fifm2013final-131228045040-phpapp01

8/12/2019 fifm2013final-131228045040-phpapp01

1/62

Financial Institutions and Markets (MBA 406B)

Module - I: Financial Markets1. Financial System- MeaningIt is a complex and well integrated set of sub system of financial institutions, financial markets, and financialintermediaries, services wic facilitate transfer and allocation of funds effectively and efficiently. It also consistsof regulations, laws and practices followed in te system.


2/62

!. Financial Markets- MeaningFinancial market refers to tose centers and arrangements wic facilitate buying " selling of financial assets #instruments. $enever a financial transaction takes place, it is deemed to ave taken place in financial market%ere is no specific place or location to indicate a financial market.

Financial markets consist of agents, brokers, institutions, and intermediaries transacting purcases and sales ofsecurities. %e many persons and institutions operating in te financial markets are linked by contractscommunications networks wic form an externally visible financial structure, laws, and friendsips. %e

financial market is divided between investors and financial institutions.

%e term financial institution is a broad prase referring to organi&ations wic act as agents, brokers, andintermediaries in financial transactions. 'gents and brokers contract on bealf of oters( intermediaries sellfor teir own account. Financial intermediaries purcase securities for teir own account and sell teir ownliabilities and common stock. For example, a stockbroker buys and sells stocks for us as our agent, but asavings and loan borrows our money )savings account* and lends it to oters )mortgage loan*. %estockbroker is classified as an agent and broker, and savings and loan is called a financial intermediary+rokers and savings and loans, like all financial institutions, buy and sell securities, but tey are classifiedseparately, because te primary activity of brokers is buying and selling rater tan buying and olding aninvestment portfolio. Financial institutions are classified according to teir primary activity, altoug tey

freuently engage in overlapping activities.

Financial markets provide our speciali&ed, interdependent economy wit many financial services, includingtime preference, distribution of risk, diversification of risk, transactions economy, transmutation ofcontractual arrangements, and financial management

. %ypes, lassification of Financial Markets/

Typesof financial markets are given in te diagram below/


3/62

%e financial markets are classified into two groups/

A. Capital Market1. orporate Securities Market

0rimary Market

Secondary Market!. overnment Securities Markets

. 2ong %erm 2oans Markets %erm 2oan Markets

Mortgages Markets

Financial uarantees Markets

B. Money Market1. 3norgani&ed Market

Money 2enders

Indigenous +ankers

it Funds!. 4rgani&ed Money Market

%reasury +ills

ommercial 0aper )0*

ertificate 4f 5eposit )5* etc

all Money Market

ommercial +ill Market

Classiication o Financial Markets

%ere are five ways tat one can classify financial markets/(!) "ature o t#e clai$:

%e claims traded in a financial market may be eiter for a fixed rupee amount or a residual amount and financialmarkets can be classified according to te nature of te claim. 's explained earlier, te former financial assets arereferred to as debt instruments, and te financial market in wic suc instruments are traded is referred to as te debtmarket. %e latter financial assets are called euity instruments and te financial market were suc instruments aretraded is referred to as te euity market or stock market. 0referred stock represents an euity claim tat entitles teinvestor to receive a fixed rupee amount. onseuently, preferred stock as in common caracteristics of instrumentsclassified as part of te debt market and te euity market. enerally, debt instruments and preferred stock are classifiedas part of te fixed income market.

(%) Maturity o t#e clai$s:

' second way to classify financial markets is by te maturity of te claims. For example, a financial market for sort-term financial assets is called te money market, and te one for longer maturity financial assets is called te capitalmarket. %e traditional cutoff between sort term and long term is one year. %at is, a financial asset wit a maturity ofone year or less is considered sort term and terefore part of te money market. ' financial asset wit a maturity ofmore tan one year is part of te capital market. %us, te debt market can be divided into debt instruments tat are partof te money market, and tose tat are part of te capital market, depending on te number of years to maturity.

(&) "e' ersus seasoned clai$s:

+ecause euity instruments are generally perpetual, a tird way to classify financial markets is by weter te financiaclaims are newly issued. $en an issuer sells a new financial asset to te public, it is said to 6issue7 te financial asset.%e market for newly issued financial assets is called te primary market. 'fter a certain period of time, te financialasset is bougt and sold )i.e., excanged or traded* among investors. %e market were tis activity takes place isreferred to as te secondary market.


4/62

(4) Cas# ersus deriatie instru$ents:

Some financial assets are contracts tat eiter obligate te investor to buy or sell anoter financial asset or grant teinvestor te coice to buy or sell anoter financial asset. Suc contracts derive teir value from te price of te financialasset tat may be bougt or sold. %ese contracts are called derivative instruments and te markets in wic tey tradeare referred to as derivative markets. %e array of derivative instruments includes options contracts, futures contractsforward contracts, swap agreements, and cap and floor agreements.

() *r+ani,ational structure o t#e $arket:

'ltoug te existence of a financial market is not a necessary condition for te creation and excange of a financial

asset, in most economies financial assets are created and subseuently traded in some type of organi&ed financial marketstructure. ' financial market can be classified by its organi&ational structure. %ese organi&ational structures can beclassified as auction markets and over-te-counter markets.

(6) c#an+es and *er-t#e-Counter Markets

8xcange 9 buyers and sellers meet in a central location.8xample/ +ombay Stock 8xcange.4ver-te-ounter )4%* Market 9 dealers at different locations trade via computer and telepone networks.8xamples/ 4ver te counter excange of India )4%8I*.

4. Money Market/

Money market is concerned wit te supply and te demand for investible funds. 8ssentially, it is a reservoirof sort-term funds. Money market provides a mecanism by wic sort-term funds are lent out andborrowed( it is troug tis market tat a large part of te financial transactions of a country are cleared. It isplace were a bid is made for sort-term investible funds at te disposal of financial and oter institutions byborrowers comprising institutions, individuals and te overnment itself. It is a market for dealing witfinancial assets and securities wic ave a maturity period of up to one year. :ence, it is a market for purely sort

term funds. %us, money market covers money, and financial assets wic are close substitutes for money.%e money market is generally expected to perform following tree broad functions/)i* %o provide an euilibrating mecanism to even out demand for and supply of sort term funds.

)ii* %o provide a focal point for entral bank intervention for influencing liuidity and general level of interestrates in te economy.

)iii* %o provide reasonable access to providers and users of sort-term funds to fulfill teir borrowing andinvestment reuirements at an efficient market clearing price.

Functions and importance of Money Market'well-developed money market is essential for a modern economy. %oug, istorically, money market as

developed as a result of industrial and commercial progress, it also as important role to play in te process of

industriali&ation and economic development of a country. Importance of a developed money market and its

various functions are discussed below/

!. Financin+ Trade/ Money Market plays crucial role in financing bot internal as well as international trade

ommercial finance is made available to te traders troug bills of excange, wic are discounted by te

bill market. %e acceptance ouses and discount markets elp in financing foreign trade.

%. Financin+ Industry: Money market contributes to te growt of industries in two ways/

)a* Money market elps te industries in securing sort-term loans to meet teir working capital reuirements

troug te system of finance bills, commercial papers, etc.

)b* Industries generally need long-term loans, wic are provided in te capital market. :owever, capital

market depends upon te nature of and te conditions in te money market. %e sort-term interest rates of

te money market influence te long-term interest rates of te capital market. %us, money market indirectly

elps te industries troug its link wit and influence on long-term capital market.


5/62

&. /roitale Inest$ent: Money market enables te commercial banks to use teir excess reserves in

profitable investment. %e main ob;ective of te commercial banks is to earn income from its reserves as well

as maintain liuidity to meet te uncertain cas demand of te depositors. In te money market, te excess

reserves of te commercial banks are invested in near-money assets (e.g. sort-term bills of excange* wic

are igly liuid and can be easily converted into cas. %us, te commercial banks earn profits witout

losing liuidity.

4. 1el-1uiciency o Co$$ercial Bank: 5eveloped money market elps te commercial banks to becomeself-sufficient. In te situation of emergency, wen te commercial banks ave scarcity of funds, tey need

not approac te central bank and borrow at a iger interest rate. 4n te oter and, tey can meet teir

reuirements by recalling teir old sort-run loans from te money market.

. 2elp to Central Bank: %oug te central bank can function and influence te banking system in te

absence of a money market, te existence of a developed money market smootens te functioning and

increases te efficiency of te central bank.

Money $arket #elps t#e central ank in t'o 'ays:

)a* %e sort-run interest rates of te money market serves as an indicator of te monetary and banking

conditions in te country and, in tis way, guide te central bank to adopt an appropriate banking policy,

)b* %e sensitive and integrated money market elps te central bank to secure uick and widespreadinfluence on te sub-markets, and tus acieve effective implementation of its policy.

Money market can be furter sub divided into/

all money market

ommercial bill market

%reasury bill market

Sort term loan market

ommercial paper market

ertificate of deposit market%e key ob;ective of money market is to provide balancing mecanism for sort term surpluses and deficits.

