higher risk profile.
They are venture capital funds, pension funds, hedge funds, mutual
funds and other institutions registered outside the country of the financial
market in which they take an investment exposure.
They are allowed to invest in the primary and secondary capital markets
in India through the portfolio investment scheme (PIS).
Under this scheme, FIIs can acquire shares/ debentures of Indian companies
through the stock exchange in India. The ceiling for the overall investment for
The number of FIIs registered with the securities and exchange Board of India
has doubled.The Indian capital market has attracted many global majors like
HSBC, Citigroup, crown capital, Fidelity, UBS, ABN Amro, Morgan Stanley.
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3. Institutional Investors
Mutual funds, unit Trust, Insurance Companies, banks and other large
institutions which invest their members money in shares and bonds are
known as Institutional Investors.
They have professional analyst and advisors who usually analyse the stock
market trends much better than individual investors.They trade in large
volumes and play a major role in the stock market.
Market Intermediaries
Intermediaries such as
Stock brokers
Depository participants
Depositories
Depository participants
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The trading can be carried out only through the members. the investors
can enter into trade only through a brokers account.
The brokers enters into trade either on his own account or on behalf of
his clients in the stock exchanges.
Individuals Firms
Corporate entities
IDBI, LIC, GIC, UTI, ICICI and subsidiaries of any of the corporations are
members in stock exchanges.
Fees: A stock broker has to pay a registration fee of Rs. 5000 for every
financial year. After the expiry of five years from the date of initial registration
as broker, he has to pay Rs. 5000 for a block of five financial years.
The stock exchange also collects transaction charges from its trading members.
Brokerage charges
1. Brokerage charge
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Penalties arising on a specific default
Service as stipulated
2) Depository
Function of Depository
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A depository established under the depositaries act can provide any
service connected with recording of allotment of securities or transfer of
ownership of securities in the recon of a depository.
3) Depository participants
The risk of bad deliveries and loss of certificates in transit are removed.
The cost of courier, notarization and the need for further follow up is
eliminated.
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The liquidity of securities due to immediate transfer and registration is
increased.
Bonuses and rights are directly credited into the depository account.
Interest charges are lower for loans taken against demat shares as
compared to physical shares.
The limit of loans availed against demat shares is higher than the loans
borrowed against physical shares.It is Rs.20 lakhs per borrower against
the demat shares as collateral, but it is Rs.10 lakh per borrower against
physical shares.
The investor has to get the account opening form from the DP and fill it up.
The agreement specifies the rights and duties of the DP and the demat
account holder.
Client identity proof along with the DP identity proof is given to the
account holder.
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To dematerialize the shares, the investors has to obtain the
dematerialization request form [DRI].
The investor has to submit the filled up form along with the share
certificate to Depository Participant.
The Dematerialized shares are credited in the demat account with fifteen days.In
the case of directly purchasing dematerialized shares from the broker, once the
order is executed, the DP receives Securities from the brokers clearing
account.
Feature
Bank
Depository
Account
Hold funds in an account
Hold Securities in an
account
Transfer
Transfers funds between
Transfers securities
holder.
Handling
Facilitates transfers without
Facilitates transfer without
having to handle money
having to handle securities
Safe Keeping
Facilitates safe keeping of
Facilities safekeeping of
money
securities
Customer contract
Direct contact
Contact through depository
participate
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Demat Services: Financial services relating to DP holding, maintaining
and dealing in securities in electronic form by a financial intermediary
known as depository participant or demat services.
Benefits of Investors:
Elimination of bad deliveries and all risks associated with physical certificate such
as loss, theft, mutilation (deliberately damaged or spoiled, forgery etc.,).
SEBI has made compulsory trading of shares of all the companies listed
nd
in stock Exchanges in demat form w.e.f 2 January 2002. Hence if an
investor wants to trade in respect of the companies which have
connectivity with NSDL and CSDL, it would require a demat (beneficiary
account) opened with the DP of choice to hold shares in dematerialized
(demat) form and to undertakeScriplus trading.
Services / Functions
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The investors (investors are called Beneficial owners in Depository
system) intending to hold securities in electronic form in the Depository
system open an account with a DP of NSDL.
The investor opens account opening form and signs an agreement with
DP. The investor can also open multiple accounts with same DP as also
with different DPs.
Materialization
Dematerialization
For this purpose the investor just files in Dematerialization request form
available with DP and submits the share certificates along with the above form
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legend like(surrendered for Dematerialization should be written on the
face of each certificates before its submission for Dematerialization).
The beneficial owners account will be credited within 15 days and he will
be informed by the DP.
Rematerialization
Electronic Trading
The debit instruction is verified for signature and correctness and then acted
upon by the DP broker in the same manner as is received now. For buying
shares in the depository system the client must inform the broker, the Depository
account number (Client ID) along with the Depository Participant ID (DPID) so
that the shares bought by the client are credited into that account.
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The payment for the shares in the depository system can be made in the
same way as one pays for the purchase of any physical shares.
Trade done and settled through a stock exchange and clearing corporation
is called Market Trade.Trade done in private without the involvement of
stock broker or stock exchange is called Off Market Trade. However DP
helps in delivering the shares against a sell transaction or receiving the
shares for a buy transaction.
Dematerialization
Steps in Dematerialization
Demat Request Form - Investor must submit Demat Request Form (DRF)
and share certificate to DP
Checking Securities - DP will check whether securities are available for Demat
Investor must deface the share certificate by stamping surrendered for
dematerialization and DP will punch two holes on the name of the comp and will
draw two parallel lines across the face of the certificate.
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Recording Details- Depository records the details of the Electronic Request in
the system and forward the request to Registrar and Transfer Agent (RTA) or
issuer (i.e., the company whose shares are sought to be dematerialized).
The investor may exercise this option by submitting demat request form
together with the option letter to the DP. Then the company or its RTA
would confirm the demat request in the usual manner.
SEBI has made it mandatory for all companies whose shares are traded
compulsorily in demat form in the stock exchanges to offer this facility
and has prescribed the procedure thereof.
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Certificate Number for Dematerialized shares
The dematerialized shares are fungible and they do not have any
certificate number or distinctive numbers.
The investor can dematerialize part of his holdings and hold the balance in
physical mode for the same security.
Partly paid up shares and fully paid up shares are identified by separate
ISINs (International Securities Identification Number). These are also
traded separately at the stock exchanges.
The company issues call notices to the beneficial holders of partly paid up
securities in the electronic form. The details of such beneficial holders will
be provided to the RTA/ Comp by the Depositories.
After the call money realization RTA/ company will electronically convert
the partly paid up shares to fully paid up shares.
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his/her demat account with the number of securities sold by him and credit
Before the pay in day, investors broker transfer the securities to clearing
corporation.
The investor receives payment from the broker for the sale in the same
manner as that is received for a sale in the physical mode.
Ministry of Finance
MINISTRY OF FINANCE
The SEBI was established under the SEBI Act 1992, as a regulatory authority of
Securities market with the objective to protect the interest of the investors in the
securities market and promote the development of the capital market.
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Regulates business in stock exchanges
Administers mostly the Acts, rules and regulations related to the securities
market.
This department takes care of the registration of all market intermediaries related
to all segments of the market namely the equity and derivative segments. It also
supervises monitors and inspects all the intermediaries.
Stock Exchanges
Stock exchanges are the most important segment of the secondary market
where securities are traded.Securities markets are places where securities,
stocks, shares and bonds of all types are bought and sold.
