NEW HORIZON COLLEGE

MARATHALLI, BANGALORE
(Affiliated to Bangalore University)
A Recipient of Prestigious Rajyotsava State Award 2012 conferred by the Government
of Karnataka

V SEM BBA STUDY MATERIAL

FINANCIAL MARKETS AND SERVICES (5.6)

Prepared By

Jissa A. Varghese
Assistant Professor

Ring Road, Bellandur Post, Near Marathalli, Bangalore - 560 103

Tel : +91-80-6629 7777 Fax : +91-80-2844 0770
E-mail : principalnhc.edu@gmail.com
Web : www.newhorizonindia.edu

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 CHAPTER 1

FINANCIAL MARKETS

MEANING OF FINANCIAL MARKETS

A financial market refers to the institutional arrangement for dealing in financial assets and
credit instruments of different types, such as currency cheques, bank deposit bills, etc.

CLASSIFICATION OF FINANCIAL MARKETS

INDUSTRIAL
PRIMARY
SECURITIES MARKET
MARKET

GOVERNMEN SECONDARY
CAPITAL T SECURITIES MARKET
MARKET MARKET

TERM LOAN
LONG TERM MARKET
ORGANISED
MARKET LOAN
MARKET
MARKET FOR
MORTGAGES

MARKET FOR
CALL MONEY
FINANCIAL
MARKET
GUARANTEES
FINANCIAL
MARKETS
COMMERCIAL
BILL MARKET
MONEY
MARKET
TREASURY BILL
MARKET

SHORT TERM
MONEY LOAN MARKET
LENDERS,
UNORGANISE
INDIGENOUS
D MARKET
BANKERS,
ETC

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UNORGANISED MARKET

Unorganised market consists of money lenders, indigenous bankers, and traders etc who lend
money to the public. Indigenous bankers also collect deposits from the public. There are also
private finance companies, chit funds, etc. Their activities are not controlled by RBI. Efforts
were made by RBI but were not successful. The regulations regarding their financial dealings
are still inadequate and their financial instruments have not been standardized.

ORGANISED MARKET

In the organised market, there are standardized rules and regulations governing their financial
dealings. There is high degree of institutionalisation and instrumentalisation. These markets
are subject to strict supervision & are controlled by the RBI or other regulatory bodies. These
organised markets can be classified into two. They are:

1. Capital Market

2. Money Market

1. CAPITAL MARKET

This is a market for financial assets which have a long or indefinite maturity. Generally, it
deals with long term securities of above one year maturity period. The Capital market is
further divided into three

A. Industrial Securities market

B. Government Securities market

C. Long-term loans market

A. Industrial Securities Market

It is a market for industrial securities like equity shares or ordinary shares, preference
shares and debentures or bonds. It is a market where companies raise their capital or debt
by issuing appropriate instruments. Industrial Securities Market is further sub-divided
into two. They are:
i. Primary Market or New issue market
ii. Secondary Market or Stock exchange

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i. Primary Market

Primary market is a market for new issues or new financial claims. Hence, the name New
issue market. It deals with those securities which are issued to the public for the 1st time.
Borrowers issue/exchange new financial securities for long-term funds in this market.
This facilitates capital formation. There are mainly three ways to raise capital. They are:

– Public issue
– Rights issue
– Private placement

ii. Secondary Market

It is a market for secondary sale of securities. In other words, securities which have
already passed through the new issue market are traded here. It consists of stock
exchanges recognised by the Government of India. Generally, securities quoted in the
Stock Exchange provide continuous and regular market for buying and selling of
securities.

B. Government Securities market

This market is also called Gilt-edged securities market. It is a market where government
securities are traded. There are long term & short term Government Securities. Long
Term securities are traded in this market whereas Short Term in the money market.
Securities issues by the Central Government, State Governments, Semi-government
authorities like city corporations, port trusts etc, state electricity boards, all India and
State level financial institutions and public sector enterprises are dealt in this market.
Government Securities are issued in denominations of Rs. 100. Interest is payable half-
yearly and they carry a tax exemption.

Major participants in this market are the commercial banks because they hold a great
portion of these securities to meet their SLR requirements. Government Securities are
sold through the Public Debt Office of the RBI while Treasury bills are sold through
auctions. The Government Securities are in many forms. These are generally:

– Stock certificates or inscribed stock

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 – Promissory notes
– Bearer bonds which can be discounted.

C. Long-term loans market

Development banks and commercial banks play a significant role in this market by
supplying LT loans to corporate. This market can be further classified as:

1. Term Loans market

2. Mortgages market
3. Financial guarantees market

2. MONEY MARKET

It is a market dealing with financial assets and securities which have a maturity period of
up to one year. It is a market for Short term funds. They are subdivided into four:
A. Call Money Market
B. Commercial Bills Market
C. Treasury Bills Market
D. Short-Term Loan Market

IMPORTANCE OF CAPITAL MARKET

• It serves as a vital source for the productive use of the economy’s savings.

• Provides incentives to saving and facilitates capital formation by offering suitable rates of
interest as the price of capital

• Provides an avenue for investors

• Facilitates increase in production and productivity in the economy and hence enhances
the economic welfare of the society.

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FOREIGN EXCHANGE MARKET

It refers to the process of converting home currencies into foreign currencies and vice-versa.
The market where foreign exchange transactions take place is called a foreign exchange
market. There is no physical space that exists in a foreign exchange market. This market
works 24/7 and is controlled by the Foreign Exchange Maintenance Act (FEMA).

PRIMARY MARKET (NEW ISSUE MARKET)

New issue market represents the primary market where new securities i.e., shares or bonds
that have never been previously issued, are offered. The new issue market encompasses all
institutions dealing in fresh claim. These claims may be in the form of equity shares,
preference shares/ debentures, rights issue, deposits etc. All financial institutions which
contribute, underwrite and directly subscribe to the securities are part of new issue market.

FEATURES OF PRIMARY MARKET

1) Primary market deals with new securities which are being issued to the public for the
first time.
2) It is the market in which both newly established companies and existing companies
can raise capital by offering their securities to the public
3) The primary market provides the issuing company with necessary funds for starting a
new enterprise or for their expansion, diversification or modernization of an existing
unit.
4) Primary market facilitates the transfer of funds from the suppliers (investors) to the
companies raising fresh capital.
5) The investors buy securities directly from the companies issuing new securities.
6) The borrowers exchange the newly created securities for long term funds in the
primary market.
7) All financial institutions which contribute, underwrite and directly subscribe to the
securities are part of the new issue market or the primary market.
8) The new issue market channelizes the savings of the individuals and others into long
term investments which helps in the economic growth and industrial development of a
country.

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 9) The securities which are dealt in new issue market are transferable and marketable.
The investors who invest money in the new issue market can receive it back by way
of selling these securities in the stock market.
10) The primary market is regulated and controlled by the Securities and Exchange Board
of India (SEBI). If offers transparency and discipline on the dealings in the primary
market.

FUNCTIONS OF NEW ISSUE MARKET/ PRIMARY MARKET

The main function of a new issue market is to facilitate transfer of resources from savers to
users. The savers are individuals, commercial banks, insurance companies, etc. the users are
public limited companies and government. The new issue market plays an important role of
mobilising the funds from the savers and transferring them to borrowers for productive
purposes, an important factor for economic growth. It is not only a platform for raising
finance to establish new enterprises but also for expansion/ diversification/ modernisation of
existing units. On this basis, the new issue market can be classified as:

1. Market where firms go to the public for the 1st time through IPO

2. Market where firms which are already trading raise additional capital through
Seasoned Equity Offering(SEO)

The main functions of a new issue market can be divided into triple service functions:

1. Origination
2. Underwriting
3. Distribution

1. ORIGINATION

It refers to the work of investigation, analysis & processing of new project proposals. It starts
before an issue is actually floated in the market.

There are two aspects to the origination process:

a) Careful study of technical, economic & financial viability to ensure soundness of the
project.

– Preliminary investigation is undertaken by the sponsors.

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 b) Advisory services which improve the quality of capital issue and ensure its success

– Advisory services include

• Type of issue

• Magnitude of issue

• Time of floating an issue

• Pricing of an issue

• Technique of selling the securities

The function of origination is done by a merchant banker.

2. UNDERWRITING

It is an agreement whereby the underwriter promises to subscribe to a specified no. of shares

or debentures or a specified amount of stock in the event of public not subscribing to the
issue.

Methods of Underwriting

• Standing behind the issue – Under this method, the underwriter guarantees the sale of a
specified number of shares within a specified period. If the public do not subscribe to the
specified amount of issue, the underwriter buys the balance in the issue.

• Outright purchase – The underwriter in this method, makes an outright purchase of shares
and resells them to the investors.

• Consortium method – underwriting is jointly done by a group of underwriters in this

method. The underwriters form a syndicate for this purpose. This method is adopted for
large issues.

Advantages of underwriting

• The issuing company is relieved from the risk of finding buyers for the issue offered
to the public i.e., the company is assured of raising adequate capital

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 • The company is assured of getting the min. subscription within the stipulated time, a
statutory obligation

• Underwriters undertake the burden of highly specialised function of distributing

securities.

• Provide expert advice with regard to timing of security issue, the pricing of issue, the
size & time of securities to the issue, etc.

• Public confidence on the issue is enhanced when underwriting is done by reputed

underwriters

• Underwriters in India may be classified into 2 categories:

1. Institutional underwriters

– Examples are LIC, UTI, IDBI, ICICI, Commercial banks &

general insurance companies

2. Non- Institutional underwriters

– Examples are brokers who view to earning commission

3. DISTRIBUTION

Distribution is the Function of sale of securities to ultimate investors. This service is

performed by brokers and agents who maintain a regular and direct contact with the ultimate
investors.

METHODS OF FLOATING NEW ISSUES

1. Public issues

Under this method, the issuing company directly offers to the general public/institutions a
fixed number of shares at a stated price through a document called prospectus. It is the most
common method adopted by Joint Stock Companies to raise capital

Prospectus must contain the following:

– Name of the company

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 – Address of the registered office of the company

– Existing & proposed activities

– Location of the company

– Names of directors

– Authorised and proposed issue capital to the public

– Dates of opening & closing the subscription

– Minimum subscription

– Names of brokers/underwriters/merchant bankers/managers and registrar to the

issue

– A statement by the company that it will apply to stock exchange for quotations of
its shares

Merits of Public issue/through prospectus

1. Sale through prospectus has the advantage of inviting a large section of the investing
public through advertisement

2. Direct method and no intermediaries are involved

3. Shares are allotted to a large section of investors on a non-discriminatory basis

Demerits

1. It is an expensive method

2. This method is suitable only for large issues.

2. Offer for Sale

The method of offer for sale consists of outright sale of securities through the intermediaries
of issue houses or share brokers. In other words, the shares are not offered to the public
directly.

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 • This consists of two steps:

– Direct sale by the issuing company to the issue house and brokers at an agreed
and negotiated price.

– The intermediaries resell the above securities to the ultimate investors at a

higher price.

The difference in the purchase and sale price is called turn or spread. This method is
otherwise called Bought Out Deals (BOD)

Advantage

• Enables an issuer with good project to obtain funds with minimum cost without fear
of under-subscription.

• Company is relieved from the problem of printing and advertisement of prospectus

and making allotment of shares

3. Placement

Under this method, the issue houses or brokers buy the securities outright with the intention
of placing them with their clients afterwards. Here, the brokers act as almost wholesalers
selling them in retail to the public. The brokers would make profit in the process of reselling
to the public. The issue houses or brokers maintain their own list of clients and through
customer contact sell the securities. There is no need for a formal prospectus as well as
underwriting agreement

Advantages of placement

• Timing of the issue is important for successful floatation of shares. In depressed

market conditions, when the issues are not likely to get public response through
prospectus, placement method is useful

• Suitable for small companies

• Avoids delays involved in public issue and also expenses involved

Disadvantages

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 • The securities are not widely distributed to the large section of investors. A selected
group of small investors are able to buy a large no of shares and get majority holding
in a company

4. Rights Issue

Rights issue is a method of raising funds in the market by an existing company. A right
means an option to buy certain securities at a certain privileged price within a certain
specified period. Shares, so offered to the existing shareholders are called rights shares. These
shares are offered to the existing shareholders in a particular proportion to their existing share
ownership. The ratio depends on the requirement of capital. The rights themselves are
transferable and saleable in the market

Advantages

• Cost of issue is minimum as there is no underwriting, brokerage, advertising and

printing of prospectus expenses.

• Ensures equitable distribution of shares to all existing shareholders so the control of

company remains undisturbed

• Prevents directors from issuing new shares in their own name or their relatives at a
lower price and get controlling right

PLAYERS IN THE PRIMARY MARKET

There are many players in the new issue market. The important of them are the following:

1. Merchant Bankers: They are the issue managers, lead managers, co- managers and are
responsible to the company and SEBI.
2. Registrars to the Issue: Registrars are an important category of intermediaries who
undertake all activities connected with new issue management. They are appointed by
the company in consultation with the merchant bankers, in respect of servicing of
investors.
The role of Registrar in the pre issue, during the currency of the issue, pre- allotment,
allotment and post allotment are described below:

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Role of Registrar in Pre- Issue
i) Suggest draft application form to the merchant bankers.
ii) Help in identifying the collection centre. The choice of collection centre and of
collecting banker is critical to the success of the issue.
iii) Assist in opening collection accounts with banks and lay down procedure for
operation of these accounts.
iv) Send instructions to collecting branches, for collection of application along
with cheques, drafts, stock invest separately and remittance of funds.
v) Workout modalities to receive the collection figures on a regular basis until the
subscription list are closed.

During the currency of Issue

i) Receive the collection figures everyday

ii) Tabulate and classify the collection data on the basis of the standard proforma
of slabs of shares applied for.
iii) Keep the merchant bankers and the company informed of the progress of total
subscriptions
iv) Inform the stock exchange about the closure of issue.

Pre- Allotment Work

i) Get all application forms from the collecting bankers and sort out valid and
invalid application forms.
ii) The valid applications are to be categorized and grouped as cash, draft and
stock invest applications.
iii) Reclassify the valid applications eligible for allotment.
iv) Prepare the list with inverted numbers and then approach the regional stock
exchange for finalizing the basis of allotment, in the event of over
subscription.
v) Finalize the allotment as per the basis approved by the stock exchange.
vi) Tally the final list approved for allotment and rejections with the in-house
control numbers and correct mistakes, if any.

Allotment Work

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 The most important work of a Registrar is allotment of shares .The system of
proportional allotment was adopted for new issues in 1993. A new quota system was
approved by SEBI in April, 1995. According to the new system 50% of quota is for
small investors and another 50% for other categories . The small investors include all
applicants’ up to 1000 shares. It has been revised recently.

Post Allotment Work

i) Get the letters of allotment and refund orders printed ready for dispatch. They
have to be mailed on or before 70 days from the closing date of subscription.
For any delay, get the permission of the Registrar of companies and the
relevant regional stock exchange.
ii) Submit all statements to the company for their final approval.
iii) Arrange to pay the brokerage and underwriting commission and submit their
relevant statements.
iv) Assist the company in getting the allotted shares listed on the stock exchange.