. Call $oney Market:%e most active segment of te money market as been te call money market, were te day to dayimbalances in te funds position of sceduled commercial banks are eased out. %e call notice money marketas graduated into a broad and vibrant institution .all# days, it is =


6/62

From May 1, 1ABA, te interest rates in te call and te notice money market are market determined. Interestrates in tis market are igly sensitive to te demand - supply factors. $itin one fortnigt, rates are knownto ave moved from a low of 1 - ! per cent to di&&y eigts of over 1>@ per cent per annum. 2arge intra-dayvariations are also not uncommon. :ence tere is a ig degree of interest rate risk for participants. In view ofte sort tenure of suc transactions, bot te borrowers and te lenders are reuired to ave current accountswit te ?eserve +ank of India. %is will facilitate uick and timely debit and credit operations. %e callmarket enables te banks and institutions to even out teir day to day deficits and surpluses of money. +anks

especially access te call market to borrow#lend money for ad;usting teir cas reserve reuirements )??*%e lenders aving steady inflow of funds )e.g. 2I, 3%I* look at te call market as an outlet for deployingfunds on sort term basis

6. 3ot. 1ecurities Market ( 3ot. 1ecurities Market 3I5T-3 MA78T)

T#e +ilt ed+ed $arket is t#e $arket is +oern$ent securities or t#e securities +uaranteed (as to ot#

principle and interest) y t#e +oern$ent. Since te government cannot default on its payment obligations

te government securities are risk free and ence are known as gilt-edged )wic means Cof te best ualityD*.

1. It is a risk free market and returns are guaranteed. 'ccordingly tere is no uncertainty regarding yield,

payment on time, etc. and tere is no scope for speculation and manipulation E* of te market.

!. %e government securities market consists of two parts - te new issues market and te secondary market.

Since it is te ?eserve +ank of India tat manages entirely te public debt operations of te entral as well as

te State governments, it is responsible for all te new issues of government loans. %e secondary market

deals in old issues of government loans and operates largely troug a few large stockbrokers wo keep in

touc wit te ?eserve +ank and oter prospective buyers and sellers.

. ?eserve +ank of India plays a dominant role in te government securities market. 's noted by S.+. upta,

=tere are only brokers or investors in te market and no dealers or ;obbers )oter tan te ?+I* wo would

make a market in government loans by standing ready to buy and sell any amount of government securities on

teir own account.=

>. overnment securities are te most liuid debt instruments.

. %e transactions in te government securities market are very large and eac transaction may run into

several crores of rupees.

9. Capital Market:%e capital market is te place were te sort, medium-term and long-term financial needs of business andoter undertakings are met by financial institutions wic supply medium and long-term resources to

borrowers. apital market is a market for financial assets wic ave a long or indefinite maturity. enerallyit deals wit long term securities aving a maturity period of above one year. apital market may be furterdivided into tree parts, i.e.)i* Industrial security market

)ii* ovt. securities market)iii* 2ong term loan marketapital market serves as a important source for te productive use of economyDs savings and investment%ese savings and investments facilitate capital formation and troug tis facilitates increase in productionand productivity in te economy. ' capital market tus serves as an important link between tose wo savesand tose wo aspire to invest teir savings.Capital $arkets Types


7/62

(i) Industrial 1ecurity MarketG It is market were industrial concerns raise teir capital or debt by issuinginstruments like euity ares or ordinary sares, preference sares, debentures or bonds. %is market can besub divided into/)a* 0rimary Market or new issue market

)b* Secondary Market or stock 8xcange/ri$ary Market is a market for new issues and ence it is called new issue market. It deals wit securitieswic are issued to te public for te first time. %ere are tree ways troug wic capital is raised inprimary market. %ese are/

- 0ublic issue- ?igt Issue- 0rivate placement1econdary $arket is a market for secondary sale of securities i.e. securities wic already passed trougte new issue market are traded in tis secondary market. enerally, suc securities are uoted in stockexcange and it provides a continuous( and regular market for buying and selling of securities.(ii) 3ot. 1ecurity MarketG It is a market were 2ong term ovt securities are traded wic are issued bycentral ovt, State ovt, Semi ovt autorities like ity orporations, 0ort %rusts, Improvement %rusts, State8lectricity +oards, 'll India and State level financial institutions and public sector organi&ations#enterprisesare dealt in tis market. ovt. Securities are in many forms suc as /

- Stock ertificates or inscribed stock

- 0romissory


8/62

%. ncoura+e$ent to 1ain+: $it te development of capital, market, te banking and non-banking

institutions provide facilities, wic encourage people to save more. In te less- developed countries, in te

absence of a capital market, tere are very little savings and tose wo save often invest teir savings in

unproductive and wasteful directions, i.e., in real estate )like land, gold, and ;ewellery* and conspicuous

consumption.

&. ncoura+e$ent to Inest$ent: %e capital market facilitates lending to te businessmen and te

government and tus encourages investment. It provides facilities troug banks and non-banking financiainstitutions. Harious financial assets, e.g., sares, securities, bonds, etc., induce savers to lend to te govern-

ment or invest in industry. $it te development of financial institutions, capital becomes more mobile

interest rate falls and investment increases.

4. /ro$otes cono$ic 3ro't#: %e capital market not only reflects te general condition of te economy

but also smootens and accelerates te process of economic growt. Harious institutions of te capital market

like non-banking financial intermediaries, allocate te resources rationally in accordance wit te

development needs of te country. %e proper allocation of resources results in te expansion of trade and

industry in bot public and private sectors, tus promoting balanced economic growt in te country.

. 1taility in 1ecurity /rices: %e capital market tends to stabili&e te values of stocks and securities and

reduce te fluctuations in te prices to te minimum. %e process of stabili&ation is facilitated by providing

capital to te borrowers at a lower interest rate and reducing te speculative and unproductive activities.

6. Beneits to Inestors: %e credit market elps te investors, i.e., tose wo ave funds to invest in long-

term financial assets, in many ways/

)a* It brings togeter te buyers and sellers of securities and tus ensure te marketability of investments,

)b* +y advertising security prices, te Stock 8xcange enables te investors to keep track of teir investments

and canneli&e tem into most profitable lines,

)c* It safeguards te interests of te investors by compensating tem from te Stock 8xcange ompensating

Fund in te event of fraud and default.

ierence et'een Money Market and Capital Market

Money market is distinguised from capital market on te basis of te maturity period, credit instruments and te institutions/

!. Maturity /eriod: %e money market deals in te lending and borrowing of sort-term finance )i.e., for one year or less*

wile te capital market deals in te lending and borrowing of long-term finance )i.e., for more tan one year*.

%. Credit Instru$ents: %e main credit instruments of te money market are call money, collateral loans, acceptances, billsof excange. 4n te oter and, te main instruments used in te capital market are stocks, sares, debentures, bonds

securities of te government.

&. "ature o Credit Instru$ents: %e credit instruments dealt wit in te capital market are more eterogeneous tan tose

in money market. Some omogeneity of credit instruments is needed for te operation of financial markets. %oo muc

diversity creates problems for te investors.

4. Institutions: Important institutions operating in teE money market are central banks, commercial banks, acceptance

ouses, non-bank financial institutions, bill brokers, etc. Important institutions of te capital market are stock excanges,

commercial banks and non-bank institutions, suc as insurance companies, mortgage banks, building societies, etc.


9/62

. /urpose o 5oan: %e money market meets te sort-term credit needs of business( it provides working capital to te

industrialists. %e capital market, on te oter and, caters te long-term credit needs of te industrialists and provides fixed

capital to buy land, macinery, etc.

6. 7isk: %e degree of risk is small in te money market. %e risk is muc greater in capital market. %e maturity of one year

or less gives little time for a default to occur, so te risk is minimi&ed. ?isk varies bot in degree and nature trougout te

capital market.

9. Basic 7ole: %e basic role of money market is tat of liuidity ad;ustment. %e basic role of capital market is tat of

putting capital to work, preferably to long-term, secure and productive employment.;. 7elation 'it# Central Bank: %e money market is closely and directly linked wit central bank of te country. %e

capital market feels central bankEs influence, but mainly indirectly and troug te money market.

days are termed as sort-term instruments.

5ebt markets are vital to te sustained growt of any economy since tey offer efficient mobili&ation andallocation of financial resources. 5ebt instruments are used to finance developmental activities undertaken byte overnment. %ey also aid in managing te liuidity in te economy. +orrowings from te debt marketallow te overnment to reduce its dependence on external sources of funding. It also reduces te pressure on

institutional financing to fund public sector or private sector pro;ects.

%e issue " trade of securities in India are regulated by eiter ?+I or S8+I. overnment securities andbonds, instruments issued by banks and financial institutions are regulated by ?+I wile issues of non-government securities )i.e. issue by corporates* are regulated by S8+I.