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Definition - Stock exchange are organized market places in which stock,
shares and other securities are traded by members of the exchange, acting
as both agents (brokers and principals dealers or traders).
Stock exchanges have a physical location where brokers and dealers meet
to execute orders from institutional and individual investors to buy and sell
securities. Here only members are allowed to buy or sell securities. It is a
market for existing not for new issues.
Central Trading Place- They provide a central place, where the brokers
and dealers regularly meet and transact business.
Continuous market- These are the market for the existing securities.
These are places for the holders of securities to buy and sell their
securities and for those who want to invest their savings. The stock
exchange thus provides liquidity to their investment.
Supply of Long Term Funds- Since the securities can be negotiated and transfer
through stock exchanges, it becomes possible for the companies to raise long term
funds from investors.In the stock exchange, one investor is
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substituted by another when a security is transacted. Therefore the
substantial profits.
10. Directs the flow of savings - A stock exchange directs the flow of
savings of the community between different types of competitive
investments. It also helps to meet the investment needs of entrepreneur.
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Stock Exchanges in India
Origin
The Securities contracts (Regulation)Act was passed in 1956 to control the security
trading in India.There are at present 23 recognized stock exchanges in India
including the over-the-counter Exchange of India(OTCET) and National stock
Exchange (NSE).Some of them are voluntary non- profit marking organizations
while others are companies limited by guarantee.Among the recognized stock
exchanges in India, Bombay, Calcutta, Madras, Delhi and Ahmedabad are the
prominent ones.24 stock exchanges are there in India.
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The recognized Stock Exchanges
Calcutta Stock
Exchange Association
National Stock Exchange of India Ltd.
Ltd.
Association Ltd.
Interconnected
Stock Exchange of
India Ltd.
As per SEBI report, Mangalore stock Exchange was derecognized in 2006 and
Hyderabad Stock Exchange Ltd., Magadh Stock Exchange Ltd., and
Saurashtra-Kutch Stock Exchange were derecognized in 2007. Coimbatore
Stock Exchange Ltd., has not filed application for renewal of recognition which
expired on 17 September 2006 due to a pending litigation in the Court.
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Organisation and management
This act permits only recognised stock exchanges which have to function
under the rules, by laws and regulations approved by the central
Government. At present the stock exchanges in India have one of the
following organizational format.
A President
A Vice President
An Executive Director
Recognition
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Membership
The members and their authorized clerks alone can enter the trading floor
and conduct buying and selling of securities. The eligibility criteria for
membership of a stock exchange are given under Rule 8 of the securities
Contracts (Regulation) Rules 1957.
Online Trading
The investor has to register with the online trading portals listed on the
site.
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He has to open a bank account with one of the Internet trading portals
banking and depository services partners.
Once the details of the login ID and password are entered the investor
has to verify the transaction details and confirm the transactions be
entering his transaction ID and password.
Types of Orders
Limit order- In the limit order, buy or sell order is placed with a price limit.
For Example if the investors place a buy order of Ranbaxy shares with
the limit price of Rs.450, he puts a cap on purchase price.
In case the current price is higher than the limit price, the order will be
kept pending. It will be executed only when the price hits Rs.450 (or)
below. If the actual price in the market is Rs.447 the order will be
immediately executed.
Market Order- In the market order, the buy and sell orders are executed at
the best price offered in the exchange. For Example, the last quote of
Infosys was Rs.1494 (15 Jan 2008) and the buyer placed a market buy
order. Then the execution was at the best offer price on the exchange
which could be above or below Rs.1494.
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Stop Loss Order- These orders are given to limit the loss due to unfavorable
price movement in the market. A particular limit is given for waiting. If the price
falls below the limit, the broker is authorized to sell the shares to prevent loss.
The limit price is also known as trigger price.
Day Trading - It means not holding any stock overnight. This is really
the safest way to do day trading because the trader is not exposed to
the potential losses that can occur overnight when the stock market is
close due to news that can affect the prices of the particular stock.
1. Scalpers
This type of day trading involves rapid and repeated buying and selling
of a large volume of stocks within seconds or minutes. The objective is
to earn a small percentage of profit per share on each transaction while
minimizing the risk.
Momentum Traders
This type of day trading involves identifying the moving patterns of the
stock during the day. It is an attempt to buy such stocks at bottoms and
sell at tops within a day.
No Overnight Risk- Since positions are closed prior to the end of the
trading day, news and events that affect the opening prices of the next
trading day do not affect the traders portfolio.
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Leverage- (Using borrowed money in order to buy it or pay for it) Day traders
have a greater leverage on their trading capital because of low margin
requirement as their trades are closed in the same market day. This increased
leverage can increase the profits.
Gains from market Movement- Day trading often utilizes short- selling to
take advantages of declining stock prices. The ability to lock in profits even
as markers fall throughout the trading day is extremely useful during the
bear market conditions.
Brokers
Jobbers
Authorised clerks
Taravaniwalas
The Badliwalas
Arbitrageurs
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with a broker or with another jobber. He does not work on commission
Brokers
Jobbers
other jobbers
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Remisers - Remisers are agents who secure business from non-members in
return for a commission. They are also called half commission me. They are
sub- brokers. They are only procurers of business and are not allowed to
transact business on the floor of the stock exchange their remuneration.
They often act as brokers for the public when they do not have any
business as jobber. This helps them to sell their own securities at
higher prices.
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different stock exchanges and the availability of fast means of
communication system.
Security Dealers - Security dealers are specialists in buying and selling gilt-
edged securities i.e. securities issued by the central and state Government
and by statutory public bodies such as municipal corporation improvement
trusts and electricity boards. They act as mainly as jobbers and are prepared
to take risks inherent in the ready purchase and sale of
10. Odd-Lot Dealers: the standard trading unit for listed stocks is
designated as a round lot which is usually a 100 shares. The odd lot
dealers are members specializing in the execution of orders for blocks of
shares less than 100. They buy odd lots which other members wish to sell
to their customers and sell odd lots which other wish to buy. The prices of
the odd-lot transaction are being determined by the round lot transactions.
The odd lot dealer earns his profit on the difference between the price at
which he buys and sells the securities.
Speculation in securities
Stock exchange is the place where the listed securities are marketed.
The people whobuy and sell securities will have different motives
namely investment motive and speculative motive.
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Investors
There are some persons who buy securities with a view to investing their
money for the purpose of getting an income or selling them for getting
ready cash. Such persons are called genuine Investors.
Speculators: There are some people who buy securities with ahope of selling
them in future at a profit (or) in the expectation of being able to buy them at a profit
in future such dealers in the stock exchange are called speculators.
Investor
Speculator
Types of Speculators
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the hope of selling them at the future date when the price rise as per his
expectation. If the prices rises, he sells and makes a speculative profit.
The bull is to buy security without taking actual delivery to sell it in the
future when there is a rise in prices. The bull raises the prices in the
stock market of those securities in which he deals.
Example of bull transaction- if a person asks his broker to buy 1000 shares
at Rs.10 per share for which no immediate payment will be made and if the
price of those shares increases to Rs.16 per share, he will instruct his broker
to sell the shares on this behalf. The transaction may not be real. The profit
made in this transaction is calculated as follows.
Profit 6000
This profit of Rs.6,000 only will be paid on the date of settlement and
there will be no delivery of shares.
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because of the non availability of securities in the market which he has
agreed to sell and at the same time the other party is not willing to
postpone the transaction.