Qualifications for Registrars to the Issue

To be appointed as Registrar to the issue, registration with SEBI is essential. The criteria
adopted by SEBI for registration are the competency and expertise, quality of manpower,
their track record, adequacy of infrastructure such as computers, storage space, etc., and
capital adequacy. A net worth of Rs. 6 Lakhs is essential for registrars. SEBI has laid down a
code of conduct for their observance.

3. Collection and Co-coordinating Bankers:

Collecting bankers collect the subscriptions in cash, cheques, and stock invest. etc.
Co-ordinating bankers collect information on subscriptions and co-ordinate the collection
work. They monitor the work and inform it to the registrars and merchant bankers.
4. Underwriters and Brokers: Underwriters promises to subscribe to a specified number of
shares or debentures or a specified amount of stock in the event of public not subscribing
to the issue.

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 Brokers along with the network of sub workers market the new issues. They send their
own circulars and applications to the clients and do follow up work to market the
securities.
5. Printers, advertising agencies and mailing agencies are other organizations involved in the
new issue market operations.
6. Individual Investors: Individuals prefer to make investments in such securities which
provide them better security of investment i.e., minimum risk, stable returns, liquidity,
capital approach and growth, lesser tax burden etc.,

The investors are classified into 3 categories. They are:-

i) Real Investors: They are the individuals who have surplus of income or past
accumulated wealth and which they wish to invest for making future. Such
investors who are not affiliated with the issuing company either as existing
shareholders or as creditors or customers of the company, etc., are termed as real
investors.
ii) Speculative investors: They are certain investors who purchase securities with
speculative motives. They aim is to sell securities and make capital gains through
wide fluctuations in the value of securities.
iii) Individuals affiliated with the issuing company: The existing companies usually
prefer to sell their fresh issues to its customers, employees, creditors and existing
shareholders etc.
7. Joint Stock companies: The joint stock companies are the next important group of
investors in corporate securities.
8. Institutional Investors: The various institutional investors are private institutional
investors – UTI, LIC’s, commercial banks etc., Public financial institutions – IDBI, ICICI
etc., & foreign institutional investors.

INSTRUMENTS IN PRIMARY MARKET

1. Secured Premium Notes with Detachable Warrants (SPN):

SPN are issued along with detachable warrant. The warrants attached to it ensure
the holder the right to apply and get equity shares after a notified period provided
the SPN is fully paid up.

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 The SPN is issued at a nominal value and does not carry any interest.

The SPN is redeemed by repayment in several instalments at a premium over the

face value. The premium amt is distributed equally over the period of maturity of
the instrument.

2. Equity Shares with Detachable Warrants:

In this instrument, along with fully paid up equity shares detachable warrants are
issued which entitle the warrant holder to apply for a specified number of shares
at a determined price.

Detachable warrants are registered separately with the stock exchange and traded
separately.

3. Preference shares with warrants:

This instrument shall carry a certain number of warrants entitling the holder to
apply for equity shares at premium at any time in one or more stages between
the third and fifth year from the date of allotment.

4. Non convertible debentures with detachable equity warrants:

The holder of the instrument is given an option to buy a specified number of

shares from the company at a predetermined price with a definite time frame.

There is a specific lock in period after which the holder can exercise his option to
apply for equity shares.

5. Fully convertible cumulative preference share: This instrument has 2 parts, A & B

• Part –A is convertible into equity shares automatically on the date of allotment

without application by the allotee,
• Part –B will be redeemed at par/converted into equity after a lock in period, at
the option of the investors.

6. Zero Interest fully convertible debentures (FCDs):

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 • No interest will be paid to the holders of this instrument till the lock in
period. After a notified period this debenture will be automatically and
compulsorily converted into shares.

7. Fully Convertible Debentures(FCDs) with interest :

• This instrument carries no interest for a specified period. After this period,
option is given to apply for equities at premium for which no additional
amount is payable.
• However, interest on FCDs is payable at a determined rate from the date of
first conversion to second/ final conversion and equity will be issues in lieu
of interest amount.
8. Zero Interest Bonds: It is sold at a discount from their eventual maturity value and
bears no interest. In India, zero interest convertible bonds are issued by companies.
These bonds do not carry any interest till the date of conversion and are converted
into equity shares at par or premium on the expiry of a fixed period.

9. Deep Discount Bonds: These bonds are sold at large discount to their nominal value.
There are no interest payments on these bonds and the investors get return as
accretion to the par value of the instruments over its life.

10. Option Bonds: It may be cumulative or non – cumulative as per the option of the
holder of the bonds.
• In case of cumulative bonds, interest is accumulated and is payable on maturity
only.
• In case of non – cumulative bonds, the interest is paid periodically .the option
is to be exercised by the investor at the time of investment.

11. Equity shares: There are also known as ordinary shares/common shares representing
the owners in a company. The holders of these shares are the real owners of the
company. Equity shareholders take more risk and they dividends are paid only after
preference shareholders’ dividends are paid.

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 12. Preference Shares: These shareholders are being given the preferential rights on the
payment of dividends. Whenever a company distribute a profit, the dividend is first
paid on preference capital.

13. Deferred Shares: These shares were earlier issued to promoters or founders for
services rendered to the company. These shares were known as founders shares
because they were normally issued to founders.

14. No par stock /shares: No par stock shares having no face value. The capital of a
company issuing such shares is divided into a number of specified shares without any
specific denominations. The share certificate of the company simply states the number
of shares held by its owner without mentioning any face value.

15. Sweat Equity: The shares issued by a company to its employees or directors at a
discount or for consideration other than cash for providing know- how or making
available rights in the nature of intellectual property rights. The purpose of sweat
equity is to ensure more loyalty and participation of employees.

PROCEDURE FOR ISSUING EQUITY AND DEBENTURES

The following steps are followed before a company goes for the issue of shares and
debentures:

1. Preliminary Investigation and Analysis: The sponsors of issue undertake a preliminary

study of the technical, economic and financial viability of the new project/enterprise
to ensure the success of the new issue.
a) Types of Issue: This refers to the type of securities to be issued whether equity
share, preference share, debenture or convertible debenture by the new or
existing company issues by new companies are called as Initial issue or Initial
Public Offering and those by existing companies are called further issue.
b) Magnitude of Issue: How many numbers of shares will be issued and in what
proportion is decided in advance by the issuer companies. Companies now
allot certain portion of the offering to different segments so that everyone gets
a chance to participate.

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 c) Terms of Issue: Whether shares are to be issued at par or at a premium or at a
discount are decided by the issuer company. The terms on which shares are to
be issued by the company are given in the prospectus.
d) Time of floating an Issue: At what time the issue should be floated in the
market has to be decided carefully as stock market conditions directly
influence the primary market.
e) Methods of Issue: How the capital is to be raised from the market whether by
issue of prospectus, or by making an offer for sale to the issue house or stock
brokers or by private placement or through issue of Rights shares or bonus
shares is an important issue to be taken care of by the issuer companies.
f) The techniques of selling of securities: The success of new issues depends on
the response of the investing public. It calls for the choice of exact method of
marketing shares and debentures,

2. Propaganda or Advertisement: After the type of issue, size of issue, time and terms of
issue have been decided, the prospectus of the new issue are highlighted to the
investors by giving an advertisement in a leading newspaper along with some
important extracts of the prospectus.

3. Underwriting: Companies do get their shares underwritten in order to ensure success

of the issue. Underwriting is an agreement whereby underwriter agrees to take up
specified number of shares or debentures or a specified amount of stock in the event
of public not subscribing to the issue.

4. Application for Shares: An investor when satisfied with the profitability and other
things has to fill up the application form and deposit the same along with the requisite
amount with the prescribed scheduled bank. The scheduled bank will send this
application money along with the list of applicants to the company.

5. Allotment of shares: After receiving the applications the directors take steps to allot
these shares. Allotment of share means acceptance of the offer of the applicant for the
purchase of shares. A company cannot allot more than shares offered to the public for
subscription through the prospectus.
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SEBI GUIDELINES TOWARDS ISSUE OF EQUITY SHARES

The important aspects of SEBI Guidelines, with reference to issue of equity shares are as
under:

1. Abridged prospectus has to be attached with every application

2. A company has to highlight the risk factors in the prospectus
3. Objective of the issue and cost of project should be mentioned in the prospectus
4. Company’s management past history and present business of the firm should be
highlighted in the prospectus.
5. Particulars in regard to company and other listed companies under the same management
which made any capital issues during the last three years are to be stated in the
prospectus.
6. Justification for premium, in case of premium is to be stated
7. Subscription list for public issues should be kept open for a minimum of three days and a
maximum of 10 working days
8. The collection centre should be at least 30 which include all centres with stock
exchanges.
9. Collection agents are not to collect application money in cash,
10. The quantum of issue whether through a right or public issue, shall not exceed the amount
specified in the prospectus. No retention of over subscription is permissible under any
circumstances.
11. A compliance report in the prescribed form should be submitted to SEBI within 45 days
from the date of closure of issue.
12. Minimum number of shares per application has been fixed at 500 shares of face value of
Rs. 100
13. The allotment has to be made in multiples of tradable lot of 100 shares of Rs.10 each.
14. Issues by way of bonus, rights etc to be made in appropriate lots to minimize odd lots.
15. If minimum subscription of 90% has not been receives, the entire amount is to be
refunded to investors within 120 days
16. The capital issue should be fully paid up within 120 days
17. Underwriting has been made mandatory
18. Limit of listing of companies issue in the stock exchange has been increased from
Rs.3crores to Rs. 5 crores

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19. The gap between the closure dates of various issues viz., rights and public should not
exceed 30days
20. Issues should make adequate disclosure regarding the terms and conditions of
redemption, security conversion and other relevant features of the new instrument so that
an investor can make reasonable determination of risks, returns, safety and liquidity of the
instrument. The disclosure will be vetted by SEBI in this regard.

SEBI GUIDELINES FOR DEBENTURES

1) The amount of working capital debenture should not exceed 20% of the gross current
assets.
2) The debt equity ratio should not exceed 2:1
3) The rate of interest can be decided by the company
4) Credit rating is compulsory for all debentures excepting debentures issued by public
sector companies, private placement of non convertible debentures with financial
institutions and banks.
5) Debentures are to be redeemed after the expiry of seven years from the date of allotment.
NCD is permitted to be redeemed at 5% premium.
6) Normally debentures above seven years cannot be issued.
7) Debentures issued to public have to be secured and registered
8) A debenture redemption reserve is to be set up out of profits of the company
9) Debentures trustee and debenture trust deed are to be finalized within six months of the
public offer.

ADVANTAGES OF PRIMARY MARKET

i) Avenue for investment: A primary market provides good avenues for investments in
financial assets which are more productive than physical assets. Most of the investors,
particularly the household sector prefers this avenue since it is convenient and more
profitable
ii) Mobilization of savings: A well developed primary market offers adequate incentives
in the form of interest or dividend that may allure investors from all walks of the
society to invest savings in the primary market.

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iii) Channelizing savings for productive use: The primary market helps to mobilises the
small and scattered saving and augments the availability of investible funds. These
funds are utilized for productive purposes and thus, the wastage in unproductive uses
is avoided.
iv) Source of large supply of funds: The rapid development of any country required the
growth of large scale industries which need huge capital. The huge amount of funds
required for these industries cannot be provided by few persons. But huge money can
be raised in a primary market by floating new shares in the market.
v) Rapid Industrial Growth: The primary market facilitates increase in production and
productivity in the economy by means of establishing many new companies and
thereby promoting rapid industrial growth in a country.
vi) Source for expansions and technological upgradation: The primary market also serves
as an important source for raising money for expansion of industries as well as for
technological upgradation.

DISADVANTAGES OF PRIMARY MARKET

i) Possibility for deceiving investors

ii) No fixed norms for project appraisal
iii) Lack of post issue seriousness
iv) Ineffective role of merchant bankers
v) Delay in allotment process
vi) Poor mobilization of savings etc.,

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 SECONDARY MARKET/ STOCK MARKET

Meaning: Stock market represents the secondary market where existing securities (shares and
debentures) are traded; stock exchange provides an organized mechanism for purchase and
sale of existing securities.

Stock exchanges are organized and regulated markets for various securities issued by
corporate sector and other institutions.

Definition of stock exchange: According to Pyle “security exchanges are market places where
securities that have been listed thereon may be bought and sold for either investment or
speculation.”

According to the Securities Contracts (Regulation) Act 1956

Stock exchange means anybody of individuals, whether incorporated or not, constituted for
the purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities.

According to this Act, securities include the following:

• Shares, scripts, stocks, bonds, debentures, stock or other marketable securities of any
incorporated company or corporate
• Government securities
• Right or interest securities

ROLE AND IMPORTANCE OF STOCK EXCHANGE

• The stock exchange will play an important role in the success of the economy of
the country.
• The stock exchange is one of the basic financial tools for stimulating the
economy by attracting capital for investment in the projects.
• The stock exchange also helps to revive other sectors of the economy such as
commerce, industry and service.
• Shares, scrips, stocks, debentures stock and government securities are traded in
stock exchange.
• Stock exchanges are provided appropriate advice to their clients.

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• Stock exchange will list public private and foreign companies.
• Stock exchange wish to join the linkage system between the region’s stock exchanges and at a
later stage, with international stock exchanges.
• Stock exchange is providing a market that mobilises and distributes the nation’s
savings utilised for the best purpose of the country.
• Stock exchange is a market in which securities are bought and sold.

Control over secondary market:

For the effective functioning of secondary market, proper control must be exercised. At
present, control is exercised through the following three important processes:-

1) Recognition of Stock Exchange

2) Listing of Securities
3) Registration of brokers

1) Recognition of Stock Exchange:-

Stock exchanges are the important ingredient of capital market. They are the citadel of
capital and fortress of finance. They are the theatres of trading in securities and as such
they assist and control the buying and selling of securities.

Recognition Procedure

The stock exchange in India have to be recognized by the central govt. under securities
contracts regulation act and SEBI and they have to comply with the provisions of the SCRA
and SEBI and also the bye laws and regulations duly approved by the govt.

Any stock exchange which needs recognition under SEBI Act has to submit an application in
the prescribed manner to the central govt. This application must be accompanied by the
following documents:-

i) A copy of the bye-laws of the stock exchange for its operation

ii) A copy of the rules relating to its constitution, governing body, powers and duties
of the office bearers, the admission procedure etc.,

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Grant of Recognition

The following conditions must be fulfilled

i) The rules and bye - laws of the stock exchange applying for registration must
ensure fair dealing and protect the interest of investors
ii) The stock exchange concerned must be willing to comply with any other
conditions that may be imposed by the govt., from time to time
iii) The grant of recognition must be in the interest of trade as well as in the public
interest.

Renewal of recognition

If any stock exchanges intend to renew its recognition, it must once again make an
application to the central govt., in the aforesaid manner three months before expiry of the
period of recognition.

Withdrawal of Recognition

The central govt., may withdraw the recognition if the grant is against the interest of trade or
public interest.

ORGANISATION STRUCTURE

The organisation structure of stock exchanges is different from place to place.