%e corporate debt market can be classified into 0rimary market and Secondary market. In te primarymarket, corporate debt is via private placements like corporate bonds placed wit wolesale investors likebanks, financial institutions, mutual funds, etc. %e Secondary market for corporate debt is available onplatforms offered by various excanges in te country. %e secondary debt market in India can be broadlycategori&ed into G

=#olesale et Market comprising of investors like +anks, financial institutions, ?+I, insurancecompanies, Mutual funds, corporates and FIIs.

7etail et Marketcomprising of investors like individuals, pension funds, private trusts,


10/62

- ?igt Issue- 0rivate placement1econdary $arket is a market for secondary sale of securities i.e. securities wic already passed troug tenew issue market are traded in tis secondary market. enerally, suc securities are uoted in stock excange andit provides a continuous( and regular market for buying and selling of securities.

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

%e term 6integration7 refers to te establisment of close connections or effective linkages between differentconstituents and between different parts of te financial system. Financial integration is te opposite of tematurity wise, geograpical, institutional, seasonal, instrumental, segmentation or ompartmentali&ation ofte financial markets. %e integration process as elped te financial markets bot at national andinternational levels to enance teir efficiency and it as also facilitated in globali&ation of financial services%e flow of foreign capital from te industriali&ed countries to te developing countries as been tesignificant outcome of tis integration process.

3loal Inte+ration o Financial Markets

In terms of international trade and financial flows, Indian economy is to a very great extent an open economytoug te extent of its openness may not be as great as in countries like 3S', 3J, ermany, Kapan0ilippines. %e foreign excange markets are cleared at a conversion price, i.e. at te excange rate. %eforeign excange rates are an important part of financial analysis. %oug te excange rate is apparentlydetermined by te supply of and demand for foreign excange, te complex forces of exports and imports liebeind te wole process of excange rate determination. %e international aspects of savings andinvestments flows are reflected in te volume of capital flows between nations.

%e world economy as witnessed significant canges in recent years. India as already opened up itseconomic frontiers and presently expects increasing gains from te new world trade order and te worldfinance system. Since 1AA@, te global economy as emerged very swiftly reuiring significant canges. %eopenness of te economy is also apparent in te pro;ections of te 8igt 0lan. $ile exports are expected togrow by 1.L p.a. in volume terms to reac a level of 3S . billion by te year 1AA-AN, imports are

pro;ected to increase by B.>L in volume terms. %e trade policy reforms ave been made part of overallreform process for e reali&ation of aforesaid ob;ectives.

%e '%% played a significant role in facilitating te rapid expansion in global trade troug a succession ofrounds wic culminated in te 3ruguay ?ound and resulted in te transformation of '%% into $orld %rade4rgani&ation. %e 3ruguay ?ound as been te most ambitious and compreensive multilateral tradenegotiations in istory. 5uring te 1AA-1AA>, international transaction sin good and non-factor services as aproportion of 50 enance from L to >L for te developing world as a wole. %e eneral 'greementon %rade in services is te first multilaterally agreed and legally enforceable rules to cover international tradein services. Sare of services in global trade as increased to over !!L in 1AA> against 1L in 1AB@.

%e way te Indian orporate sector reacted to te domestic liberali&ation process as well as to te 3ruguay?ound results disclose tat a large segment is uite conscious tat tis liberali&ation process is desirablepossibly also irreversible and te world trade liberali&ation troug te 3ruguay ?ound can be a positionfactor tat will facilitate te ad;ustments needed to be done at te corporate level in response to te domesticreforms process.

%us global integration of financial markets resulted from de-regulatory measures, tecnological andinformation explosion and financial innovations. %e Indian orporate Sector as appreciated te concept ofglobali&ation of economy and as been initiating measures to emerge as Indian multinationals. %e measuresinclude improved uality products, establisment of overseas distribution and marketing cannels, capacityutili&ation, cost consciousness, strategic alliances for bot domestic and international operations and so fort.


11/62

Module - II: Financial Institutions!. Financial Institutions

%e financial institutions in any country are significant financial and commercial organi&ations responsible forproviding proper facilitation to te flow of money and finances troug te economy, troug acting as ma;or and mainfinancial intermediaries between te potential lenders or investors and te borrowers of all categories. In most of tecountries all across te world, tese financial institutions operate under eavily and stringently regulated environmentusually by te governments, because of being magnificent and critical part of countryEs economy. +y dint of tese facts

and privileges, te financial institutions of all over te world, terefore, deserve our special attention and selective legalservices.

!.!: Broad Cate+ories%e structure of financial institutions )FIs* in India is widely diversified and includes


12/62

&. Capital Market Institutions%ese institutions may furter be classified into investing institutions and development banks on te basis ofte nature of teir activities and te financial mecanism adopted by tem. Investing institutions comprisetose financial institutions wic garner te savings of te people by offering teir own sares and stocks, andwic provide long-term funds, especially in te form of direct investment in securities and underwritingcapital issues of business enterprises. %ese institutions include investment banks, mercant banksinvestment companies and te mutual funds and insurance companies. 5evelopment banks include tose

financial institutions wic provide te sinews of development, i.e. capital, enterprise and know-ow, tobusiness enterprises so as to foster industrial growt.

4. Financial 1erices Institutions? Functions and structure introduced:

Financial institutions or institutions offer various types of transformation services. %ey issue claims to teircustomers tat ave caracteristics different from tose of teir own assets. For example, banks acceptdeposits as liability and convert tem into assets suc as loans. %is is known as 6liability-assettransformation7 function. Similarly tey coose and manage portfolios wose risk and return tey alter byapplying resources to acuire better information and to reduce or overcome transaction costs. %ey are able todo so troug economies of scale in lending and borrowing. %ey provide large volumes of finance on tebasis of small deposits or unit capital. %is is called 6si&e-transformation7 function.

Furter, tey distribute risk troug diversification and tereby reduce it for savers as in te case of mutualfunds. %is is called 6risk-transformation7 function. Finally tey offer savers alternate forms of depositsaccording to teir liuidity preferences, and provide borrowers wit loans of reuisite maturities. %is isknown as 6maturity-transformation7 function. ' financial system also ensures tat transactions are effectedsafely and swiftly on an on-going basis. It is important tat bot buyers and sellers of goods and servicessould ave te confidence tat instruments used to make payments will be accepted and onored by allparties. %e financial system ensures te efficient functioning of te payment mecanism.

In sort, financial markets can be said to perform proximate functions suc as/

1. 8nabling economic units to exercise teir time preference,

!. Separation, distribution, diversification, and reduction of risk,

. 8fficient operation of te payment mecanism,

>. %ransmutation or transformation of financial claims so as to suit te preferences of bot savers andborrowers,

. 8nancing liuidity of financial claims troug securities trading, and

. 0ortfolio management.

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


13/62

%e 0owers of te entral overnment under te 'ct are far-reacing and include te following in particular/)1* rant and witdrawal of recognition, approval or cange of byelaws.

)!* all for periodical returns from te Stock 8xcange.

)* 5irect enuiries on te members or on te Stock 8xcange.

)>* 2iability of te 8xcange to submit annual reports.

)* 5irecting te Stock 8xcange to make certain rules.

)* Supersede te overning +oard of te 8xcange.

)N* Suspend te overning +oard of te 8xcange.)B* Impose any oter conditions or regulations for trading.

Constitution:

' overning +oard comprising of A elected director )one tird of tem retire every year by rotation*, an8xecutive 5irector, tree overnment nominees, a ?eserve +ank of India nominee and five publicrepresentatives, is te apex body wic regulates te 8xcange and decides its policies. ' 0resident, a Hice-0resident and an onorary %reasurer are annually elected from among te elected directors, by te overning+oard following te election of directors. %e 8xecutive 5irectors as te ief 8xecutive 4fficer isresponsible for te day-to-day administration of te 8xcange.

8arliest records of securities trading in India are available from te end of te eigteent century. +efore1B@, tere was business conducted in Mumbai in sares of banks and te securities of te 8ast Indiaompany wic were considered as securities for buying, selling and excange. %e sares of teommercial +ank, Mercantile +ank and +ank of +ombay were some of te prominent sares traded. %ebusiness was conducted under sprawling banyan tree in front of te %own :all, wic is now in te:orniman ircle 0ark.

In 1B@, te ompanies 'ct was passed and tat eralded te commencement of ;oint stock companies inIndia, It was te 'merican civil war tat elped Indians to establis broking business. %e leading brokerSri 0remcand ?oycand was responsible for developing conventions and procedures. In 1BN>, te 5alalStreet became te prominent place of meeting of te brokers to conduct teir business. %e brokers organi&edand 'ssociation on AtKuly 1BN known as te


14/62

Control:

%e governing body of a recogni&ed stock excange as wide governmental and administrative powers and iste decision G taking body. It as te power, sub;ect to governmental approval, to make, amend and suspendte operation of te rules, byelaws and regulations of te excanges. It also as complete ;urisdiction over allmembers and in practice, its power of management and control are almost absolute. 3nder te constitutionte governing body as te power to admit and expel members, to warn, censure, fine and suspend membersand teir partners, attorneys, remisiers, autori&ed clerks and employees, to approve te formation anddissolution of partnersips and appointment of attorney, remisiers and autori&ed clerks, to enforce attendance

and information, ad;udicate disputes and impose penalties, to determine te mode and conditions of stockexcange business and regulate stock excange trading all its aspects and generally to supervise, direct andcontrol all matters and activities affecting te stock excange.