Stag: A stag is a premium hunter. He does not buy and sell securities in the
market. He applies for shares in the new issue market just like a genuine
investor. He expects that the price of shares will soon increase and shares can
be hold for premium stag expects a rise in price.
National stock Exchange was established by the IDBI and other all- India
financial institutions in Bombay in Nov 1992 with a paid up equity capital of
Rs.25 crore.
NSE was recognized by the Government in 1993 and its started its
operation in whole sale debt and equity market.
It has become a national market for shares, public sector undertaking bonds,
UTI units, debentures, treasury bills, government securities and call money. It
has no trading floor as in other stock exchanges NSE has a country wide
screen based, online trading system.
Membership -
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Participating Trading members who are allowed to trade only on their
own behalf.
Over the counter Exchange of India (OTCEI) is the first unlisted security
market in India. It has been incorporated as a company under the companies
Act 1956. It has been promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI
capital markets Ltd and can bank financial services Ltd.
The OTCEI is a different kind of stock exchange OTC stands for Over the
Counter. Investor can buy and sell securities over the counters of heir local
banks. The OTC markets refers to a way of trading securities through a
network of broker dealers spread over different locations linked with
telephone, Tele-Fax, Faxes and comfort.
Features of OTCEI
OTCEI operations are fully computerized and there are four components in a
transaction via offer, Acceptance, Settlement and Documentation.
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OATCEI has an exclusive list on the OTCEI are not permitted to list on
other exchanges and vice versa
OTCEI Market
The OTCEI has two classes such as members and dealers undertake
booking, trading and voluntary market and listed companies may choose one
among them. It has in house control over the transfer of securities.
Objectives of OTCEI
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Guideline of OTCEI:
The minimum issued equity share capital of a company for eligible for
listing on the OTCEI is Rs.30 Lakhs. Subject to a minimum of public offer
of equity shares worth of Rs.20 Lakh in face value.
The stock holding corporation of India Ltd (SHCIL) has been promoted
by IDBI, ICICI, IFCI, UTI, LIC and GIC and its subsidiaries. It is the first
organization to register as a depository participant both with National
Securities Depository Ltd (NSDL) and central Depository services Ltd
(CSDL).
The SHCIL is the largest depository participant in the country with more
than 7 lakh account. It has the network of many offices across the
country. It formulates new products that give benefits to investors,
corporate houses and brokers.
The SHCIL provides complete solutions to its institutional clients. Its core
services such as market operations, safe keeping, custody mgt.
corporation action, stock lending, reporting and market updates, etc.
support services like fund transfer and data bank information needs. The
SHCIL is accredited by the RBI for providing services to investments in
Government securities in dematerialized form.
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UNIT-II
SECURITIZATION
Definition of Securitization
Securities may then be rated and sold based upon the economic quality
of the assets.
A technique where by assets are converted into securities, which are in turn
converted into cash on an ongoing basis, with a view to allow for increasing
turnover of business and profit is known as asset securitisation.
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Securitization involves selling this series of cash flow that emanates from
the above dealing by creating pools of securities and selling them for a
certain maturity period.
Meaning of security
The word security here means a financial claim which is generally in the form of a
document its essential feature being marketability .To endure marketability the
instrument must have general acceptability as a store of value.
The above said needs set the stage for the evolution of financial instruments
which would convert financial claims into liquid,easy to understand and
homogenous products at times carrying certified quality labels(credit
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ratings or security )which would be available in small denominations to
suit everyones purse.
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Therefore the originator transfers the assets to SPV which holds the
assets on behalf of investors and issues to the investors its own
securities.For this purpose the SPVis also called the issuer.
Process of Securitisation
Origination
Security Creation
Securities of uniform maturity are created out of the assets that are
identified. These are then passed on to another institution called Special
purpose vehicle.The SPV is a trust,which like an investment
banker,manage the issue of securities to investors.These securities are
known as pay or pass through certificates.The SPV becomes liable to
the investor for principal repayments and interest recovery.
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SPVs Task
The SPV engages itself in the task of enhancing its credibility in order to
make the issue attractive.For this purpose the SPV obtains an insurance
policy to cover the credit losses or arranges a credit facility from a third
party lender to cover delayed payments.
Security Issue
The SPV issues tradable securities to fund the purchase of assets. The
performance of these securities is directly linked to the performance of
the assets and there is no recourse (other than in the event of breach of
contract) back to the originator.
Security purchase
Receipt of Benefits
The SPV agrees to pay any surplus which arises during its funding of the assets
back to the originator.This means that the originator, for all practical purposes
retains its existing relationship with the borrowers and all the economics of
funding the assets(i.e.the originator continues to administer the portfolio and
continues to receive the economic benefits (profits)of owning the assets)
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The SSPV gets the securities rated by some reputed credit rating
agencies so as to enhance the marketability of the securitized assets. In
addition,credit rating increases the trading potential of the certificate in a
secondary market, thus augmenting its liquidity potential.
Redemption
Securitization Benefits
Benefits to originator
2.Creditenhancement
3.Low costs
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4..Access to market
Benefits to investors
Enabling the end investor to look past the issuing entity to the collateral
pool that the issue represents.
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Unit -II
UNDERWRITING OF SECURITIES
1. Firm underwriting
2.Sub-underwriting
3.Joint underwriting
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It refers to a situation of issue of securities being underwritten by two or
more underwriting intermediaries jointly.
4.Syndicate underwriting
Functions of Underwriting
Adequate funds
Expert advice
Enhanced Goodwill
The fact that the issues of securities of a firm are underwritten would
help the firm achieve a successful subscription of securities by the
public.This is because intermediaries of financial integrity and
established reputation usually do the underwriting.Such an activity
therefore helps to enhance the goodwill of the issuing company.
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Assurance to investors
Better Marketing
Benefits to Buyers
Price Stability
Underwriting Agencies
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Private Agencies
Some of the important private firms that are involved in underwriting business
are M/s.Dalaland Co., M/s.Kothari and Co and M/s.Wright and Co.
Investment Companies
Commercial Banks
Underwriter
The financial services intermediary who arranges for the subscription of issue not
being taken by the public or who firmly guarantees a capital issue is called the
underwriter.National financial institutions ,commercial banks,merchant bankers
and members of stock exchanges function as underwriters.
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Unit - II
BOOK BUILDING
Tendering process
Floor price is the minimum price set by the lead manager in consultation
with the issuer. This is the price at which the issue is open for
subscription. Investors are free to place a bid at any price higher than the
floor price.
Price Band
The range of price (The Highest and the lowest price) at which offer for
the subscription of securities is made is known as price band. Investors
are free to bid any price within the Price band.
Bid
The Investor can place a bid with the authorized lead manager- merchant banker.
In case of equity shares usually several brokers in the stock exchange are also
authorized by the lead manager. The investor fills up a bid-cum-application form,
which gives a choice to bid upto three optional
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prices. The price and demand options submitted by the bidder are treated
Allotment
The lead manager in consultation with the issuer, decides the price at
which the issue will be subscribed and proceeds to allot shares to the
investors who have bid at or above the fixed price. All investors are
allotted shares at the same fixed price. For any allottee, therefore, the
price will be equal to or less than the price bid.
Participants
STOCK INVEST
Meaning
To avail the benefit of stock invest the prospective subscriber has to open an
account with a banker,who operates the stock-invest scheme.Banks issue the
facility of stock-invest to the prospective subscriber in the deposit account of
the investor. The issue is made with the banks lien for the amount of stock-
invest issued.The collecting banker gives credit to the account of the company
only on successful allotment of securities.