Different forms are:
• Voluntary non-profit making association - 3 Stock Exchanges
• Public Limited Company - 14 Stock Exchanges
• Company Limited by Guarantee - 6 Stock Exchanges.
Mumbai, Ahmedabad and Indore are three recognized Stock Exchanges. These are the
voluntary non-profit making associations. Kolkata, Delhi, Bangalore, Cochin, Kanpur,
Ludhiana, Guwahati Stock Exchanges are the examples of Public Limited Company/Joint
Stock Companies Limited by Shares. Hyderabad, Mumbai and Pune Stock Exchanges are the
examples of the Companies Limited by Guarantee.

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Listing of Securities
Listing of securities means the securities are admission for trading on a recognized stock
exchange. In the case of securities are not listed in the stock exchange such company
securities are not trading n the stock exchange. Listing is compulsory for a public issuing
company that intends to offer shares/debentures to the public for subscription. Listed
securities are of two classes, viz., cash List and Forward List. The securities on the cash list
are those involving ready delivery while securities in the forward list enjoy forward trading
privileges.

L i st i ng has s ome a dvantage s

• Listing of securities provides the marketability and liquidity of the securities

• Listing protects the interest of both shareholders and the investing public
• Listing encourages investment and flow of savings into the capital market
• Listing offers wide publicity to the concerned companies
• Listing provides buying and selling of securities in the stock exchange
• Listing promotes better corporate practices and lead to progressively higher standards
of corporate procedures and practices
• Listing enjoys higher public confidence as the stock exchange compels the issuer to
comply with high standards

Disadvantages

• Listed securities offers wide scope for the speculators to manipulate the values in such
a way as detrimental to the interest of the company
• Sometime listed securities are subject to wide fluctuations in their value. The wide
fluctuations in their values have the effect of degrading the company’s reputation and
images in the eyes of the public as well as the financial intermediaries
• Listing discloses vital information such as operating environment to competitors

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TRADING IN SECURITIES

The trading in securities is governed by the Rules and Bye laws of the Stock Exchange.

Meaning of Securities

According to the Securities Contracts (Regulation) Act 1956, Section 2( h) def i ne s t h e

k e y wo r d “ Se c ur i t ie s” . Se c uri t ie s i nc l ude s sha r e s, scrips, stocks, bonds,
debentures, debenture stock or other marketable securities of a like nature in or of any
incorporated company or other body corporate. Securities also cover government securities
and rights or interests in securities. But it does not include securities of private companies as
they are not capable of being dealt in on a stock exchange and are not marketable securities due to
possible restrictions on transfer. The major instruments in securities trading are debentures, public
sector bonds and government securities.

Issue of securities are as outlined below:

• Government Securities
• Corporate Securities
• Corporate Debentures
• Company Deposits
• Commercial Paper
• Fixed Deposits
• Equity Shares
• Preference Shares
• Bonds

Registration of Stock Brokers

Stock Broker
• An agent that charges a fee or commission for executing buy and sell orders
submitted by an investor

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 • The firm that acts as an agent for a customer, charging the customer a
commission for its service
• A stock broker is someone who performs transactions on the stock market on
behalf of third parties who are unable or unwilling to trade themselves
• Stock broker who is a member of the stock exchange to deal securities on
recognised stock exchanges, the broker should register his name as a broker with the
SEBI. A stock broker should possess the following qualifications to register as a broker.
• He should be an Indian Citizen within 21 years of age
• He should not be bankrupt or compounded with creditors
• He should not have been convicted for any offence, fraud etc.
• He should not have engaged in any other business other than that of a broker
in securities
• He should not be defaulter of any stock exchange
• He should have completed 12th Standard examination.

Duties/Code of Conduct for Stock Brokers

• A st oc k broke r shoul d be hone st a nd pr om pt l y e xe c ut e a l l orders

regarding upon buying and selling of securities.
• He should make prompt payment to his clients in the case of sales and prompt
delivery in the case of purchases.
• He should not difference between small investors and big
investors.
• •He should issue a contract note for all transactions as specified by the stock
exchange without any delay.
• •He should maintain complete secrecy of his client’s personal investment and
other information of a confidential nature.
• He should not influence purchases or sales just for the sake of his brokerage
or commission.
• He should not give any false and misleading information to his clients
particularly as relating to sales and purchases of securities.•
• He should not entertain those clients who have failed to carry out their
commitments in respect of securities with other stock brokers.

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 • He should acting as duly informed to his client.
• He should have adequate infrastructure facilities and maintain proper staff to
render prompt, efficient and fair service to his clients
• He should not advertise his business publicly except when it is permitted by
the stock exchange.
• He should not adopt unfair practices with a view to attracting clients from
other brokers.
• He should not fail to submit the necessary returns to the SEBI

Registration of Sub- Brokers

A sub-broker is not a member of a stock exchange. Therefore, he is a person who acts as
an agent of a stock broker. He undertakes the securities trading business on behalf of
his clients by through stock brokers. Sub-brokers should also get a certificate of registration
from SEBI. Just like as brokers, they have to satisfy the eligibility criteria, pay registration
fees and follow the code of conduct and the various rules and regulations framed by the
regulating authorities from time to time. In this case excepting the registration fees, other
aspects are more or less similar to brokers.

Types/Kinds of Brokers
Brokers may be classified as below:
 Jobbers
 Commission Broker
 Tarawaniwalas
 Sub-brokers/Rem i s e r s
 Floor Broker
 Odd Lot Dealer
 Budliwala
 Arbitrageur
 Dealers in Non-cleared Securities
 Security Dealer
 Authorized Clerk

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Jobbers
A Jobber is a professional and independent broker who deals insecurities on his behalf. It
means, he purchases and sells securities in his own name. His main job objective is to earn a
margin of profit due to price variations of securities. Jobbers are a professional broker who
carefully judges the value of the securities and makes a good forecast of their future price
movements. He buys securities as a owner, keeps them for a very short period and sells them
for profit known as the Jobber’s turn .A Jobber will always quote a two-way price called
double-barreled price. The lower price indicates that the jobber is ready to purchase and
higher price indicate that the jobber is ready to sell the securities.

Commission Brokers
A commission broker is nothing but a broker. He buys and sells securities for earning a
commission on behalf of the clients. He is permitted to deal with non-members directly. His
main function is to buy and sell securities on behalf of his client and earning commission. He
does not purchase or sell in his name.

Tarawaniwalas

A Tarawaniwala is an active member in the stock exchange. He is similar to as Jobber.

Tarawaniwalas act as a broker and as well as a jobber. He is not prohibited from acting as a
broker. This system has a demerit that a tarawaniwala can act against the interest of investors
by purchasing securities from them in his own name at lower prices and selling the same
securities to them at higher prices.

Sub-broker
As stated earlier, a sub-broker is an agent of a stock broker. He helps the clients to buy and
sell securities only through the stock broker.

Floor Broker
Floor brokers are not found on Indian Stock Exchanges. The floor broker buys and sells
shares for other brokers on the floor of exchange. The floor brokers are not officially attached
to other members. The floor broker executes orders for any members and receives as his
compensation a share of brokerage charged by the commission.

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Odd Lot Dealer

The odd lot dealer specializes in buying and selling in amount less than the prescribed trading
units or lots. He buys odd lots and makes them up to marketing trading units or lots. He
engaged in round lot transactions. The price of the odd lot is determined by the round lot
transactions. He earns high profit on the difference between the price at which he buys and
sells the securities. He does not rely on commission

Buddiwala

Buddiwala is a financier in the stock exchange. He is also known as Budliwalla. He is giving

credit facilities to the market. And he charges a fee which called as ‘Contango’ or
‘Backwardation’ charge. He gives a secured loan that for a short period of two to three
weeks. The return is governed by technical position of the market and ruling the rate
of interest.

Arbitrageur
Arbitrageur is a specialist in buying and selling in securities in different markets at the same
time and profits by the difference in the price between the two stock exchanges.

Dealers in Non-cleared Securities

He is a specialist in buying and selling on his own account shares which are not in the active
list.

Security Dealer
He is a specialist in buying and selling the Government or Gilt Edge securities.

Authorized Clerks
An authorised clerk is one who is appointed by a stock broker to assist him in the business of
securities trading. As per the rules of the stock exchange, each broker can employ a specified
number of authorized clerks to transact the securities trading business

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FUNCTIONS OF SECONDARY MARKET

1. Liquidity of securities as securities can be converted into cash readily

2. Marketability of securities as it facilitates buying and selling of securities.
3. Safety of funds belonging to investors
4. Availability of long term funds
5. Flow of funds to profitable projects.
6. Motivation for improved performance by companies to get competitive edge.
7. Promotion of investment opportunities.
8. Availability of business information.
9. Reflection of business cycle.
10. Promotes marketing of new issues by companies.

Kind/Types of Transaction in a Stock Exchange

The Stock Exchanges are permitted to the members on behalf of his client to enter into transactions in
securities as outlined:-

Spot Delivery: Means for delivery and payment on the same day.

Hand Delivery: Means for delivery and payment with the time, which shall not more than 14
days

Special Delivery: For delivery and payment within any time exceeding 14 days following the
date of contract as may be stipulated when entering into the bargain and permitted by the
governing board.

Badla Transaction

Badla transaction/carry over refers to the postponement of the settlement of transaction till
the next settlement period. It is a facility to carry forward the transaction from one settlement
period to another. If the buyers/sellers wish to carry forward their transactions from

32
settlement period to the next settlement period, they draw up a fresh set of contract notes to
give effect to the carry forward of the purchase/sale at rates which reflect the badla charges.

Badla Charges

Badla charges are fixed on the basis of demand and supply conditions in the market and they
are fixed on a fortnightly basis. Therefore, the Badla charges could vary in different
settlement periods. The carry forward charges or interest is to be paid by the buyer or
seller in each scrip sold. Badla charges or the amount of interest charges is also known as
Vyaj Badla.

Factors Influencing Badla Rates

The Badla charges or the amount of interest charges which are contracted to be paid as a result of carry
forward the transaction from one settlement period to another are based on several factors as
outlines below:•
• The total amount of badla finance available in the market
• The speculative business position in the market
• Availability of badla finance for a particular scrip (scrip means speculative
transaction)
• The present interest rates in the money market
• The psychological state of the market.

Speculation on the Stock Exchange

Speculation transactions are made with the intention of making profits by disposing of
securities at favourable prices. Speculative transactions does not involve full payment for and
taking delivery of the securities which the speculators have contracted to transfer. Speculators
do nottake/give delivery of shares. They deal in differences in the purchase and sale prices.
Their main intention is to carry forward the transactions and get short term gains due to price
differences.

Kinds/Types of Speculators

Speculators of the stock exchanges may be classified into the three.:-

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Bull: A Bull is also known as Tejwalla, Bulls are very optimistic of the rise in prices of
securities. He is a speculator who buys shares in the expectation of selling it at a higher
price latter. Thus, in a bull market there will be excess of purchases over sales.

Bear: A bear is also known as Mandiwalla. Bears are very pessimistic and always they
expect a fall in the prices of securities in future. Hence, bear goes on selling securities.
Therefore, a bearish market refers to a falling market and there will be excess sales over
purchases.

Stag : A stag neither buys nor sells but applies for subscription to the new issues expecting that he can sell
them at a premium. Generally, Stag buys new issues and sell it on allotments or even before allotment for a
profit.

SPECULATIVE TRANSACTION

Option Dealing
Option is the right to buy or sell a certain quantity of security at a certain price within a
certain time. The option to buy is known as call option or Teji Sauda and the option to sell is
known as Put Option/Mandi Sauda. The Put and Call is q double option (known as Teji
Mandi) giving right either to purchase or to sell securities. In option dealing, a speculator is
given the right or option to buy or sell, or both buy and sell as the case may be on the
settlement day or else he will forfeit the option money.

Wash Sales
It is technique through which a speculator is able to earn huge profits by creating a
misleading picture in the market. It is of fictitious transaction in which a speculator sells and
buys security at a higher price through another broker. However, it creates a false or
misleading opinion in the market about the price of the security in question. As a result of
misleading, the price records a further rise and the speculator is able to get high profits by
selling the securities to the public. It is purely in the interest of speculators.

Arbitrage

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Arbitrage is a highly skilled speculative activity. Arbitrage is a device to make profit out of
the differences in prices of a security in two different markets. Arbitrages refers to carry of a
security from one market to another, it is also described as traffic in securities. Such a traffic
may be carried on between two markets within the country is known as domestic arbitrage. A
traffic may be carried on between two markets with one country to another country is known
as Foreign Arbitrage.

Cornering
Cornering refers to the process of holding the entire supply securities by an individual or a
group of individuals in terms to the short seller sand earning more profits. In this case, the
short sellers (i.e., bears) who have contracted to sell the security without actually possessing
it would be unable to deliver it to the buyers, who have cornered the market. It is also a
prohibited activity.

Rigging the Market

Rigging is the process to create an artificial condition in the market. This impact is the price
fluctuation of the securities in the market. Speculators main intention is earning of huge profit
from the speculation

Blank Transfers
Blank transfer helps to speculative activities by through carry-over/ badla transactions. The
transferor (seller) signs the transfer form without specifying the name of the transferee
(buyer) as known as blank transfer. Badla/carryover transactions are involves temporary
purchases and sales of securities.

Blank transfer is an undesirable activity due to the following reasons:

• In the case of partly paid up capital, the seller’s liability is continues even after he
actually sold it. It is not justifiable.
• Blank transferee escapees from the payment of stamp duty and transfer fees etc. which is
the loss of revenue to the government.
• In the case of blank transfer, the transferee’s name is not disclosed. Therefore, he can
evade income tax.

35
• Blank transferees to gain control of the management of companies without disclosing
their names.
• The blank transferee’s name will not be recorded in the register of companies. Therefore,
the registers are incomplete and misleading information to perspective investors.
• Registered shares are made freely negotiable through blank transfers. However, it
encourages unhealthy speculation.

Margin Trading
Margin Trading is a popular method of Speculative Trading. In this method, the client opens
an account with his broker. Client makes deposit of cash or securities in his account. Client
has agreed to maintain a minimum margin of amount deposit always in his account.
When, broker purchases securities on behalf of his client his account will be debited and vice
versa

TRADING AND SETTLEMENT SYSTEM OF STOCK EXCHANGE TRANSACCTIONS

TRADING PROCEDUE IN A STOCK EXCHANGE

The stock exchange operations at floor level are highly technical in nature. Non-members are
not permitted to enter into the stock market. Hence, various stages have to be completed in
executing a transaction at a stock exchange. The steps involved in the method of trading are
as follows:

1. Selection of a broker:
The buying and selling of securities can only be done through SEBI registered brokers
who are members of the Stock Exchange. The broker can be an individual,
partnership firms or corporate bodies. So the first step is to select a broker who will
buy/sell securities on behalf of the investor or speculator.

2. Opening Demat Account with Depository:

Demat (Dematerialized) account refer to an account which an Indian citizen must
open with the depository participant (banks or stock brokers) to trade in listed
securities in electronic form. Second step in trading procedure is to open a Demat
account.

