MANAGEMENT OF

FINANCIAL
SERVICES
MODULE-1 NATURE AND SCOPE OF FINANCIAL SERVICS-
FINANCIAL SYSTEM
A system that aims at establishing and providing
a regular, smooth, efficient, and cost effective
linkage between depositors and investors is
known as financial system

An institutional framework existing in a country

to enable financial transactions

A set of complex and closely connected

instructions, agents, markets, transactions,
relating to financial aspects of an economy
FINANCIAL SYSTEM
Main parts
 Financial assets (loans, deposits, bonds, equities,
etc.)
 Financial institutions (banks, mutual funds,
insurance companies, etc.)
 Financial markets (money market, capital market,
forex market, etc.)
 Financial services ( Leasing , credit cards,
factoring, credit rating etc.)
 Regulation is another aspect of the financial
system (RBI, SEBI, IRDA, FMC)
 Financial System in India

 Financial Sector consists of three main

segments viz.,
 1) Financial institutions -banks, mutual funds,
insurance companies
 2) Financial markets -money market,
debt market,capital market, forex market
 3) Financial products -loans, deposits, bonds,
equities
 Financial Sector -
Regulators

Regulators

Insurance Regulatory
Reserve Bank of Securities Exchange
and Development
India Board of India
Authority
(RBI) (SEBI) (IRDA)

Capital Markets/ Insurance

Banks
Mutual Funds Companies
Functions of FINANCIAL SYSTEM

 provides a payment system for exchange of

goods and services
 Permits multiple payment mechanisms- cash,
cheque, DD, credit card…….
 Supplies a diversified portfolio of financial
investments
 It provides an ideal linkage between
depositors and investors
 facilitates Expansion of financial market
 Efficient allocation of financial resources
 Helps for economic development
Functions of FINANCIAL SYSTEM

 Stabilize the interest rates

 Undertake matured financial engineering
techniques for financial inclusion
 Perfect financial market knowledge.
 Encourages direct finance mechanisms
 Better corporate governance-securities
markets impose a discipline..
Objectives of Financial Services
 
1.      Fund Raising – Financial Services help to raise required
fund from a host of investors, individuals, institutes and
corporate.
  
2    Funds Deployment – An array
(variety/types/collection/group) of financial services are
available in the market which helps the players to ensure an
effective deployment of the funds raised. Services such as
Bills Discounting, Factoring of debtors, parking of short term
funds in the money market, credit rating, etc. are provided
by financial services firms in order top ensure efficient
management of funds.
Objectives of Financial Services

3.      Specialized services – The financial services sector provides

specialized services such as credit rating, venture capital financial,
lease financing, factoring, mutual funds, merchant banking, credit
cards, housing finance, etc. besides banking and insurance.

4.      Regulation – In India, Agencies such as Securities and

Exchange Board of India (SEBI), RBI and the Dept. of Banking and
Insurance of the Govt. of India, through a number of legislations
regulate the functioning of the financial services institutions.

  5   Economic Growth – Financial services help in speeding up the

process of economics growth and development. This takes place
through the mobilization of the savings of a cross section of
peoples, for the purpose of channeling then in the productive
investments.
 
 The Circular Flow

Wages, rents,
interest, profits

Factor services

Goods
Household t Firms
n n
me (production)
v er
Taxes Government Go ending
Savin Sp tm e nt
gs Financial markets Inves
Imp
orts Personal consumption rt s
Ex po
Other countries

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.

The Capital Market
Financial Markets Link Household Saving and
Investment by Firms
 Housing finance

Introduction- housing market segmentation-

National housing policy- National Housing Bank-
housing finance- PROBLEMS AND ISUES WITH THE HOUSING
FINANCE INDUSTRY IN INDIA-securitization- VENTURE CAPITAL-
THEORETICAL FRAME WORK-INDIAN VENTURE CAPITAL
SCNARIO….
-
Housing market

 Housing market segmentation

a) a legal private sector
b) public sector housing-for employees&
poor
c) the unregulated sector-squatter
settlements and slums
 rural & Urban, formal and informal.
Housing finance- introduction

 All financial arrangements that are made

available HFCs to meet the requirements
of housing is called housing finance.
 Housing finance Done in two ways-
* during construction
*or at the time of
purchase
The Housing & Habitat Policy aims at

:
 (i) Creation of adequate housing stock both on rental and
ownership basis.

 (ii) Facilitating accelerated supply of serviced land and

housing with particular focus to EWS-(economically weaker
section) and LIG categories and taking into account the
need for development of supporting infrastructure and
basic services to all categories.

 (iii) Facilitate Up gradation of infrastructure of towns and

cities and to make these comparable to the needs of the
times.

 (iv) Ensuring that all dwelling units have easy accessibility

to basic sanitation facilities and drinking water.
The Housing & Habitat Policy aims
at
 (v) Promotion of larger flow of funds to meet the revenue
requirements of housing and infrastructure using innovative
tools.

 (vi) Providing quality and cost effective housing and shelter

options to the citizens, especially the vulnerable group and the
poor.

 (vii) Using technology for modernizing the housing sector to

increase efficiency, productivity, energy efficiency and quality.
Technology would be particularly harnessed to meet the housing
needs of the poor and also specific requirements of `green’
housing.
The Housing & Habitat Policy aims
at
 (viii) Guiding urban and rural settlements so that a
planned and balanced growth is achieved with the
help of innovative methods such as Provision of
Urban Amenities in Rural Areas (PURA) leading to
in-situ urbanization.
 (ix) Development of cities and towns in a manner
which provide for a healthy environment, increased
use of renewable energy sources and pollution free
atmosphere with a concern for solid waste disposal,
drainage, etc.
The Housing & Habitat Policy aims at
 Using the housing sector to generate more
employment and achieve skill up gradation in
housing and building activity, which continue
to depend on unskilled and low wage
employment to a large extent.
 (xi) Removing legal, financial and
administrative barriers for facilitating access
to
 tenure, land, finance and technology.
The Housing & Habitat Policy
aims at
 (xii) Progressive shift to a demand driven approach and from a
subsidy based housing scheme to cost recovery-cum-subsidy
schemes for housing through a pro-active financing policy
including micro-financing, self-help group programmes.
 (xiii) Facilitating, restructuring and empowering the institutions at
state and local governments to mobilize land and planning and
financing for housing and basic amenities.
 (xiv) Forging strong partnerships between private, public and
cooperative sectors to enhance the capacity of the construction
industry to participate in every sphere of housing and urban
infrastructure.
The Housing & Habitat Policy aims
at
 (xv) Meeting the special needs of SC/ST/disabled/freed bonded
labourers/ slum dwellers, elderly, women, street vendors and
other weaker and vulnerable sections of the society.
 (xvi) Involving disabled, vulnerable sections of society, women
and weaker sections in formulation, design and implementation
of the housing schemes.
 (xvii) Protecting and promoting our cultural heritage, architecture,
and traditional skills. 10
 (xviii) Establishing a Management Information System in the
housing sector to strengthen monitoring of building activity in the
country.
Role of the National Housing Bank….

 The National Housing Bank (NHB), a fully-

owned subsidiary of the Reserve Bank of India,
was set up in 1988 to accelerate housing finance
activity in India and
 to promote the Housing Finance Companies
(HFCs) by providing financial support to them.
 It acts as the apex institution and regulator of the
housing finance industry.
Role of the National Housing Bank

 Direct and regulate the functioning of housing finance

institutions for fair practices
 Provide loans, advances or any other financial assistance
to Banks and housing finance institutions for slum
improvement
 Supervise mobilization of resources and extension of
credit for housing
 NHB has the main objective of promoting a network of
highly efficient and dedicated housing finance institutions
to cater to the finance needs from various regions and
income groups. In order to upgrade the housing stock in
the country, National Housing Bank undertakes
augmentation of supply of buildable land and building
materials.
Role of the National Housing Bank
 Mortgage Credit Guarantee scheme for
protection of lenders against any default.
 Providing Refinance to Housing Finance
Institutions
 National Housing Bank also engages in Project
Finance for large-scale housing projects
 The finance products by NHB include Equity
Support and Reverse Mortgage loans along with
the above listed services
Role of the National Housing Bank
 Raising Resources by issuing bonds or
debentures, borrowing from reserve bank of India
and other financial institutions
 NHB launched "Swarna Jayanti Rural Housing
Finance Scheme" to make housing loans
accessible for housing development works in rural
India on the golden jubilee of India's
Independence
 Mortgage Backed Securitisation and
development of secondary mortgage market in
India
PROBLEMS AND ISUES WITH THE
HOUSING FINANCE INDUSTRY IN INDIA

 1.Variation in standards
The housing sector is witnessed varying
standards and practices among the lending
community, be it in origination and
documentation or monitoring and supervision.
Variation in standards across the industry
imposes systematic risks, which can be a
potential threat
PROBLEMS AND ISUES WITH THE HOUSING FINANCE INDUSTRY IN INDIA

 2.Aggressive approach may lead to defaults

Growing competition coupled with reduction in risk weights on
housing loans has led the lending institutions to adopt aggressive
practices including very high loan has led the lending institutions to
adopt aggressive practices including very high loan to value loans,
softening of collateral requirements, competitive pricing etc. with such
an aggressive approach being followed may lead to increase in the
default rates

 3. Cost of funds
The prevailing interest rate war has resulted in constant downward
revision of interest rates. Further, the spreads are increasingly
becoming thin as the lending rates are fast nearing the cost of funds.
while during 1993-94, the interest rate on housing loans were in the
range of 17-18% the same right now are in the range of 7%-8.5%. this
may lead to erosion of profitability in the long run
PROBLEMS AND ISUES WITH THE HOUSING FINANCE INDUSTRY IN INDIA

 4.Security Deficit due to norms

Many primary lending institutions are making terms and
conditions of sanction flexible and liberal, thus enabling the
borrowers to avail the loans even more than value of security for
long tenure of 20 to 25 years. The large quantum of institutional
finance in the property transactions may lead to the problem of
security deficit. Logically, the RBI has stipulated higher risk
weightage of 75% as against 50% in November 2004.

 5.Due diligence Issues

Increasingly, there have been instances of dilution in due
diligence on the part of lenders. Sometimes, loans are
sanctioned without strictly complying with laid down rules,
systems and procedures. This situation arises primarily out of
fierce competitive pressures. It is observed that the growing
customer expectations force the PLIs to compromise due to
diligence, field verification process and appraisal norms, in a
rush to sanction the loan at the earliest.
PROBLEMS AND ISUES WITH THE HOUSING FINANCE INDUSTRY IN INDIA

 5.Lack of Uniformity of norms amongst industry players

While banks and HFCs are the prominent players, HFCs face few constraints.
The regulatory norms stipulate 10% capital adequacy for banks whereas the
same is 12% for HFCs. Further, banks have access to lower cost retail funds
compared to HFCs. Uniformity in norms and hence a level playing field has to be
ensured for a healthy housing finance system. These are newer challenges
which need to be addressed and resolved in times to come
 .
6.Industry Fragmentation
The fragmented nature of the housing finance industry is a major impediment for
its further growth. Despite this, the industry has managed to grow mainly due to
consistent decline in interest rates, tax incentives given by the government and
changing income profile of the Indian middle class population.

7.Conflicting Interests
While the private housing finance institutions are required to abide by the
guidelines of the NHB, the general financial institutions, which include the
commercial banks, follow the guidelines set by the RBI. Today, both these
sections are competing with each other for the same housing quiche but their
functioning and lending practices seem to bear no similarity
PROBLEMS AND ISUES WITH THE HOUSING FINANCE INDUSTRY IN INDIA

7.ALM
Asset liability mismatch is one of the biggest risks housing finance
institutions are confronted with. Funding of long term loans with short
term deposits, leads to a mismatch between assets and liabilities that
can be overcome by adopting appropriate asset liability management
(ALM) techniques.

8.FDI Constraints
FDI guidelines for real estate development have come under a lot of
flay. Guidelines requirements such as a minimum capitalization of
US$10 million for a wholly owned subsidiary and US$5 million for
joint ventures with Indian partners, development of a minimum area of
acres, a minimum lock in period of 3 years from completion of
minimum capitalization before repatriation of original investment, act
as constraints to foreign investors
Recommendations
 Greater Uniformity of standards
Adoption of uniform practice by the housing finance
industry relating to matters like appraisal and
documentation, prepayment of housing loans,
conversion of fixed rate loans into floating rate loans
etc.
 Greater transparency in dealings with the borrowers
to enable them to exercise informed choices about
products and lending institutions
 Generate a greater volume of mortgage lending in
the Indian market
 Lower down payment requirements to as low as 5%
 Broaden the eligibility for mortgages; and
Extend mortgage repayment periods up to 25 years.
GUIDELINES FOR EXTENDING EQUITY
SUPPORT TO
HOUSING FINANCE COMPANIES

The National Housing Bank (NHB) issues the following

guidelines to Housing Finance Companies (HFCs)

 1.A HFC who desires to avail of equity participation

from NHB
(a) be a public limited company;
(b) provide long term finance for construction or purchase
of houses in India for residential purposes;
(c) invest 75% of “capital employed” by way of long term
finance or housing.
GUIDELINES FOR EXTENDING EQUITY SUPPORT TO
HOUSING FINANCE COMPANIES

 2.MINIMUM PAID-UP CAPITAL AND LISTING

REQUIREMENTS
HFCs should have a minimum paid up capital of not
less than
Rupees ten crores inclusive of equity support of
NHB or such other amount as may be fixed from
time to time by NHB and/or the Securities and
Exchange Board of India (SEBI) for listing shares on
recognized stock exchanges, whichever is higher.
Minimum Guidelines for Extending Equity Support
to Housing Finance Companies as amended w.e.f.
March 1, 2003
GUIDELINES FOR EXTENDING EQUITY SUPPORT TO
HOUSING FINANCE COMPANIES

 3.With a view to enlarge equity base as well as

public participation in housing finance activity, it is
preferable that HFCs get their shares listed on
recognised stock exchange(s) in India at an early
date.
 4. HFCs should conform and/or obey with all other
rules, regulations, instructions, guidelines or orders
issued by NHB or any other authority empowered in
that behalf.
 5.NHB`s participation in equity in any case will not
exceed 10% of paid up capital of the HFC.
Refinance- Home loans in India

 The process of reimbursing the previous loan by filing an

application for another loan from the same or any other lender is
known as refinancing. Refinancing any kind of loan has become
a widely acknowledged way of reimbursing the previous liabilities
and forming new ones

Types of Refinance Calculators India

There can be several types of refinance and hence there can be

several types of refinance calculators as well.
 Mortgage Refinance Calculator
 Auto Loan Refinance Calculator
 Bad Credit Refinance Calculator
 Cash Out Refinance Calculator
 Commercial Refinance Calculator
In a refinance calculator, you need to provide information on your
existing loan and the calculator would return you the refinance
details----- two examples
 Mortgage Refinance Calculator
The calculator would find out every details relating to your refinance
including new monthly payment, rate of interest on your current
mortgage, rate of interest on refinanced mortgage, and how
much you would save through the refinancing etc.
 Auto Loan Refinance Calculator
Auto loan refinance calculator would help you to find out the
refinancing details on your existing auto loan and at the same
time, would also help you to decide whether refinancing would be
fruitful for you or not.
Precautions for Refinance of home loan