%e organisation of Mumbai Stock 8xcange is typical. %e members on roll elect 1 members to be5irectors on te overning +oard, wo in turn elect a 0resident. Hice-0resident and %reasurer. %e 8xecutive5irector is appointed by te government on te recommendation of te overning +oard to te ief'dministrator of te 8xcange. %ere are also tree representatives from te overnment, tree from tepublic and one from te ?+I on te +oard to represent teir interests. 's per te S8+I guidelines, te8xcanges ave agreed to ave @L representation to non-members on te overning +oard.

F@"CTI*"1 *F A 1T*C8 C2A"3%e functions of stock excange can be enumerated as follows/!. /roides ready and continuous $arket: +y providing a place were listed securities can be bougt andsold regularly and conveniently, a stock excange ensures a ready and continuous market for various saresdebentures, bonds and government securities. %is lends a ig degree of liuidity to oldings in tesesecurities as te investor can encas teir oldings as and wen tey want.%. /roides inor$ation aout prices and sales: ' stock excange maintains complete record of altransactions taking place in different securities every day and supplies regular information on teir prices andsales volumes to press and oter media. In fact, now-a-days, you can get information about minute to minutemovement in prices of selected sares on %H cannels like


15/62

political conditions. It is observed tat during te periods of economic prosperity, te sare prices tend to riseonversely, prices tend to fall wen tere is economic stagnation and te business activities slow down as aresult of depressions. %us, te intensity of trading at stock excanges and te corresponding rise on fall in teprices of securities reflects te investorsD assessment of te economic and business conditions in a country,and acts as te barometer wic indicates te general conditions of te atmospere of business.6. Better Allocation o unds: 's a result of stock market transactions, funds flow from te less profitable tomore profitable enterprises and tey avail of te greater potential for growt. Financial resources of teeconomy are tus better allocated.

6. /rudential "or$s:

1BI Market 7e+ulator and Inestors /rotector

S8+I is reuired to create a proper and conducive atmospere reuired for raising money from te capital

market. %e atmospere includes te rules, regulations, trade practices, customs and relations amonginstitutions, brokers, investors and companies. it sall endeavor to restore te trust of investors andparticularly to safeguard te interest of te small investors. %is can be acieved by meeting te needs ofte persons connected wit te security market and establising proper coordination among te treemain groups directly connected wit its operations, namely, )a* investors, )b* corporate sectors and )c*intermediaries.

S8+I is expected to educate investors and make tem aware of teir rigts in clear and specific terms. Itsall provide investors wit information and see tat te market maintains liuidity, safety andprofitability of te securities wic are crucial for any investments.

S8+I sall create a proper investments climate and enable te corporate sector to raise industria

securities easily, efficiently and at affordable minimum cost.

S8+I sall develop a proper infrastructure so tat te market automatically facilitate expansion and

growt of business to middlemen like brokers, ;obbers, commercial banks, mercant bankers, mutualfunds, etc, %us, it will ensure tat tey provide efficient service to teir constituents, namely, investorsand te corporate sector at a competitive price.

S8+I sall make more effective te law in te existing status as far as tey relate to te industrialsecurities, mutual funds, investments in 3nits, 2I savings plan. it-Fund companies and securitiesissued by ousing#industrial societies and corporations wit te purpose of making investments inousing#industrial pro;ects.

S8+I sall create te framework for more open, orderly, and unpre;udiced conduct in relation to takeover

and mergers in te corporate sector to ensure fair and eual treatment to all te security olders, and tofacilitate suc takeovers and mergers in te interest of efficient by prescribing a mecanism for moreorderly conduct.

9. 1BI 7e+ulations ( 73@5ATI*"1 *F 1T*C8 C2A"31 )

's indicated earlier, te stock excanges suffer from certain limitations and reuire strict control over teiractivities in order to ensure safety in dealings tereon. :ence, as early as 1A, te Securities ontracts)?egulation* 'ct was passed wic provided for recognition of stock excanges by te central overnment. Itas also te provision of framing of proper bylaws by every stock excange for regulation and control of teirfunctioning sub;ect to te approval by te overnment. 'll stock excanges are reuired submit informationrelating to its affairs as reuired by te overnment from time to time. %e overnment was given widepowers relating to listing of securities, make or amend bylaws, witdraw recognition to, or supersede tegoverning bodies of stock excange in extraordinary#abnormal situations. 3nder te 'ct, te overnmentpromulgated te Securities ?egulations )?ules* 1AN, wic provided inter alia for te procedures to befollowed for recognition of te stock excanges, submission of periodical returns and annual returns by


16/62

recogni&ed stock excanges, inuiry into te affairs of recogni&ed stock excanges and teir members, andreuirements for listing of securities.7*5 *F 1BI

's part of economic reforms programme started in Kune 1AA1, te overnment of India initiated severalcapital market reforms, wic included te abolition of te office of te ontroller of apital Issues )I* andgranting statutory recognition to Securities 8xcange +oard of India )S8+I* in 1AA! for/)a* protecting te interest of investors in securities()b* promoting te development of securities market(

)c* regulating te securities market( and)d* matters connected tere wit or incidental tereto.

S8+I as been vested wit necessary powers concerning various aspects of capital market suc as/

regulating te business in stock excanges and any oter securities market(

registering and regulating te working of various intermediaries and mutual funds(

promoting and regulating self regulatory organisations(

promoting investors education and training of intermediaries(

proibiting insider trading and unfair trade practices(

regulating substantial acuisition of sares and take over of companies(

calling for information, undertaking inspection, conducting inuiries and audit of stock excangesand intermediaries and self regulation organisations in te stock market( and

performing suc functions and exercising suc powers under te provisions of te apital Issues)ontrol* 'ct, 1A>N and te Securities ontracts )?egulation* 'ct, 1A as may be delegated to itby te entral overnment.

's part of its efforts to protect investorsD interests, S8+I as initiated many primary market reforms, wicinclude improved disclosure standards in public issue documents, introduction of prudential norms andsimplification of issue procedures. ompanies are now reuired to disclose all material facts and risk factorsassociated wit teir pro;ects wile making public issue. 'll issue documents are to be vetted by S8+I toensure tat te disclosures are not only adeuate but also autentic and accurate. S8+I as also introduced a

code of advertisement for public issues for ensuring fair and trutful disclosures. Mercant bankers and allmutual funds including 3%I ave been brougt under te regulatory framework of S8+I. ' code of conductas been issued specifying a ig degree of responsibility towards investors in respect of pricing and premiumfixation of issues. %o reduce cost of issue, underwriting of issues as been made optional sub;ect to tecondition tat te issue is not under-subscribed. In case te issue is under-subscribed i.e., it was not able tocollect A@L of te amount offered to te public, te entire amount would be refunded to te investors. %epractice of preferential allotment of sares to promoters at prices unrelated to te prevailing market prices asbeen stopped and private placements ave been made more restrictive. 'll primary issues ave now to bemade troug depository mode. %e initial public offers )I04s* can go for ook uildin+ for wic te priceband and issue si&e ave to be disclosed. ompanies wit demateriali&ed sares can alter te par value as andwen tey so desire.

's for measures in te secondary market, it sould be noted tat all statutory powers to regulate stockexcanges under te Securities ontracts )?egulation* 'ct ave now been vested wit S8+I troug tepassage of securities law )'mendment* 'ct in 1AA. S8+I as duly notified rules and a code of conduct toregulate te activities of intermediaries in te securities market and ten registration in te securities marketand ten registration wit S8+I is made compulsory. It as issued guidelines for composition of te governingbodies of stock excanges so as to include more public representatives. orporate membersip as also beenintroduced at te stock excanges. It as notified te regulations on insider trading to protect and preserve teintegrity of stock markets and issued guidelines for mergers and acuisitions. S8+I as constantly reviewedte traditional trading systems of Indian stock excanges and tried to simplify te procedure, acievetransparency in transactions and reduce teir costs. %o prevent excessive speculations and volatility in te


17/62

market, it as done away wit badla system, and introduced rolling settlement and trading in derivatives. 'llstock excanges ave been advised to set-up learing orporation # settlement guarantee fund to ensuretimely settlements. S8+I organi&es training programmes for intermediaries in te securities market andconferences for investor education all over te country from time to time.