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 The securities are held in the electronic form by a depository. Depository is an
institution or an organization which holds securities (e.g. Shares, Debentures, Bonds,
Mutual (Funds, etc.) At present in India there are two depositories: NSDL (National
Securities Depository Ltd.) and CDSL (Central Depository Services Ltd.) There is no
direct contact between depository and investor. Depository interacts with investors
through depository participants only.

Depository participant will maintain securities account balances of investor and

intimate investor about the status of their holdings from time to time.

3. Placing the Order:

After opening the Demat Account, the investor can place the order. The order can be
placed to the broker either (DP) personally or through phone, email, etc.

Investor must place the order very clearly specifying the range of price at which
securities can be bought or sold. e.g. “Buy 100 equity shares of Reliance for not more
than Rs 500 per share.”

The orders may take any one of the following forms:

a) At best order: It is an order which does not specify any specific price. It must
be executed immediately at the best possible price. The client may also fix a
time-frame within which the order has to be executed.

Ex: ‘Buy 100 Essar Oil shares at Best’

b) Limit order: It is an order for the purchase or sale of securities at a fixed price
specified by the client.

Ex: ‘Sell 100 DCM at Rs.76’

c) Immediate or cancel order: It is an order for the purchase or sale of securities

immediately at the quoted prices. If the order could not be executed at the
quoted prices immediately, it should be treated as cancelled.

Ex: ‘Buy 100 shares of Infosys at Rs. 700 immediate’

37
 d) Discretionary order: It is an order to buy or sell shares at whatever price the
broker thinks reasonable. This is possible only when the client has complete
faith on the broker.

e) Limited Discretionary order: It is an order to buy or sell securities within a

specified price range and/or within the given time period as per the best
judgement of the broker.

f) Open order: It is an order to buy or sell without fixing any time limit or price
limit on the execution of the order. It is similar to discretionary order.

g) Stop loss order: It is an order to sell as soon as the price falls up to a particular
level or to buy when the price rises up to a specified level. This is mainly to
protect the clients against a heavy fall or rise in prices so that they may not
suffer more than the pre-specified amount.

4. Execution of orders

As per the Instructions of the investor, the broker executes the order i.e. he buys or
sells the securities. Broker prepares a contract note for the order executed. The
contract note contains the name and the price of securities, name of parties and
brokerage (commission) charged by him. Contract note is signed by the broker.

5. Settlement of Transactions

The settlement is made by means of delivering the share certificates along with the
transfer deed. The transfer deed is duly signed by the transferor, i.e., the seller. It
bears the stamp of the selling broker. The buyer then fills up the particulars in the
transfer deed. At present, the settlement can be made by nay one of the following
methods:

a) On the spot settlement:

It means settlement is done immediately and on spot settlement follows T + 2
rolling settlement. This means any trade taking place on Monday gets settled
by Wednesday.

38
 b) Forward settlement:
It means settlement will take place on some future date. It can be T + 5 or T +
7, etc. All trading in stock exchanges takes place between 9.55 am and 3.30
pm from Monday to Friday.

At present India follows the T+2 or rolling settlement system. Rolling settlement is a system
to settle share transactions in predefined number or days. It is a mechanism of settling trades
done on a stock exchange on the Day of Trade (T) plus "X" trading days. "X" trading days
could be any number of days like 1,2,3,4 or 5 days. So, if we say the rolling settlement for a
transaction is T+3 then it means that the transaction will be settled in TODAY + Next 3
Days. In other words, in T+3 environments, a trade done on T day is settled on the 3rd
working day excluding the T day.

At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd
working day. Saturdays and Sundays are excluded because the stock exchanges remain
closed on weekends.

PLAYERS IN THE STOCK MARKET

The key players in the stock market are:

1. Stock exchanges – they act as a facilitator for trading
2. SEBI – acts as a regulator in the market
3. Depositories - Depository is an institution which maintains an account for investors’
securities (share, debentures, mutual fund etc) in a dematerialized or an electronic
form and the exchanges of securities takes place.
4. Dealers - An individual or entity, such as a securities firm, who it acts as a
principal and stands ready to buy and sell for its own account. More generally, an
individual or entity which buys and sells products and holds an inventory
5. Broker - An individual or firm who acts as an intermediary between a buyer
and seller, and usually charges a commission for securities and most other products.
Broker requires a license to function.

39
 6. Retail investor - An individual who purchases small amounts of securities for
him/herself, as opposed to an institutional investor. They are also called individual
investors or small investors.
7. Domestic institutional investors like mutual funds, insurance companies, pension
funds, banks, financial institutions etc
8. Foreign Institutional Investors (FIIs) - A hedge fund, pension fund manager, mutual
fund, bank, insurance company, large corporate buyer, or a representative agent for
any of these parties that is registered to do business in a country other than where
the investment instrument is being purchased. The investor
takes positions in foreign financial markets on behalf of the institution in the home
country.
9. Speculators - A person who makes risky investments, anticipating a major change in
the future price of the asset.
10. Arbitrageurs - A trader who uses arbitrage strategies to take advantage of
price disparities between the same security, currency, or commodity in two different
markets.

MERITS OF STOCK MARKET

• Stock market is an Economic Barometer of the country.

• Stock Market provides continuous and ready market for securities.
• Stock Market ensures transparency in dealing through proper regulation mechanism.
• Stock Market contributes to the Economic growth in the country
• It allows for spreading of Equity cult
• It provides scope for speculation
• Stock Market provides liquidity to the existing investment
• It facilitates better allocation of capital
• Promotes the habits of savings and investment

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DEMERITS OF STOCK MARKET

• Companies listed in the stock market may become vulnerable to market fluctuations
beyond control – including market sentiments, economic conditions or developments
in the sector.
• Companies listed in the stock market become more responsible to shareholders which
may divert them from their own objectives
• Extreme downturn in the stock market may result in erosion of investment of small
and retail investor
• Stock market may become vulnerable to scams as happened in the past
• Excessive speculation in the stock market may be dangerous

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 NATIONAL STOCK EXCHANGE (NSE)

The National Stock Exchange of India (NSEI) was established in 1994to encourage stock
exchange reform through system modernization and competition. It is an electronic
screen based system where members have equal access and equal opportunity of business
irrespective of their location in different parts of the country as they are connected through a
satellite network.

The National Stock Exchange is to operate in two segments as outlined below

• Wholesale Debt Market: Wholesale Debt Market is concerned with trading

instruments such as Gilt edge securities, commercial papers, PSU Bonds, units, and
certificate of Deposits.
• Capital Market: The Capital Market is concerned with equity and corporate debt
instruments.

OBJECTIVES OF NATIONAL STOCK EXCHANGE

The NSE objectives as outlined below:

• It establishes nationwide trading facility for equity debt and hybrid.
• It facilitates equal access to investors across the country.
• It provides fairness, efficiency and transparency to the securities trading.
• It enables shorter settlement cycles.
• It meets international securities market standard.

FEATURES OF NSE

• It set up a fully automated screen based trading system

• It has consists of three segments: The capital market segment, wholesale debt market
segment and derivatives market
• It market is a fully automated screen based environment

42
• It owns satellite network by through market operates with all participants stationed at
their office and making use of their computer terminals, to receive market information, to
enter orders and execute to trade.
• The NSE has opted for an order driven system. This system provides enormous flexibility
to trading members. A trading member can place various conditions on the order in terms
of price, time or size when an order is placed by a trading member; an order confirmation
slip is generated. All orders received are staked in price and time priority. The computer
system automatically reaches for a match and no sooner to the same is found the deal is
struck.
• When a trade takes place, a trade confirmation slip is printed at the trading member’s
work station.
• It pending orders is delayed, the identity of the trading is not revealed to others
• On the eighth day of trading, each member get a statement showing his net position as the
clearing house of the securities.
• Members are required to deliver securities and cash by the thirteenth and fourteenth day
respectively, the fifteenth day is the payout day.
• It automated trade matching system secures the best prices available in the market to the
investor

OVER THE COUNTER OF EXCHANGE OF INDIA

Meaning
Over the counter market is a market where buyers seek out sellers’ and vice versa and then
attempt to arrange terms and conditions for purchase/sale acceptable to both parties. In OTC
refers trading take place by putting buy and sell orders by telephone, telex, letter, oral
message, etc. There is no particular market place in the geographical area.

OTCEI- ORIGIN

The OTCEI was incorporated in 1990 as a company under the Companies Act 1956. It
became fully operational on September 1992, with opening of a counter in Bombay. The
OTCEI is recognised by the Government of India as a recognized Stock Exchange under
Section 4of the Securities Control Regulation Act, 1956

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BASIC OBJECTIVES OF OTC

• Quicker liquidity
• Fixed and Fair Price
• Liquidity for a less trade security or it suited to small company
• Simplified process of buying and selling
• Creation of public interest in risky, although viable ventures•
• Easy of making public sale of new issues.

Promoters
The OTCEI has been promoted by all financial institutions in India such as UTI, ICICI, IDBI,
IFCI, LIC, GIC, SBI Capital Markets, etc.

BENEFITS TO THE INVESTORS

The OTC Exchange offers a number of benefits to the investors. They are as mentioned
below:
• Quick payment of money to the sellers and quick delivery of shares to buyers
• Price transparency means buyer and seller know the actual price at which the scrips
are bought or sold for him in other stock exchanges
• The OTCEI saves the investors from other unscrupulous behavior of the brokers
• Liquidity even for scrips of small and new companies
• Fair prices
• Simple procedure of buying and selling
• Facility to sell even odd lots.

BENEFITS TO THE COMPANIES

The OTC exchange offers certain benefits to the companies. The benefits are outlined below:
• It enables even smaller and less liquid companies to get listed
• Facilitate new issues at lower cost
• Market raising capital through issues easy for small, new and closely held companies
• Helps create market for scrips of small and new companies.

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IMPACT OF CERTAIN ECONOMIC INDICATORS ON STOCK
EXCHANGE/LIMITATIONS OF INDIAN STOCK MARKET/ DEFECTS OF INDIAN
STOCK MARKET

The Indian Stock Market has suffered from many limitations. Important limitations are
outlined below: These are the major factors for impact of certain economic indicators on
stock exchange.

1. Absence of Genuine Investors

Speculative activities are created absence of genuine investors. Therefore, speculators
always earn more profit from buying and selling of securities in the securities market.
Most of the transactions are carry forward transactions with a speculative motive of
deriving benefit from short term fluctuations.

2. Lack of Transparency
SEBI regulates stock exchanges in India but is unable to regulate the stock market
operations of brokers and speculators. Many brokers and speculators are violating
rules and regulations with a view to cheating to the customers in the market.

3. High Volatility of Stock Market

Research survey has indicated that the high price fluctuations in the capital market.
The high price volatility is not good for smooth functioning of the stock market

4. Problem of Odd Lots

Odd lots means tradable securities are not listed in the market. This is the major
problem to the security holders. It discourage to the trading activities to the investor.

5. Dominance of Financial Institutions

Financial institutions like LIC, UTI, GIC are dominated in the stock market. In
addition, they majorly influence and control in the securities market in stock
exchange.

6. Lack of Professionalism

45
 Professionals are efficiently managed and Administration of the security operations.
The lack of the professionalism has been creating several problems to investors,
brokers and speculators. Professionals are aware of the financial institution role in the
operation market. If lack, a problems for brokers and their clients.

7. Presence of Price Rigging

There is a strong bull moment in a market has created artificially demand for the
products and push up the prices before the issues of securities. This process has
generally done by a few group involved in buying and selling of the securities.

8. Prevalence of Insider Trading

Insider Trading has been a practice which is accepted in India although, SEBI has
introduced many regulations to control the insider trading. Insider means insider are
those who have access to unpublished price-sensitive information by virtue of their
good positioning the company and who ready to use such information in their best
merits.

9. Lack of Liquidity
Around 8000 companies are listed in Stock Exchanges in India. The shares of only a
few companies are actively traded in the market and become they are liquid.
Remaining shares of the listed companies are not actively traded in the market and
become they are lack of liquidity.

10. Scarcity of Floating Securities

In the stock market, there is a scarcity of floating securities. The security market is
highly volatile and easy price manipulations. In additionally, there is inadequate
supply of good scrips and imbalance of demand and supply of securities in the market

REFORMS IN STOCK MARKET

• Regulation of Intermediaries
• Change in the management structure

46
• Insistence of quality securities
• Prohibition of insider trading
• Transparency of accounting practices
• Strict supervision of stock market operations
• Prevention of price rigging
• Encouraging of market making
• Discouragement of price manipulations
• Protection of investors interest
• Free Pricing of Securities
• Freeing of Interest rates
• Setting up of Credit rating agencies
• Introduction of Electronic Trading
• Establishment of OTCEI and NSE
• Rolling settlement system

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 CHAPTER 2

NON BANKING FINANCE COMPANY

Non-Banking Financial intermediaries/ companies are the institutions which mobilizes funds
by the way of deposits from the public and channelize these to meet the requirements of the
borrowers in different sectors by making loans and advances, investments, leasing, factoring,
hire purchase etc

A non-banking institution which is a company and has principal business of receiving

deposits under any scheme of arrangement in one lump sum or in instalments by way of
contributions or in any other manner, is also a non-banking financial company (Residuary
non-banking company).

1. NBFCs lend and make investments and hence their activities are akin to that of banks;
however there are a few differences as given below:
2. NBFC cannot accept demand deposits;
3. NBFCs do not form part of the payment and settlement system and cannot issue
cheques drawn on it;
4. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is
not available to depositors of NBFCs, unlike in case of banks.

VARIOUS SERVICES OFFERED BY NBFIs

I. INVESTMENT COMPANY

Generally, an "investment company" is a company (corporation, business trust, partnership,

or Limited Liability Company) that issues securities and is primarily engaged in the business
of investing in securities.

An investment company invests the money it receives from investors on a collective basis,
and each investor shares in the profits and losses in proportion to the investor's interest in the
investment company. The performance of the investment company will be based on (but it
won't be identical to) the performance of the securities and other assets that the investment
company owns.

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 II. FINANCE COMPANY

Finance company is an organization that originates loans for both businesses and consumers.
Much like a bank, a typical finance company acts as a lending entity by extending credit.
However, the main difference between a bank and a finance company is that, unlike a bank, a
finance company does not accept deposits from the public. Instead, a finance company may
draw funding from banks and various other money market resources. A finance company
may extend credit to individuals for various consumer purchases, as well as to corporations
for commercial use. A finance company may also specialize in providing financing for a
variety of instalment plan sales. A finance company may also be affiliated with a
manufacturing firm or a holding company.

III. MERCHANT BANKS

Merchant Banker has been defined by SEBI (Merchant Bankers) rules, 1992 as “any person
who is engaged in the business of issue management either by making arrangements
regarding selling, buying, or subscribing to securities or acting as manager, consultant,
advisor, or rendering corporate advisory services in relation to such issue management.
Merchant banks do not provide regular banking services to the general public.