 Be careful - A person cannot always gain from

refinancing. For seeking the advantages from the
refinance loan, the borrower has to be sensible
enough to calculate the amount he would save by
refinancing the home loan
 Be calculative enough to identify heavy
mortgage charges
 Select a home loan refinance lender that does
apply any prepayment penalty .
 Securitization in India
 Securitization is the process of pooling and packaging Financial
Assets, usually relatively illiquid, into liquid marketable securities.
 Conversion of existing or future cash flows into tradable
securities that can be sold to investors.( ‘factoring’ involves
transfer of debts- no transformation)
Types:
1) Assets Backed Securitization ( ABS)-current and moveable fixed
asset
2)Mortgage Backed Securities (MBS)-immovable fixed assets
Securitization in India- problems
 Lack of appropriate legislation and legal clarity, unclear
accounting treatment,
 High incidence of stamp duties making transactions unviable,
 lack of understanding of the instrument amongst investors,
originators and,
 till recently, even rating agencies are some of the glaring reasons
for the lack of activity in the area of securitization in India.
 Securitization in India
Need for Securitization- advantages
 1 With the help of securitization transaction, a
creator can transfer the credit and other risks
associated with the pool of assets securitized.
 2.Securitization can provide much needed liquidity
to an Originator’s balance sheet;
 3.help the originator mix its portfolio and make room
for fresh asset creation;
 4.obtain better pricing than through a debt-financing
route; and help the creator in proactively managing
its asset portfolio.
 5.Securitization allows investors to improve their
yields while keeping intact or even improving the
quality of investment
Need for Securitization- advantages

 6.Release of locked- up funds

 7.Costs of fund is reduced
 8.Improved ratios--- ROA, ROE…
 9.Increase in capital adequacy ratio-CAR
 10.Matching of assets and liabilities
 11.Risk eliminated
 12.Larger spread
HOUSING FINANCING COMPANIES IN INDIA

 1.Housing Development Finance Corporation

Limited (HDFC)
Housing Development Finance Corporation Ltd
(HDFC) is one of the leaders in the Indian housing
finance market with almost 37% market share.
Serves more than 26 lakh customers across the
nation, HDFC also offers customized solutions that
fit to the need of the customer. In the FY 2008, it
registered a net profit of Rs. 2,282.54 crore. It also
registered a net profit of Rs. 663.94 crore in the
quarter ended September 30, 2009.
HOUSING FINANCING COMPANIES IN INDIA

 2.State Bank of India Home Finance (SBI)

State Bank of India is another major player in
the Indian housing finance market with
almost 16% of the market share. The SBI
Housing Loan schemes are specifically
designed to meet the varied requirements of
the customers. It offers home loan for various
purposes including new house/flat, purchase
of land, renovation/alteration/extension of
existing house/flat etc. SBI Home Finance
registered a net profit of Rs. 24.63 crore in
the year ended March 31, 2009.
HOUSING FINANCING COMPANIES IN INDIA

 3.LIC Housing Finance Limited

LIC Housing Finance is another major player in
housing finance sector in India with almost 13% of
market share. Promoted by Life Insurance
Corporation of India, LICHFL has an extensive
distribution network with a strong brand presence.
Recently, the company has been awarded
“Consumer Superbrand 2009/10 Status” by
Superbrands Council. In the last financial year
(ended on March 31, 2009), LICHFL earned a net
profit of Rs. 387.19 crore, comparing to Rs. 279.14
in the previous FY. It also registered a net profit of
Rs. 171.25 crore in the quarter ended on September
30, 2009
HOUSING FINANCING COMPANIES IN INDIA

 4.ICICI Home Finance Company Limited

ICICI is a leading housing finance company in India
with almost 6% market share. It offers various types
of home loans for its customers which may have
tenure up to 20 years. The home loan interest rate is
connected to the ICICI Bank Floating Reference
Rate (FRR/PLR). Here it can be added here that,
the PLR has been reduced to 14.75% from its
previous rate of 15.25% since June 4, 2009. As on
January 23, 2009, ICICI HFC has 1416 branches
with an asset of Rs. 3,74,410 crore. As on
December 31, 2008, the company has a net worth
of Rs. 50,035 crore.
HOUSING FINANCING COMPANIES IN INDIA

 5.PNB Housing Finance Limited

PNB Housing Finance Limited offers a wide range of loans for
purchase/construction of property to resident Indians as well as NRIs. It
also offers housing finance for renovations, repairs and enhancement of
immovable properties. In the last financial year (ended on March 31,
2009), PNB Housing Finance Limited registered a net profit of Rs. 534.1
million, which is 32% more than the net profit of its previous financial
year of Rs. 405.9 million.

 6.Dewan Housing Finance Corporation Limited (DHFL)

Dewan Housing Finance Corporation Limited is one of the largest
housing finance solution providers in India with an extensive network of
74 branches, 78 service centers and 35 camps spread across the
nation. The company registered a net profit of Rs. 8,631.83 lacs in
2008-09, comparing to a net profit of Rs. 8,257.74 lacs in the previous
financial year. In the quarter ended on September 30, 2009, DHFL
earned a profit (after tax) of Rs. 3,751.09 lacs
HOUSING FINANCING COMPANIES IN INDIA

 6.Housing Urban Development

Corporation (HUDCO)
Through its ‘Niwas’ scheme, HUDCO offers housing loans for the
buying/constructing house/flat. Loans are also offered for
renovation/extension/alteration of existing house/flat. In the last financial
year (ended on March 31, 2009), HUDCO registered a net profit of Rs.
400.99 crore, comparing to Rs. 373.73 crore of the previous
 7. IDBI Home finance Limited (IHFL)
Founded in January 10, 2000, IDBI Homefinance Limited has become
one of the major players in the Indian housing finance market. It offers a
range of housing financial solutions to its customers including Individual
Home Loans, Home Improvement Loan, Home Extension Loan, Home
Loans for NRIs, Plot Loans, and Loan Against Home etc. In the financial
year 2008-09, IDBI Homefinance Limited registered a profit of Rs.
3209.93 lakhs, comparing to a net profit of Rs. 2988.62 lakhs in the
previous financial year.
HOUSING FINANCING COMPANIES IN INDIA

 8.GIC Housing Finance Limited

GIC Housing Finance Limited, one of the leading housing finance
companies in India, was initially established as ‘GIC Grih Vitta Limited’
on December 12, 1989. Promoted by General Insurance Corporation of
India, GIC Housing Finance Limited offers extensive range of housing
finance solutions to its customers through its wide network of 24
Business Centers and 3 Collection Centers across the nation. In the
financial year 2008-09, GIC Housing Finance Limited registered a profit
(after tax) of Rs. 5714 lakhs. Furthermore, in the last quarter (ended
September 30, 2009), it registered a profit of Rs. 1713 lakhs.

9.Can Fin Homes Limited (CFHL)

Can Fin Homes Limited is another big player in the Indian housing
finance market with an extensive network of 40 branches. It is also the
first and one of the biggest bank-sponsored (sponsored by Canara
Bank) housing finance companies in India. In the financial year 2008-
09, Can Fin Homes Limited registered a net profit of Rs. 3,152.9 lakhs.
It also registered a net profit of Rs. 790.9 lakh in the quarter ended on
June 30, 2009
Housing Finance Companies
India
 Birla Home Finance Limited
BOB Home Loan
Canara Bank Home Loan
Dewan Housing Home Loan
GIC Home Loan
 HDFC Home Loan
HSBC Home Loan
ICICI Home Loan
IDBI Home Loan
LIC Home Loan
 PNB Home Loan
SBI Home Loan
Sundaram Home Finance
Terms Used in Housing
Finance
 EMI: Equated Monthly Installment
 Floating Rate of interest
 Monthly Reducing balance
 Annual Reducing Balance
 Fixed rate of interest
 Processing charge
 Prepayment Penalties
 Commitment Fee
 Miscellaneous Cost
Venture Capital
 Venture capital is a form of financing for a company
in which you give up some level of ownership and
control of the business in exchange for capital for a
limited timeframe, usually 3-5 years. Venture
capitalists usually exit through an Initial Public
Offering (IPO), a merger, a sale of the business or a
buyout
 An IPO is offering stock to the public on an open
market for the first time. Consequently, the alternate
term for this process is "going public".
Venture Capital
Features
1. High degree of risk
2. Equity participation
3. Long term investment
4. Participation in management
5. Achieve social objectives
6. investment is illiquid
Types
1.Funds set up by angel investors- high net work
individuals
2.Subsidieries of corporations- formed by corporations,
commercial banks etc.
3 Private capital firms--
Venture Capital
 Venture capital firms are limited partnerships or
closely held corporations that invest in early-stage,
risk-oriented business endeavors.
 Most firms usually have a general manager who
serves as the fund manager with the investors
serving as limited partners.
 The limited partners put up 99% of the money, while
the general partner does all the sourcing, due
attentiveness, investing and monitoring
Venture Capital
 The participants in venture capital firms can be
institutional investors like pension funds, insurance
companies, foundations, corporations or individuals
 Venture firms generally are looking for a return of
five to ten times the original investment
 Funding Options
Venture capital firms usually focus their funding by
geographic location, industry or stage. Stages of a
company's growth are delineated in a number of
ways, but some of the most common are
Factors affecting investments
 Strong management team
 A viable idea
 Business plan
 Project cost and returns
 Future market prospects
 Existing technology
 Miscellaneous factors
Venture Capital
Stages of financing
A. Early Stages of financing
i. seed capital and R&D project
ii. Start ups
iii. Second round
Later Stages of financing
i. development capital
ii. Expansion finance
iii replacement capital
iv. Buyouts
v. turn around
 Venture Capital
Early Stages of financing
i.seed capital and R&D project
These funds are to help the entrepreneurs prove that an invention or concept works. The money usually pays
for product development and market research
ii. Start-up financing -for initial marketing and product production.
iii. Second round financing- already been launched in the market but needs additional funds- time scale-3 to 7
years
Later stage financing
i. Development capital –have profits but cannot go public- need financial support- time 1 to 3 yrs
ii. Expansion finance- for new product, market , factories- time 1 to 3 yrs .

iii. Buyouts- transfer of management control

iv. Replacement capital- for the purchase of existing shares of owners
v. Turn arounds- buying a sick company
Venture Capital Do's
 Let experienced business people read and critique your plan,
testing it for clarity and reasonableness.
 Make a full disclosure of the possible pitfalls as well as the
strengths.
 Proofread carefully to make certain there are no errors in
grammar or math.
 Put together a strong management team.
 Remember this is a long term relationship.
 Research the investment criteria of the venture capitalists to
ensure that what you offer is what they are looking for.
 Take time to study and understand competitors, addressing their
strengths and weaknesses.
 Widen your network of contacts to give you more avenues of
approach
Venture Capital Do's

 Base the projections on realistic assumptions.

 Be concise, but complete.
 Be positive and enthusiastic about your company
and product/service.
 Clearly explain the opportunity.
 Document how the products are different and better
than what is available.
 Keep trying.
 Know your minimum deal and be prepared to walk
away, if necessary.
Venture Capital Don'ts
 Avoid answering questions.
 Focus on the technology (leaving out mention of the market, the
competition, the customers)
 Give up.
 Have any types, errors, repetition, junky charts.
 Make exaggerated claims about the product or the management.
 Predict you will capture "2% of a billion-dollar market..."
 Press for immediate decisions.
 Send the first draft of your business plan to the venture
capitalists.
 Use four significant digits anywhere
Venture Capital
 Finding Venture Capital
Venture capital firms can be found worldwide
The National Venture Capital Association
provides a wide variety of resources for
finding venture capital firms. Venture capital
can also be found through bankers,
insurance companies, and business
association
To attract venture capital:
:
 Preparation is a critical factor in funding. Allocate plenty of time
and energy to it.
 Make certain all your financial records are in order.
 Identify professional references who can support your reliability
and the need for your product.
 Prepare a well thought out, comprehensive business plan.
 Write a business summary covering the main points of the
business plan. This will be the first introduction of your
business. Getting past the first cut will depend on how well you
sell your business in this summary.
 Identify venture capital firms that specialize in your type of
business.
 Learn as much as possible about the funding process for each
of the firms.
To attract venture capital:
 How is the capital going to be used?
 If possible, talk with businesses that have been funded by each
of the firms.
 Write a brief, but compelling cover letter for submitting your
information to the firms.
 Select 8-10 venture capital firms that you definitely wish to
approach.
 modify submission information to fit the preference of each
firm, including reformatting the business plan if needed.
 Submit your applications.
 About 2 weeks after applying, call to request an in-person visit
 Do not be afraid to continue to keep in touch. Do not be a pest,
but also do not be afraid to ask when you might know
something and if they mind you checking in occasionally
Venture Capital in India
 In India the Venture Capital plays a vital role in the
development and growth of innovative
entrepreneurships. Venture Capital activity in the
past was possibly done by the developmental
financial institutions like IDBI, ICICI and State
Financial Corporations. These institutions promoted
entities in the private sector with debt as an
instrument of funding.
 VC financing really started in India in 1988 with the
formation of Technology Development and
Information Company of India Ltd. (TDICI) -
promoted by ICICI and UTI.
Venture Capital in India
Types of Venture Capital Funds in India
Generally there are three types of organised or institutional venture
capital funds:
 venture capital funds set up by angel investors, that is, high net
worth individual investors;
 venture capital subsidiaries of corporations and private venture
capital firms/ funds.
 Venture capital subsidiaries are established by major
corporations, commercial bank holding companies and other
financial institutions.
Venture funds in India can be classified on the basis of the type of
promoters.
1 . VCFs promoted by the Central govt. controlled development
financial institutions such as TDICI, by ICICI, Risk capital and
Technology Finance Corporation Limited (RCTFC) by the Industrial
Finance Corporation of India (IFCI) and Risk Capital Fund by IDBI .
Venture Capital in India
2. VCFs promoted by the state government-
controlled development finance institutions such
as Andhra Pradesh Venture Capital Limited
(APVCL) by Andhra Pradesh State Finance
Corporation (APSFC) and Gujarat Venture Finance
Company Limited (GVCFL) by Gujarat Industrial
Investment Corporation (GIIC)
3. VCFs promoted by Public Sector banks such as
Canfina by Canara Bank and SBI-Cap by State
Bank of India.
4. VCFs promoted by the foreign banks or private
sector companies and financial institutions such
as Indus Venture Fund, Credit Capital Venture Fund
and Grindlay's India Development Fund.
Venture Capital in India