;. 1ensitie Indices/Security market Index measures te beaviour of te security prices and te stock market.Indicators represent te entire stock market and its segments wic measure te movement of te stock market.%e most popular index in India are te +ombay stock excange sensitivity Index )+S8 Sensex or +S8 G 1@@* and

te


18/62

sti$ates t#e 'ort# o securities/ Stock excange provides te facility of knowing te wort )i.e true marketvalue* of investment due to uotations )i.e. price list* and reports publised regularly by te excange. %istype of information guides investors as regards teir future investments. %ey can purcase or sell securitiesas per te price trends )i.e. latest price value* in te market.*ers saety in corporate inest$ent/ 'n investor can invest is surplus money )i.e. extra money* in telisted securities wit reasonable safety. %e risk in suc investment is reduced considerably due to tesupervision of stock excange autorities on listed companies. Moreover, securities are listed only wen teexcange autorities are satisfied as regards legality and solvency of company concerned. Suc scrutiny

)detailed cecking* avoids listing, of securities of unsound companies )i.e. companies wit bad financiastatus*.1erices +ien y 1tock c#an+e to Co$panies:

=idens $arket or securities/ Stock excange widens te market for te listed securities and enables tecompanies to collect capital for promotion, expansion and moderni&ation purpose. It indirectly providesfinancial support to companies # corporations.Creates +ood'ill and reputation/ Stock excange enances te goodwill and te reputation of tecompanies wose securities are listed. 2isting acts as a caracter certificate given to a company. It givesprestigious position to company.Facilitates air pricin+ o listed securities/ %e market price of listed securities tends to be sligtly iger inrelation to earnings and property values.

/roides etter response ro$ inestors/ 2isted securities get better response from te investor due to safetyand security. 2isting of securities is a uniue service wic stock excanges offer to companies. It is a moralsupport given to stable companies.Facilitates uick sellin+ o securities/ Stock excange enables companies to sell teir securities easily anduickly. %is is natural as investors always prefer to invest money in listed securities.

!0. 3rieance 7edressal Measures: (Inestor 3rieance 7edressal)

Securities and 8xcange +oard of India )S8+I* as been establised wit te prime mandate to protect teinterest of investors in securities. It is also mandated to promote te development of and to regulate tesecurities market.

'n investor en;oys investing, if

e knows ow to invest(

e as full knowledge of te market(

te market is safe and tere are no miscreants( and

%ere are arrangements to redress te grievances.

'ccordingly, S8+IDs investor protection strategy as four elements.

First, build te capacity of investors troug education and awareness to enable an investor to take

informed investment decisions. S8+I endeavors to ensure tat te investor learns investing, tat is, e obtainsand uses information reuired for investing, evaluates various investment options to suit is specific goals,ascertains is rigts and obligations in a particular investment, deals troug registered intermediaries, takesnecessary precautions, seeks elp if e gets into any problem, etc.

%owards tis end, S8+I as been organi&ing investor education and awareness worksops directlyand troug investor associations and market participants, and also been encouraging market participants toorgani&e similar programmes. It maintains an updated, compreensive web site for education of investors. Itpublises various kinds of cautions troug media. It responds to te ueries of investors troug teleponee-mails, letters, and in person for tose wo visit S8+I office.


19/62

Second, make available every detail relevant for investment in public domain. S8+I as adopteddisclosure based regulatory regime. 3nder tis framework, issuers and intermediaries disclose relevant detailsabout temselves, te products, te market and te regulations so tat te investor can take informedinvestment decisions based on suc disclosures. S8+I as prescribed and monitors various initial andcontinuous disclosures.

%ird, ensure tat te market as systems and practices wic make transactions safe. S8+I as taken

various measures, suc as, demateriali&ation of securities( screen based trading system, %Q! rollingsettlement, etc. %e demateriali&ation of securities eliminated a large number of investor grievancesemanating from servicing of paper based securities suc as bad delivery of sares, delay#non-transfer ofsares, etc. %is facilitated migration from account period settlement to %Q! rolling settlement wic reducedsettlement risk substantially.

Fourt, elp an investor in problem. S8+I as a compreensive mecanism to facilitate redressal ofinvestor grievances against intermediaries and listed companies. It follows up wit te companies andintermediaries wo do not redress investorsD grievances, by sending reminders to tem and aving meetingswit tem. It takes appropriate enforcement actions )ad;udication, prosecution proceedings, directions, etc.*as provided under te law were progress in redressal of investor grievances is not satisfactory. It as

provided for a compreensive arbitration mecanism in stock excanges and depositories for resolution ofdisputes of te investors wit brokers and depository participants. It as instituted investor protection funds at8xcanges to compensate investors were a broker is declared a defaulter. 5epository indemnifies investorsfor loss due to negligence of depository or depository participant. ?ecently, S8+I as reali&ed a receipt ofunlawful gain of about ?s. @ crore and so far disbursed about ?s. !> crore among te investors wo lost outin te I04 irregularities.

$ile S8+I as been taking various measures for te investor protection, tis memorandum focuses on teinvestor grievance redressal mecanism available in S8+I, its performance, measures taken in recent years forexpediting te redressal of investorsD grievances, difficulties in te existing system and improvementsplanned.

7edressal o Inestors 3rieances

%e 4ffice of Investor 'ssistance and 8ducation )4I'8* acts as te single window interface,interacting wit investors seeking assistance of S8+I. Investors can submit grievances eiter by post or anddelivery at any of te S8+I office or by electronic mode )web or e-mail*. 'll grievances received by S8+I)excluding tose wic refer#pertain to investigation* are individually acknowledged wit uniue numberwic facilitates tracking.

5edicated investor elpline telepone numbers )@!!-!>>A1BB " !>>A1AA* are available forinvestors seeking general guidance pertaining to securities markets and to provide assistance in filing

grievances. 5edicated personnel manning te elpline also guide te investors in filing up te grievancesubmission forms as well as in determining te appropriate autority for teir first recourse. uidance is alsoprovided to approac te appropriate autority if teir grievance is outside te purview of S8+I.

3rieances a+ainst listed co$panies: %e grievances lodged by investors are taken up wit terespective listed company and are continuously monitored. %e company is reuired to respond in prescribedformat in te form of 'ction %aken ?eport )'%?*. 3pon te receipt of '%?, te status of grievances isupdated. $ere te response of te company is insufficient # inadeuate, follow up action is initiated.


20/62

3rieances a+ainst stock rokers and depository participants: rievances pertaining to stockbrokers and depository participants are taken up wit concerned stock excange and depository for redressaand monitored by te concerned department troug periodic report obtained from tem.

3rieances a+ainst ot#er inter$ediaries: rievances pertaining to oter intermediaries are taken upwit tem directly for redressal and are continuously monitored by concerned 5epartment of S8+I.

I$proe$ents planned

S8+I is in te process of upgrading te investor grievance redressal mecanism. %e upgradedmecanism S4?8S )S8+I omplaints ?edress System* would be a web-based, centrali&ed grievanceredress system for S8+I.

%e salient features of te new system are/

entrali&ed grievances tracking system for te entire S8+I.

rievance pertaining to any of te ?egional 4ffices of S8+I can be lodged from anywere.

'll grievances and 'ction %aken ?eport to be in electronic mode

'ction taken and te current status of te grievance can be accessed online by te investors.

Facility for online updation of 'ction %aken ?eports.

S4?8S will reduce grievance process time at S8+I since pysical movements of grievances are notreuired. Similarly te grievance redressal time will be reduced since te entire process is in electronic modeincluding action taken report submitted by te company#intermediary. %e problems arising fromloss#misplacement of grievance records would be eliminated since grievances are available in electronicformat. Similarly, te problem of pysical storage, maintenance and redressal as also been addressed due tote proposed conversion of pysical grievances into electronic mode. 8ac grievance will be treated asresolved #closed only after S8+IDs satisfaction. 's investors can track teir grievance redressal status online,multiple correspondences from investors to know te status of teir grievances are avoided.

%e software for te new system is being developed by te


21/62

Subseuent to te demonstration, parallel processing in S4?8S as commenced for grievancesagainst stock brokers and depository participants since September 1, !@1@ and for


22/62

'ltoug India ad a vibrant capital market wic is more tan a century old, te paper-based settlement oftrades caused substantial problems like bad delivery and delayed transfer of title till recently. %e enactmentof 5epositories 'ct in 'ugust 1AA paved te way for establisment of


23/62

systematic analysis of te strengts and weaknesses of a company and debt instrument issued by te company,based on financial statements, pro;ect analysis, creditwortiness factors and future prospectus of te pro;ectand te company appraised at a point of time.

*Decties o Credit 7atin+

redit rating alms to )i* provide superior information to te investors at a low cost( )ii* provide a sound basisfor proper risk-return structure( )iii* sub;ect borrowers to a ealty discipline, and )iv* assist in te framing ofpublic policy guidelines on institutional investment. %us, credit rating financial services represent

anexercise in fait building for te development of a ealty financial System.