Features of Stock-invest
Additional Mode
No Locking up of funds
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Denominations
The instrument was issued in five denominations, with ceiling for drawing upto
Rs.250,Rs.500,Rs.2,500,Rs.5,000 and Rs.10,000.Later on stock-invests came
to be issued with the RBI directives upto a maximum it Rs.50,000.
Interest income
The scheme provided for the benefit of earning interest income for the investors
by allowing the money to remain with bank,which is highly advantageous.
Participation
All investor and banks may take part in the scheme and be benefited by
its merits
Release of funds
Funds are released from the stock-invest account by the bank only in the
event of successful allotment of securities to the subscriber customer.
Nature
Validity
The instrument of stock invest has a validity of 4months from the date
of issue by the bank concerned
Bank Charges
Banks levy a charge to the extent of utilization of the money in the stock
invest account. This is to the tune of Rs.5 for every Rs.1,000.
Modus Operandi
Account
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Request
Issue
Banks issue the facility of stock-invest for a certain amount is made out
in the prescribed form by the prospective applicant.
Enclosure
The prospective investor encloses the stock-invest form with the application
made for securities to companies and deposits the same with the collecting
banker.The investor fills in particulars such as companys name,number
and the value of shares applied for ,etc in stock-invest form.
Collecting Banker
The collecting banker receives the share application forms along with the
stock-invest form.The amount is not credited to the account of the
company making the public issue. The banker gives credit to the account
of the company only on successful allotment of securities.
Entitlement
The company and the Registrar to the issue present to the bank,the
entitlement of the investor in the stock-invest.The banker credits the
account of the issuing company upon the presentation of stock-invest.
Intimation
The issuing bank intimates the unsuccessful applicants about the non-
allotment of shares . The bank then lifts the lien on the account or males
due payment from the account.This way the stock-invest account is closed.
Benefits
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Convenient Mode
Safe Mode
No misuse of funds
The scheme allows for the use of funds of the prospective allottee only
on the successful allotment of securities.There is no locking up of funds
and this prevents possible misuse by the issuer.
Satisfied investor
The scheme of stock-invest works to the total satisfaction of the investor to earn
too,for the period between application for shares and the allotment/refund.
Sources of Funds
The funds that are available in stock-invest are used by the issuing bank
as an ideal source of short-term financing. In fact stock -invest serves as
an additional source of attracting funds needed for business.
Bank Lien
Boon to investors
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Unit - II
VENTURE CAPITAL
A form of equity financing designed specially for funding high risk and
high reward projects is known as Venture Capital.Venture capital plays
an important role in financing hi-tech projects,besides helping research
and development projects to turn into commercial production.
Venture capital fund activities generally include financing new and rapidly growing
companies that are specially knowledge based,sustainable,up-scalable
companies, purchase of equity securities assisting in the development of new
products or services,adding value to the company through active participation of
higher rewards and having a long term orientation.
New ventures
Continuous Involvement
Mode of Investment
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Objective
Hands on Approach
Venture capital institutions take active part in providing value added services
such as providing business skills to investee firms.They do not interfere in the
management of the firms nor do they acquire a majority controlling interest in
the investee firms. The rationale for the extension of hands on management is
that venture capital investments tend to be highly non liquid.
Venture capitalists finance high risk return ventures.Some of the ventures yield
very high return in order to compensate for the heavy risks related to the
ventures.ventures capitalists usually make huge capital gains at the time of exit.
Nature of Firms
Venture capitalists usually finance small and medium sized firms during the
early stages of their development until they are established and are able to
raise finance from the conventional industrial finance market.Many of these
firms are new high technology oriented companies.
Liquidity
Seed capital
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entrepreneur to provide the feasibility of a project and qualify for start up
capital.
This stage involves serious risk as there is no guarantee for the success
of the concept,idea,and process pertaining to high technology or
innovation. This stage requires constant infusion of funds in order to
sustain the research and development work and establish the process to
successful adaptation going into the commencement of commercial
production and marketing. Venture financing constitutes financing of
ideas developed by research and development wings of companies or at
university centers.Chances of success in hi-tech projects are meager.
Start up financing
The European Venture capital association defines early stage finance as finance
provided to companies that have completed development stage and require
further funds to initiate commercial manufacturing and sales.They will not yet be
generating profit. This is the kind of financing required for completed the project.It
is required immediately after the start up stage of a project.The enterprises may
need further investment before completion of the project.
Follow on Financing
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Expansion Financing
Replacement Financing
Turnaround Financing
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Management Buy In
Mezzanine Finance
CREDIT RATING
Meaning
FeaturesofCreditRating
Specificity
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Relativity
The rating is based on the relative capability and willingness of the issuer
of the instrument toservice debt obligations(both principal and interest) in
accordance with the terms of the contract.
Guidance
Not a Recommendation
BroadParameters
NoGuarantee
The rating furnished by the agency does not provide any guarantee for the
completeness or accuracy of the information on which the rating is based.
QuantitativeandQualitative
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quantitative analysis is limited toassist in the making of the best possible
overall judgement.
Advantages
ToInvestors
1.Information service
The credit system allows for the recognition of risk perception by the
common investor debt instruments and makes the investor familiar with
risk profile of debt instruments.
3.Professional competency
A credit rating agency equipped with the required skills ,competence and
credibility,provides a professional service,making it possible to use well-
research and scientifically analyzed opinions regarding the relative
ranking of different debt instruments according to their credit quality.
4.Easy to Understand
Large investors may use the credit rating for portfolio diversification by
information provided by rating agencies, by carefully watching upgrades
and downgrades and altering their portfolio mix by operating agencies by
carefully watching upgrades and downgrades and altering their portfolio
mix by operating in the secondary market.
7.Other benefits
The investor community in general also benefits from the other services offered
by credit rating agencies namely,research in the form of industry reports,
corporate reports, seminars, and open access to the analysis of the agencies.
To Issuers
1.Index of faith
Credit rating acts as an ideal index of faith placed by the market on the
issuers.This eventually also acts as aguide for investment decision.
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3.Bench Mark
MajorIssues
Continuous Monitoring
Credit rating agencies keep a constant surveillance during the life of the
instrument for any developments until it is fully serviced by the company.In the
absence of any specific development,such reviews are taken up periodically
either quarterly,orannually.In addition a formal and extensive written review is
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taken up immediately.The grading is altered on the basis of the changing
debt servicing capability of the issuer.
Grade surveillance
Where any major deviation from the expected trends of the issuers
business occurs or where any event has taken place which may have an
impact on the debt servicing capability of the issuer, which could warrant
a change in the rating, the rating agency put such ratings under grade
surveillance.Gradesurveillance listing may also specify positive or
negative outlooks.
Rating ceiling
Evaluation of Line
Ownership Considerations
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Grading Process
The process of Equity Grading is mandate from the issuer and involves
the following steps.
The agency initiates the job of equity analysis and grading on the basis
of instructions received from the issuer.
After obtaining the mandate from the issuer, the agency then proceeds to assign
technical teams to the issuing company in order to begin the analysis process.
Data Analysis
The data collected by the team of analysis is analyzed for inferences. The results
are then benchmarked against general business and financial parameters.
Discussions
Detailed and personal discussions are held with various managerial personnel. In
addition interactions are also held with bankers and auditors of the company.
Credit Report
On the basis of the discussions and meetings that are held and based on the
data analyzed, a report on the company is prepared. The report is then
presented to the Grading Committee, which in turn assigns the relevant grade.