Methods of Venture Financing

Venture capital is typically available in three
forms in India, they are:
 1.Equity : All VCFs in India provide equity
but generally their contribution does not
exceed 49 percent of the total equity capital.
Thus, the effective control and majority
ownership of the firm remains with the
entrepreneur.  They buy shares of an
enterprise with an intention to ultimately sell
them off to make capital gains.
Venture Capital in India
 2.Conditional Loan: It is repayable in the form of a royalty after
the venture is able to generate sales. No interest is paid on such
loans. In India, VCFs charge royalty ranging between 2 to 15
percent; actual rate depends on other factors of the venture such
as gestation period, cost-flow patterns, riskiness and other
factors of the enterprise.
 3.Income Note : It is a hybrid security which combines the
features of both conventional loan and conditional loan. The
entrepreneur has to pay both interest and royalty on sales, but at
substantially low rates.
Other Financing Methods: A few venture capitalists, particularly in
the private sector, have started introducing innovative financial
securities like participating debentures, introduced by TCFC is an
example.
 Module-4
Issue management-intermediaries-
activities- procedures-pre issue &post
issue obligations-merchant bankers-
credit rating agencies-process&
methodology .
Issue Management
Issue Management
 The management of securities of the corporate
sector offered to the public on a regular basis, and
existing shareholders on a rights basis, is known as
public issue management .
 The management of issues for raising funds though
various types of instruments by companies is known
as Issue management .
Issue Management
Categories of Securities issue:
Corporate enterprises use several sources for raising
funds from the capital market. Issue of securities
constitutes an important mode of raising such
finances. Security takes the following forms:
1. Public Issue
2. Right Issue
3. Private Placements
Issue Management
1.Public Issue
When capital funds are raised through the issue of a prospectus, it
is called public issue of securities.
It is the most common method of raising funds in the capital
market.
A security issue may take place either at par, or at a premium or at
a discount.
The prospectus has to disclose all the essential facts about the
company to the prospective purchasers of the shares.
Further, the prospectus must conform to the format set out in
Schedule II of the Companies Act 1956, besides taking into the
account SEBI guidelines.
SEBI insists on the adequacy of disclosure of information that
should serve as the basis for investors take a decision about
the investment of their money
Issue Management

2.Rights Issue:
When shares are issued to the existing shareholders
of a company on a privileged basis, it is called as
Rights Issue.
The existing shareholders have a pre-emptive to
subscribe to the new issue of shares.
Rights shares are offered as additional issues by
corporate to mop up further capital funds. Such
shares are offered in proportion to the capital paid
up on the shares held by them at the time of the
offer.
Issue Management
3.Private Placements:
 When the issuing company sells securities directly to the
investors especially institutional investors, it takes the form of
private placement.
 In this case no prospectus is issued since it is presumed that
the inverts have sufficient knowledge and experience and are
capable of evaluating of the risk of the investment.
 Private placement covers shares, preference shares and
debentures.
 The role of the financial intermediary such as the merchant
Bankers and lead managers assumes greater significance in
private placement.
 They involve themselves in the task of preparing a offer
memorandum and negotiating it investors.
The Registered Intermediaries
They consist of brokers, sub-brokers, Trading and
Clearing Members, portfolio managers, Bankers to
Issue, merchant bankers, registrars, underwriters
and credit rating agencies.
They all provide a basket of services to the investors
to less on risk and make transaction earlier and
smooth.
They are all registered with SEBI and act under the
regulation of SAEBI abiding by the Code of Conduct
prescribed for each of them governing their
respective roles
Intermediaries
 When a company launches an IPO inviting the public to buy its
shares, it has to appoint various intermediate people who will
enable them t successfully complete the issue process. They
are:

1. a).Book Running Lead Managers (BRLMs)

 b). co- managers
2. Bankers for the Issue
3. Underwriters
4. Registrars
5.Brokers
6. Auditors
7.Cunsultents
Issue Manager

A financial institution or intermediary who

carry out the activities connected with issue
management.
The institution should register with SEBI
and follow the regulations and guideline
The major function of Merchant Banker
 Categories of Issue Managers

1. Category I – MB who act as Issue

manager, advisor, consultant, underwriter
and portfolio manager
2. Category II – MB who act as advisor,
consultant, underwriter and portfolio
manager
3. Category III – MB who act as advisor,
consultant and underwriter
4. Category IV – MB who act as advisor or
consultant.
Bankers to the issue

The functions are

 Distribution of application forms of the issue
 Collection of application money
 Collection and co-ordination of application
forms and monitor the same to the registrar
and issue managers
Registrars

Functions
 Collect application form from banker and
scrutinise the same
 Finalise the basis of allotment
 Issue the allotment letter
 Issue share certificate and refund orders
within the stipulated time
 Satisfy the listing requirements and get the
sharers listed in SE
Activities involved in Public issue Management

performed by the issue manager in order to raise money from the capital
market
 Pre-Issue Activities
1 . Signing of MoU: Signing of MoU between the client company and the
merchant banker-issue management activities marks the award of the
contract..

2. Obtaining appraisal note: An appraisal note containing he details of the

proposed capital outlay of the project and the sources of funding is
either prepared in-house or is obtained from external appraising
agencies viz., financial institutions/banks etc.

3. Optimum capital structure: The level of capital that would maximize

the shareholders value and minimize the overall cost of capital has to
be determined. This has to be done considering the nature and size of
the project. Equity funding is preferable especially when the project is
capital intensive.
Activities involved in Public issue Management

4. Convening meeting: A meeting of the board

of directors of the issuing company is
convened. The purpose of these meetings is
to decide the various aspects related to the
issue of securities.
5. Appointment financial Intermediary:
Financial intermediaries such as
Underwriters, Registrars, etc. have to be
appointed.
Activities involved in Public issue Management

6.Preparing documents: As part of the issue

management procedure the documents to be
prepared are initial applications of submission to
those stock exchanges where the issuing company
intends to get its securities listed. MoU with the
registrar, with bankers to the issue, with advisors to
the issue and co-managers to the issue, agreement
for purchase of properties etc. This has to be sent
for inclusion in the prospectus.
Activities involved in Public issue Management

7. Due diligence certificate: The lead manager issue

a due diligence certificate which certifies that the
company has meticulously followed all legal
requirements has exercised utmost care while
preparing the offer document and has made a true
fair and adequate disclosures in the draft offer
document
8. Submission of offer document: The draft offer
document along with the due diligence certificate is
filed with SEBI. The SEBI in turn makes necessary
corrections in the offer document and returns the
same with relevant observations, if any within 21
days from the receipt of the offer document
Activities involved in Public issue Management

. Finalization of collection centers: In order to collect the issue

9

application forms from the prospective investors to lead manager

finalizes the collection centers.
10. Filing with RoC: The offer document completed in all respects
after incorporating SEBI observation is filed with Registrar of
Companies (RoC) to obtain acknowledgement.
11. Launching the issue: The process of marketing the issue
starts once legal formalities are completed and statutory
permission for issue of capital is obtained. The lead manager has
to arrange for the distribution of public issue stationary to various
collecting banks, brokers, investors etc
The announcement regarding opening of issue is also required to
be made through advertising in newspapers, 10 days before the
opening of the public issue.
Activities involved in Public issue Management

12. Promoters’ contribution: A certificate to

the effect that the required contribution of the
promoters has been raised before opening
the issue, has to be obtained from a
Chartered Accountant, and duly filed with
SEBI.
13. Issue closure: An announcement
regarding the closure of the issue should be
made in the newspaper
Activities involved in Public issue Management

 POST-ISSUE OBLIGATIONS
 
1.       To associate with allotment procedure
2.       Post issue monitoring reports
3.       3-day post issue monitoring report
4.       Final post issue monitoring report (78 days)
5.       Redresses of investors grievances
6.       Coordination with intermediaries
7.       Post-issue advertisements
8.       Basis of allotment in over-subscribed issues
9.       Other responsibilities
Merchant
Banking
 Origin of Merchant Banking
 13th Century merchant bankers were traders of
commodities and acted as bankers to the kings of
European states.
 They Financed the continental wars and
coastal trades.
 They lent their names to lesser known traders
by accepting bills through which they
guaranteed that the holder of the bill would
receive full payment.
 Managers to the issue or Merchant
Bankers
 Advise on the capital structure, instrument of
issue.
 Pricing
 Assessing and appraisal of project report.
 Appointment of bankers, underwriters, brokers,
registrars, printers and advertisement agents.
 Holding brokers-Underwriters,
 Press and investor conferences.
 Deciding the pattern of advertisement.
 Deciding the collection branches where
application can be received or collected.
 Deciding on the dates of opening and closing
of the subscription list.
 Obtain daily report of the applications and
amounts collected at branches.
 Obtaining subscription to the issue.
 Obtain consent of the Stock Exchange and get
basis of allotment approved.
Factors to select a client.

 Track record of the company.

 Track record of the promoters.

 Professional management.

 Financial strength of the promoters and the

company.
 Economic viability of the project.
Prime Objectives of MB
 Providing long term funds to the projects or
companies.
 Project counseling- loan syndication, project
appraisal and arrangement of Working
capital.
 Deciding the capital structure.
 Portfolio Management
 Underwriting
 Corporate advisory & issue mgmt.
SEBI (MB) Regulations, 1992
 Code of Conduct for MB
 Observe high standards of integrity and
fairness in all his dealings.
 Render high standard of service, exercise
due diligence, proper care, exercise
independent judgment & disclose conflict
of interest while providing unbiased
service.
Code of conduct continued……..
 Not make any statement or become privy
to any act, practice or unfair competition,
likely to harm the interest of other MB or
is likely to place such other MB in a
disadvantageous position in relation to the
MB, while competing for or executing any
assignment. (Harmful statement while
solicitation & execution)
 Not make exaggerated statements, written or
oral, to the client either about the qualification or
the capability to render certain services or his
achievements in regard to services rendered to
other clients.
 Render best possible advice to the client having
regard to the clients needs and the environment
and his own professional skill;
 Ensure that all professional dealings are effected
in a prompt, efficient and cost effective manner.
 A MB shall not divulge to other clients, press or
any other party any confidential information about
his client, which has come to his knowledge.
 Deal in securities of the client company without
making disclosure to the board as required under
the regulation and also to the Board of Directors of
the client company.
 Provide investors with true and adequate
information without making any misguiding or
 exaggerated claims and are aware of
attendant risks before any investment
decisions are made.
 Ensure copies of prospectus, memorandum
and related literature are made available to
investors.
 Fair allotment of securities and refund of
application money without delay.
 Investor complaints are adequately dealt
with.
 The MB shall not generally and particularly in
respect of issue of any securities be party to
 Creation of false market

 Price rigging or manipulation

 Passing of price sensitive information or take

any other action which is unethical or unfair to
the investors.
A MB shall stand for by the provisions of the
Act, rules and regulations which may be
applicable and relevant to the activities
carried on by the merchant banker.
Qualities of a good MB
 Leadership
 Aggressive action
 Co-operative and friendliness
 Contacts
 Attitude towards problem solving
 curiosity for new skills, information and
knowledge
MERCHANT BANKS- IN INDIA

 1) SBI CAPITAL MARKET LTD.

 2) BOI FINANCE LTD.
 3) PNB CAPITAL SERVICES LTD.
 4) BOB CAPITAL MARKET DIVISIONS
 5) CANBANK FINANCIAL SERVICES LTD.
History of Indian Merchant Banking

 The formal beginning of the merchant banking

services in India began in 1967 when the
Reserve Bank of India provided license to the
Grindlays Bank. The Grindlays Bank was
engaged in capital issue management and it
provided diverse financial services to the
emerging section of entrepreneurs, especially
those belonging to the small and medium
enterprise sector.
Importance of Merchant Banking in India

 The need of merchant banking services in India arises from

the fact that high level industrialization is taking place in the
country. So, there is need for skilled professionals who can take
care of various finance-related needs of the advanced industrial
sectors. These specialist services are also of great importance
for the small and medium sized enterprises to help them operate
smoothly. 

 Most of the rural areas still lack industrial advancement and the
main reasons for this include lack of funds and information. The
merchant banking services help the entrepreneurs to come up
with industrial setups in these areas. Besides, the merchant
banks help the entrepreneurs to explore the joint venture
opportunities in the foreign markets
Importance of Merchant Banking in India
 According to the Ministry of Finance in India, a
merchant banker is a person or body engaged in
selling, buying and subscribing to securities or in
advising the corporations on issue management. To
learn more about the merchant banking setup in
India, you should go through the following
discussion.
 Citibank started the merchant banking services in 1970
and the State Bank of India followed the same in 1972.
After few years, the national merchant banks started
collaborating with their counterparts in different
countries to start their merchant banking divisions
abroad
CREDIT RATING
CREDIT RATING
According to Credit Rating Information Services of
India Ltd. (CRISIL) “Credit rating is an unbiased,
objective and independent opinion as to issuer’s
capacity to meet its financial obligations. It does not
constitute a recommendation to buy/sell or hold a
particular Security”
To enable the investors to take informed decisions,
Credit Rating has emerged as one of the most
important financial services.
HISTORY
 The concept of credit rating dates back to 1840s
 · Mercantile Credit Agency (MCA) was set up in New York after the
financial crisis of 1837.
 · The agency (MCA) rated the ability of merchants to pay their financial
obligations.
 ·The first rating guide was published in 1859.
 · In 1909, John Moody founded Moody’s Investors Agency, which gave
a new direction to the concept of credit rating.
 · In 1970, Penn Central, the then largest Railroad company in the world
went bankrupt with just under $100 million in outstanding commercial
paper.
 · This forced the investors to ask for rating for commercial papers
 ·Today, almost 100% of the commercial paper and 99% of the
corporate bond are rated in the U.S.A
REASONS FOR GROWTH OF C.R SYSTEM

1.The increasing role of capital and money markets

2.Increase in corporate borrowing and lending
3.The continuing growth of Information Technology
4 .The growth of confidence in the efficiency of the market
functioning
BENEFITS OF CREDIT RATING 
1. Low cost information
2. Quick investment decision
3. Independent investment decision
4. Investors protection
BENEFITS TO RATED COMPANIES

 
1.  Sources of additional certification
2.  Increase the investors population
3.  fore-warn risks
4.  Encourages financial discipline
5.  Merchant bankers job made easy
6.   Foreign collaboration made easy
7.   Benefits the industry as a whole
8.    Low cost of borrowing
9.    Rating as a marketing tool
CREDIT RATING IN INDIA

The stupendous growth of Indian Capital Market necessitated setting up of

Credit rating agencies in India
This growth led the establishment of

1. Credit Rating Information Services of India Limited

(CRISIL) in 1987.

2. Investment Information and Credit Rating Agency of

India (ICRA) in 1991

3.Credit Analysis and Research Limited (CARE) in

1993.
CREDIT RATING IN INDIA

CRISIL
   It is the first credit agency started on January 1,1988
  
 It was started jointly by ICICI and UTI with an Equity Capitalof Rs.4
crores
  It is the most important rating agency in the country.
   
   Its major objective is to rate the debt obligations of Indian Companies 

 Apart from rating debentures, commercial papers, LPG/Kerosene

dealers, its rating services also extend to preference shares, real estate
developers/builders, banks, etc.

  Its rating guides investors about the risk of timely payment of interest
and principal on particular debt instrument.