SERVICES PROVIDED BY THE MERCHANT BANKER

1. Project Management
Merchant banker takes care of project management right from planning to commission of
the project. They render various services as a part of project management. They are:
• Counseling
• Preparation of report
• Feasibility report
• Preparation of loan application
• Government clearance
• Foreign collaboration etc

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2. Issue Management
It is mandatory under SEBI rules that every issuing company must appoint one or more
SSEBI registered Merchant Bankers as Lead manager(s) for the management of issue.
Merchant bankers play an important role as one of the intermediaries in the primary
market. They undertake all the activities related to capital issues and play different roles
as lead managers, co-managers, underwriters, consultants and advisors to the issue. They
perform the duties of portfolio managers.

Issue management activities include

A. Pre-issue management
B. Post-issue management

A. Pre-issue management activities

Steps required to be taken to manage pre-issue activity is as follows:
• Obtaining stock exchange approvals to memorandum and articles of
associations
• Taking action as per SEBI guidelines
• Finalizing the appointments of the following agencies:
o Co-manager/ Advisers to the issue
o Underwriters to the issue
o Brokers to the issue
o Bankers to the issue and refund banker
o Advertising agency
o Printers and registrar to the issue
• Advise the company to appoint auditors and legal advisers
• Drafting the prospectus
• Obtaining approvals of draft prospectus from the company’s legal
advisers, underwriting financial institutions/Banks
• Approval of prospectus from the SEBI
• Filing the prospectus with the Registrar of Companies (ROC)
• Making an application for enlistment with stock exchange along with copy
of the prospectus
• Publicity of the issue with advertisement and conferences

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 B. Post – issue Management
Steps involved in post-issue management are:
• To verify and confirm that the issue is subscribed
• To supervise and co-ordinate the allotment procedure of registrar to the
issue as per prescribed stock exchange guidelines
• To ensure issue of refund order, allotment letters/ certificates within the
prescribed time limit after the closure of subscription list.
• To report periodically to the SEBI about the progress in the matters related
to allotment and refunds
• To ensure the listing of securities in the stock exchange
• To attend the investors grievances regarding the public issue

3. Portfolio Management Services

Different merchant bankers provide portfolio management services by managing the
portfolios of their clients. Merchant banker charges fees for providing portfolio services.
Merchant bankers may or may not have the discretionary power of investing the funds.

4. Loan Syndication
Merchant Banker arranges huge amount of loans for their clients from different banks and
financial institutions, this service is called loan syndication. Merchant bankers prepare
project report for loan syndication, approaches different institutions and finalize the deal.
For this service merchant banker charges some percentage of commission. Some of the
important credit syndication services offered is:
• Preparing applications for financial assistance to be submitted to financial
institutions and banks
• Monitoring the sanction of funds while acting as a specialized liaison agency
• Negotiating the term of assistance on behalf of client
• Post sanction formalities with these institutions and banks

5. Corporate Counseling
Merchant banker provides different types of corporate counseling to their clients related
to areas such as product development, mergers and acquisitions, foreign collaborations,

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 rehabilitation of sick units etc. Some of the specific assignments for the merchant bankers
are:
• Rejuvenating old line and ailing/sick units
• Assisting in obtaining approvals from Board for Industrial and Financial
Reconstruction (BIFR)
• Evolving rehabilitation programmes /packages
• Monitoring implementation of schemes of rehabilitation
• Identifying potential buyers for disposal of assets
• Advice on tactics in approaching potential acquisition

6. Advisory services relating to mergers and takeovers

A merger is a combination of two or more companies into a single company where one
survives and others lose their corporate existence. A takeover is the purchase of one
company by another existing company who acquires, controls and shows an interest in the
share capital of the other company. Merchant Bankers are the middlemen in setting
negotiation between the offeree and offeror. Being a professional expert, it is the
responsibility to safeguard the interest of the shareholders of both the companies.

7. Non-resident Investment
The services of merchant bankers include investment advisory services to NRIs in terms
of identification of investment opportunities, selection of securities, investment
management, etc. They also take care of the operational details like purchase and sale of
securities, securing necessary clearance from RBI for repatriation of interest and
dividend.
8. Other services
• Arranging External Commercial Borrowings
• Arranging and participating in international loan syndication
• Import Finance for Indian Corporate
• Debt Issue Management
• Private Placement
• Project Appraisal
• Corporate advisory services
• Share Valuations

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IV. HIRE PURCHASE FINANCE

It is a method of buying goods through making instalment payments over time. The term hire
purchase originated in the U.K., and is similar to what are called "rent-to-own" arrangements
in the United States. Under a hire purchase contract, the buyer is leasing the goods and does
not obtain ownership until the full amount of the contract is paid.

Hire Purchase is a method of selling good. In a hire purchase transaction, the goods are let
out on hire by a finance company (creditor) to the hire purchase customer (hirer). The buyer
is required to pay an agreed amount in periodical installments during a given period. The
ownership of the property remains with creditor and passes on to hirer on the payment of last
installments.

FEATURES OF HIRE PURCHASE AGREEMENT

1. Under hire purchase system, the buyer takes possession of goods immediately and
agrees to pay the total hire purchase price in installments.
2. Each installment is treated as hire charges.
3. The ownership of the goods passes from buyer to seller on the payment of the
installment
4. In case the buyer makes any default in the payment, the seller has the right to
repossess the goods from the buyer and forfeit the amount already received treating it
as hire charges.
5. The hirer has the right to terminate the agreement any time before the property passes.
That is, he has the option to return the goods in which case he need not pay
installments falling due thereafter. However, he cannot recover the amount already
paid as it is considered as hire charges.

DIFFERENCE BETWEEN HIRE PURCHASE AND LEASING

Hire purchase is also different from leasing

1. Ownership – in a contract of lease , the ownership rests with the lessor throughout
and the lessee (hirer) has no option to purchase the goods
2. Method of financing–leasing is a method of financing business assets whereas hire
purchase is a method of financing both business assets and consumer articles

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 3. Depreciation – In leasing, depreciation and investment allowance cannot be claimed
by the lessee. In hire purchase, depreciation and allowance can be claimed by the
hirer.
4. Tax benefits – the entire lease rental is tax deductible expense .only the interest
component of hire purchase installment is tax deductible.
5. Salvage value – the lessee not being the owner of the asset, does not enjoy the salvage
value of the asset. The hirer, in purchase, being the owner of the asset, enjoys the
salvage value of the asset.
6. Deposit – lessee is not required to make any deposit whereas 20 percent deposit is
required in hire purchase.
7. Rent purchase – with lease, we rent and with hire purchase we buy the goods.
8. Extent of finance – lease financing is invariably 100 percent financing .it requires no
immediate down payment or margin money by the lessee. In hire purchase, a margin
equal to 20-25 percent of the asset is to be paid by the hirer.
9. Maintenance – the cost of maintenance of the hired asset is to be borne by the hirer
himself .in case of finance lease only, the maintenance of leased asset is the
responsibility of the lessee.
10. Reporting - the asset on hire purchase is shown in balance sheet of the hirer .the
leased assets are shown by way of footnote only.

CRITERIA HIRE PURCHASE LEASING

Ownership Financier Lessor
Relationship Owner-hirer Lessor-lessee
Buying Owner purchases and Lessor purchases and
supplies to the hirer supplies to lessee
Compensation Hire charges Lease rent
Repayment Hire charges paid in Lease rent paid periodically
installments
Insurance At owner’s cost At lessor’s cost

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V. LEASE FINANCE

A legal document outlining the terms under which one party agrees to rent property from
another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the
lessor (the property owner) regular payments from the lessee for a specified number of
months or years. Both the lessee and the lessor must uphold the terms of the contract for the
lease to remain valid.

Lease is defined as follows

‘Lease is a form of contract transferring the use or occupancy of land, space, structure or
equipment, in consideration of a payment usually in the form of rent’

-Dictionary of Business and Management

‘Lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the
exclusive right to use the asset usually for an agreed period of time in return for the payment
of rent’

-James C. Van Horne

‘A contract between lessor and lessee for the hire of a specific asset selected from a
manufacturer or vendor of such assets by the lessee .the lessor retains the ownership of the
asset. The lessee has possession and use of the asset on payment of specified retain over the
period’.

-Equipment Leasing Association of UK

STEPS INVOLVED IN LEASING TRANSACTION

The steps involved in a leasing transaction are summarised as follows:

1. First the lessee has to decide the asset required and select the supplier. He has to decide
about the design specifications, the price, warranties, terms of delivery, servicing, etc.
2. The lessee then enters into a lease agreement with the lessor. The lease agreement
contains the terms and conditions of the lease such as:
• The basic lease period during which the lease is irrecoverable.
• The timing and amount of periodical rental payments during the lease period.

55
 • Details of any option to renew the lease or to purchase the asset at the end of the
period.
• Details regarding payment of cost of maintenance and repairs, taxes, insurance and
other expenses.
3. After the lease agreement is signed, the lessor contacts the manufacturer and requests
him, to supply the asset to the lessee. The lessor makes a payment to the manufacturer
after the asset has been delivered and accepted by the lessee.

TYPES OF LEASE

1. FINANCIAL LEASE
A financial lease is also known as Capital lease, long-term lease, net lease and close lease.
In a financial lease, the lessee selects the equipment, settles the price and terms of sale
and arranges with a lease company to buy it. He enters into an irrevocable and non-
cancellable contractual agreement with the leasing company. The lessee uses the
equipment exclusively, maintains it, insures and avails the after-sales service and
warranty backing it. He also bears the risk of obsolescence as it stands committed to pay
the rental for the entire lease period.

The financial lease could also be with purchase option, where at the end of the
predetermined period, the lessee has the option to buy the equipment at a predetermined
value or at a nominal value or at fair market price. The financial lease may also contain a
non-cancellable clause which means that the lessor transfers the title to the lessee at the
end of lease period.

2. OPERATING LEASE
An operating lease is also known as service lease, short-term lease or true lease. In this
lease, the contractual period between lessor and lessee is less than the full expected
economic life of equipment. This means that the lease for a limited period, may be a
month, 6 months, a year or few years. The lease terminable by giving stipulated notice as
per the agreement. Normally, the lease rentals will be higher as compared to other leases
on account of short period of primary lease. The risk of obsolescence is enforced on the
lessor who will also bear the cost of maintenance and other relevant expenditure. The

56
 lessor also does the services like handling warranty claims, paying taxes, scheduling and
performing maintenance and keeping complete records lease suitable for:
1. Computers, copy machines and other office equipments, vehicles, material
handling equipments, etc which are sensitive to obsolescence and
2. When the lessee is interested in tiding over temporary problem.

Difference between Financial Lease and Operating Lease

Financial Lease Operating Lease

A financial lease is like an instalment loan. It An operating lease is a rental agreement. The
is a legal commitment to pay for the entire lessee is not committed to paying more than
cost of the equipment plus interest over a the original cost of equipment during
specified period of time. The lessee commits contractual period
to a series of payment which in total exceed
the cost of the equipment
It excludes provisons for maintenance or Operating lease provides for maintenance
taxes which are paid separately by the lessee. expenses and taxes of the lessor.
The risk of obsolescence is assumed by the Leasing company assumes risk of
lessee obsolescence
Contract period ranges from medium to long Contract period ranges from intermediate to
term short term.
Contracts are usually non-cancellable Contracts are usually cancellable either by
the lessor or by the lessee
Aircrafts, land and building, heavy Computers, office equipments, automobiles,
machinery are leased truck, etc are leased.
The lease involves a financial commitment The financial commitment is restricted to
similar to a loan by a leasing company. It regular rental payment. The rentals find a
places the lessee in a position of borrow place in the P&L account of the lessee
The lessor fulfils financial function The lessor fulfils the service function

3. LEVERAGE LEASE

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A leverage lease is used for financing those assets which require huge capital outlay. The
outlay for purchase cost of the asset generally varies from Rs 50 lakh to Rs 2 crore and has
economic life of 10 years or more. The leverage lease agreement involves three parties- the
lessee, the lessor and the lender. The lessor acquires the assets as per the terms of the lease
agreement but finances only a part of the total investment, say 20 per cent to 50 per cent. The
balance is provided by a person or group of person in the form of loan to the lessor. The loan
is generally secured by mortgage of the asset besides assignment of the leased rental
payments. In leveraged lease, a wide range of equipments such as railroad, rolling stock, coal
mining, electricity generating plants, pipelines, ships, etc are required.

4. SALE AND LEASE BACK

Under this type of lease, a firm which has an asset sells it to the leasing company and gets it
back on lease. The asset is generally sold at its market value. The firm receives the sales price
in cash and gets the right to use the asset during the lease period. The firms make periodical
rental payment to the lessor. The title to the assets vests with the lessor. Most of the lease
back agreements are on a net-to-net basis which means that the lessee pays all the
maintenance expenses, property taxes and insurance. In some cases, the lessee agreement
allows the lessee to repurchase the property at the termination of lease.

The sale and lease back agreement is beneficial to both lessor and lessee. The lessor gets
immediate cash which becomes available for working capital or for further expansion and
lessor gets tax benefits. Retail stores, official buildings, multipurpose industrial building and
shopping centres are financed under this method.

5. CROSS-BORDER LEASE

Cross-border lease is international leasing and is known as transnational leasing. It relates to

a lease transaction between a lessor and the lessee domiciled in different countries and
includes exports leasing. In other words, the lessor may be of one country and the lessee may
be of another country. To illustrate, if a leasing company is USA makes available an air bus
on lease to air India, there would be a cross-border lease.

6. WET LEASE AND DRY LEASE

58
A wet lease is one where the lessor is responsible for full control and maintenance of leased
asset. For instance, the jet airways has entered into a wet lease agreement with Oman
Airways for two air buses for 6 months from may 2009.

On the other hand, a dry lease involves the payment of insurance and maintenance costs by
the lessee.

7. VENDOR LEASING

A vendor leasing is one where the retail vendors tie up with the lease finance companies
which give financing option to the customers of the vendors to purchase a product. This type
of lease is popular in auto finance.

Advantages of leasing

The following are the advantages of leasing

1. Permit alternative use of funds: A leasing arrangements provides a firm with the
use and control over asset without incurring huge capital expenditure. The firm is
required only to make periodical rental payments. It saves considerable funds for
alternative uses which would otherwise be tied up in fixed capital
2. Faster and cheaper credit: Depending on tax structure of the lessee, it costs less
than other methods of acquiring assets. It permits firms to acquire new equipment
without going through formal scrutiny procedure. Hence, acquisition of assets under
leasing agreement is cheaper and faster than any other source of finance.
3. Flexibility: Leasing arrangements may be tailored to the lessee’s needs more easily
the ordinary financing. Lease rentals can be structured to match the lessee’s cash
flows. It can be skipped during the months when the cash flows are expected to be
low.
4. Facilities additional borrowings: Leasing may increase long-term ability to acquire
funds. The lessee can utilize more funds for working capital needs. Moreover,
acquisition of assets under the lease agreement does not alter debt-equity ratio. Hence,
the lessee can go for additional borrowings in case need arise.