Grade Communication
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of non-acceptance the company is given one chance to appeal and the
analysts are provided with fresh inputs and clarifications.
UNIT -III
CONSUMER FINANCE
Meaning
The term consumer finance refers to the activities involved in granting credit to
consumers to enable them possess own goods meant for everyday use.
Revolving Credit
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consumer is entitled to avail credit to the extent sanctioned as the credit
limit. An ideal example of revolving credit is credit cards.
Fixed credit
It is like a term loan whereby the financier provides loan for a fixed period
of time.The credit has to be squared off within a stipulated period.
Examples of fixed credit include monthly instalment loan, hire purchase,etc.
Cash Loan
Under this type of credit banks and financial institutions provide money with
which the consumers buy articles for personal consumption. Here the lender and
the seller are different. The lender does not have the responsibilities of a seller.
Secured Finance
Unsecured Finance
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Traders
Commercial Banks
NBFCs
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Credit Unions
Middlemen
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Unit-III
Definition
1.Popular Method
Hire purchase is the most popular method used for the sale of expensive
and durable goods on credit.
2.Retention of Right
In a hire purchase the seller sells on credit to buyers the security being
the sellers right to retain property rights on the goods sold.
3.Instalments
4.Ownership
The property rights in goods sold remains with the seller and the buyer gets
legal ownership of the article only after the payment of the last instalment.
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5.Agreement
6.Possession
The buyer is given possession of the goods on payment of the first rental
amount in cash known as the down payment.
7.Default
When the buyer defaults i.e fails to either pay the specified instalments or
insure the article in accordance with the terms of the contract, the seller has
the right to terminate the hire purchase agreement and take re-possession of
the article. If the agreement is terminated because of default, the hirer or
buyer will have no claim to the amount already paid since that amount is
already paid, since that amount is already treated as rental charges.
Under the hire purchase agreement the buyer simply hires the article.
The buyer cannot commit any criminal breach of trust. If the buyer does
so and managers to sell the article the seller can recover the article from
the sub-buyer, since there is no transfer of ownership.
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1.Formal agreement
2.Document
It is a document that sets out the terms and conditions on the basis of
which goods are sold on credit. It also sets out the payment schedule
spread over a fixed future period.
3.Property
The property ownership right for the goods passes from the seller to the
buyer only when the last instalment is paid and only where the buyer
fulfills all the terms of the agreement.
4.Owner
The seller is the owner of the goods right up to the payment of the last
instalments. Therefore the seller can take possession of the article sold
in the event of failure to pay the instalments.
2.Easy possession
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3.Economic growth
4.Thrift
Hire purchase inculcates /forces the saving habit on the buyer so that it
becomes possible to pay instalments without default.
5.Relief to Buyer
It relieves the buyer of arranging for loans and advances which eventually
involves a financial burden to pay for the asset. It is considered to be
advantageous especially for the small sector farmers and industrialists.
Definition
The instalment system which is a modified hire purchase sale has the
following features.
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3.Payment is made through a number of instalments.
4.No possibility of the article sold being returned to the seller since sale
is complete immediately after the execution of the agreement.
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Unit - III
LEASING
Meaning
Characteristics of Lease
1.The Parties
There are two parties to a lease agreement.They are the lessor and the
lessee.Lessor is a person who conveys to another person (lessee) the right
to use an asset in consideration of a periodical rental payment, under a
lease agreement.Lessee is a person who obtains the right to use from the
lessor for a periodical rental payment for an agreed period of time.
2.The Asset
Leasing is used for financing the use of fixed assets of high value.The asset is
the property to be leased out.It may include an automobile,an aircraft ,plant and
machinery, a building etc.However the ownership of the asset is separated from
the use of the asset.During the period of the lease, the ownership of the asset
rests with the lessor while the use is transferred to the lessee.
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3.Term
The term of the lease is called the lease period.It is the period for which the
lease agreement is in operation.It is illegal to have a lease without a specified
term. However in India, perpetual lease is in operation where the lease period
is for an indefinite period of time. On expiry of the lease period, the asset
reverts to the lessor mentioned in the operating lease.In the case of a financial
lease period is in consonance with the economic life of the asset so that the
lessee is given the advantage of exclusive use throughout its useful period.
Sometimes the lease period may be broken into primary lease period and
secondary lease period.A primary lease period is a period during which the
lessor wants to get back the investment together with interest. As secondary
period comprises the latter part of the lease period where only nominal rentals
are charged in order to keep the lease agreement operational.
Types of Lease
Variants of financial lease include full payout lease and true lease.
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(i).Full Payout Lease-In this type of lease,the lessor recovers the full value of
the leased asset within the period of the lease rentals and the residual value.
(ii)True Lease- In this type of lease, the typical tax-related benefits such as
investment tax credit,depreciation tax shields etc. are offered to the lessor.
The lease is cancellable at short notice by the lessee.The lessee has the
option of renewing the lease after the expiry of the lease period.It is the
responsibility of the lessor to ensure maintenance,insurance, etc. of the
asset which is chargeable by the lessor. It is a high-risk lease to the
lessor since it could be cancelled at any time.
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involves one more financier who may hold a charge over the leased
asset over and above a part of the lease rentals.
4.Sale and LeaseBack-Under this type of lease the owner of an asset sells it to
the lessor and gets the asset back under theleaseagreement.The ownership of
the asset changes hands from the original owner to thelessor who in turn leases
out the asset,back to the original owner.This paper exchange of title has the effect
of providing immediate free finance to the selling company, the lessee.The
transaction also helps the release of fundstied up in that particular asset.
7.Balloon Lease-A type of lease which has zero residual value at the
end of the lease period is called Balloon Lease.It also means a kind of a
lease where thelease rentals are low at the inception, high during the
mid years and low again during the end of the lease.
Under this arrangement if the assets residual value fetches less price than
agreed,the lessee pays the difference to the lessor. In the same manner where
the assets residual value fetches more than the value agreed the lessor pays the
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excess to the lessee.It is so called because the lessee does not know
the actual cost of the asset until it is sold at the end of the lease.
12.Cross Border Leasing-A type of lease where the lessor in one country
leases out assets to another country is known as cross-border leasing.
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Unit IV
Mutual Funds
Meaning
A trust that pools the savings of investor who share a common financial goal is
known as a Mutual Fund.The money thus collected is then invested in financial
market instruments such as shares,debentures and other securities like
government paper.The income earned through these investments and the capital
appreciation realized,are shared by its unit holders in proportion to the number of
units owned by them.Investments in securities are spread over a wide cross
section of industries and sectors,thus allowing risk reduction to take place.
To state in simple words, a mutual funds collects the savings from small
investors, invest them in Government and other corporate securities and
earn income through interest and dividends.
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his investment.Thus every investor whether big or small will have a stake in
the fund and enjoy the wide portfolio of the investment held by the fund.
Features /Role/Benefits
Mutual funds mobilize funds by; selling their own shares,Known as units.To an
investor, a unit in mutual funds means ownership of a proportional share of
securities in the portfolio of a mutual fund.This gives the benefit of
convenience and the satisfaction of owning shares in many industries.Thus,
mutual funds are primarily investment intermediaries to acquire individual
investments and pass on the returns to small fund investors.
2.Investment Avenue
3.Professional Management
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Expertise in stock selection and timing is made available to investors so
that the invested funds generate returns.