 It has used its information base and expertise in credit rating to

provide counselling to governments, banks, financial institutions on
aspects such as privatization of PSUs, credit evaluation and so on.
CREDIT RATING IN INDIA

ICRA 
 It was set up by IFCI on 16th Jan’1991·        
 It focuses on rating of instruments for which credit
rating is mandatory, suhc as debentures/bonds,
commercial papers, Kerosene/LPG dealers.
 It also rates banks
 It also provides credit assessment and general
assessment services
 During 1994-95, ICRA rates 212 debt instruments
covering a debt volume of Rs.5,343 crores.
 The cumulative number of instruments rated since its
inception till March 1995 has been 485 covering a
total debt volume of Rs.17,638 crores.
 
CREDIT RATING IN INDIA
CARE
   It is credit rating and information services company promoted by IDBI jointly with
investment institutions, banks, and fianance companies.
  
 It commenced its credit rating operation in October’1993. CARE is
offering a wide range of products & services in the fields of credit
information and equity research.
     
 CARE confines to normal rating business only and has not diversified its
operations the instruments credit-rated by CARE are debentures, Fixed
deposits, Commercial papers, etc
     
 CARE also undertakes general credit  analysis of companies for the use of
bankers, other lenders and business counterparties     
 CARE’s rating methodology and rating process are much similar to
CRISIL    

 Since its inception till the end of March 1995, CARE has rated249
instruments covering a total debt volume of Rs.9,729 crores.
  
 
CREDIT RATING IN INDIA

 RATING PROCESS
 
The credit rating process adopted by leading credit
rating agencies in India and the world over is
depicted below
1.  Contract between Rater and Client
2.   Sending expert team to client’s Place
3.   Data collection
4.    Data analysis
5.    Discussion
6.    Credit report preparation
7.    Submission to “grading committee”
8.    Grade communication to client  
CREDIT RATING IN INDIA

 RATING METHODOLOGY
In India, the rating exercise starts at the request of the
company the process of obtaining a rating is quite
lengthy and time consuming. Ratings are assigned after
an in-depth study of various factors related to Business,
Financial Management, and so on. The analytical
framework for rating consists of the following four broad
areas.
 
1.       Business Analysis
2.       Financial Analysis
3.       Management Evaluation
4.       Fundamental Analysis
 Interpretation of rating-
 Debt instruments should yield two types of cash flows for
the investor
 a. payment of interest
 b. repayment of principal
Rating is an indication of how these two flows are .
 short term ratings

short term ratings of CRISIL are P1+, P1, P2

 long term

AAA- Excellent
AA- Highest safety
A- adequate safety only
BBB- Satisfactory- moderate safety
 ICRA- LAAA,LAA+, LAA, LAA-, LA+, LA, LA-...
Interpretation of rating-long term
The ratings lie on a spectrum ranging between
highest credit quality on one end and default or
"junk" on the other. Long–term credit ratings are
denoted with a letter: a triple A (AAA) is the
highest credit quality, and C or D (depending on
the agency issuing the rating) is the lowest or
junk quality. Within this spectrum there are
different degrees of each rating, which are,
depending on the agency, sometimes denoted
by a plus or negative sign or a number
IPO Grading
five point scale adopted by ICRA and CARE
Grade 5- strong fundamentals
Grade 4- above average
Grade 3- average
Grade 2- below average
Grade 1- poor fundamentals
MUTUAL FUNDS
mf AAA- Highest security
mf AA -Second
mf A -average risk
mfBBB, mf BB, mf B, mf C, mf C, mf D- LOW
QUALITY
Short term debt funds
mf A1-Highest quality
mf A2- above average
mfA3- Moderate
mfA4- High risk
mfA5-Lowest quality
SMALL AND MEDIUM ENTERPRISE-SMEs
SME1- High performance
SME2-
SME3…………………….SME8- defaulty
MODULE-5

STOCK MARKT-STOCK
BROKING-TRADING SYSTEM –
DEPOSITARY SERVICES-
ROLE OF DEPOSITARIES-
NSDIL-CSDL- SEBI-
REGIULATIONS-REGULATERY
BODIES
Structure of Capital Market in India
• Market Segments
– Primary and Secondary
• Regulators
– SEBI, RBI, DCA, DEA
• Legislations
– Capital Issues (Control) Act,1947
– SEBI Act, 1992; Depositories Act,1996
– Securities Contract Regulation Act 1956
– Companies Act, 1956
• Participants
– Issuers, Intermediaries, Investors
STOCKS
 Stocks or Shares represent the ownership of
a company in proportion to stocks or shares
held

 Stock represents a claim on the company's

Assets , Earnings and have Voting Rights

 Holding a company's stock means that you

are one of the many owners
FEATURES
 Entitled to a portion of the company’s profits
and have a claim on assets
 Claim on profit – Dividend, if paid out
 Claim on Asset – Residual claim if business is liquidated

 Limited liability
 Liability limited to amount paid to buy stocks

 Tradability
 Stock are tradable at recognised stock exchanges through its
members (Stock Brokers)
Primary and Secondary Market
 The primary market is where securities are
created (by means of an IPO)

 In the secondary market, investors trade

previously-issued securities without the
involvement of the issuing-companies

 When we talk about markets we refer to

secondary market
Market Place
 The purpose of a stock market is to facilitate the
exchange of securities between buyers and sellers
 Interactive ,Information driven and Volume driven
 Stocks are held and traded in Demat form
 Tech savvy & Screen based trading
 Expanding product range
 Advanced settlement and regulatory mechanism in
place
 Major Stock Exchanges are
• BSE

• NSE
Market Activities
 Normal working hours 9.55 am to 3.30 pm,
Monday to Friday

 Buying and Selling of stocks during this

period moves price up or down

 When we talk about markets are up or down

we refer to market indices
Bank A/c DEMAT

BUYER BROKER
STOCK
EXCHANG
E
SELLER BROKER

Cash
Bank A/c DEMAT Shares
Depository
 The term depository is defined as “a central
location for keeping securities on deposit”. It is
also defined as “a facility for holding securities,
either in certificated or un certificated form to
enable book entry transfer of securities”.
 It is understood from the above two definitions
that the depository is a place where securities are
stored, recorded in the books on behalf of the
investors
 Therefore, a depository can be defined as, “an
institution which transfers the ownership of
securities in electronic mode on behalf of its
members
Depository
OBJECTIVES
 Reduce the time for transfer of securities.

 Avoid the risk of settlement of securities.

 Enhance liquidity and efficiency

 Reduce cost of transaction for the investor.

 Create a system for the central handling of all

securities.
 Promote the country’s competitiveness by

 complying with global standards.

 Provide service infrastructure in a capital

market
BENEFITS TO INVESTORS
 This system will eliminate paper work as the book entry
system does not need physical movement of certificates
for transfer process.
 The risk of bad deliveries, fraud and misplaced and lost
 share certificates will not exist.
 The electronic media will shorten settlement time and
hence the investor can save time and increase the
velocity of security movement.
 Investor will be able to change portfolio more frequently.
The distribution of dividend, interest and other benefits
will be speedier as the ownership can be easily
identifiable.
 The cost of transfer is less as the share transfers are
exempt from stamp duty. Faster payment in case of sale
of shares.
Demat Account
 A short form of  saying Dematerialized Account  is
a type of banking account which dematerializes
the paper based physical shares.
It can be considered as another form of  a
personal account where people keep shares
instead of money and cheque.
A savings account holds your money
electronically and a demat account holds your
stocks electronically.
A demat account can be opened with no balance
of shares.
 As per Securities and Exchange Board of
India rules, one can purchase shares up to
500 in physical form. But it mandates demat
account for share trading above 500.

 Demat account allows you to buy or sell and

transact shares in safe, secure and
convenient way without making any delay
and paperwork. 
Depositary Participants
 The Depositary Participants are the agents governed by
Depositories through which one can operate the demat
account.  Depository participants are mainly banks and
brokers. There are over a 100 DPs in India. 
 . The relationship between the DPs and the depository is
governed by an agreement made between the two under
the Depositories Act. In a strictly legal sense, a DP is an
entity who is registered as such with SEBI under the sub
secton 1A of Section 12 of the SEBI Act. As per the
provisions of this Act, a DP can offer depository-related
services only after obtaining a certificate of registration
from SEBI
services of DP
 a) Dematerialisation, i.e. getting physical
securities converted into electronic form.
 b) Rematerialisation, i.e. getting electronic
securities balances held in a BO account
converted into physical form.
 c) To maintain record of holdings in the
electronic form.
 d) Settlement of trades by delivering /
receiving underlying securities from / in BO
accounts.
 e) Settlement of off-market trades i.e. transactions
between BOs entered outside the Stock Exchange.
 f) Providing electronic credit in respect of securities
allotted by issuers under IPO or otherwise.
 g) Receiving on behalf of demat account holders non-
cash corporate benefits, such as, allotment of bonus and
rights shares in electronic form or securities resulting
upon consolidation, stock split or merger / amalgamation
of companies.
 h) Pledging of dematerialised securities & facilitating
loans against shares.
 i) Freezing of the demat account for debits, credits, or
both.
Benefits
 Demat account holders need not pay stamp duty posted in case of
physical shares.
 It enables quick ownership of securities resulting in increased
liquidity and makes the processes like pledging and hypothecation
of shares much easier.
 Demat account holds portfolio of shares in electronic form and
obviate the need to hold shares in physical form.
 This account is very safe, secure and convenient for trading and
investments.
 This makes a speed-e transactions in stock trading.
 Demat account eliminates the risk of loss, forged transfer, bad
delivery and fake certificates in the share transaction.
 Nomination facility is available
Depository
 Shares held in Demutualization form.

 Transferred in electronics forms.

 Two types of depositories.

 NSDL
 CDSL
National Securities Depository
Limited (NSDL)
 The enactment of Depositories Act in August 1996
paved the way for establishment of National Securities
Depository Limited (NSDL), the first depository in India.
This depository.

 NSDL aims at ensuring the safety and soundness of

Indian marketplaces by developing settlement solutions
that increase efficiency, minimise risk and reduce costs.
NSDL plays a quiet but central role in developing
products and services that will continue to nurture the
growing needs of the financial services industry
National Securities Depository Limited (NSDL)
 NSDL provides various services to investors
and other participants in the capital market .

Services…….
clearing members, stock exchanges, banks and issuers of
securities. These include basic facilities like account
maintenance,
materialization, dematerialization, settlement of trades
through market transfers, off market transfers & inter-
depository transfers, distribution of non-cash corporate
actions and nomination/ transmission .
1.Dematerialization
 Dematerialization is the process by which a client can get
his electronic holdings converted into physical
certificates. The client has to submit the dematerialization
request to the DP with whom he has an account. The DP
enters the request in its system which blocks the client's
holdings to that extent automatically
Features:
 A client can rematerialise his dematerialised holdings at any point of
time.
 The rematerialisation process is completed within 30 days.

 The securities sent for rematerialisation cannot be traded

2.Market Transfers
 Trading in dematerialized securities is quite similar to
trading in physical securities. The major difference is that
at the time of settlement, instead of delivery/receipt of
securities in the physical form, the same is affected
through account transfers.
Features:
Delivery of securities to or from a clearing member are
called "Market Trades" in the depository system. A simple
way of determining whether a trade is a market trade is
that, either source or target in a transfer instrument is a
CM account; such a transfer is a "Market Trade"
3.Off - Market Transfers
 Trades which are not settled through the
Clearing Corporation/ Clearing House of an
exchange are classified as "Off Market
Trades". Delivery of securities to or from sub
brokers, delivery for trade-for-trade
transactions, by this definition are off-market
trades
4.Inter-Depository Transfers
 Transfer of securities from an account in one
depository to an account in another
depository is termed as an inter-depository
transfer. This facility is quite similar to the
account transfers within NSDL.
 It can be done only for securities that are
available for dematerialisation on both the
depositories
 5.Transmission
 The word 'transmission' means devolution of title
to shares otherwise than by transfer, for
example, devolution by death, succession,
inheritance, bankruptcy, marriage, etc. While
transfer of shares is brought about by delivery of
a proper instrument of transfer (viz, transfer
deed) duly stamped and executed, transmission
of shares is done by forwarding the necessary
documents (such as a notarised copy of death
certificate) to the company
6.Corporate Actions
 Features:
Corporate actions are benefits given by a company to its investors.
These may be either monetary benefits like dividend, interest or
non-monetary benefits like bonus, rights, etc. NSDL facilitates
distribution of corporate benefits.

6.1.Monetary benefits (dividends etc): NSDL will give the

beneficiary ownership details to the Issuer/R & T Agent. The
Issuer/R & T Agent will carry out the necessary processing and the
distribution of such benefits will be outside the system.

6.2.Non-monetary benefits (rights bonus etc): NSDL will give the

beneficiary ownership details to the Issuer/ R & T Agent. The
Issuer/R & T Agent will carry out the necessary processing and
upload the beneficiary ownership details to NSDL. NSDL will then
credit the beneficiary owners' accounts by downloading the data to
the DPs
6.3.Dividend distribution scheme of NSDL
 The Issuer will execute an agreement with NSDL for the
purpose of dividend distribution and furnish to NSDL
details of the dividend payment. The Issuer will write to the
shareholders holding demat shares intimating them that
NSDL's Dividend Distribution Scheme for direct distribution
of dividend will be used and give them an opportunity to
update their bank details with the DP. This should happen
atleast one month before the dividend distribution so that
modifications/ corrections will get updated in the
beneficiary position (benpos) of the record date.
 The bank details given by the beneficial owners to their
DPs at the time of account opening or as updated later,
will be used for crediting the dividend.
6.3a.Dividend distribution scheme of NSDL
Advantages:
 Issuer will be giving a single cheque to NSDL.
 Savings in administrative cost for printing of paper
instruments in MICR format and dispatching by registered
post.
 Loss of instrument in-transit and fraudulent encashment
thereof can be totally eliminated.
 Effortless receipt for investor - no need to visit the bank for
depositing the warrant.
 Reconciliation will be smooth.
 Investor grievances will be handled by NSDL.
 Issuer can ensure better investor service.
6.4.Public Issues
   Investors have an option to seek allotment of public
issues in electronic form. As per SEBI guidelines trades
in shares issued through public issue shall be settled
only in demat form. Therefore, it is advisable that
investors seek allotment in demat form.
Features:
NSDL depository system provides facility for allotments
of securities directly in to the depository account of the
investors in the dematerialised form
6.5Dematerialization and Settlement of
Warehouse Receipts
 Warehouse receipts are title documents issued by warehouses to
depositors against the commodities deposited in the warehouses.

 Warehouses, that have entered into an agreement with NSDL and

multi-commodity exchange, will issue depository eligible warehouse
receipts.

 At present, NSDL has agreements with two multi-commodity

exchanges viz., National Commodity & Derivatives Exchange Limited
(NCDEX) and Multi Commodity Exchange of India Limited (MCX) and
about 20 warehouses that hold Thirty Five commodities in their
custody.