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 5. Protection against obsolescence: A firm can avoid risk of obsolescence by entering
into operating lease agreement. This is highly useful in respect of assets which
become obsolete at a faster rate.
6. No restrictive covenants: The restrictive covenants such as debt-equity ratio,
declaration of dividend, etc., which are usually imposed under debenture or loan
agreement are absolutely absent in a lease agreement.
7. Hundred per cent financing: Lease financing enables a firm to acquire the use of an
asset without having to make a down payment. So, hundred per cent financing is
assured to the lessee.
8. Boon to small firm: The firms which are either small or have uncertain records of
earning are able to obtain the use of asset through lease financing. It is a boon to small
firms and technocrats who are able to make promoter’s contribution as required by
financial institutions.

Disadvantages of Leasing

1. Lease is not suitable mode of project finance. This is because rentals are repayable
soon after entering into lease agreement while in new projects cash generations may
start only after a long gestation period.
2. Certain tax benefits/incentives such as subsidy may not be available on leased
equipment.
3. The value of real assets such as subsidy may not be available on leased equipment.
4. The cost of financing is generally higher than that of debt financing.
5. A manufacturer who wants to discontinue a particular line of business will be not in a
position to terminate the contract except by paying heavy penalties. If it is a owned
asset, the manufacturer can sell the equipment at his will.
6. If the lessee is not able to pay rentals regularly, the lessor would suffer a loss
particularly the lessee. Hence, the lessee by himself is not entitled to any protection in
case the supplier commits breach of warranties in respect of the leased assets.
7. In the absence of exclusive laws dealing with the lease transaction, several problems
crop up between lessor and lessee resulting in unnecessary complications and
avoidable tension.

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STRUCTURE OF LEASING COMPANY

The present structure of leasing industry in India consists of:

1. Private sector Leasing and

2. Public Sector Leasing.

The private sector leasing consists of:

1. Pure Leasing Companies,

2. Hire Purchase and Finance Companies, and
3. Subsidiaries of Manufacturing Group Companies.

The public sector leasing organizations are divided into:

1. Leasing Divisions of Financial Institutions,

2. Subsidiaries of Public Sector Banks, and
3. Other Public Sector Leasing Organizations.

Private Sector Leasing

(i) Pure Leasing Companies: These companies operate independently without any
link or association with any other organization or group of organization. The First
Leasing Company of India Limited. The Twentieth Century Finance Corporation
Limited, and the Grover Leasing Limited, falls under this category.
(ii) Hire purchase and finance companies: The companies started prior to 1980 to do
hire purchase and finance business especially for vehicles added leasing to their
activities during 1980. Some of them do leasing as major activity and some others
do leasing on a small scale as a tax planning device. Sundaram Finance Limited
and Motor and General Finance Limited belong to this group.
(iii) Subsidiaries of manufacturing group companies: These companies consist of two
categories,
(a) Vendor leasing.
(b) In-house leasing.
(a) Vendor Leasing: These types of companies are formed to boost and
promote the sale of its parent companies products through offering leasing
facilities.

61
 (b) In-house leasing: In-house leasing or capture leasing companies are set up
to meet the fund requirements or to avoid the income tax liabilities of the
group companies.

PUBLIC SECTOR LEASING

(i) Financial institution: the financial institutions such as IFCI, ICIC, IRBI and NSIC
have set up their leasing divisions or subsidiaries to do leasing business. The
shipping credit and investment company of India offers leasing facilities in
foreign currencies for ships, deep seas’ fishing vehicles and related equipments to
its clients.
(ii) Subsidiaries of banks: The commercials\ bank in India can, under Section 19(1) of
the Banking Regulation Act, 1949, set up subsidiaries for undertaking leasing
activities. The SBI was the first bank to start a subsidiary for leasing business in
1986.

Leasing in SBI is transacted through Strategic Business Unit (SBU) of the bank.
Each SBU is manned but specially trained staff and is equipped with the latest
technological aids to meet the needs of top corporate clients. For the bank as a
whole, leasing is considered as a meet the needs of top corporate clients. For the
bank as a whole, leasing is considered as a high growth area. Now, the bank as a
whole, leasing is considered as a high growth area. Now, the bank is concentrating
only on ‘Big Ticket Leasing’ which is generally of 5 crore and above. So far, SBI
has disbursed more than 300 crore by way of leasing with the average size of deal
being 25 crore.

(iii) Other public sector organizations: A few public sector manufacturing companies
such as Bharat Electronics Limited, Hindustan Packaging Company Limited and
Electronic Corporation of India Limited have started to sell their equipment
through leasing.

DIFFERENCE BETWEEN HIRE PURCHASE AND LEASING

Basis Leasing Hire Purchase

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

62
 arrangement, whereby an equipment owner instalment credit under which
or manufacturer conveys to the equipment the hire purchaser agrees to
user the right to use the equipment in return take the goods on hire at a
for a rental stated rental, which is
inclusive of the repayment of
principal as well as interest,
with an option to purchase.
Asset No option is provided to the lessee(user) to Option is provided to the
purchase purchase the goods hirer(user)
option
Nature of Lease rentals paid by the lessee are entirely Only interest element
expenditure revenue expenditure of the lessee included in the HP
instalments is revenue
expenditure by nature
Claiming of Lessee cannot claim depreciation Hirer is although not the
Depreciation owner of the asset, for tax
purpose, he can claim
depreciation on the asset
Income Tax Entire lease rentals is tax deductable Only interest component of
treatment hire purchase instalments is
tax deductable

VI. HOUSING FINANCE COMPANY

Housing finance company is a company which carries on, as its principal business, the
business of financing of acquisition or construction of houses, including acquisition or
development of land in connection therewith.

RISK IN HOUSING FINANCE

Till recently, housing finance was considered to be a risky venture from the point of view of
financial institutions due to the following reasons:

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 1. Large investment
2. Long term Advance
3. High Inflation Rate
4. High stamp Duty
5. Defective Title
6. High Delinquency Rate
7. Keen competition.

REASONS FOR THE POPULARITY OF HOUSING FINANCE

1. The corporate borrowers have started accessing the capital market for their financial
requirements leaving surplus cash in the hands of bankers to lend to other sectors.
2. There is greater risk of lending to industries on account of recession.
3. The entry of foreign player with innovative retail financial products has compelled the
Indian players also to enter into the retail finance field on large scale.
4. The development banks like IDBI and ICICI have been converted into commercial banks
which has made the competition very tense and all banks via with one another in
attracting more and more customers by offering varieties of retail finance products.
5. There is an increase in the middle income group people in recent years. Again more
families are found to be dual income families having a sizable disposable income at their
hands.
6. One can also witness a shift in the attitude of the people i.e.; instead of having an attitude
of ‘save and buy’ they have the attitude of ‘buy and repay’.
7. Again low cost construction techniques have been developed motivating people to go for
their own house on a larger scale.
8. The interest rates on housing loans have been considerably reduced from 16 per cent to
18 per cent slab 8 per cent to 9 percent slab. Some of the bank charges even below their
prime lending rates so as to motivate people to avail of housing loans on easy terms. This
has considerably improved the borrower’s ability to repay.
9. Similarly, the period for the loans has expanded from 5 to 7 years period to 20 to 30 years
period.
10. The government has also taken some initiatives to popularize housing loans such as:
(a) Giving tax relief for housing loans.
(b) Repealing of land ceiling act in 199 to provide houses to weak and low income group.
11. The RBI has also taken the following initiatives to make housing loans proper:

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 (a) Bringing housing loans under priority sector advances.
(b) Reducing the rest weightage from 100 per cent to 50 per cent for loans granted for
acquiring residential houses.
(c) Deregulating the interest rates giving much freedom to lending institutions price their
housing loan products according to their discretion.
(d) Reducing the CRR and SLR so that the lending capacity of financial institutions may
increase with an improvement in their liquidity position.
12. Diversification of risk is possible by spreading the risk over a large number of borrowers
which is not possible under wholesale lending.

HOUSING FINANCIAL PRODUCTS

Easy access at affordable rates has accelerated the tempo of housing activities in recent times.
Different financial products have been introduced to cater to the vast housing requirements of
varied people. Housing rooms are given not only for construction, but also for extension,
improvements etc. loans are given for furnishing houses and also for paying stamp duties.
Banks have come forward to waive the processing fees. Housing loans are sanctioned for
family planning clinics, health centers, educational, social, cultural and other institutions also.
Shopping centers in residential areas can also avail housing loan facilities.

Generally, the following financial products are available in the housing market.

1. Housing loan for purchase of homes: This product is available purely for the
purpose of either houses or flats or existing ones.
2. House construction loan: This product is available only for the construction of new
house.
3. Home extension loan: This is available purely for expanding an already existing
home.
4. Home improvement loan: This is granted for renovating an existing house.
5. Flexible repayment loan: This type of housing loan permits the borrower to fix the
repayment schedule as per his option.
6. Flexible loan installment plan: Under this type of housing loan, the borrower can
decide the amount of installment to be paid according to his discretion on the basis of
his future earrings.

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 7. Home transfer or conversion loan: This product is available for those who have
already availed of housing loans and want to move to another house for which
additional funds are required. Under this type, the existing housing loan is transferred
to the new housing loan amount without the necessity of settling the previous loan
account.
8. Home furnishing loan: this product is available to furnish a house fully.
9. Housing repayment or refinance loan: This loan is available to redeem the prior
debts incurred for the purchase of home from friends, relatives and other private
sources.
10. Housing loan transfer plan: This is available to pay off an existing housing loan
with higher interest rate and enjoy a new loan with lower rate of interest.
11. Bridge loan for housing: this product is available to those who wish to sell their old
homes and purchase another. This loan is available for the new home until a suitable
buyer is found for the old home.

VII. VENTURE CAPITAL FUNDS

Venture capital is a long term risk capital to finance high technology projects which involve
risk but at the time has strong potential for growth. Venture Capitalists pool their resources
including managerial abilities to assist new entrepreneurs in the early years of the project.
Once the project reaches the stage of profitability, they sell their equity holdings at a high
premium.

DEFINITION OF A VENTURE CAPITAL COMAPANY

A venture capital company is defined as ‘a financing institution which joins an entrepreneur

as a co-promoter in a project and shares the risks and rewards of the enterprise

FEATURES OF VENTURE CAPITAL

Some of the features of venture capital financing are as under:

1. Venture capital is usually in the form of equity participation. It may also take the form of
convertible debt or long-term loan.

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2. Investment is made only in high risk but high growth potential project.
3. Venture capital is available only for commercialisation of new ideas or new technology
and not for enterprises which are engaged in trading, booking, financial services, agency,
liaison work or research and development.
4. Venture capitalist joins the entrepreneur as a co-promoter in projects and shares the risks
and rewards of the enterprise.
5. There is continuous involvement in business after making an investment by the investor
6. Once the venture has reached the full potential, the venture capitalist disinvests his
holdings either to the promoter or in the market. The basic objective of investment is not
profit but capital appreciation at the time of the disinvestment.
7. Venture capital is not just injection of money but also an input needed to set up the firm,
design its marketing strategy and organize and manage it.
8. Investment is usually made in small – and medium – scale enterprises.

SCOPE OF VENTURE CAPITAL FUNDS

1. Development of an Idea- Seed capital:

In this initial stage capitalist provide seed capital for translating an idea into business
proposition. At this stage investigation is made in-depth which normally takes a year or
more.
2. Implementation stage-start up finance:
When the firm is set up to manufacture a product or provide a service, start up finance
provide by the venture capitalist.
3. Fledging stage-Additional finance:
The firm has made headway and entered the stage of manufacturing a product but faces
teething problems.
4. Establishment stage-establishment finance:
At this stage the firm is established in the market and expected to expand at rapid pace

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IMPORTANCE OF VENTURE CAPITAL / ADVANTAGES

1. ADVANTAGES TO INVESTING PUBLIC

• The investing public will be able to reduce risk significantly against unethical
management, if the public invest in venture fund who in turn will invest in equity of
new business. With their expertise in the field and continuous involvement in the
business, they would be able to stop malpractices by management.
• Investors have means to vouch for the reasonableness of the claims made by the
promoters about profitability of the business. The venture funds equipped with
necessary skills will be able to analyze the prospects of the business.
• The investors do not have any means to ensure that the affairs of the business are
conducted prudently. The venture fund having representatives on the board of
directors of the company would overcome it.

2. ADVANTAGES TO PROMOTERS
• Venture capital provides a solid capital base for future growth by injecting long- term
equity financing.
• Public issue of equity shares has to be preceded by a lot of efforts namely necessary
statutory sanctions, underwriting and brokers arrangement, publicity of issue, etc. the
new entrepreneurs find it very difficult to make underwriting arrangements which
require a great deal of efforts. Venture fund assistance would eliminate those efforts
by leaving entrepreneur to concentrate upon the activities of the business.
• Costs of public issues of equity share often range from 10% to 15% of nominal value
of issue of moderate size, which are often even higher for small issues. These
expenses can be ill-afforded by the business when it is new. Assistance from venture
funds does not require such expenditure.

Business partners: The venture capitalist act as business partners who share the rewards as
well as the risks.

Mentoring: Venture capitalist provide strategic, operational, tactical and financial advice
based on past experience with other companies in similar situations.

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Alliances: the venture capitalists helps in recruitment of key personnel, improving
relationship with international markets, co-investment with other VC firms and decision
making.

3. GENERAL
• A developed venture capital institutional set-up reduces the time-lag between a
technological innovation and its commercial exploitation.
• It helps in developing new process, products in conducive atmosphere, free from the
dead-weight of corporate bureaucracy, which helps in exploiting full potential.
• Venture capital acts as a cushion to support business borrowings, as bankers and
investors will not lend money with inadequate margin of equity capital
• Once venture capital funds start earning profits, it will be very easy for them to raise
resources from primary capital market in the form of equity and debts. Therefore, the
investors would be able to invest in new business through venture funds and at the
same time they can directly invest in existing business when venture fund disposes its
own holding.
• The economy with well-developed venture capital network induces the entry of large
number of technocrats in industry, helps in stabilizing industries and in creating a new
set of trained technocrats to build and manage medium and large industries, resulting
in faster industrial development.
• A venture capital firm serves as an intermediary between investors looking for high
returns for their money and entrepreneurs in search of needed capital for their start-
ups.
• It also paves the way for private sector to share the responsibility with public sector.

METHODS OF VENTURE FINANCING

Venture capital is available in four forms in India:

1. Equity participation
2. Conventional loan
3. Conditional loan
4. Income notes

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 1. EQUITY PARTICIAPATION: The venture capital firms participate in equity through
direct purchase of shares but their stake does not exceed 49 per cent. These shares are
retained by them till the assisted projects make profit. These shares are sold either to the
promoter at negotiated price under buyback agreement or to the public in the secondary
market at a profit.
2. CONVENTIONAL LOAN: Under this form of assistance, a lower fixed rate of interest is
charged till the assisted units become commercially operational, after which the loan
carries normal or higher rate of interest. The loan has to be repayed according to a
predetermined schedule of repayment as terms of loan agreement.
3. CONDITIONAL LOAN: Under this form of finance, as interest – free loan is provided
during the implementation period but it has to pay royalty on sales. The loan has to be
repaid according to a predetermined schedule as soon as the company is able to generate
sales and income.
4. INCOME NOTES: It is a combination of conventional and conditional loans. Both
interest and royalty are payable at much lower rates than in case of conditional loans.