Credit 7atin+ Inor$ation 1erices o India 5i$ited (C7I1I5)

?ISI2 was set up by III and 3%I in 1ABB. ?ISI2 rates debentures, fixed deposits, commercial paper,preference sares and structured obligations. %e rating metodology followed by ?ISI2 involves andanalysis of te following factors/

)i* +usiness 'nalysis)a* Industry risk, including analysis of te structure of te industry, te 5emand -supply position, a study ofte key success factors, te nature and basis of competition, te impact of government policies, cyclic andseasonality of te industry.)b* Market position of te company witin te industry including market sares, product and customer

diversity, competitive advantages, selling and distribution arrangements.)c* 4perating efficiency of te company like locational advantages, labour relationsips, tecnology,manufacturing efficiency as compared to competitors.)d* 2egal position including te terms of te prospectus, trustees and teir responsibilities an systems fortimely payments.

)ii* Financial 'nalysis)a* 'ccounting uality like any overstatement or understatement of profits, auditorsualifications in teirreports, metods of valuation of inventory, depreciation policy)b* 8arnings protection in terms of future earning growt for te company and future profitability.

)c* 'deuacy of cas flows to meet debt servicing reuirements in addition to fixed and working capital

needs. 'n opinion would be formed on te sustainability of cas flows in te future and te working capitalmanagement of te company.

)d* Financial flexibility including te companyDs ability to source finds from oter sources like groupcompanies, ability to defer capital expenditure and alternative financing plans in times of stress.

)iii* Management 8valuation/ %e uality and ability of te management would be ;udged on te basis of tepast track record, teir goals, pilosopies and strategies teir ability to overcome difficult situations, etc. Inaddition to ability to repay, an assessment would be made of te managementDs willingness to pay debt. %iswould involve an opinion of integrity of te management.

)iv* ?egulatory and competitive environment and regulatory framework of te financial system would beexamined keeping in view teir likely impact on te company. %rends in regulation # deregulation are alsoexamined keeping in view teir likely impact on te company.

)v* Fundamental 'nalysisa* apital adeuacy, i.e. te true net work as compared to te volume of business and risk profile assets.

b* 'sset uality including te companyDs credit risk management, systems for monitoring credit, exposure toindividual borrowers and management of problem credits.

c* 2iuidity management. apital structure, term matcing of assets and liabilities and policy on liuid assetsin relation to financial commitments would be some of te areas examined.


24/62

d* 0rofitability and financial position in terms of past istorical profits, te spread of funds deployed andaccretion to reserves.

e* 8xposure to interest rate canges and tax law canges.

%e rating process begins at te reuest of te company. ' professionally ualified team of analysisvisits te companyDs plants and meets wit different levels of te management including te 84. 4n

completion of te assignment, te team interacts wit a back-up team tat as separately collected additionalindustry information and prepares a report. %is report is placed before an internal committee and tere is anopen discussion to arrive at te rating. %e rating is presented to an external committee wic ten takes tefinal decision wic is communicated to te company.

Sould te company volunteer any furter information at tat point wic could affect te rating ispassed on to te external committee. %erefore, te company as te option to reuest for a review of rating?ISI2 publises te ?ISI2 ratings in S'< wic is a uarterly publication in :indi and u;aratibesides 8nglis. ?ISI2 can rate mutual funds, banks and cit funds. ?ating of mutual funds as assumedimportance after te poor performance of mutual fund industry in 1AA to 1AA. ?ISI2 Hentured into mutualfund rating market in 1AAN. It may also start rating real estate developers and governments. ?ISI2 iseuipped to do euity grading.

C7I1I5 7atin+ 1y$ols

eenture

''' :igest Safety'' :ig safety' 'deuate safety+++ Moderate safety++ Inadeuate safety+ :ig risk Substantial risk5 5efault)5ebentures rated 657 are in default and in arrears of interest or principal payment or are expected to defaulton maturity. Suc debentures are extremely speculative and returns from tese debentures may be reali&edonly on reorgani&ation or liuidation*, risil may apply plus or minus signs for ratings from '' to 5 toreflect comparative standing witin te category. For rating preference sares, te letters pf are prefixed to tedebentures rating symbols, e.g. pf''' )%riple '*

Fied eposit /ro+ra$

F''' :igest SafetyF'' :ig SafetyF' 'deuate safetyF+ Inadeuate safetyF :ig riskF5 5efault or likely to be in default

1#ort ter$ Instru$ents

0-1 Hery Strong degree of safety0-! Strong degree of safety0- adeuate degree of safety0-> inadeuate degree of safety

1tructured *li+ations

''' )S4* :igest Safety


25/62

'' )S4* :iger Safety' )S4* 'deuate safety+++ )S4* Moderate safety++ )S4* Inadeuate safety+)S4* :ig risk)S4* Substantial risk5)S4* 5efault

Inest$ent Inor$ation and Credit 7atin+ A+ency (IC7A)I?' wic was promoted IFI in 1AA1 carries out rating of debt instruments of manufacturing

companies, finance companies and financial institutions. %e factors tat I?' takes into consideration forrating depend on te nature of borrowing entity. %e inerent protective factors, marketing strategiescompetitive edge, level of tecnological development, operational efficiency, competence and effectiveness ofmanagement, uman resource development policies and practices, edging of risks, trends in cas flows andpotential liuidity, financial flexibility, asset uality and past record of servicing of debt as well asgovernment policies affecting te industry and unit arc examined.

I?' commences work at te reuest of te prospective issuer. ' team of analysts collect data bygoing troug te companyDs books, interviewing executives and from te in-ouse researc and data base of

I?'. I?' offers te company on opportunity to get te instrument rated confidentially and also an optionregarding te use of te rating. If, te company decided to use te rating. I?' monitors it untilredemption#repayment. In te case of misstatement by te company I?' can disclose te correct position.

IC7A 7atin+ 1y$ols

5on+-ter$ includin+ deentures? onds and preerences s#ares

2''' :igest Safety2'' :ig Safety2' 'deuate Safety2+++ Moderate Safety2++ Inadeuate safety

2+ ?isk prone2 Substantial risk25 5efault

Mediu$ ter$ includin+ ied deposits

M''' :igest SafetyM'' :ig SafetyM' 'deuate safetyM+ Inadeuate safetyM ?isk proneM5 5efault

'-1 :igest Safety'-! :ig Safety'- 'deuate safety'-> ?isk prone'- 5efault

Credit Analysis and 7esearc# in uity 5i$ited (CA7)

redit 'nalysis and ?esearc in 8uity 2imited is te tird rating agency promoted by I5+I ;ointly witinvestment institution, banks and finance companies in 1AA. %ey include anara +ank, 3nit %rust of Indiaredit apital Henture Fund )India* 2imited, )since taken over by Infrastructure 2easing and Financial


26/62

Services 2td.*. Sundaram Finance 2imited, %e Federal +ank 2imited te Hysya +ank 2imited, First 2easingompany of India 2imited, I% lassic Finace, Jolak Maindra Finance among oters. '?8 commencedits rating operations in 4ctober, 1AA.redit rating by '?8 covers all types of debt instruments suc as debentures, fixed deposits, commercialpaper and structured obligations. It also undertakes credit analysis of companies for te use of bankers, oterlenders and business enterprises.

CA7s 7atin+ 1y$ols

For lon+-ter$ and $ediu$-ter$ instru$ents

'?8 ''' +est uality investments.

'?8 ''' )F5*#)5*#)S4*5ebt service payments protected by stable as flows wit good margin

'?8 '' )F5*#)5*#)S4* :ig uality but rated lower because of Somewat lower margin of protection

'?8 ' 3pper medium grade.

'?8 '' )F5*#)5*#)S4* Safety adeuate

'?8 +++ )F5*#)5*#)S4* Sufficient safety. +ut adverse canges in assumptions likely to weaken te debtservicing capabilities

'?8 ++ )F5*#)5*#)S4* Speculative instruments. Inadeuate protection for interest and principalpayments.

'?8 )F5*#)5*#)S4* :igest investment risk.'?8 5 )F5*#)5*#)S4* 2owest category , 2ikely to be in default soon

In order of increasing risk, te ratings for sort-term instruments are 0?-1,0?-!, 0?- and 0?- and '?8

-1, '?8 -!, '?8 -, '?8 G >, and '?8 G for credit analysis of companies.

u and /#elps Credit 7atin+ A+ency o India 5td.? (C7)

5? )India* set up in 1AA is one of te credit rating agencies for rating te non-banking financial companies)for fixed deposits*. %e minimum investment grade credit rating to be assigned by tis company wic willbe acceptable to te ?+I as been fixed at Ind-+++. Since te criteria used by 5? )India* for rating fixeddeposits of


27/62

providing institutional investors wit iger interest earning tan tey could obtain form te banking system

te issue of 0 imparts a degree of financial stability to te systems as te issuing company as an incentive

to remain financially strong.

Features o C/ are:

Sort term money market instrument wit a fixed maturity.

3nsecured corporate debt

Issued at discount in interest bearing form

Issuer promises to pay buyer some fixed amount on future period.

Issued directly by a company to investor or troug bank#mercant banker. %ey are negotiable byendorsement and delivery.