 An accountholder who wants warehouse receipt balances in its demat

account, will have to quote the demat account number specifically
opened for this purpose. Warehouse will credit warehouse receipts in
the demat account using "corporate action" facility offered by NSD
Present position of NSDL
 In August 2009, number of Demat accounts
held with NSDL crossed one crore.
 NSDL is promoted by Industrial Development
Bank of India Limited (IDBI) - the largest
development bank of India, Unit Trust of India
(UTI) - the largest mutual fund in India and
National Stock Exchange of India Limited
(NSE) - the largest stock exchange in India.[2]
Some of the prominent banks in the country
have taken a stake in NSDL
Present position of NSDL
 As on March 31, 2010
 Number of certificates eliminated (Approx.) :
702 Crore
 Number of companies in which more than
75% shares are dematted : 2670
 Average number of accounts opened per day
since November 1996 : 3646
 CDSL
FEATURES

 CDSL was promoted by Bombay Stock Exchange Limited (BSE)

jointly with leading banks such as State Bank of India, Bank of India,
Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union Bank
of India and Centurion Bank.
 CDSL received the certificate of commencement of business from SEBI in
February, 1999.

Honourable Union Finance Minister, Shri Yashwant Sinha flagged off the
operations of CDSL on July 15, 1999.

Settlement of trades in the demat mode through BOI Shareholding Limited,
the clearing house of BSE, started in July 1999 .
CSDL….
 All leading stock exchanges like the National
Stock Exchange, Calcutta Stock Exchange,
Delhi Stock Exchange, The Stock Exchange,
Ahmedabad, etc have established
connectivity with CDSL.

As at the end of Dec 2007, over 5000 issuers
have admitted their securities (equities,
bonds, debentures, commercial papers),
units of mutual funds, certificate of deposits
etc. into the CDSL system.
CSDL….
Convenience:
….

 Wide DP Network: CDSL has a wide network

of DPs, operating from over 6000 sites,
across the country, offering convenience for
an investor to select a DP based on his
location.
 On-line DP Services:The DPs are directly
connected to CDSL thereby providing on-line
and efficient depository service to investors.
 Convenience:
CSDL….
 Wide Spectrum of Securities Available for Demat:The
equity shares of almost all A, B1 & B2 group companies
are available for dematerialisation on CDSL, consisting
of Public (listed & unlisted) Limited and Private Limited
companies
 Competitive Fees Structure: CDSL has kept its tariffs
very competitive to provide affordable depository
services to investors.
 Internet Access:A DP, which registers itself with CDSL
for Internet access, can in turn provide demat account
holders with access to their account on the Internet
 Security IN CSDL
 Computer Systems: All data held at CDSL and is automatically
mirrored at the Disaster Recovery site and is also backed up and
stored in fireproof cabinets at the main and disaster recovery site.
 Unique BO Account Number:: Every BO in CDSL is allotted a
unique account number, which prevents any erroneous entry or
transfer of securities. If the transferor's account number is wrongly
entered, the transaction will not go through the CDSL system,
unless corrected.
 Data Security: All data and communications between CDSL and its
users is encrypted to ensure its security and integrity.
 Claims on DP: If any DP of CDSL goes into liquidation, the creditors
of the DP will have no access to the holdings of the BO.
 Insurance Cover: CDSL has an insurance cover in the unlikely event
of loss to a BO due to the negligence of CDSL or its DPs.
OVER THE COUNTER
MARKET
OVER THE COUNTER
EXCHANGE OF INDIA

OTCEI
 OTCEI

OTCEI was incorporated in 1990 as a Section

25 company under the Companies Act 1956 and
is recognized as a stock exchange under
Section 4 of the Securities Contracts Regulation
Act, 1956. The Exchange was set up to aid
enterprising promoters in raising finance for new
projects in a cost effective manner and to
provide investors with a transparent & efficient
mode of trading
benefits
 provide capital formation opportunities for young
companies without a track record
 be national in order to reach and service entrepreneurs
and investors
 enable access to a wide spectrum of financial
intermediaries
 be cost effective for issuers
 provide an exit route to venture capital & private equity
funds for their investments
 adopt state of art trading systems and practices in tune
with international norms
 be well regulated to promote transparent and fair market
practices
OTC Exchange of India has been co-
promoted by the leading financial
institutions of the country

 ICICI Bank Limited

 Administrator of Specified Undertaking of Unit Trust  of India
 IDBI Bank Limited.
 SBI Capital Markets Limited
 IFCI Limited
 Life Insurance Corporation of India
 Canbank Financial Services Limited
 General Insurance Corporation of India
 The New India Assurance Company Limited
 The Oriental Insurance Company Limited
 United India Insurance Company Limited
 National Insurance Company Limited
:
benefits of listing at the OTCEI are
 Small and medium closely-held companies can go
public.
 The OTCEI encourages entrepreneurship.
 Companies can get the money before the issue in cases
of Bought-out-deals.
 It is more cost-effective to come with an issue of OTCEI.
 Small companies can get listing benefits.
 Easy issue marketing by using the nation-wide OTCEI
dealer network.
 Nation-wide trading by listing at just one exchange
Benefits of Trading on OTCEI for Investors :
 The OTCEI trading counters are easily accessible by any
investors.
 The OTCEI provides greater confidence to investors
because of complete transparency in deals.
 At the OTCEl, the transactions are fast and are
completed quickly.
 The OTCEI ensures security, liquidity by offering two-
way quotes.
 The OTCEI is an investor friendly exchange with Single
Window Clearance for all investor requests
Trading on OTCEI
It is fully computerised set-up where trading takes place through a
network of computers at the member/dealer end which in turn are
connected to a central computer at OTCEI, Mumbai.
Initial Allotment:. The investor who has been allotted a share
on OTCEI would be receiving an Initial Counter Receipt.
Buying Process in the Secondary Market: first get
himself registered at any of the counters if he has not already
registered himself. Then he can approach any of the counters of
OTCEI. When the transaction takes place, the investor is given a
Permanent Counter Receipt (PCR).
Selling Process in the Secondary Market:
The investor has to surrender the PCR + Transfer Deed (TD The
counter makes payment to the investor after registrar’s validation of
the signatures on the PCR.) to the counter
Why do we need a regulatory body
for Investor protection in India?
India is an ` informationally ' weak market

 Boosting capital market demands restoring the

confidence of lay investors who have been beaten
down by repeated scams

 Progressively softening interest rates and an under

performing economy have eroded investment
options, and require enhanced investing skills.
Regulation of the Financial
System
 To increase the information available to investors:
 To ensure the soundness of financial intermediaries (and
the overall financial system):
 Restrictions on entry
 Disclosure
 Restrictions on Assets and Activities (e.g. Basel II)
 Deposit Insurance
 Limits on Competition
 Restrictions on Interest Rates
Ministry of Finance

SEBI

Stock Exchange

Broker

Advisor
Mission of SEBI

Securities & Exchange Board of India (SEBI)

formed under the SEBI Act, 1992 with the prime
objective of
 Protecting the interests of investors in
securities,
 Promoting the development of, and
 Regulating, the securities market and for
matters connected therewith or incidental
thereto.’
 FUNCTIONS OF SEBI
 Section 11 of the Securities and Exchange
Board of India Act.
Regulation Of Business In The Stock Exchanges
A review of the market operations, organizational structure and
administrative control of the exchange
 All stock exchanges are required to be Body
Corporate
 The exchange provides a fair, equitable and
growing market to investors.
 The exchange’s organisation, systems and
practices are in accordance with the Securities
Contracts (Regulation) Act (SC(R) Act), 1956
 FUNCTIONS OF SEBI
B) Registration And Regulation Of The Working Of Intermediaries

Primary Market Secondary Market

Merchant Bankers Stock brokers

Underwriters Sub- Brokers
Portfolio Managers

egulates the working of the depositories [participants], custodians of

securities, foreign institutional investors, credit rating agencies and such
other intermediaries
 FUNCTIONS OF SEBI
C) Registration And Regulation Of Mutual Funds, Venture
Capital Funds & Collective Investment Schemes

 AMFI-Self Regulatory Organization-'promoting and

protecting the interest of mutual funds and their unit-
holders, increasing public awareness of mutual funds, and
serving the investors' interest by defining and maintaining
high ethical and professional standards in the mutual
funds industry'.
 Every mutual fund must be registered with SEBI and
registration is granted only where SEBI is satisfied with
the background of the fund.
 SEBI has the authority to inspect the books of accounts,
records and documents of a mutual fund, its trustees,
AMC and custodian where it deems it necessary
FUNCTIONS OF SEBI

 SEBI (Mutual Funds) Regulations, 1996 lays down

the provisions for the appointment of the trustees and
their obligations

 Every new scheme launched by a mutual fund needs

to be filed with SEBI and SEBI reviews the document
in regard to the disclosures contained in such
documents.

 Regulations have been laid down regarding listing of

funds, refund procedures, transfer procedures,
disclosures, guaranteeing returns etc
FUNCTIONS OF SEBI
 SEBI has also laid down advertisement code to be
followed by a mutual fund in making any publicity
regarding a scheme and its performance

 SEBI has prescribed norms / restrictions for investment

management with a view to minimize / reduce undue
investment risks.

 SEBI also has the authority to initiate penal actions

against an erring MF.

 In case of a change in the controlling interest of an

asset management company, investors should be given
at least 30 days time to exercise their exit option.
 FUNCTIONS OF SEBI
D) Promoting & Regulating Self Regulatory
Organizations
 In order for the SRO to effectively execute its
responsibilities, it would be required to be structured,
organized, managed and controlled such that it
retains its independence, while continuing to perform
a genuine market development role

E) Prohibiting Fraudulent And Unfair Trade Practices

In The Securities Market
 SEBI is vested with powers to take action against
these practices relating to securities market
manipulation and misleading statements to induce
sale/purchase of securities.
 FUNCTIONS OF SEBI
F] Prohibition Of Insider Trading
 Stock Watch System, which has been put in place,
surveillance over insider trading would be further
strengthened.
G] Investor Education And The Training Of Intermediaries
 SEBI distributed the booklet titled “A Quick Reference
Guide for Investors” to the investors
 SEBI also issued a series of advertisement /public notices
in national as well as regional newspapers to educate and
caution the investors about the risks associated with the
investments in collective investment schemes
 SEBI has also issued messages in the interest of investors
on National Channel and Regional Stations on Doordarshan.
 FUNCTIONS OF SEBI
H) Inspection And Inquiries

I) Regulating Substantial Acquisition Of Shares And

Take-overs

J) Performing Such Functions And Exercising Such

Powers Under The Provisions Of The Securities
Contracts (Regulation) Act, 1956 As May Be
Delegated To It By The Central Government;

K) Levying Fees Or Other Charges For Carrying Out

The Purposes Of This Section

L) Conducting Research For The Above Purposes

 Inspection By SEBI
 A company cannot come out with public issue unless
Draft Prospectus is filed with SEBI. Prospectus is a
document by way of which the investor gets all the
information pertaining to the company in which they are
going to invest. It gives the detailed information about the
Company, Promoter / Directors, group companies, Capital
Structure, Terms of the present issue etc.
 A company cannot file prospectus directly with SEBI. It
has to be filed through a merchant banker. After the
preparation of prospectus, the merchant banker along with
the due diligence certificates and other compliances and
sends the same to SEBI for inspection.
 SEBI on receiving the same scrutinizes it and may
suggest changes within 21 days of receipt of prospectus
 Inspection By SEBI
 The company can come out with a public issue any time
within 180 days from the date of the letter from SEBI
 If the issue size is upto Rs. 20 crores then the merchant
bankers are required to file prospectus with the regional
office of SEBI falling under the jurisdiction in which
registered office of the company is situated.

 If the issue size is more than Rs. 20 crores, merchant

bankers are required to file prospectus at SEBI, Mumbai
office.
 Evaluation Of SEBI’ s Performance

1,Enhancing disclosures

 In most case only the minimum information required

under the Companies Act is made available

 The manner in which the swap ratio is fixed and what

the management thinks of the same is largely taken
for granted.

 valuation reports are made available for inspection,

but access is not easy for all investors.
2.Inability To Utilize The Existing
Powers Effectively
 SEBI could initiate prosecution proceedings on insider trading
only in one case and seven cases on fraudulent and unfair
practices.
 Only in seven of the 181 cases, SEBI resorted to cancellation
of registration during the last four years.
 Though SEBI has the power to impose a penalty of Rs 1.50
lakhs every time a person fails to furnish the requisite
information, but rarely has this power has been exercised by it.
 The provision for mandatory punishment of imprisonment in
addition to award for penalty has scarcely has been used.
3.Quality Of Decisions

What is worrying is the poor rate of assurance in major

cases. Virtually every SEBI decision involving major
cases — such as Sterlite, BPL, Videocon, Anand
Rathi and Associates and Hindustan Lever — has
been reversed by the appeals process (or the
Securities Appellate Tribunal).
4.Accounting, audit quality
The surplus of inter-corporate investments, intra-
company and intra-group transactions, guarantees and
conditional liabilities are areas where there is room
for considerable concern.
5.Price Manipulation — No Dent:
Price manipulation, informed trading and insider trading with
key operators/investors is now routine. This is an area that is
difficult to tackle for any regulator. But over the last ten
years, SEBI has taken action on such price manipulation in
just two cases (Bayer ABS and Amara Raja Batteries). Here,
too, the penal action has hardly been stringent
6.Enticing ads and investor risk
Advertisement lacking indication of performance by mutual
funds has continued regardless of the SEBI guidelines on this.