VIII. FACTORING

It is a financial intermediary that purchases receivables from a company. A factor is

essentially a funding source that agrees to pay the company the value of the invoice less a
discount for commission and fees. The factor advances most of the invoiced amount to the
company immediately and the balance upon receipt of funds from the invoiced party.
Factoring is a financial transaction whereby a business sells its accounts receivable
(i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate
money with which to finance continued business.

A study group appointed INTERNATIONAL INSTITUTE for the Unification of Private Law
(UNIDROIT) ROME 1988 defines:-
“Factoring means an arrangement between a factor and his client which includes at least two
of the following services to be provided by the factor-
• Finance
• Maintenance of accounts
• Collection of debts

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 • Protection against credit risk

Why a firm uses factoring

• Factoring is used by a firm when the available Cash Balance held by the firm is
insufficient to meet current obligations and accommodate its other cash needs, such as
new orders or contracts

Parties involved in factoring

1. Client
2. Customer
3. Factor
4. Buyer Seller Financer buys invoices collection

Services offered by a factor

• Follow-up and collection of Receivables from Clients.
• Purchase of Receivables with or without recourse.
• Help in getting information and credit line on customers (credit protection)
• Sorting out disputes, due to his relationship with Buyer & Seller.

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.

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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 up to 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 honored 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.

Charges for factoring services

• Factor charges Commission (as a flat percentage of value of Debts purchased) (0. 5 0% to
1. 5 0%)
• Commission is collected up-front.
• For making immediate part payment, interest charged. Interest is higher than rate of
interest charged on Working Capital Finance by Banks.
• If interest is charged up-front, it is called discount.

FUNTIONS OF FACTORING

As stated earlier, the term ‘factoring’ simply refers to the process of selling trade debts of a
company to a financial institution. But, in practice, it is more than that. Factoring involves the
following functions.

1. Purchase and collection of debts

2. Sales ledger management
3. Credit investigation and undertaking of credits risk
4. Provision of finance against debts, and

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 5. Rendering consultancy services
1. Purchase and collection of debts: Factoring envisages the sale of trade debts to the
factor by the company, i.e., the client. It is where factoring differs from discounting.
Under discounting, the financier simply discounts the debts backed by account
receivables of client. He does so as an agent of the client. But, under factoring, the factor
purchases the entire trade debts and thus, he becomes a holder for value and not an agent.
Once the debts are purchased by the factor, collection of those debts becomes his duty
automatically.
2. Sales Ledger Management: This function is an important one in factoring. Once the
factoring relationship is established, it becomes the factors responsibility to take care of
all the functions relating to the maintenance of sales ledger. The factor has to credit the
customer’s account whenever payment is received, send monthly statements to the
customers and to maintain liaison with the client and the customer to resolve all possible
disputes. He has to inform the client about the balances in the account, the overdue
period, the financial standing of the customers, etc. Thus, the factor takes up the work of
monthly sales analysis, overdue invoice analysis and credit analysis.
3. Credit investigation and undertaking of credit risk: The factor has to monitor the
financial position of the customer carefully, since; he assumes the risk of default in
payment by customers due to their financial inability to pay. This assumption of credit
risk is one of the most important functions which the factor accepts. Hence, before
accepting the risk, he must be fully aware of the financial viability of the customer, his
past financial performance record, his future ability, his honesty and integrity in the
business world, etc. For this purpose, the factor also undertakes credit investigation work.
4. Provision of finance: After the finalization of the agreement and sale of goods by the
client, the factor provides 80% of the credit sales as prepayment to the client. Hence, the
client can go ahead with his business plans or production schedule without any
interruption. This payment is generally made without any recourse to the client. That is,
in the event of non-payment, the factor has to bear the loss of payment.
5. Rendering consultancy services: Apart from the above services, the factor also provides
management services to the client. He informs the client about the additional business
opportunities available, the changing business and financial profiles of the customers, the
likelihood of approaching recession, etc.

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TYPES OF FACTORING

The type of factoring services varies on the basis of the nature of transaction between the
client and the factor, the nature and volume of client’s business, the nature of factor’s
security, etc. In general, the factoring services can be classified as follows,

1. Full service factoring or without recourse factoring

2. With recourse factoring
3. Maturity factoring
4. Bulk factoring
5. Invoice factoring
6. Agency factoring
7. International factoring
8. Suppliers guarantee factoring
9. Limited factoring
10. Buyer based factoring
11. Seller based factoring

1. Full service factoring or without recourse factoring

Under this type, a factor provides all kinds of services discussed above. Thus a factor
provides finance, administers, the sales ledger, collects the debts at his risk and renders
consultancy services. This type of factoring is a standard one. If the debtors fail o repays
the debts, the entire responsibility falls on the shoulders of the factor since he assumes the
credit risk also. He cannot pass on this responsibility to his clients and, hence, this type of
factoring is also called without recourse factoring.
2. With recourse factoring
As the very name suggests, under this type, the factor doses not assume the credit risk. In
other words, if the debtors do not repay their dues in time and if their debts are
outstanding beyond a fixed period say 60 or 90 days from the due date, such debts are
automatically assigned back to the client. The client has to take up the work of collection
of overdue account himself. If the client wants the factor to go on with the collection
work of overdue accounts, the client has to pay extra charge called ‘refactoring charges’
3. Maturity factoring
Under this type, the factor does not provide immediate cash payment to the client at the
time of assigned of debts. He undertakes to pay cash as and when collections are made

74
 from the debtors. The entire amount collected less factoring fees is paid to the client
immediately. Hence, it is also called ‘collection factoring’. In fact, under this type, no
finance is involves. But all other services are available.
4. Bulk factoring
Under this type, the factor provides finance after disclosing the fact of assignment of
debts to the debtor concerned. This type of factoring is resorted to when the factor is not
fully satisfied with the financial condition of the client. The work relating to sales ledger
administration, credit control, collection work, etc. has to be done by the client himself.
Since the notification has been made, the factor simply collects the debts on behalf of
client. This is otherwise called ‘disclosed factoring’ or ‘notified factoring’.
5. Invoice factoring
Under this type, the factor simply provides finance against invoices without undertaking
any other functions. All work connected with sales administration, collection of dues, etc.
has done by the client himself. The debtors are not at all notified and hence they are not
aware of the financing arrangement. This type of factoring is very confidential in nature
and hence it is called ‘confidential invoice discounting’ or undisclosed factoring’.
6. Agency factoring
The word agency has no meaning as far as factoring is concerned. Under this type, the
factor and the client share the work between themselves as follows:
a) The client has to look after the sales ledger administration and collection work, and.
b) The factor has to provide finance and assume the credit risk.
7. International factoring
Under this type, the services of a factor in a domestic business are simply extended to
international business. Factoring is done purely on the basis of the invoice prepared by
the exporter. Thus, the exporter is able to get immediate cash to the extent of 80 per cent
of the export invoice under international factoring. International factoring is facilitated
with the help of export factors and import factors.
8. Suppliers guarantee factoring
This type of factoring is suitable for business establishments which sell goods through
middlemen. Generally, goods are sold through wholesalers, retailers or through
middlemen. In such cases, the factor guarantees the supplier of goods against invoices
raised by the supplier upon another supplier. The bills are assigned in favor of the factor
who guarantees payment of those bills. This enables the suppliers to earn profits without
much financial involvement.
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9. Limited factoring
Under this type, the factor does not take up all the invoice of a client. He discounts only
selected invoices on merit basis and converts credit bills into cash in respect of those bills
only.
10. Buyer based factoring
In most cases, the factor is acting as an agent of the seller. But under this type, the buyer
approaches a factor to discount his bills. Thus, the initiative for factoring comes from the
buyers end. The approved buyers of a company approach a factor for discounting their
bills to the company in question. In such cases, the claims on such buyers are paid by
discounting the bills without recourse to the seller and the seller also gets ready cash. This
facility is available only to reputed creditworthy buyers and hence it is also called
‘selected buyer based factoring’.
11. Seller based factoring
Under this type, the seller, instead of discounting his bills, sells all his accounts
receivables to the factor, after invoicing the customers. The seller’s job is over as soon as
he prepares the invoices. Thereafter, all the documents connected with the sales are
handed over to the factor who takes over the remaining functions. This facility is
extended to reputed and creditworthy sellers and hence it is also called ‘selected seller
based factoring’.

BENEFITS OF FACTORING

1. Financial service
2. Collection service
3. Credit risk service
4. Provision of expertise ‘Sales Ledger Management’
5. Consultancy service
6. Economy in servicing
7. Trade benefits

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 CHAPTER 3

SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

MALPRATICES IN SECURITIES MARKET

With the growth of securities market, the number of malpractices also increased in both the
primary and secondary markets. The malpractices were noticed in the case of companies,
merchant bankers and brokers who are all operating in the market.

A few examples of malpractices are as follows:

1. Manipulation of security prices: companies issuing securities, often, artificially push

up the prices before the issue of securities. This process starts well before a company
seeks permission from the government for the issue of further capital. It is not only an
attempt to get a higher premium on the basis of manipulated prices but also to lure
investors to subscribe to these further issues.
2. Price rigging: a common way of pushing up the prices is to resort to circular trading –
three or four parties buy and sell stocks among themselves and push the prices up.
3. Insider trading: insider trading by agents of companies or brokers caused wide
fluctuations in the prices of securities. Many companies have intricate network of
brokers, their clients, friends and associates. The insiders who are privy to price –
sensitive information use such information to their advantage and build –up large
fortunes.
4. Delay in settlement: this delay in noticed in giving delivery of shares, making
payments to clients and passing contract notes.
5. Delay in listing: delay in listing and commencement of trading in shares was also
prevalent.

DEFICIENCIES IN THE MARKET

Besides the Indian stock market is said to be deficient in the following respects:

1. Lack of diversity in financial instruments: lack of variety in the financial instruments

available is one of the defects of the stock market. Equity shares and convertible

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 debentures seem to be the only instruments in the armoury of companies. Preference
shares, rights debenture, etc., are not issued by the companies.
2. Disclosure of financial information: the efficiency of the capital market depends upon
the availability of reliable and complete information about the issues and companies.
The prospectus issued by a company does not contain adequate and relevant
information to enable investors to take correct investment decisions. Sometimes, the
information given is misleading and deceptive. Further, the brochures and pamphlets
and advertisements issued at the time of public issue tend to prevent a biased profile
of the company.
3. Preponderance of speculative trading: a major portion of transactions in stock market
are done by speculative motive. The main motive is o derive benefit from short term
price fluctuations. Only a very small fraction of transactions represent purchase/sale
by genuine investors.
4. Poor liquidity: The Indian stock market suffers from poor liquidity. Only a small
portion of shares are actively traded and highly liquid. Most shares are traded
infrequently and hence lack liquidity.
5. Lack of control over brokers: lack of control over the activities of brokers and jobbers
is another deficiency of capital market. Significantly, few people are able to cause
fluctuations in the market activity. Besides, many of them lack high professional
standards.

INTRODUCTION TO SEBI

SEBI was set as a non statutory body on 12th April, 1988. It got its statutory power in the year
1992.

OBJECTIVES OF SEBI

1. To protect the interest of investors to ensure steady flow of savings into capital market
2. To regulate securities market and ensure fair practices by issuers of securities
3. To promote efficient services by brokers, merchant bankers and intermediaries to become
competitive and professional.

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FUNCTIONS OF SEBI

1. Regulatory functions:
a) Regulation of stock exchange and self regulatory organisation.
b) Registration and regulation of stock brokers, sub brokers, merchant bankers,
underwriters, port folio managers etc
c) Prohibition of insider trading in securities
d) Regulating substantial acquisition of shares and takeover of companies.
e) Prohibition of fraudulent and unfair trade practices relating to securities market.
2. Development functions

a) Promote investors education

b) Training of intermediaries
c) Conducting research and published information useful to all market participants
d) Promotion of fair practices. code of conduct for self regulatory organisations
e) Promoting self regulatory organisations
f) Information and Research functions: collects and disseminates information and
conducts research in this field.
g) Supervision of Banks: It has the extensive power of supervision and control over
commercial and cooperative banks. It has power to call for information and give
directions to them.
h) Monetary data and publications: it is the main source of information about
monetary data and Banking system.
i) Promotional functions: It has been performing a variety of promotional functions
towards building and strengthening of financial infrastructure by promoting
commercial, co operative, industrial and agriculture banks and also promotion of
finance of exports.

POWERS OF SEBI

1. Power to call for periodical returns from recognised stock exchange

2. Power to call for any information or explanation from recognised stock exchanges
3. Power to direct enquiries to be made in relation to affairs of stock exchanges or their
members

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 4. Power to grant approval to bye laws of recognised stock exchange
5. Power to make or amend bye laws of recognised stock exchange
6. Power to compel listing of securities by public companies
7. Power to control and regulate stock exchanges
8. Power to grant registration to market intermediaries
9. Power to levy fees.

ORGANISATION OF SEBI

It consists of six members. The chairman and 2 members are to be appointed by central
government and one member by RBI and 2 members having experience in stock market to be
appointed by central government. Apart from Central Board of Directors, four Local Boards
are constituted representing each area at Mumbai, Kolkata, Chennai and New Delhi
consisting of different departments such as:
• Issue Department which issues currencies
• Banking Development helps to develop banking in all areas
• Banking operation helps in controlling, supervising and regulating working of
banking functions and also helps in granting licences to open new branches
• Non Banking Companies: Supervises the functioning of NBFCs

SEBI is divided into 4 operational departments:

1. Primary market department: deal with policies and regulatory issues relating to
primary market
2. Issue management and intermediaries department: regulation and monitoring of issues
relating to intermediaries and registrations
3. Secondary market department: it looks after all policies and regulatory issues for
secondary market.
4. Institutional investment department: is concerned with framing policies for FII, MFs
and takes care of publications and membership in international organisations.

Other departments

• Legal Affairs: provides legal advice on legal issues.

• Exchange Control: deals with sale & purchase of Forex
• Agriculture credit

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 • Industrial Finance
• Economics Department to frame banking policies
• Research Statistics: Collection of details relating to money, credit, production etc.
• Banking department keeps the RF of Commercial banks and assistance to FIs
• Inspection department: inspects local offices of commercial banks
• Planning and reorganisation: formulates new policies and plans
• RBI services board deals in recruitment, selection
• Accounts and Expenditure maintains the receipts and expenses.
• Supervision: supervising commercial banks
• Control department: controls the affairs
• External investments and operations
• Press relations
• Industrial Export credit.

SEBI GUIDELINES

SEBI has bought out a number of guidelines separately from time – to – time, for primary
market, secondary market, mutual funds, merchant bankers, foreign institution investors,
investor protection etc . The guidelines are described below.

1. Guidelines for Primary Market

New company: A new company is one (a) which has not completed 12 months commercial
production and does not have audited results and (b) where the promoters do not have a track
record. These companies will have to issue shares only at par.

New company set up by existing company: when a new company is being set up by
existing companies with a five-year track record of consistent profitability and a contribution
of at least 50% in the equity of new company, it will be free to price its issue. i.e., it can issue
its share at premium.