4.Diversified Invesments
5.Better Liquidity
Mutual funds have the distinct advantage of offering to its investors the benefit
of better liquidity of investment.There is always a ready market available for
the mutual funds units. In addition there is also an obligation imposed by SEBI
guidelines.Further a high level of liquidity is possible for the fund holders
because of more liquid securities in the mutual fund portfolio.The securities
could be converted into cash at anytime.Moreover mutual fund schemes
provide the advantage of an active secondary market by allowing the units to
be listed and traded thus offering a secondary market for the units
6. Reduced Risk
There is only a minimum risk attached to the principal amount and return for
the investments made in mutual fund schemes. This is usually made possible
by expert supervision, diversification, and liquidity of units. Mutual funds
provide small investors the access to reduced investment risk resulting from
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diversification, economies of scale on transaction cost and professional
finance management.
7. Investment Protection
Mutual funds in India are largely by guidelines and legislative provisions put in
place by regulatory agencies such as the SEBI.The Securities Exchange
Commission (SEC) in the USA allows for the provision of safety of
investments. In order to protect the investor interest, it is incumbent on the
part of mutual funds to broadly follow the provisions laid down in this regard.
8. Switching Facility
9. Tax-Benefits
The cost of purchase and sale of mutual funds units is relatively lower.
This is due in the large volume ofmoney being handled by mutual funds
in the capital market. The fees payable such as brokerage fee or trading
commission etc. are lower. This obviously enhances the quantum of
distributable income available for investors.
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11. Economic Development
12. Convenience
Mutual Fund units can be traded easily and with little or no transaction
costs. No brokerage is incurred.
Regular returns
PRODUCTS/SCHEMES
Operational Classification
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Under this scheme the capitalization of the fund will constantly
change,since it is always open for the investors to sell or buy their share
units.The scheme provides an excellent liquidity facility to
investors,although the units of such scheme are not listed.
Under this classification fall those mutual fund schemes that are
designed to meet the diverse needs of investors and to earn a good
return.Returns expected are in the form of regular dividends or capital
appreciation or a combination of these two.
This scheme that is tailored to suit the needs of investors who areparticular
about regular returns is known as income fund scheme.The scheme offers the
maximum current income,where by the income earned by units is distributed
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periodically .such funds are offered in two forms.Such funds are offered
in two forms.The first scheme earns a target constant income at
relatively low risk,while the second scheme offers the maximum possible
income.This obviously implies that the higher expected return comes
with a higher potential risk of the investment.
Investment-Based Classification
A kind of mutual fund whose strength is derived from equity based investments
is called equity fund scheme.They carry a high degree of risk.Such funds do well
in periods of favourable capital market trends.A variation of the equity fund
scheme is the Index Fund or Never beat market fund which are involved in
transacting only those scrips which are included in any specific
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index E.g the scrips which constitute the BSE-30 or 100 shares National
index.Thesefunds involve low transactions costs.
A scheme of mutual fund that has a mix of debt and equity in the portfolio
of investments may be referred to as a balanced fund scheme.The
portfolio of such funds will be often shifted between debt and
equity,depending upon the prevailing market trends.
When the managers of mutual funds invest the amount collected from a
wide variety of small investors directly in various specific sectors of the
economy,such funds are called sectoral mutual funds.The specialized
sectors may include gold and silver,realestate,specific industry such as
oil and gas companies,offshore investments.
5.Funds-of-funds scheme
There can also be funds of funds where funds of one mutual fund are invested
in the units of other mutual funds.There are a number of funds that direct
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investment into a specified sector of the economy. This makes
diversified and yet intensive investment of funds possible.
6.Leverage-fund scheme
The funds that are created out of investments with not only the amount
mobilized from small savers but also the fund managers who borrow money
from the capital market are known as leverage-fund scheme.This way fund
managers pass on the benefit of leverage to the mutual fund investors.
7.Gilt Funds
8.Index-Funds
These are also known as growth funds,but they are linked to a specific
index if share prices.It means that funds mobilized under such scheme
are invested principally in the securities of companies whose securities
are included in theindex concerned and in the same weightage. Thus the
funds performance is linked to the growth in the concerned index.
Certain mutual fund schemes offer tax rebate on investments made in equity
shares, under section 88 of the Income Tax Act 1961.Income may also be
periodically distributed,depending upon surplus.Subscriptions made upto
Rs.10,000 in an assessment year are eligible for tax rebate under Section 88.
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10.Other Funds
a.LoadFunds
Where mutual fund managers charge a fee over and above the NAV
from the purchaser.
b. No Load Funds
also known as regional or country funds where the funds are mobilized
from abroad for deployment in the Indian market.
etc.
The regulations governing the functioning of the mutual funds in India were
introduced by SEBI in December 9,1996.The objectives of these regulations
was to impose regulatory norms for the formation, operation and management
of mutual funds in India.The regulations also lay down the broad guidelines on
investment valuations,investment restrictions,advertisement code and code of
conduct for mutual funds and asset management companies.The salient
features of these regulations are as follows.
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SEBIs Regulations to Registration of Mutual Fund
2.Every mutual fund shall pay Rs.25 lakh towards registration fee and
Rs.2,50,000 p.a.as service fees.
4.Agreement-The trustees and the AMC with SEBI s prior approval shall
enter into an investment management agreement.
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5.Requirement-The trustees shall ensure before the launch of a scheme
that theAMC has its back office,dealing and accounting system in place,
and that key personnel,auditors and registrars are appointed. They also
have to ensure that the compliance manual has been prepared,an internal
control mechanism has been designed and norms have been specified for
the empanelment of brokers and marketing agents.
6.Monitoring- The trustees shall ensure that the AMC has been diligent
in monitoring securities transactions with brokers, and in avoiding undue
concentration of business with any single broker.
7.Managing-The trustees shall ensure that the AMC has been managing
the schemes independently of other activities.They should also take
remedial steps by informing SEBI if the conduct of business of a mutual
fund is not in accordance with SEBI regulations.
8.Consent-In the interests of unit holders the trustees shall obtain the
consent of the unit holders or if a majority of trustees decide to wind up
or prematurely redeem the units or in the event of any change in the
fundamental attributes of any scheme , trustee, fees, expenses payable
or any other change in the fundamental attributes of any scheme,
trustees, fees, expenses payable or any other change which would
modify the scheme or affect the interest of unit holders.
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2.The sponsor or trustees (if authorized by the trust deed)shall appoint
an AMC with SEBI s approval.
6.The Chairman of the AMC should not be atrustees of any other mutual fund.
7.No AMC shall act as an AMC for any other mutual fund.
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5.Redemption-Units of a close ended scheme can be opened for sale or
redemption at apredetermined fixed interval.
6.Subscription open- No scheme other than unit linked scheme can be opened
for subscription for more than 45 days. The AMC shall specify in theoffer
documents the minimum subscription amount it seeks to raise under the scheme
and in case of oversubscription, the extent of subscription it may retain.In such a
case all applicants applying for upto 5000 units shall be given full allotment.
8.Conversion into open- ended schemes The units of close ended schemes
may be converted into open ended scheme, if the offer document of such a
scheme discloses the option and the4period of conversion. Upto January
12,1998, approval by the majority of the unit holders for such a conversion was
required. But now, those unit holders who do not express written consent to the
above shall be allowed to redeem their holdings in fullat NAV based prices.
9.Roll over- A close ended scheme shall be fully redeemed at the end of the
maturity period unless a majority of the unit holders decide for its roll over by
passing a resolution. But the unit holders who do not opt for roll-over shall be
allowed to redeem their holdings in the scheme at NAV based prices.