The Securities and Exchange Board of India (Sebi) is being

blamed for lack of alertness and poor risk-management
measures with regard to the automated lending and borrowing
mechanism.
 Role and Functions of
a stock exchange
 Established for the purpose of
assisting, regulating and controlling
business of buying, selling and dealing
in securities
 Provides a market for the trading of
securities to individuals and
organizations seeking to invest their
saving or excess funds through the
purchase of securities
Role and Functions of a stock
exchange cont’d……..
 Provides a physical location for buying
and selling securities that have been listed
for trading on that exchange
 Establishes rules for fair trading practices
and regulates the trading activities of its
members according to those rules
 The exchange itself does not buy or sell
the securities, nor does it set prices for
them
Role and Functions of a stock exchange cont’d……
Fair
The exchange assures that no investor will have an
undue advantage over other market participants

Efficient market This means that orders are executed

and transactions are settled in the fastest possible way

Transparency Investor make informed and intelligent

decision about the particular stock based on information

Listed companies must disclose information in timely,

complete and accurate manner to the Exchange and the
public on a regular basis
Benefits of listing
• Visibility
• Market support
• Investors confidence
• Increased demand for products and
services
• Overall increase in profitability
Delisting

Stock exchange can delist companies for a

number of reasons including :-
• Merger with another company
• Solvency problems
• Name change company asked to be removed
• Failure to comply with exchange rules
 Desirable Characteristics
of a stock market cont’d
• Liquidity
Ability to sell an asset quickly at a fairly
known price Low transactions costs
Availability of information Market
efficiency
• Prices react quickly to new information
• Small price fluctuations
• Narrow price spread
Financing the exchange
• Transaction fees paid by members for each
order executed
• Fees paid by firms when their securities are
originally listed
• Annual fees by firms
• Entrance fees from new members
• sale of historic trading and market
information
Indian Economy and Capital
Market at a glance

 Second fastest growing economies after

China with an average annual growth rate
of more than 8 per cent in the last three
years
 India’s growth rate has surpassed some of
the developed economies
 GDP at current market prices is over US
$778 billion
Trading system
1.auction market - an auction market model where a
potential buyer bids a specific price for a stock and a
potential seller asks a specific price for the stock. When
the bid and ask prices match, a sale takes place, on a
first-come-first-served basis if there are multiple bidders
or askers at a given price.
2.the broker dealer market-
A firm that functions both as a broker by bringing buyers
and sellers together and as a dealer by taking positions
of its own in selected securities. Many firms that are
commonly called brokers or brokerage firms are actually
broker-dealers.
 Indian Economy – A Snapshot
 One of the fastest growing in the world

 Consumption growth fuelling economic growth – consumption

expenditure forming 78% of GDP

 Services sector contributing over 60% to GDP

 Emerging as a hub of manufacturing excellence. new growth

engines of Indian economy include IT, ITes, pharmaceuticals,

bio-technology, nano technology, agri. businesses

 Where forces of competition are at work

 Innovation driving enterprises

 Economic reforms well on course – entering second phase         

Indian Economy and Capital
Market at a Glance

 9040 brokers in cash segment and 1064 in

derivative segment of the market
 122 investment bankers in the market
 58 under writers to support primary issues
 34 foreign venture capital funds
 120 Portfolio managers
Indian Economy and Capital
Market at a Glance
 Business Week says that of 100 emerging
market firms which are rapidly globalising 21
are Indian firms
 Economists project India to become the third
largest economy in the world by 2040
 Indian capital market regulator has acquired
international credibility in the least possible
time
 Indian Economy and Capital
Market at a Glance
 India has a disclosure based regime of
regulation
 Disclosure and Investor Protection guidelines
available
 India’s accounting standards are closer to
international standards
 India has a well laid down legal framework
Indian Economy and Capital
Market at a Glance
 India has T+2 rolling settlement as opposed
to T+3 in NYSE.
 In India the transactions are totally electronic
on a real time basis.
 India has several protective safeguards for
the retail investor such as grading system of
public offering, retail quota at 25 per cent etc.
Indian Economy and Capital
Market at a Glance
 As an integral part of risk management
trading and exposure limits, various margins
and mark to market margins are in vogue
 Clearing houses in place
 Almost 100 per cent risk free electronic
settlement through depository system
 SEBI has a surveillance and enforcement
system in place
 Indian Economy and Capital Market at a Glance

 India - one of 10 fastest-growing population of HNWIs globally

 There are at least 23 Indian citizens amongst the richest
people on the planet
 Non Resident Indians can invest in all Indian Asset
Classes
 Salary increases in India – 13.9% is the highest in the world
 Increasing Investment avenues – Art, Realty Funds, Commodities
 The number of companies listed on the Bombay Stock Exchange,
at more than 6,000, is second only to NYSE.
 Each year 2,500 tonnes of gold is mined (fifth of the world's gold
output.) and 3,500 tonnes is consumed, of which 1,000 tonnes is
consumed in India alone.
Indian Equities Long term prospects are
Unharmed-- WHY ?
Consumerism Infrastructure
Demographics Retail credit, low interest rates, Development of roads, ports, Reforms
Half the population below 25 yrs changing aspirations telecom FDI, Tax reforms

Sustained GDP Growth

Exports
Global
competitiveness Outsourcing

High GDP Growth

Growth Gap Over The World
Module-2
 Factoring & Forfeiting-
Theoretical frame work-
factoring in India – bills
discounting- bill market-
Mutual funds- meaning –
types- major players
Factoring
Factoring is the Sale of Book Debts by a firm
(Client) to a financial institution
(Factor) on the understanding that the Factor
will pay for the Book Debts as and when they
are collected or on a guaranteed payment
date. Normally, the
Factor makes a part payment (usually upto 80%)
immediately after the debts are purchased
thereby providing immediate liquidity to the
Client
Explanation
 It is the outright purchase of credit approved
accounts receivables with the factor assuming
bad debt losses.
 Factoring provides sales accounting service, use
of finance and protection against bad debts.
 Factoring is a process of invoice discounting by
which a capital market agency purchases all
trade debts and offers resources against them.
Evolution of factoring
 The term factor has its origin from the Latin
word, ‘Facere’meaning to get things done. The
dictionary defines a factor as an agent
particularly a mercantile agent. Factoring has a
long fascinating history which traces back
through several centuries.
 In the early stages factors were itinerant
merchants who were entrusted with
merchandise belonging to others.
Different kinds of factoring
services
Debt administration:
 The factor manages the sales ledger of the
client company. The client will be saved of
the administrative cost of book keeping,
invoicing, credit control and debt collection.
The factor uses his computer system to
render the sales ledger administration
services.
Different kinds of factoring
services
 Credit Information: Factors provide credit
intelligence to their client and supply periodic
information with various customer-wise analysis.
 Credit Protection: Some factors also insure
against bad debts and provide without recourse
financing.
 Invoice Discounting or Financing : Factors
advance 75% to 80% against the invoice of their
clients. The clients mark a copy of the invoice to
the factors as and when they raise the invoice
on their customers.
Different kinds of factoring
services
 Basically there are three parties to the
factoring services as depicted below:

Buyer
Se
ller
Client customer

factor
Financer
So, a Factor is,

a) A Financial Intermediary
b) That buys invoices of a manufacturer or a trader,
at a discount, and
c) Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:-

a) Supplier or Seller (Client)

b) Buyer or Debtor (Customer)
c) Financial Intermediary (Factor)
Services rendered by factor
 Client forwards invoice/copy to factor along with
receipted delivery challans.
 Factor provides credit to client to the extent of 80%
of the invoice value and also notifies to the
customer
 Factor periodically follows with the customer
 When the customer pays the amount of the invoice
the balance of 20% of the invoice value is passed
to the client recovering necessary interest and
other charges.
 If the customer does not pay, the factor takes
recourse to the client.
Benefits of factoring
 The client will be relieved of the work relating to
sales ledger administration and debt collection
 The client can therefore concentrate more on
planning production and sales.
 The charges paid to a factor which will be
marginally high at 1 to 1.5% than the bank
charges will be more than compensated by
reductions in administrative expenditure.
 This will also improve the current ratio of the
client and consequently his credit rating.
Benefits of factoring
 The subsidiaries of the various banks have
been rendering the factoring services.
 The factoring service is more comprehensive
in nature than the book debt or receivable
financing by the bankers.
 PROCESS INVOLVED IN
FACTORING
 Client concludes a credit sale with a customer.

 Client sells the customer’s account to the Factor and notifies the customer.

 Factor makes part payment (advance) against account purchased, after adjusting
for commission and interest on the advance.

 Factor maintains the customer’s account and follows up for payment.

 Customer remits the amount due to the Factor.

 Factor makes the final payment to the Client when the account is collected or on
the guaranteed payment date.
MECHANICS OF FACTORING
 The Client (Seller) sells goods to the buyer and prepares invoice with a
notation that debt due on account of this invoice is assigned to and must be
paid to the Factor (Financial Intermediary).

 The Client (Seller) submits invoice copy only with Delivery Challan showing
receipt of goods by buyer, to the Factor.

 The Factor, after scrutiny of these papers, allows payment (,usually upto 80%
of invoice value). The balance is retained as Retention Money (Margin Money).
This is also called Factor Reserve.

 The drawing limit is adjusted on a continuous basis after taking into account
the collection of Factored Debts.

 Once the invoice is honoured by the buyer on due date, the Retention Money
credited to the Client’s Account.

 Till the payment of bills, the Factor follows up the payment and sends regular
statements to the Client.
TYPES OF FACTORING
 Recourse Factoring

 Non-recourse Factoring

 Maturity Factoring

 Cross-border Factoring
RECOURSE FACTORING

 Upto 75% to 85% of the Invoice Receivable is factored.

 Interest is charged from the date of advance to the date of collection.

 Factor purchases Receivables on the condition that loss arising on account of

non-recovery will be borne by the Client.

 Credit Risk is with the Client.

 Factor does not participate in the credit sanction process.

 In India, factoring is done with recourse.

NON-RECOURSE FACTORING
 Factor purchases Receivables on the condition that the Factor has no
recourse to the Client, if the debt turns out to be non-recoverable.

 Credit risk is with the Factor.

 Higher commission is charged.

 Factor participates in credit sanction process and approves credit limit

given by the Client to the Customer.

 In USA/UK, factoring is commonly done without recourse.

MATURITY FACTORING
 Factor does not make any advance payment to the Client.

 Pays on guaranteed payment date or on collection of Receivables.

 Guaranteed payment date is usually fixed taking into account previous

collection experience of the Client.

 Nominal Commission is charged.

 No risk to Factor.
CROSS - BORDER FACTORING
 It is similar to domestic factoring except that there are four parties, viz.,
a) Exporter,
b) Export Factor,
c) Import Factor, and
d) Importer.

 It is also called two-factor system of factoring.

 Exporter (Client) enters into factoring arrangement with Export Factor in
his country and assigns to him export receivables.
 Export Factor enters into arrangement with Import Factor and has
arrangement for credit evaluation & collection of payment for an agreed
fee.
 Notation is made on the invoice that importer has to make payment to the
Import Factor.
 Import Factor collects payment and remits to Export Factor who passes on
the proceeds to the Exporter after adjusting his advance, if any.
 Where foreign currency is involved, Factor covers exchange risk also.
 FACTORING
vs
BILLS DISCOUNTING
BILL DISCOUNTING FACTORING
1. Bill is separately examined and 1. Pre-payment made against all
discounted. unpaid and not due invoices
purchased by Factor.

2. Factor has responsibility of

2. Financial Institution does not Sales Ledger Administration
have responsibility of Sales and collection of Debts.
Ledger Administration and
collection of Debts.
3. Notice of assignment is
3. No notice of assignment provided to customers of the
provided to customers of the Client.
Client.
 FACTORING
vs
BILLS DISCOUNTING (contd…)

BILLS DISCOUNTING FACTORING

4. Bills discounting is usually 4. Factoring can be done
done with recourse. without or without recourse
to client. In India, it is done
with recourse.

5. Financial Institution can get

5. Factor cannot re-discount
the bills re-discounted
the receivable purchased
before they mature for
under advanced factoring
payment.
arrangement.
 STATUTES APPLICABLE TO
FACTORING
 Factoring transactions in India are governed by the following Acts:-

a) Indian Contract Act

b) Sale of Goods Act

c) Transfer of Property Act

d) Banking Regulation Act.

e) Foreign Exchange Regulation Act.

WHY FACTORING HAS NOT
BECOME POPULAR IN INDIA
 Banks’ reluctance to provide factoring services

 Bank’s resistance to issue Letter of Disclaimer (Letter of Disclaimer is

mandatory as per RBI Guidelines).

 Problems in recovery.

 Factoring requires assignment of debt which attracts Stamp Duty.

 Cost of transaction becomes high.

Factoring companies in India
 Canbank Factors Limited:
 SBI Factors and Commercial Services Pvt. Ltd:
 The Hongkong and Shanghai Banking
Corporation Ltd:
 Foremost Factors Limited:
 Global Trade Finance Limited:
 Export Credit Guarantee Corporation of India
Ltd:
 Citibank NA, India
 Small Industries Development Bank of India
(SIDBI):
 Standard Chartered Bank:
 Forfaiting

Forfaiting is a mechanism by which the right

for export receivables of an exporter(Client) is
purchased by a Financial Intermediary
(Forfeiter) without recourse to him.
Forfaiting
 The forfaiting owes its origin to a French term
‘forfait’ which means to forfeit (or surrender)
one’s rights on something to some one else.
 It is a trade finance extended by a forfaiter to
an exporter/seller for an export/sale
transaction involving deferred payment terms
over a long period at a firm rate of discount.
 Forfaiting is generally extended for export of
capital goods, commodities and services
where the importer insists on supplies on
credit terms.

Methodology
 The exporter has option to forfaiting usually in
cases where the credit is extended for long
durations but there is no prohibition for
extending the facility where the credits are
maturing in periods less than one year.
 Credits for commodities or consumer goods is
generally for shorter duration within one year.
Forfaiting services are extended in such cases
as well.
Mechanism

 There are five parties in a transaction of

forfaiting. These are :
1. Exporter
2. Exporter’s bank
3. Importer
4. Importer’s bank and
5. Forfaiter
Mechanism
 The exporter and importer negotiate the proposed
export sale contract. These are the preliminary
discussions.
 Based on these discussions the exporter
approaches the forfaiter to ascertain the terms for
forfeiting.
 The forfaiter collects from exporter all the relevant
details of the proposed transaction, viz., details
about the importer, supply and credit terms,
documentation, etc., in order to ascertain the
country risk and credit risk involved in the
transaction..
Mechanism
 Depending upon the nature and extent of these
risks the forfaiter quotes the discount rate.
 The exporter has now to take care that the
discount rate is reasonable and would be
acceptable to his buyer.
 He will then quote a contract price to the
overseas buyer by loading the discount rate,
commitment fee, etc., on the sale price of the
goods to be exported.
 If the deals go through, the exporter and
forfaiter sign a contract.
Mechanism

 Export takes place against documents

guaranteed by the importer’s bank.
 The exporter discounts the bill with the
forfaiter and the forfaiter presents the same
to the importer for payment on due date or
even can sell it in secondary market.
MECHANICS OF FORFAITING

EXPORTER IMPORTER

FORFAITER AVALLING BANK

HELD TILL MATURITY

SELL TO GROUPS OF INVESTORS

TRADE IN SECONDARY MARKET

 ESSENTIAL REQUISITES OF FORFAITING
TRANSACTIONS

 Exporter to extend credit to Customers for periods above 6

months.

 Exporter to raise Bill of Exchange covering deferred

receivables from 6 months to 5 years.

 Repayment of debts will have to be avallised or guaranteed

by another Bank, unless the Exporter is a Government Agency
or a Multi National Company.

 Co-acceptance acts as the yard stick for the Forefaiter to

credit quality and marketability of instruments accepted.
IN FORFAITING:-
 Promissory notes are sent for avalling to the Importer’s Bank.

 Avalled notes are returned to the Importer.

 Avalled notes sent to Exporter.

 Avalled notes sold at a discount to a Forefaiter on a NON-

RECOURSE basis.

 Exporter obtains finance.

 Forfaiter holds the notes till maturity or securitises these notes

and sells the Short Term Paper either to a group of investors or to
investors at large in the secondary market.
 CHARACTERISTICS OF FORFAITING
 Converts Deferred Payment Exports into cash transactions,
providing liquidity and cash flow to Exporter.

 release Exporter from Cross-border political or conversion risk

associated with Export Receivables.