%ey are issued in multiple of ?s laks.

%e maturity varies between 1 days to a year.

laks

%e company fund based working capital limit sould not less tan ?s 1@ crore.

%e issuing company sall ave 0! and '! rating from ?ISI2 and I?'.

Inestors in C/s are:

Individuals, banks, corporate,s


28/62

FAT@71 *F C

1. 'll sceduled bank oter tan ??+ and sceduled cooperative bank are eligible to issue 5s.

!. 5s can be issued to individuals, corporation, companies, trust, funds and associations.


29/62

%ese bills were introduced in 1AAB. %e treasury bills in India issued on auction basis. %e date of

issue of tese bills will be announced in advance to te market. %e information regarding te notified

amount is announced before eac auction. %e notified amount in respect of treasury bills auction is

announced in advance for te wole year separately. ' uniform calendar of treasury bills issuance is

also announced.

* A1 days treasury bills/-

%e A1 days treasury bills were issued from Kuly 1A. %ese were issued tap basis at a discount rate.

%e discount rates vary between !. to >.L 0.a. from Kuly 1AN> te discount rate of >.L remained

uncarged te return on tese bills were very low. :owever te ?+I provides rediscounting facility

freely for tis bill.

>* 1B! days treasury bills/-

%e 1B! days treasury bills was introduced in days treasury bills/-

%e > treasury bills were introduced by te government in 'pril 1AA!. %ese instruments are issued

to stabili&e te money market. %ese bills were sold on te basis of auction. %e auctions for tese

instruments will be conducted for every fortnigt. %ere will be no indication wen tey are putting

auction. %erefore te ?+I does not provide rediscounting facility to tese bills. %ese instruments

ave been instrumental in reducing, te net ?+I credit to te government. %ese bills ave become

very popular in India.

!


30/62

%0. 3oern$ent securities (3ilt ed+ed 1ecurities) are instruments issued by overnment of India to raisemoney. Secs pays interest at fixed rate on specific dates on alf-yearly basis. It is available in wide range ofmaturity, from sort dated )one year* to long dated )up to tirty years*. Since it is sovereign borrowing, it isfree from risk of default )credit risk*. Rou can subscribe to tese bonds troug ?+I or buy it in stockexcange.

%!. uity 1#ares )instrument of ownersip*8uity saresare instruments issued by companies to raise capital and it represents te title to te ownersip

of a company. Rou become an owner of a company by subscribing to its euity capital )wereby you will beallotted sares* or by buying its sares from its existing owner)s*.'s a sareolder, you bear te entrepreneurial risk of te business venture and are entitled to benefits ofownersip like sare in te distributed profit )dividend* etc. %e returns earned in euity depend upon teprofits made by te company, companyDs future growt etc.

%%. e$aterialisation:

5ematerialisation is te process of converting te pysical form of sares into electronic form. 0rior todematerialisation te Indian stock markets ave faced several problems like delay in te transfer ofcertificates, forgery of certificates etc. 5ematerialisation elps to overcome tese problems as well as reduceste transaction time as compared to te pysical segment. %e article discusses te procedures, advantages

and problems of dematerialisation.

%e Indian Stock markets ave seen a ma;or cange wit te introduction of depository system and scrip lesstrading mecanism. %ere were various problems like inordinate delays in te transfer of sare certificates,delay in receipt of securities and inadeuate infrastructure in banking and postal segments to andle a largevolume of application and storage of sare certificates .%o overcome tese problems pysical dealing insecurities sould be eliminated . %e Indian stock market introduced te system of dematerialisationrecogni&ing te need for scrip less trading.

'ccording to te 5epositories 'ct, 1AA, an investor as te option to old sares eiter in pysical orelectronic form .%e process of converting te pysical form of sares into electronic form is called

dematerialisation or in sort demats. %e converted electronic data is stored wit te depository from weretey can be traded. It is similar to a bank were an investor opens an account wit any of te depositoryparticipants. 5epository participant is a representative of te depository .%e 50 maintains te investorssecurities account balances and intimates im about te status of oldings.

/rocedure or conertin+ t#e p#ysical s#ares into electronic or$:

%o convert te sares into electronic form te investor sould open an account wit any of te depositoryparticipants. For opening an account te investor as to fill up te account opening form. 'n account number)client I5* will be allotted after signing te agreement wic defines te rigts and duties of te 50 and teinvestor wising to open te account. %e client I5 along wit te 50 I5 gives a uniue identification in tedepository system. 'ny number of depository accounts can be opened.

'fter opening an account wit te 50 te investor sould surrender te pysical certificates eld in is nameto a depository participant. %ese certificates will be sent to te respective companies were tey will becancelled after demateriali&ation and will credit te investors account wit te 50. %e securities ondematerialisation will appear as balances in te depository account. %ese balances can be transferred like tesares eld in pysical form. 5ematerialised sares are in te fungible form and do not ave any distinctive orcertificate numbers .%e securities in te demat can again be converted into pysical form wic is called asrematerialisation.1aety to t#e inestor

E Securities 8xcange +oard of India )S8+I* as laid down certain rules and regulations for getting registered


31/62

as a depository participant. $it te recommendation of te 5epository and S8+IEs own independenevaluation a 50 will be registered under S8+I.

E %e investors account will be credited#debited by te 50 only on te basis of valid instruction from teclient.

E %e system driven mandatory reconciliation is done between te 50 and


32/62


33/62


34/62

5erivative is a product wose value is derived from te value of one or more basic variables called bases

)underling asset, index, or reference rate*, in a contractual manner. %e underlying asset can be euity, forex

commodity or any oter asset. For example weat farmers may wis to sell teir arvest at a future date to

eliminate te risk of a cange in prices by tat date. Suc a transaction is an example of a derivative. %e

price of tis derivative is driven by te spot price of weat wic is te 6underlying7.

Types o deriaties

%e most commonly used derivatives contracts are forwards, futures and options and since tis pro;ect

revolves around futures and options, it will be discussed in greater detail later on. For now we take a brief

look at te various derivatives contracts tat ave come to be used.

F4?$'?5S/ ' forward contract is a customi&ed contract between two entities, were settlement takes

place on a specific date in te future at todayDs pre-agreed price.

F3%3?8S/ ' futures contract is an agreement between two parties to buy or sell an asset at a certain time

in te future at a certain price. In simpler words, futures are forward contracts uoted in an excange.

40%I4


35/62

S$'0%I4


36/62

at any given time varies wit te maturity of te contract so tat te forward price of a contract to buy or sell

in one mont would be typically different from tat of a contract wit time of tree monts or six monts to

maturity.

F@T@71 C*"T7ACT

I"T7*@CTI*"

' futures contract is a type of forward contract wit igly standardi&ed and closely specified contract terms

's in all forward contracts, a futures contract calls for te excange of some good at a future date for cas

wit te payment for te good to occur at a future date. %e purcaser of a futures contract undertakes to

receive delivery of te good and pay for it, wile te seller of a future promises to deliver te good and

receive payment. %e price of te good is determined at te initial time of contracting.

In a crude sense, futures markets are an extension of forward markets. %ese markets, being organi&ed#In a crude sense, futures markets are an extension of forward markets. %ese markets, being organi&ed#

standardi&ed, are very liuid by teir own nature. %erefore, liuidity problem, wic persists in te forwardstandardi&ed, are very liuid by teir own nature. %erefore, liuidity problem, wic persists in te forward

market, does not exist in te futures market. In futures market, clearing corporation# ouse becomes temarket, does not exist in te futures market. In futures market, clearing corporation# ouse becomes te

counter-party to all te trades or provides te unconditional guarantee for teir settlement i.e. assumes tecounter-party to all te trades or provides te unconditional guarantee for teir settlement i.e. assumes te

financial integrity of te entire system. In oter words, we may say tat in futures market, te credit risk of tefinancial integrity of te entire system. In oter words, we may say tat in futures market, te credit risk of te

transactions is eliminated by te excange troug te clearing corporation# ouse.transactions is eliminated by te excange troug te clearing corporation# ouse.

*/TI*"1*/TI*"1

I"T7*@CTI*" T* */TI*"1

$e now come to te next derivative product tat is traded, namely 4ptions. 4ptions are fundamentally

different from forward and future contracts. 'n option gives te older of te option te rigt to do

someting. %e older need not exercise tis rigt. In contrast, in a forward or futures contract, te two parties

are committed and ave to fulfill tis commitment. 'lso it costs noting )except margin reuirement* to enter

into a futures contract wereas te purcase of te option reuires an upfront payment called te option

premium.

T>/1 *F */TI*" C*"T7ACT1:

!. CA55 */TI*":

' call option gives te buyer te rigt to purcase a specified number of sares of a particular company from

te option writer )seller* at a specified price )called te exercise price* up to te expiry of te option. In oter

words te option buyer gets a rigt to call upon te option seller to deliver te contracted sares anytime up to

te expiry of te option. %e contract tus is only a one-way obligation, i.e. te seller is obliged to deliver te

contracted sares wile te buyer as te coice to exercise te option or let te contract lapse. %e buyer is

not obliged to perform.