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11.Refund- The mutual fund and asset management company shall be
liable torefund the application money to the applicants if the minimum
subscriptions referred to above is not received and incase of over
subscription. The same shall be refunded within 6 weeks from the date
of closure of subscription list or 15 % p.a shall be payable.
The mutual fund industry in India made its debut with the setting up of
the largest public sector mutual fund in the world namely the Unit Trust
of India (UTI).It was set up in the year 1964 by a special Act of
Parliament. The first unit scheme offered was the US-64.A host of other
fund schemes were subsequently introduced by the UTI.
The basic objective behind the setting up of the Trust was to mobilize
small savings and to allow channelizing of those savings into productive
sectors of the economy so as to accelerate the industrial and economic
development of the country.
The monopoly of the UTI ended in the year 1987 when the Government of India
permitted commercial banks in the public sector to set up subsidiaries operating
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astrusts to perform thefunctions of mutual funds by amending the
Banking Regulation Act.
SBI set up the first mutual fund which was followed by Canara
Bank.Later many large financial institutions under government control
also came out with mutual funds subsidiaries.
The four tier system for managing mutual funds in India is as designed by the
SEBI
The Sponsor
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The Trustees
Persons who hold the property of the mutual fund in trust for thebenefit of the unit
holders are called trustees. Trustees look after the mutual fund which is
constituted as a trust under theprovisions of the Indian Trust Act. For this purpose
a company or appointed as a trustee to manage with prior approval from SEBI. A
minimum of 75 percent of the trustees must be independent of the sponsors so
as to ensure fair dealings. The important functions of the Trustees:
1.Keep under its custody allthe property of the mutual fund schemes
administered by the mutual fund.
2.Furnish information to unit holders as well asto about the mutual fund
schemes.
8.Are paid compensation for their services in the form of trusteeship fee
as specified in the provisions of the trust deed. Trustees are to present
an annual report to the investors.
The Custodians
An agency that keeps custody of the securities that are bought by the mutual
fund managers under the various schemes is called the custodians. They ensure
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safe custody and ready availability of scrips. According to SEBI norms, the
custodian who is so appointed should in no way be associated with the
AMC and cannot act as sponsor or trustee to any mutual fund. A custodian
is supposed to act for a single mutual fund unless otherwise approved by
SEBI. Some of the important functions of thecustodians are:
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Unit Trust of India
The unit trust of India(UTI) was the first government sponsored mutual fund in
the country with social content and government commitment.The Trust was
established in 1964 by a special Act of parliament passed in the year 1963.It
was constituted as afinancial intermediary to mobilize savings through the sale
of units and invest these funds,primarily in corporate securities.UTI followed
the British pattern in which the function of management and trustees is
combined in one body.The special attraction of theschemes that were
launched by the trust was the tax concessions that were launched by the Trust
was the tax concessions that were made available to the unit holders.
Management
Investment Committee
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Investment Restrictions
2.Investing more than 10 percent of the total assets of the Unit trust of
India scheme in unlisted equities.
6.Investing more trust holding more than 5 percent of the total assets of
the scheme of the Trust in the obligations of single equity, provided that
such percentage may be increased upto 10 percent on the condition that
the aggregate of all such obligations on excess of 5 percent does not
exceed 20 percent of the total assets of the scheme of the Trust.
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Reorganization of UTI
Parliament has approved the bifurcation of the unit trust of India into two
companies viz UTII and UTI-II.Under the new arrangement,UTI-Iwould
not be floating any new scheme and the government would meet all
existing commitments. The UTI-IIwould be started as a SEBI regulated
asset managed and market competing scheme.
1.RBI Guidelines.
RBI Guidelines
2.Sponsor- The sponsor bank fund contribution to the corpus of the fund should
be a minimum of Rs.2 crores or such higher amount as may be specified by the
RBI.The corpus may be converted at a later date into a subscription to any of the
schemes of the fund with theapproval of the Board of Trustees of the fund.The
sponsor bank should make no additional contribution to the corpus without the
approval of RBI.The sponsor bank should contribute and maintain its stake in
each of the funds scheme equivalent to the amount outstanding.
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3.Nolending-The mutual funds should not undertake direct or indirect lending,
portfolio fund management,underwriting,billsdiscounting,money market
operations etc which are essentially banking /merchant banking functions.
5.Prohibited avenues- Mutual funds shall not make short sale /purchase
of securities to carry over the transactions from one settlement period tk the
next settlement period.Similiarly no investment shall be made in any other
unit trust, mutual fund or similar collective investment schemes.The funds
should also not invest in shares etc of investment companies.
Income Distrtibution
1.Cost- The total cost of managing any scheme under a fund inclusing
management fees and other administrative costs should be kept3 within
5 percent of the total income of thescheme.
UTI Guidelines
4.Approval- UTI should obtain approval for its mutual fund schemes
from the Ministry of finance.
Investment Limits
Scheme limit- No schemes of a mutual fund should invest more than 5 percent
of its assets on the equity of the company.Investment in a company should not
exceed 15 percent of the securities issued by the company.
1.The mutual fund should maintain separate account for each scheme.
2.Books of account should be balanced and closed atleast once each year.
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Unit-V
Factoring Meaning
The word factor is derived from the Latin word facere which means to
make or do or to get things done. Factoring originated in countries like
USA ,UK,France,etc where specialized financial institutions were
established to assist firms in meeting their working capital requirements
by purchasing their receivables.
Definition
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becomes responsible for all credit control,sales accounting and debt
collection from the credit customers.
Mechanism
Under the factoring arrangement the seller does not maintains a credit or
collection department.The job is handed overto a specialized agency called the
Factor.After each sale a copy of the invoice and delivery challan,the agreement
and other related papers are handed over to the factor.The factor in turn receives
payment from the buyer on the due date as agreed, whereby the buyer is
reminded of the due date payment account for collection.The factor remits the
money collected to the seller after deducting and adjusting its own service
charges at the agreed rate.Thereafter the seller closes all transactions with the
factor.The seller passes on the papers to the factor for recovery of the amount.
Characteristics of Factoring
1.The Nature
2.The Form
Factoring takes the form of a typical invoice factoring since it covers only
those receivables which are not supported by negotiable instruments such
as bills of exchange etc.This is because the firm resorts to the practice of
bill discounting with its bankers in the event of receivables being backed by
bills.Factoring of receivables helps the client do away with the credit
department and the debtors of the firm become the debtors of the factor.
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3.The Assignment
4.Fiduciary Position
The position of the factor is fiduciary in nature since it arises from the
relationship with the client firm.The factor is mainly responsible for better
credit management.
5.Credit Realizations
6.Less Dependence
7.Recourse Factoring
8.Compensation
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Factoring and Off- Balance Sheet Financing
Under factoring arrangements and while making credit sales the invoice
is made in the name of the factor.The clients debts are purchased by the
factor.Hence the finance provided by the factor goes off the balance
sheet and the items appear in the balance sheet only as acontingent
liability in the case of recourse factoring.In case of non-recourse
factoring it does not appear in financial statements of the borrower.
Types of Factoring
1. Domestic factoring
1. Disclosed Factoring
2. Undisclosed Factoring
Under undisclosed factoring the name of the proposed factor finds no mention on
the invoice made out by the seller of goods. Although the content of all monies
remains with the factor, the entire re4alization of the sales transaction is done in
the name of the seller. This type of factoring is quite popular in the U.K.