 Finance available upto 100% (as against 75-80% under

conventional credit) without recourse.

 Acts as additional source of funding and hence does not have

impact on Exporter’s borrowing limits. It does not reflect as
debt in Exporter’s Balance Sheet.

 Provides Fixed Rate Finance and hence risk of interest rate

fluctuation does not arise.
CHARACTERISTICS OF FORFAITING
(contd….)

 Exporter is freed from credit administration.

 Provides long term credit unlike other forms of bank

credit.

 Simple Documentation as finance is available against bills.

 Forfait financer is responsible for each of the Exporter’s

trade transactions. Hence, no need to commit all of his
business or significant part of business.

 Forfait transactions are confidential.

Documentation and cost
 Forfaiting transaction is usually covered either
by a promissory note or bill of exchange. In
either case it has to be guaranteed by a bank
or, bill of exchange may be ‘avalled’ by the
importer’ bank.
 The ‘Aval’ is an endorsement made on bill of
exchange or promissory note by the
guaranteeing bank by writing ‘per aval’ on
these documents under proper authentication.
 The forfeiting cost for a transaction will be in
the form of ‘commitment fee’, ‘discount fee’
and ‘documentation fee’.
 COSTS INVOLVED IN FORFAITING
 Commitment Fee:- Payable to Forfaiter by Exporter in
consideration of forefaiting services.

 Commission:- Ranges from 0.5% to 1.5% per annum.

 Discount Fee:- Discount rate based on the period

concerned.

 Documentation Fee:- where elaborate legal

formalities are involved.

 Service Charges:- payable to Exim Bank.

 FACTORING vs. FORFAITING
POINTS OF DIFFERENCE FACTORING FORFAITING

Extent of Finance Usually 75 – 80% of the value of 100% of Invoice value

the invoice

Credit Worthiness Factor does the credit rating in The Forfaiting Bank relies on
case of non-recourse factoring the creditability of the
transaction Avalling Bank.

Services provided Day-to-day administration of sales No services are provided

and other allied services

Recourse With or without recourse Always without recourse

Sales By Turnover By Bills

 COMPARATIVE ANALYSIS

BILLS FACTORING FORFAITING

DISCOUNTED
1. Scrutiny Individual Sale Service of Sale Individual Sale
Transaction Transaction Transaction
2. Extent of Upto 75 – 80% Upto 80% Upto 100%
Finance
3. Recourse With Recourse With or Without Without Recourse
Recourse
4. Sales Not Done Done Not Done
Administration
5. Term Short Term Short Term Medium Term

6. Charge Creation Hypothecation Assignment Assignment

WHY FORFAITING HAS NOT
DEVELOPED
 Relatively new concept in India.
 Depreciating Rupee
 No ECGC Cover
 High cost of funds
 High minimum cost of transactions (USD 250,000/-)
 RBI Guidelines are vague.
 Very few institutions offer the services in India.
Exim Bank alone does.
 Long term advances are not favoured by Banks as
hedging becomes difficult.
 Lack of awareness.
Mechanism- a case
 Export-Import Bank of India, (EXIM Bank) has started
with a scheme to the Indian exporters by working out
an intermediary between the exporter and the forfaiter.
 The scheme takes place in the following stages:

1. Negotiations being between exporter and importer with

regard to contract price, period of credit, rate of
interest, etc.
2. Exporter approaches EXIM Bank with all the relevant
details for an indicative discount quote.
3. EXIM Bank approaches an overseas forfaiter, obtain
the quote and gets back to exporter with the offer.
Mechanism- a case
4.Exporter and importer finalise the term of contract.
All costs levied by a forfaiter are to be transferred
to the overseas buyer. As such discount and
other charges are loaded in the basic contract
value.
5. Exporter approaches EXIM Bank and it in turn the
forfaiter for the firm quote. The exporter confirm
the acceptance of the arrangement.
6. Export takes place — shipping documents along
with bill of exchange, promissory note have to be
in the prescribed format.
Mechanism- a case
7.Importer’s bank delivers shipping documents to
importer against acceptance of bill of exchange
or on receipt of promissory note from the
importer as the case may be and send these to
exporter’s bank with its guarantee.
8. Exporter’s bank gets bill of exchange/promissory
note endorsed with the words ‘Without Recourse’
from the exporter and present the document(s) to
EXIM Bank who in turn send it to the forfaiter.
Mechanism- a case
9. Forfaiter discounts the documents at the pre-
determined rate and passes on funds to EXIM
Bank for onward disbursement to exporter’s
bank nostro account of exporter’s bank.
10.Exporter’s bank credits the amount to the
exporter.
11.Forfaiter presents the documents on due date
to the importer’s bank and receives the dues.
12.Exporter’s bank recovers the amount from the
importer.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
1.Suitable for ongoing open 1. Oriented towards single
account sales, not transactions backed by
backed by LC or LC or bank guarantee.
accepted bills or 2. Financing is usually for
exchange. medium to long-term
2. Usually provides credit periods from 180
financing for short-term days upto 7 years though
credit period of upto 180 shorterm credit of 30–180
days. days is also available for
large transactions.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
3.Requires a continuous 3. Seller need not route or
arrangements between commit other business to
factor and client, whereby the forfaiter. Deals are
all sales are routed concluded transaction-
through the factor. wise.
4. Factor assumes 4. Forfaiter’s responsibility
responsibility for extends to collection of
collection, helps client to forfeited debt only.
reduce his own Existing financing lines
overheads. remains unaffected.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
5. Separate charges are 5. Single discount charges
applied for is applied which depend
—  financing on
—  collection —  guaranteeing bank
—  administration and country risk,
—  credit protection and —  credit period involved
and
—  provision of information. —  currency of debt.
Only additional charges is
commitment fee, if firm
commitment is required
prior to draw down during
delivery period.
FFACTORING AND
FORFAITINGFERENCE BETWEEN
6. Service is avDIailable 6. Usually available for
for domestic and export receivables
export receivables. only denominated in
7. Financing can be with any freely convertible
or without recourse; currency.
the credit protection 7. It is always ‘without
collection and recourse’ and
administration essentially a financing
services may also be product.
provided without
financing.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
8. Usually no restriction on 8. Transactions should be of
minimum size of a minimum value of USD
transactions that can be 250,000.
covered by factoring . 9. Forfaiting will accept only
9. Factor can assist with clean documentation in
completing import conformity with all
formalities in the buyer’s regulations in the
country and provide exporting/importing
ongoing contract with countries
buyers.
Exchange
 According to section 5 of Negotiable
Instrument Act,
 “A Bill Of Exchange is an instrument
in writing containing an unconditional
order, signed by the maker , directing a
certain person to pay a sum of money
only to or to the order of a certain person
or to the bearer of the instrument”
Specimen Of A Bill Of
Exchange

JAMMU

27th Nov. 2006

Three months after due date, pay XYZ or order, the

Sum of Rs 1000(one thousand only) for value received. Stamp

To,
M/S ABC
Gandhi Nagar
Jammu
Parts Of A Bill Of
Exchange
 Date

 Term

 Amount

 Stamp

 Parties
Special features
1 A Bill Of Exchange is an instrument in
writing
1. It must be signed by the maker
2. It contains an unconditional order
3. The order must be to pay money and
money only
4. The sum payable must be specific
5. The amount must be paid within a
stipulated time
6. The name of the drawee must be clearly
mentioned
7. It must be dated and stamped
Parties to a Bill Of
Exchange
Drawer
The person who draws or writes the
Bill Of Exchange is called the
Drawer. The Drawer must be the
seller or creditor to whom the money
is owing
Drawee
 TheDrawee is the person on
whom the bill is drawn. He is the
purchaser or debtor who is
ordered by the Drawer to pay the
amount
Payee
 The person who has the right
to receive the amount of the
bill is called the Payee, the
Payee may be a third person or
the Drawer himself
Advantages of Bill of
Exchange
1. A Bill of Exchange is used in settlement
of debts
2. It fixes the date of payment
3. It is a written and signed
acknowledgement of debt
4. A debtor enjoys full period of credit
5. A drawer can convert the bill into cash
by getting it discounted with the bank
Mutual Funds
 Mutual Fund: an investment company that invests its
shareholders’ money in a diversified portfolio of securities
 Investors own a share of the fund proportionate to the amount of
the investment
 First started in 1924
 A mutual fund is a common pool of money into which investors place
their contributions that are to be invested in different types of
securities in accordance with the stated objective.
 An equity fund would buy equity assets – ordinary shares, preference
shares, warrants etc.
 A bond fund would buy debt instruments such as debenture bonds, or
government securities/money market securities.
 A balanced fund will have a mix of equity assets and debt
instruments.
 Mutual Fund shareholder or a unit holder is a part owner of the fund’s

asset .
History of Indian Mutual funds

The history of the Indian mutual fund industry can

be traced to the formation of UTI in 1963. This was
a joint initiative of the Government of India and RBI.
It held monopoly for nearly 30 years.
Since 1987, non-UTI mutual funds entered the
scenario. These consisted of LIC, GIC and public-
sector bank backed Indian mutual funds.
SBI Mutual fund was the first of this kind. 1993 saw
the entry of private sector players on the Indian
Mutual Funds scene. Mutual fund regulations were
revised in 1996 to accommodate changing market
needs
First Phase - 1964-87
Unit Trust of India (UTI) was established on 1963
by an Act of Parliament. It was set up by the
Reserve Bank of India and functioned under
the Regulatory and administrative control of the
Reserve Bank of India. In 1978 UTI was de-
linked from the RBI and the Industrial
Development Bank of India (IDBI) took over the
regulatory and administrative control in place of
RBI. The first scheme launched by UTI was
Unit Scheme 1964. At the end of 1988 UTI had
Rs.6,700 crores of assets under management.
Second Phase - 1987-1993 (Entry of Public Sector Funds

 Entry of non-UTI mutual funds. SBI Mutual

Fund was the first followed by Canbank
Mutual Fund (Dec 87), Punjab National Bank
Mutual Fund (Aug 89), Indian Bank Mutual
Fund (Nov 89), Bank of India (Jun 90), Bank
of Baroda Mutual Fund (Oct 92). LIC in 1989
and GIC in 1990. The end of 1993 marked
Rs.47,004 as assets under management.
Third Phase - 1993-2003 (Entry of Private Sector Funds)
 With the entry of private sector funds in 1993, a new era
started in the Indian mutual fund industry, giving the Indian
investors a wider choice of fund families. Also, 1993 was
the year in which the first Mutual Fund Regulations came
into being, under which all mutual funds, except UTI were
to be registered and governed. The erstwhile Kothari
Pioneer (now merged with Franklin Templeton) was the
first private sector mutual fund registered in July 1993.
The 1993 SEBI (Mutual Fund) Regulations were
substituted by a more comprehensive and revised Mutual
Fund Regulations in 1996. The industry now functions
under the SEBI (Mutual Fund) Regulations 1996. As at the
end of January 2003, there were 33 mutual funds with total
assets of Rs. 1,21,805 crores.
 Fourth Phase - since February 2003

This phase had bitter experience for UTI. It was bifurcated
into two separate entities. One is the Specified Undertaking of
the Unit Trust of India with AUM of Rs.29,835 crores (as on
January 2003). The Specified Undertaking of Unit Trust of
India, functioning under an administrator and under the rules
framed by Government of India and does not come under the
purview of the Mutual Fund Regulations
 The second is the UTI Mutual Fund Ltd, sponsored by SBI,
PNB, BOB and LIC. It is registered with SEBI and functions
under the Mutual Fund Regulations.
 ABN AMRO Mutual Fund  JM Financial Mutual Fund

Benchmark Mutual Fund Kotak Mahindra Mutual Fund

Birla Mutual Fund LIC Mutual Fund

BOB Mutual Fund Morgan Stanley Mutual Fund

Canbank Mutual Fund PRINCIPAL Mutual Fund
Chola Mutual Fund
Prudential ICICI Mutual Fund
Deutsche Mutual Fund
Reliance Mutual Fund
DSP Merrill Lynch Mutual Fund
Sahara Mutual Fund
Escorts Mutual Fund
SBI Mutual Fund
Fidelity Mutual Fund

Franklin Templeton Investments Standard Chartered Mutual Fund

HDFC Mutual Fund Sundaram Mutual Fund

HSBC Mutual Fund Tata Mutual Fund

ING Vysya Mutual Fund Taurus Mutual Fund

Unit Trust of India

Advantages of Mutual Funds
• Portfolio diversification: It enables him to hold a diversified
investment portfolio even with a small amount of investment like Rs.
2000/-.
• Professional management: The investment management skills,
along with the needed research into available investment options,
ensure a much better return as compared to what an investor can
manage on his own.

• Reduction/Diversification of Risks: The potential losses are also

shared with other investors.

• Reduction of transaction costs: The investor has the benefit of

economies of scale; the funds pay lesser costs because of larger
volumes and it is passed on to the investors.

• Wide Choice to suit risk-return profile: Investors can chose the

fund based on their risk tolerance and expected returns.
Advantages of Mutual Funds
• Liquidity: Investors may be unable to sell shares directly, easily
and quickly. When they invest in mutual funds, they can cash their
investment any time by selling the units to the fund if it is open-
ended and get the intrinsic value. Investors can sell the units in the
market if it is closed-ended fund.

• Convenience and Flexibility: Investors can easily transfer their

holdings from one scheme to other, get updated market information
and so on. Funds also offer additional benefits like regular
investment and regular withdrawal options.

• Transparency: Fund gives regular information to its investors on

the value of the investments in addition to disclosure of portfolio
held by their scheme, the proportion invested in each class of
assets and the fund manager's investment strategy and outlook
Disadvantages of Mutual Funds
• No control over costs: The investor pays investment management
fees as long as he remains with the fund, even while the value of his
investments are declining. He also pays for funds distribution
charges which he would not incur in direct investments.

• No tailor-made portfolios: The very high net-worth individuals or

large corporate investors may find this to be a constraint as they will
not be able to build their own portfolio of shares, bonds and other
securities.

• Managing a portfolio of funds: Availability of a large number of

funds can actually mean too much choice for the investor. So, he
may again need advice on how to select a fund to achieve his
objectives.

• Delay in redemption: It takes 3-6 days for redemption of the units

and the money to flow back into the investor’s account.
Open-end Vs. Closed-end Funds
 Open-end Fund
• Available for sale and repurchase at all times based on the net
asset value (NAV) per unit.
• Unit capital of the fund is not fixed but variable.
• Fund size and its total investment go up if more new subscriptions
come in than redemptions and vice-versa.
 Closed-end Fund
• One time sale of fixed number of units.
• Investors are not allowed to buy or redeem the units directly from
the funds. Some funds offer repurchase after a fixed period. For
example, UTI MIP offers a repurchase after 3 years.
• Listed on stock exchange and investors can buy or sell units
through the exchange.
• Units maybe traded at a discount or premium to NAV based on
investor’s perception about the funds future performance and other
market factors.
Load Vs. No-load Funds
 Marketing a new mutual fund scheme involves initial expenses.
These expenses are charged to the investors through loads and are
recovered from the investors in different ways:
• Front-end or entry load is charged to the investor at the time of
his entry into the scheme.
• Back-end or exit load is charged to the investor at the time of his
exit from the scheme.
• Deferred load is charged to the investor over a period of time.
• Contingent deferred sales charge: Different amount of loads are
charged to the investor depending upon the time period the investor
has stayed with the fund. The longer he stays with the fund, lesser
the amount of exit fund he is charged.