37/62

/*1ITI*" 37A/2:

Q 0remium

b

b Stock 0rice

U U

Intrinsic value 2ines

(a) Buy A Call () =rite a Call

'n option buyer starts wit a loss euivalent to te premium paid. :e as to carry on wit te loss till te

stock market price euals te exercise price as sown in )a*. %e intrinsic value of te option up to tis price

remains &ero, and tus runs along te O-axis. 's te stock price increases furter, te loss starts reducing and

gets wiped out as soon as te increase euals te premium, represented on te grap by point CbD, also called

te break even point. %e profitability line starts climbing up at an inclination of > degrees after crossing te

O-axis at b and from tereon moves into te positive side of te grap. %e inclined line beyond te point C bD

indicates tat te option acuires intrinsic value and is, tus referred to as te intrinsic value line.

%e position grap )b* represents te profitability status of te writer wo does not own te stock i.e

naked or an uncovered writer. %e grap is logically te inverse of tat for te option buyer.

!. /@T */TI*"

' put option gives a buyer te rigt to sell a specified number of sares of a particular stock to te option of

te writer at a specific price )called exercise price* any time during te currency of te option. %e seller of a

put option as te obligation to take delivery of underlying asset. $en put position is opened, te buyer pays

premium to te put seller. If te price of underlying asset rises above te strike price and stays tere, te put

will expire wortless. %e seller of put will keep te premium as is profit and te put buyer will ave a cost

to purcase rigt.

Q

Intrinsic alue

1tock /rice


38/62

0ut buyers are bearis, tey believe tat te price of te underlying asset will fall and tey may not be able to

sell te asset at a iger price. 0ut sellers are bullis, as tey believe tat te price of te underlying asset will

rise.

/osition 3rap#:

Intrinsic Halue 2ine

Q

Stock 0rice

U 0remium

1=A/1:

Swap can be defined as a financial transaction in wic two counter parties agree to excange streams of

payments, or cas flows, over time. %wo types of swaps are generally seen i.e. interest rate swaps and

currency swaps. %wo more swaps being introduced are commodity swaps and te tax rate swaps, wic are

seen to be an extension of te conventional swaps. ' swap results in reducing te borrowing cost of bot

parties.

Module - III: Indian Financial Institutions!. Co$$ercial Banks- ommercial +anks are banking institutions tat accept deposits and grant sort-termloans and 'dvances to teir customers wit a profit motive. In addition to giving sort-term loanscommercial banks also give Medium-term and long-term loan to business enterprises.


39/62

N. Implementation of Monetary policy

B. Moneti&ation of te economy

A. 8xport promotion cells

!. Banks pro$ote capital or$ation:

ommercial banks accept deposits from individuals and businesses, tese deposits are ten made available tote businesses wic make use of tem for productive purposes in te country.

%e banks are, terefore, not only te store ouses of te countryDs wealt, but also provide financial resources

necessary for economic development.%. Inest$ent in ne' enterprises:

+usinessmen normally esitate to invest teir money in risky enterprises. %e commercial banks generallyprovide sort and medium term loans to entrepreneurs to invest in new enterprises and adopt new metods ofproduction.

%e provision of timely credit increases te productive capacity of te economy.&. /ro$otion o trade and industry:

$it te growt of commercial banking, tere is vast expansion in trade and industry.

%e use of bank draft, ceck, bill of excange, credit cards and letters of credit etc as revolutioni&ed botnational and international trade.

4. eelop$ent o a+riculture:

%e commercial banks particularly in developing countries are now providing credit for development of

agriculture and small scale industries in rural areas. %e provision of credit to agriculture sector as greatly elped in raising agriculture productivity and income of

te farmers.. Balanced deelop$ent o dierent re+ions:

%e commercial banks play an important role in acieving balanced development in different regions of tecountry.

%ey elp in transferring surplus capital from developed regions to te less developed regions.

%e traders, industrialists etc of less developed regions are able to get adeuate capital for meeting teirbusiness needs.

%is in turn increases investment, trade and production in te economy.6. Inluencin+ econo$ic actiity:

%e banks can also influence te economic activity of te country troug its influence on

a. 'vailability of credit b. %e rate of interest

If te commercial banks are able to increase te amount of money in circulation t#rou+# credit creation or bylowering te rate of interest, it directly affects economic development.

' low rate of interest can encourage investment.

%e credit creation activity can raise aggregate demand wic leads to more production in te economy.9. I$ple$entation o Monetary policy:

%e central bank of te country controls and regulates volume of credit troug te active cooperation of tebanking system in te country.

It elps in bringing price stability and promotes economic growt wit in te sortest possible period of time.;. Moneti,ation o t#e econo$y:

%e commercial banks by opening brances in te rural and backward areas are reducing te excange of goodstroug barter.

%e use of money as greatly increased te volume of production of goods.

%e non moneti&ed sector )barter economy* is now being converted into moneti&ed sector wit te elp ocommercial banks.


40/62

0rocessing of payments by way of telegrapic transfer, internet banking or oter means

Issuing bank drafts and bank ceues

'ccepting money on term deposit

2ending money by way of overdraft, installment loan or oterwise

0roviding documentary and standby letter of credit, guarantees, performance bonds, securities underwritingcommitments and oter forms of off balance seet exposures

Safekeeping of documents and oter items in safe deposit boxes

urrency excange

Sale, distribution or brokerage, wit or witout advice, of insurance, unit trusts and similar financial products asa 6financial supermarket7.

&. 7ole o co$$ercial anks to'ards custo$ers:

BA"87 A1 A T7@1T

Main relationbetween +anker and ustomer G 5ebtor and reditor Vreversal wen bank grants 45 facilitiesW

7e$ittances $ade to ank to purcase sares, before buying stipulated no. of sares, bank failed- unspentmoney bank olding in trust

Banker receied $oney ro$ one partyon bealf of anoter )later not a customer*, bank enuired aboutpurpose and intimated money meanwile being kept in suspense, banker is a trustee

Banker $ust not e party to appropriationof funds inconsistent wit te caracter in wic customer oldstem

A1 A" A3"T

=#en created

+uying and selling securities of customer

ollection of ceues, dividends, +#8 or 0#. iscountin+ o Bills o c#an+e: %is is te most prevalent and important metod of advancing loans to te traders

for sort-term purposes. 3nder tis system, banks advance loans to te traders and business firms by discounting teir

bills. In tis way, businessmen get loans on te basis of teir bills of excange before te time of teir maturity.


43/62

. Inest$ent o Funds: %e banks invest teir surplus funds in tree types of securitiesYovernment securities, oter

approved securities and oter securities. overnment securities include bot, central and state governments, suc as

treasury bills, national savings certificate etc.

4ter securities include securities of state associated bodies like electricity boards, ousing boards, debentures of 2and

5evelopment +anks units of 3%I, sares of ?egional ?ural banks etc.

. A+ency Functions: +anks function in te form of agents and representatives of teir customers. ustomers give teir

consent for performing suc functions. %e important functions of tese types are as follows/

)i* +anks collect ceues, drafts, bills of excange and dividends of te sares for teir customers.

)ii* +anks make payment for teir clients and at times accept te bills of excange/ of teir customers for wic

payment is made at te fixed time.

)iii* +anks pay insurance premium of teir customers. +esides tis, tey also deposit loan installments, income-tax,

interest etc. as per directions.

)iv* +anks purcase and sell securities, sares and debentures on bealf of teir customers.

)v* +anks arrange to send money from one place to anoter for te convenience of teir customers.

N. Miscellaneous Functions: +esides te functions mentioned above, banks perform many oter functions of genera

utility wic are as follows/

)i* +anks make arrangement of lockers for te safe custody of valuable assets of teir customers suc as gold, silver,

legal documents etc.

)ii* +anks give reference for teir customers.

)iii* +anks collect necessary and useful statistics relating to trade and industry.

)iv* For facilitating foreign trade, banks undertake to sell and purcase foreign excange.

)v* +anks advise teir clients relating to investment decisions as specialist

)vi* +ank does te under-writing of sares and debentures also.

)vii* +anks issue letters of credit.

)viii* 5uring natural calamities, banks are igly useful in mobili&ing funds and donations.

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

7e+ulations:

BANKING REGULATIONS ACT 1949

%e +anking ?egulation 'ct was passed as te +anking ompanies 'ct 1A>A and came into force wef1..>A. Subseuently it was canged to +anking ?egulations 'ct 1A>A wef @1.@.. Summary of someimportant sections is provided ereunder. %e section no. is given at te end of eac item. For details, kindlyrefer te bare 'ct.


44/62

+anking means accepting for te purpose of lending or investment of deposits of money from public

repayable on demand or oterwise and witdrawable by ceue, drafts order or oterwise ) )i* )b**. +an

Documents

fifm2013final-131228045040-phpapp01