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3. Discount Factoring
2. Export Factoring
Full- service factoring also known as old line factoring is a type of factoring
whereby the factor has no recourse to the seller in the event of the failure of the
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buyers to make prompt payment to their dues to the factor,which might
result from financial inability/ insolvency/bankruptcy of the buyer. It is a
comprehensive form of factoring that combines the features of almost all
factoring services specially those of non-recourse and advance factoring
services, specially those of non-recourse and advance factoring.
The factor has recourse to the client firm in the event of the book debts
purchased becoming irrecoverable.
If the customer defaults in payment the resulting bad debt loss shall be
met by the firm.
The factor becomes entitled to recover dues from the amount paid in
advance.
*The factor actively involves in the process of grant of credit and the
extension of line of credit to the customers of the client.
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*The factor makes an advance payment in the range of 70 to 80 percent
of the receivables factored ans approved from the client the balance
amount being payable after collecting from customers.
*The factor collects interest on the advance payment from the client.
*The factor considers such conditions as the prevailing short term rate,
the financial standing of their client and the volume of turnover while
determining the rate of interest.
9.Collection/Maturity Factoring
The contract entered into between the seller of goods and the factor is called
factoring contract. Such a contract is similar to any of the sale purchase
agreement regulated under the law of contract. All the relevant terms and
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conditions on which factor agrees to purchase the debts from seller are specified
in the contract.
The following are the legal implications of the contract entered into between the
The factor is to confirm that there is no double financing from any other
source as bank etc.
Advantages of Factoring
advantages
Cost savings
Factoring allows for the elimination of trade discounts .Besides it also helps in
reduction of administrative cost and burden, facilitating cost savings. There is
also overall savings in cost, expenses and efforts as there is no need for the
client to maintain a special administrative set up to look after credit control.
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Leverage
Enhanced Return
Liquidity
Credit Discipline
Cash Flows
Accelerated cash flows helps the client meet liabilities promptly as and
when they arise.
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Credit Certification
Prompt Payment
Information Flow
Infrastructure
Better Linkages
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Reduced Risk
Factoring allows for reduction in the uncertainty and risk associated with
the collection cycle,since funds from a factor are an additional source of
finance for the client outside the purview of MPBF.
Export Promotion
Limitations of Factoring
Factoring Players
Factoring starts with credit sales made by the seller and is mainly
concerned with the realization of credit sales. Factoring starts where
credit sales ends. Thus the factor works between the seller and the
buyer and sometimes together with sellers banks too.
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The people who take part in factoring services include the following:
Buyer of the goods who has to pay for them on credit terms.
Factor who acts as agent in realizing credit sales from buyer and passes
on the realized sum to the seller after deducting a commission.
Functions of a Factor
The various functions that are performed by a factor are described below:
RBI has come out with guidelines designed to regulate the functioning of
the factors in India. Accordingly factoring can be started as an associate
business of a banking company with prior permission from RBI.
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Development in India factoring scenario started taking place with the
recommendations of the Kalyansundaram committee on factoring. At
present factoring is undertaken by a limited number of banks on a
smallscale. Banks such as SBI and Canara Bank in addition to certain
institution in the private sector, such as Foremost Factors Limited and
Fairgrowth Factors Limited are involved in the factoring business.
Forfaiting
Definition
Characteristics of Forfaiting
194
5.Forfaiting to be successful it is imperative that there exists a successful
secondary market. A forfaiting may not be interested in holding the
discounted bills or notes upto maturity because of liquidity considerations.
6. In the secondary market forfeiters can buy or sell these bills like any
other security. The reputation of the forfaiting agency and the credit
period are important in deciding the cost of forfaiting .
1.Commercial contract
Exporter and importer enter into a commercial contract. The contract provides
th basic terms of the arrangement, such as cost of forfaiting, margin to cover
risk, commitment charges, days of grace, fee to compensate the forfeiter for
the loss of interest due to transfer and payment delays ,period of forfeiting
contract, repayment instalment (usually by annually),rate of interest and so on.
The factoring charge depends on such factors as the terms of the note/bill, the
currency in which it is denominated, the credit rating of the availing bank, the
country, risk of the importer etc.
2. Transaction
The exporter sells and delivers the goods to the importer on a deferred
payment basis.
3. Notes Acceptance
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4. Factoring contract
The exporter and the forfaiting agent enter into a forfeiting contract, with
the forfaiter usually being a reputed bank, including the exporters banks.
5. Sale of notes
6. Payment
The exporter makes payment to the forfeiter for the face value of the bill/note,
less discount. The forfeiter either holds these notes/bills till maturity for payment
by the importers bank or securitizes them in order to sell them as short
term high yielding unsecured paper in the secondary market.
ADVANTAGES OF FORFAITING
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DISTINCTION BETWEEN FACTORING AND FORFAITING
S.NO
CHARACTERISTICS
FACTORING
FORFAITING
1
Suitability
For transactions with
For transactions with
period.
period
2
Recourse
Can be either with or
Can be either without
without recourse
recourse only
3
Risk
Risk can be
All risks are assumed by
transferred to seller
the forfeiter
4
Cost
Cost of factoring is
Cost of forfeiting is
seller
buyer (importer)
5
Coverage
Covers a whole set
Structuring and costing
of jobs at a pre-
is done on a case to case
determined price.
basis
6
Extent of financing
Only a certain
Hundred percent
percent of
financed is available
receivables factored
is advanced
7
Basis of financing
Financing depends
Financing depends on
on the credit
the financial standing of
standing of the
the availing bank
exporter
8
Services
Besides financing, a
It is a pure financing
as ledger
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administration etc.,
9
Exchange fluctuations
No security against
A forfeiter guards
exchange rate
against exchange rate
fluctuations
fluctuations for a
premium charge
10
Contract
Between seller and
Between exporter and
factor
forfaiter
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Unit -V
Merchant Banking
199
8.Working Capital Finance 9.Acceptance credit and Bill Discounting
Corporate Counselling
Project counselling
200
Project counsellingis a part of corporate counselling and relates to project
finance. It broadly covers the study of the project, offering advisory
assistance on the viability and procedural steps for its implementation.
Pre-investment studies
Activities that are carried out to assist projects in achieving their maximum
potential through effective capital structuring and to suggest various
strategies to widen and restructure the capital base, diversify operations
and implementation schemes for amalgamation, merger or changes in
business status are collectively known as Capital Restructuring services.
Credit Syndication
Portfolio Management
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of security to be bought, is known as portfolio Management. It involves making
the right choice of investment, aimed at obtaining an optimum investment mix,
taking into account factors such as the objectives of the investment, tax
bracket of the investor, need for maximizing yield and capital appreciation etc.
Venture Financing
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national development financial institutions such as IFCI, IDBI, and ICICI
are engaged in venture capital financing and have developed a number
of special schemes for this purpose.
Lease Financing
203
Mutual Funds
*Rejuvenating old lines and ailing units by appraising their technology and
process, assessing their requirements and restructuring their capital base.
Project Appraisal
Guide lines of SEBI and the Ministry of Finance Companies Act ,1956
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Listing guidelines of stock exchanges
SEBI Regulations
205
exceeding Rs.400 crore, the number could go up to five. Lead merchant banker
is not necessary where the issue does not exceed Rs.50 lakh.
Inspection by SEBI
SEBI may inspect the books of account, records and documents of merchant
bankers
to ensure that the books of account are maintained in the required manner;