 Very often, AMC’s do not charge any initial expenses to the investor
in the IPO. These are hence are no-load funds. In no-load funds,
the investors get units for the complete amount invested.
Mutual Fund Types
 Money Market Funds/Cash Funds
• Invest in securities of short term nature I.e. less than one year
maturity.
• Invest in Treasury bills issued by government, Certificates of
deposit issued by banks, Commercial Paper issued companies and
inter-bank call money.
• Aim to provide easy liquidity, preservation of capital and moderate
income.
 Gilt Funds
• Invest in Gilts which are government securities with medium to long
term maturities, typically over one year.
• Gilt funds invest in government paper called dated securities.
• Virtually zero risk of default as it is backed by the Government.
• It is most sensitive to market interest rates. The price falls when the
interest rates goes up and vice-versa.
Debt Funds

 Debt Funds/Income Funds

• Invest in debt instruments issued not only by government, but also
by private companies, banks and financial institutions and other
entities such as infrastructure companies/utilities.
• Target low risk and stable income for the investor.
• Have higher price fluctuation as compared to money market funds
due to interest rate fluctuation.
• Have a higher risk of default by borrowers as compared to Gilt
funds.
• Debt funds can be categorized further based on their risk profiles.
• Carry both credit risk and interest rate risks.
Equity Funds
 Equity Funds:
• Invest a major portion of their amount in equity shares issued by
companies, acquired directly in initial public offering or through
secondary market and keep a part in cash to take care of
redemptions.
• Risk is higher than debt funds but offer very high growth potential
for the capital.
• Equity funds can be further categorized based on their investment
strategy.
• Equity funds must have a long-term objective.
Hybrid Funds
 Balanced Funds:
• Has a portfolio comprising of debt instruments, convertible
securities, preference and equity shares.
• Almost equal proportion of debt/money market securities and
equities. Normally funds maintain a Equity-Debt ratio of 55:45 or
60:40.
• Objective is to gain income, moderate capital appreciation and
preservation of capital.
• Ideal for investors with a conservative and long-term orientation.
 Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience

Bank Low High High No High

Deposit

Equity High Low High or No Moderate

Instruments Low

Debentures Moderate Moderate Low No Low

Fixed Moderate Low Low No Moderate

Deposits by
Companies

Bonds Moderate Moderate Moderate Yes Moderate

 Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience
RBI Relief Moderate High Low Yes Moderate
Bonds

PPF Moderate High Low Yes Moderate

National Moderate High Low Yes Moderate

Saving
Certificate

National Moderate High Low Yes Moderate

Saving
Scheme

Monthly Moderate High Low Yes Moderate

Income
Scheme
Mutual Funds Vs. Other Investments
Product Return Safety Liquidity Tax Conven-
Benefit ience

Life Moderate High Low Yes Moderate

Insurance

Mutual Moderate Moderate High No High

Funds
(Open-end)

Mutual Moderate Moderate High Yes High

Funds
(Closed-
end)
Fund Structure and its
Constituents
Fund Sponsor
 The Fund Sponsor
• Any person or corporate body that establishes the Fund
and registers it with SEBI.
• Form a Trust and appoint a Board of Trustees.
• Appoints Custodian and Asset Management Company
either directly or through Trust, in accordance with SEBI
regulations.

 SEBI regulations also define that a sponsor must

contribute
 at least 40% to the net worth of the asset management
 company.
Trustees
 Trustees
• Created through a document called the Trust
Deed that is executed by the Fund Sponsor
and registered with SEBI.
• The Trust-the mutual fund may be managed
by a Board of Trustees- a body of individuals
or a Trust Company- a corporate body.
• Protector of unit holders interests.
• 2/3 of the trustees shall be independent
persons and shall not be associated with
the sponsors.
Trustees
 Rights of Trustees:
• Approve each of the schemes floated by
the AMC.
• The right to request any necessary
information from the AMC.
• May take corrective action if they believe
that the conduct of the fund's business is not
in accordance with SEBI Regulations.
• Have the right to dismiss the AMC,
• Ensure that, any shortfall in net worth of
the AMC is made up.
Trustees
 Obligations of the Trustees:
• Enter into an investment management agreement with
the AMC.
• Ensure that the fund's transactions are in accordance
with the Trust Deed.
• Furnish to SEBI on a half-yearly basis, a report on the
fund's activities
• Ensure that no change in the fundamental attributes of
any scheme or the trust or any other change which would
affect the interest of unit holders is happens without
informing the unit holders.
• Review the investor complaints received and the
redressal of the same by the AMC.
 Asset Management Company

• Acts as an invest manager of the Trust under the

Board Supervision and direction of the Trustees.
• Has to be approved and registered with SEBI.
• Will float and manage the different investment
schemes in the name of Trust and in accordance
with SEBI regulations.
• Acts in interest of the unit-holders and reports to
the trustees.
• At least 50% of directors on the board are
independent of the sponsor or the trustees.
Asset Management Company
 Obligation of Asset Management
Company:
 Float investment schemes only after receiving prior approval
from the Trustees and SEBI.
 Send quarterly reports to Trustees.
 Make the required disclosures to the investors in areas such as
calculation of NAV and repurchase price.
 Must maintain a net worth of at least Rs. 10 crores at all times.
 Will not purchase or sell securities through any broker, which is
average of 5% or more of the aggregate purchases and sale of
securities made by the mutual fund in all its schemes.
 AMC cannot act as a trustee of any other mutual fund.
 Do not undertake any other activity conflicting with managing the
fund.
Structure of Mutual Funds
 Custodian
• Has the responsibility of physical handling
and safe keeping of the securities.
• Should be independent of the sponsors and
registered with SEBI.
 Depositories
• Indian capital markets are moving away from
physical certificates for securities to
‘dematerialized’ form with a Depository.
• Will hold the dematerialized security
holdings of the Mutual Fund.
Distribution Channels
 Mutual Funds are primary vehicles for large collective investments,
working on the principle of pooling funds.
 A substantial portion of the investments happen at the retail level.
 Agents and distributors are a vital link between the mutual funds
and investors.
 Agents
- Is a broker between the fund and the investor and acts on behalf of
the principal.
- He is not exclusive to the fund and also sells other financial
services. This in a way helps him to act as a financial advisor.

 Distribution Companies
- Is a company which sells mutual funds on behalf of the fund.
- It has several employees or sub-broker under it.
- It manages distribution for several funds and receives commission
for its services.
Distribution Channels
 Banks and NBFCs
- Several banks, particularly private and foreign
banks are involved in a fund distribution by
providing similar services like that of distribution
companies.
- They work on commission basis.

 Direct Marketing
- Mutual funds sell their own products through their
sales officers and employees of the AMC.
- This channel is normally used to mobilise funds
from high net worth individuals and institutional
investors.
Accounting
Calculating Net Asset Value
 Unit Capital is the investor’s subscriptions. In mutual
funds it is not treated as a liability.
Investments made on behalf of the investors are
reflected on the assets side of the balance sheet.
 There are liabilities of short-term nature.

 Fund’s Net Asset = Asset – Liabilities

 Net Asset Value = Net Assets of the scheme / No. of

Outstanding Units
 NAV = (Market value of investments + Receivables +
Other Accrued Income + Other assets – Accrued
Expenses – Other Payables – Other liabilities) / ( No. of
Units Outstanding as at the NAV date)
Accounting
 The factors affecting the NAV are as
following:
 Capital Gains or Losses on the sale or
purchase of the Investment securities.
 Dividend and income earned on the assets.
 Capital Appreciation in the underlying value
of the stocks held in the portfolio.
 Other assets and liabilities.
 Number of units sold or purchased.
 NAV = Total market value of assets under management
Number of mutual fund shares outstanding
Net asset Value
 NAV: per share value of a mutual fund’s investment
holding.
Market Value of Assets  Portfolio Liabilities
NAV 
No of Shares Outstanding

Example
A mutual fund has $100 mil in assets and $3 mil in short
term liabilities. 10.765 mil shares outstanding. What is
the NAV?
Solution
($100 mil - $3 mil) / 10.765 mil = $9.0107 per share
Accounting
 SEBI regulations for NAV
• The day on which NAV is calculated by a
fund is called valuation date.
• NAV of all schemes must be calculated
and published at least weekly.
• This is applicable to both open-end and
closed-end fund.
• Some closed end funds (Monthly Income
Schemes) that are not listed on stock
exchange may publish it monthly-quarterly.
Accounting
 SEBI Guidelines for Pricing of Units:
 The mutual fund shall ensure that the re-purchase
price is not lower than 93% of the NAV.
 The sale price is not higher than 107% of the NAV.
Repurchase price of closed end scheme shall not be
lower than 95% of the NAV.
 The difference between the repurchase price and the
sale price of the units shall not exceed 7% of the
sale price.
Types of Mutual Funds
1. Money Market Funds
 Objectives of income and liquidity
 Short-term money market instruments
 Low risk and high liquidity
2. (a) Mortgage Funds
 Investment terms may be  5 years
 Riskier than money market (more interest rate risk), but
less risky than bond funds (shorter maturities)
(b) Bond Funds
 Objectives of income and safety
 Subject to capital gains/losses due to interest rate risk
Types of Mutual Funds
3. (a) Balanced Funds
 Objectives of safety, income and capital appreciation
 Min./max. rules apply for percentage invested in each
asset class.
(b) Asset Allocation Funds
 Similar objectives as balanced funds, but typically not
restricted by asset class percentage rules
4. Equity/Common Stock Funds
 Objective of capital gains
 Bulk of assets are in equity, but other assets held for
liquidity, income and diversification purposes
 May vary greatly in degree of risk and growth objectives
Types of Mutual Funds
5. Growth Funds
 Tend to invest in small-cap stocks, i.e. small
companies with growth potential
 Riskier than equity funds (small firms pay no
dividends)
6. Specialty Funds
 Objective of superior capital gains (through minimal
diversification)
 Tend to focus on one industry, market, or segment
 International/Global Funds, for example, invest in
foreign securities (and carry the risk of foreign
exchange exposure)
Types of Mutual Funds
7. (a) Real Estate Funds
 Invest in income-generating properties for long-
term growth and capital gains
 Portfolio valuation is based on infrequent external
appraisal
 Less liquid than other funds – investors may need
to give advance notice when selling
(b) Ethical Funds
 Relatively new type of fund
 Investments are guided by moral criteria (e.g., not
investing in tobacco-related firms)
Types of Mutual Funds

8. Index Funds
 Objective is to mirror the performance of a market
index (e.g., S&P/TSX 60)
 Generally lower management fees than other
funds.
9. Dividend Funds
 Objective of tax reduction through favourable
treatment of dividend
 Inappropriate for RRSPs or RRIFs
 Price changes are driven by interest rates and
market trends
Types of Mutual Funds
ranked from lowest risk/return to highest
risk/return as follows:
1.Money market

2.Mortgage

3.Bond

4.Balanced

5.Dividend

6.Equity

7.Real estate

8.Specialty

http://finance.yahoo.com/funds
Exchange-Traded Funds
(ETFs)
 Units of these trusts hold shares of firms in
market indices in proportion to their weights
in the index
 Differences from traditional mutual funds:
http://finance.yahoo.com/etf
 Traded throughout the day on exchanges
 Lower management fees (e.g., 0.08% to 0.25% versus 2.5%
average for active equity funds versus 0.75% average for
Index funds)
 Lower portfolio turnover – reduces capital gains income and
taxes payable
 Permit short-selling
 May be purchased on margin
MODULE-1
Leasing & Hire purchase
Sources of Finance
 Sources of Finance

Own funds
Government Grants

Venture capital
Loans Hire purchase

Profits
Selling assets

Debentures Overdraft

Leasing Shares
 Owners’ funds – this could be the owners’ own savings. The
good point about using this method is that the money can be repaid
at leisure.

Profits – the profits of the business can be re-invested in the

business. This type of finance does not have to be repaid.

Loans – these can be long term or short term. The borrower usually
pays interest on the loan, which is a percentage of the amount of
the loan, e.g. 5%. The good point - money is available
immediately, but the drawback is that the money is paid
back, usually on a monthly basis.
Overdrafts – this is a very short-term loan, when a business can go
overdrawn in the bank but will be repaid as soon as money is out into
the account. It helps with short-term finance problems, i.e. paying
the bills each month.

Hire Purchase – this is used to purchase equipment or

machinery for the business. This allows the business to have
immediate use of the equipment but have to pay each month for
it, until they own the equipment. The main problem with this
form of finance is that when the HP agreement has been met, the
equipment could be out of date.
Leasing – this is similar to HP but the company will never own
the equipment. They use the equipment and usually pay a
monthly rental charge for it. The advantage to this is that
equipment can be kept up to date and serving charges are
usually included in the price.

Selling assets – the business could sell some of their assets to

gain instant money for a new purchase. The downside is that they
no longer own that asset but it does give instant cash.

Venture Capital – this is when another business will invest

money in the business in return for a shared ownership and a
share of the profits.
Government Grants – the government may help a business by
giving a grant to businesses that may locate in an area of high
unemployment. A grant does not have to be paid back unless there
is a breach of the terms of the grant agreement.

Shares – this allows people to buy into the company (shares) in

return for a money reward out of the profits (dividend).

Debentures – are loans to a company. Debenture holders are

not owners of the company but are paid a fixed rate of interest
each year.
Leasing
 A lease represents an agreement that gives
control over an asset owned by the lessor to
the lessee for a specific period of time upon
the payment of an agreed upon amount,
known as rent
THERE ARE SEVERAL TYPES OF LEASES:

 OPERATING LEASE

 CAPITAL (OR FINANCIAL) LEASE.

Operating Lease
 USUALLY A SHORT-TERM RENTAL
ARRANGEMENT IN WHICH THE RENTAL
CHARGE IS CALCULATED ON A TIME BASIS.
 SUCH AS THE HOUR OR THE DAY, ETC.
 THE LESSEE PAYS THE DIRECT COST SUCH AS
FUEL AND LABOR
Capital or Financial Lease
 A LONG - TERM CONTRACTUAL ARRANGEMENT
IN WHICH THE LESSEE ACQUIRES CONTROL OF
AN ASSET IN RETURN FOR RENTAL PAYMENTS.
 USUALLY RUNS FOR SEVEAL YEARS AND
CANNOT BE CANCELLED WITHOUT PENALTY.
 IS FULLY AMORTIZED, MEANING THAT THE
PRESENT VALUE OF THE LEASE PAYMENTS
EQUALS THE FULL PRICE OF THE LEASED
EQUIPMENT.
 MAY HAVE A PRUCHASE OPTION AT THE END
OF THE LEASE.