Private and closely held companies: The private and closely held companies having a track
record of consistent profitability for at least three years shall be permitted to price their issues
freely. The issue price shall be determined only by the issues in consultation with lead
managers to the issue.

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Existing listed companies: the existing listed companies will be allowed to raise fresh
capital by freely pricing expanded capital provided the promoters contribution is 50% on first
Rs 100 crore of issue, 40% on next Rs 200 crore, 30%on next Rs 300 crore and 15% on
balance issue amount.

Reservation of issues

Reservation under public subscription for various categories of persons are made in the
following manner:

1. Permanent employees-10%
2. Indian mutual funds-20%
3. Foreign institutional investors-15%
4. Development financial institutions-20%
5. Shareholders of group of companies-10%

Composite issues

In the case of composite issue, i.e., right-cum-public issue by existing listed companies,
differential pricing shall be allowed. In other words, issue to the public can be priced
differentially as compared to issue to rights shareholders. However, justification for the price
difference should be given in the offer document.

Lock – in –period

Lock-in period is 5 years for promoter’s contribution from the date allotment or from the
commencement of commercial production whichever is late. At present, the lock-in period
has been reduced to one year.

GUIDELINES FOR PUBLIC ISSUE:

1. Abridged prospectus has to be attached with heavy application.

2. As company has to highlight the risk factors in the prospectus.
3. Objective of the issue and cost of project should be mentioned in the prospectus.
4. Company’s management, passed history and present business of the firm should be
highlighted in the prospectus.

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5. Particulars with regard to company and other listed companies under the same
management which made any capital issues during the last three years are to be stated
in the prospectus.
6. Justification for premium in the case of premium is to be stated.
7. Subscription list for public issues should be kept open for a minimum of three days
and a maximum of ten working days.
8. The collection centres should be at least thirty which include all centres with stock
exchanges.
9. Collection agents are not to collect application money in cash.
10. The quantum of issue, whether through a rights or public issue, shall not exceed the
amount specified in the prospectus. No retention of over subscription is permissible
under any circumstances.
11. A compliance report in the prescribed form should be submitted to SEBI within 45
days from the date of closure of issue.
12. Minimum number of shares per applications has been fixed at 500 shares of face
value of Rs.100.
13. The allotments have to be made in multiples of tradable lot of hundred shares of
Rs.10 each.
14. Issues by way of bonus, rights, etc., to be made in appropriate lots to minimize odd
lots.
15. If minimum subscription of 90% has not been received, the entire amount is to be
refunded to investors within 120 days.
16. The capital issue should be fully paid up within 120 days.
17. Underwriting has been made mandatory.
18. Limit of listing of companies issue in the stock exchange has been increased from
Rs.3 crore to Rs.5 crore.
19. The gap between the closure dates of various issue, viz., rights and public should not
exceed 3o days.
20. Issues should make adequate disclosure regarding the terms and conditions of
redemption, security conversion and other relevant features of the new instrument so
that an investor can make a reasonable determination of risks, returns, safety and
liquidity o instrument. The disclosure shall be vetted by SEBI in this regard.
21. SEBI has made grading of all IPO mandatory for which draft documents are filed
with it after April 30, 2007.
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It shall be mandatory to obtain grading from at least one credit rating agency.

The issues shall be required to disclose all grades obtained by it in the prospectus , abridged
prospectus , issue advertisements and other places where the issues is advertising for the IPO,
EBI has announced on august 5 , 2008 that am alternate payment mode would ensure that the
funds of retail investors are no locked until the actual allotment of shares . on September 10 ,
2008 , five banks have agreed to debit application money only when it is required and not 21
days in advance and the registrar to give instruction to block the amount only when it was
required .

2. Secondary Market

STOCK EXCHANGE

1. Board of directors of stock exchange has to be reconstituted so as to include non–

members, public representatives, government representatives to the extent of 50 per
cent of total number of members.
2. Capital adequacy norms have been laid down for members of various stock exchanges
depending upon their turnover of trade and other factors.
3. Working hours for all stock exchanges have been fixed uniformly.
4. All the recognized stock exchanges will have to inform about the transaction within
24 hours.
5. Guidelines have been issued for introducing the system of market –making is less
liquid scrips in a phased manner in all stock exchanges.

BROKERS

1. Registration of brokers and sub-brokers in made compulsory.

2. In order to ensure that brokers are professionally qualified and financially solvent,
capital adequacy norms for registration of brokers have been evolved.
3. Compulsory audit of broker’s book and filling of audit report with SEBI have been
made mandatory.
4. To bring about greater transparency and accountability in the broker-client
relationship, SEBI has made it mandatory for brokers to disclose transaction price and
brokerage separately ion the contract notes issued to client.
5. No broker is allowed to underwrite more than 5 per cent of public issue.

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FOREIGN INSTITUTIONAL INVESTORS

1. Foreign Institutional Investors have been allowed to invest in all securities traded in
primary and secondary markets.
2. There would be no restriction on the volume of investment for the purpose of entry of
FIIs.
3. The holding of single FII in a company will not exceed the ceiling of 5 per cent of the
equity capital of a company.
4. Disinvestment will be allowed only through stock exchanges in India.
5. FIIs have to pay a concessional tax rate of 10 per cent on large capital gain and 30
percent on short term capital gains .a tax rate of 20 per cent on dividend and interest is
prescribed.

INVESTORS’ PROTECTION

Need for investors protection

1. To instil confidence in investor mind

2. To create a conducive atmosphere for investment
3. To ensure transparency in dealing
4. To create a vibrate capital market
5. To regulate the market on sound lines
6. To create disciple in the market
7. To create accountably among market players
8. To create awareness among investors

Factors affecting investors’ interest

1. Price rigging
2. Insider trading
3. Excessive speculation
4. Lack of transparency
5. Short selling
6. Retired trading
7. Restricted trading hours and trading days
8. Dominance of few stock exchange

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9. Dominance of institutional and foreign institutional investor
10. Excessive volatility
11. Grievance against listed companies
Moreover, the investor complaints against listed companies are manifold. Some of them are:
a) Non receipt of share certificates
b) Non receipt of refund orders
c) Non receipt duplicate securities
d) Non receipt of certificate after consolidation
e) Non receipt of certification after splitting
f) Bad delivery of shares certificate
g) Failure to effect transfers and delay in executing there
h) Non receipt in interest on listed debenture
i) Non receipt of redemption prices of listed dentures
j) Non receipt of allotment above.
k) Compliance regarding revalidations

12. Grievance against members of stock exchange: The nature of complaints assist the members of
stock exchange are:

a) Non receipt of delivery of shares

b) Non receipt of dividend.
c) Non recipient of the shares
d) Non recipient of bonus shares
e) Non receipt of sale proceeds
f) Disputes relating to non settlement of accounts
g) Disputes regarding rate difference, etc.
h) Miscellaneous grievances

Miscellaneous grievances arise due to

1. Non repayment of fixed deposit on financial companies

2. Non repayment of deposits in manufacturing company
3. Non redemption of mutual funds and all completed relating to mutual funds
4. Complaints relating to shares and dentures in instead companies

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 ROLE OF SEBI IN MARKETING AND PROTECTING THE INTEREST OF
INVESTORS

SEBI has been mandated to protect the interest of investors in securities and to promote the
development of and to regulate the securities market contributing to Indian economy.

SEBI has undertaken various steps to protect the interest of small investors. They are:

a) Relating to new issue

b) Relating to derivatives

A) Relating to new issue: SEBI securities, drafts, prospects of company for full and fair
disclosures.

I. It makes sure that issuing company provides fair and correct information.
II. It ensures transparent allotment mechanism
III. SEBI has ensured that underwriting obligation is necessary to inspire confidence of
investors.
IV. It ensures timely and transferability of the issue.
V. No delay in refunds or dispatch of share certificate.
VI. Listing should be timely and transferability is ensured
VII. Both stock exchange and companies are responsible for investor protection in respect
of free trading and transferability of shares.
VIII. The investor’s protection is not only ensured by the director/secretary of company but
also by all the parties involved in the issue of shares like Merchant bankers, registrars,
collecting banks, stock exchange and SEBI.
IX. An investor’s grievance cell is set up to handle investor’s complaints.
X. SEBI has issued few investors guidance, advertisement and published a book on
Investors grievance- rights and remedies. It also has an active investors association.
XI. Curtailing unfair trade practice like insider trading.

Insider Trading : It takes place when insider or any person who by virtue of their position in
office or otherwise have access to unpublished price and sensitive information relating to the
affairs of the company, A penalty of Rs.500000 is imposed for those who indulge in insider
trading.

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Stock investment: It was designed by SEBI has an additional facility for making application
for new issues. Individuals can approach he bank with which they maintain an account for
issue of stock invest of required denomination for payment of application money, while
making an application for shares.

B) Relating to derivatives: the trading member is required to provide every investor with a
risk disclosure document, Investor would get contract note duly stamped for receipt of the
order and execution of order. In derivative markets, all money paid by the investor towards
margins on all open possessions is kept in trust with clearing house or clearing corporation
and in the event of default of the trading or clearing members, the amount paid by the client
towards margin are segregated and not utilised towards the default of the member.

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 CHAPTER 4

MUTUAL FUNDS

INTRODUCTION, MEANING AND DEFINITION

The fund established in the form of a trust by sponsor to raise money by the trustees
through sale of units to the public under one or more schemes for investing in securities in
accordance with the regulation. In general meaning, a mutual fund mobilising the savings
from small investors, invest them in Government and other corporate securities and earn
income through interest and dividends, besides capital gains. It works on the general principal
of “small drops of water make a big ocean”. For example, if one has invested Rs. 1,000, it
may not fetch very much on its own. Therefore, when it is pooled with Rs. 1,000 each from a
lot of other people, then, one could create a ‘big fund’ large enough to invest in a wide
varieties of shares and debentures on a commanding scale and thus, to enjoy the economies of
large scale operations. However, a mutual fund is nothing but a form of mobilising
investment from the small investors who transfer their saving into professionally qualified
organisation to manage it. Mutual fund has emerged as a popular vehicle of creation of
wealth due to high return, lower cost and diversified risk

According to Weston J. Fred and Brigham, Eugene, F., Unit Trusts are “Corporation which
accept dollars from savers and then use these dollars to buy stocks, long term bonds, short
term debt instruments issued by business or government units: these corporations pool funds
and reduce risk by diversification.”All these definitions reveal that the mutual funds are
corporations which pool funds by selling their own shares and reduce risk by diversification.

FEATURES OF MUTUAL FUNDS

1. A mutual fund belongs to those who have contributed to that fund and thus, the ownership
of the fund lies in the hands of the investors.
2. Since all investors cannot take part in the management of the fund, it is left in the hands
of investment professionals who earn a fee for their service

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3. The pool of funds collected is invested in a portfolio of marketable securities
4. The investors’ share in the fund is represented by ‘units’ just like shares in the case of
share capital of a company.
5. The unit value depends upon the value of the portfolio held by the fund. Hence, the value
changes almost every day and it is called Net Asset Value.
6. Generally, the investment portfolio of the mutual fund is created according to the
objective of the fund. For example, a sectoral mutual fund invests its funds in a specific
sector like IT sector, oil sector, etc.

IMPORTANCE OF MUTUAL FUNDS

1. Channelizing and mobilising savings for investment.

2. It is offering wide folio investment in different schemes.
3. Mutual funds are providing better yields to investors.
4. Mutual fund companies are rendering specialize investment service at low cost.
5. Mutual fund companies are mobilising corpus from individual investors; therefore, they
are providing research service.
6. Mutual funds are widely offering tax benefits to investors.
7. Mutual funds are introducing flexible investment schedule.
8. Mutual funds are providing greater affordability and liquidity.
9. Mutual funds has simplified record keeping.
10. It’s support to capital market and money market.
11. It is providing Industrial Development.
12. Mutual funds acting as substitute for initial public offering.
13. Mutual funds are reducing the market cost of new issues.
14. It is keeping the money market active.

Scope of mutual funds

1) Organization of the fund lies in the hands of investors.

2) Investment in left in the hands of progression who earn fee for services.

3) It is invested in a portfolio of marketable securities.

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4) It is represented in units.

5) It is invested in specific sector like IT sectors, fertilizer industries, ETC.

Advantages of Mutual Funds

Mutual fund are becoming very popular worldwide because of the fallowing important
advantages

1. Diversification: a large number of investors have small savings with them. They can at
the most buy share of one are two companies
2. Expert supervision and management: a small investor cannot be expert in port folio
management. When he invests in mutual funds, he gets the benefit of expert supervision
management which mutual funds can offered because of large resources at their disposal.
3. Liquidity: a peculiar advantage of mutual fund is that investment made in its schemes
can be converted back into cash promptly without heavy expenditure brokerage, delays,
etc.
4. Reduced risk: as mutual fund invests in large number of companies and is managed
professionally, the risk factor of the investor is reduced.
5. Tax advantage: there are certain schemes of mutual funds which provide tax advantage
under the income tax act
6. Low operating costs: mutual funds have large investible funds at their disposal and thus
can avail economies of large scale
7. Flexibility: mutual funds provide flexible investment plans to its subscribers such as,
regular investment plans, regular withdrawal plans and dividend reinvestment plans, etc.
8. Higher return: mutual funds are expected to provide higher returns to the investors as
compare to direct investment because of professional management, economies of scale,
reduced risk, etc.
9. Investor protection: the regulation of 1993, provide better protection to the investors,
impart a greater degree of flexibility and facilities competition

TYPES OF FUNDS/ CLASSIFICATION OF MUTUAL FUNDS

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 Close ended
On the basis of execution &
Operation
Open ended

Income Fund
MUTUAL FUNDS
Growth fund

Balanced fund
On the basis of yield and
investment pattern
Specilised fund

Money Market MF

Taxation Fund

ON THE BASIS OF EXECUTION AND OPERATION

1. CLOSE-ENDED FUNDS

Under this scheme, the corpus of the fund and its duration are prefixed. In other words, the
corpus of the fund and the number units are determined in advance. Once the subscription
reaches the predetermined level, the entry of investors is closed. After the expiry of the fixed
period, the entire corpus is disinvested and the proceeds are distributed to the various
unitholders in proportion to their holding. Thus, the fund ceases to a fund, after the final
distribution.

FEATURES

The main features of the close-ended funds are:

• The period and / or the target amount of the fund is defined and fixed beforehand.
• Once the period is over and / or the target is reached, the door is closed for the
investors .they cannot purchase any more units.
• These units are publicly traded through stock exchange and generally, there is no
purchase facility by the fund.
• The main objective of this fund is capital appreciation.

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 • The whole fund is available for the entire duration of scheme and there will not be
redemption demands before its maturity. Hence, the fund manager can manage the
investment efficiently and profitably without the necessity of maintaining any
liquidity.
• At the time of redemption, the entire investment pertaining to a close – ended scheme
is liquidated and the proceeds are distributed among the unit holders.
• From the investors’ point of view, it may attract more tax since the entire capital
appreciation is realized in at one stage itself.
• If the market condition is not favourable, it may also affect the investor since he may
not get the full benefit of capital appreciation in the value of the investment.
• Generally, the prices of close-ended scheme units are quoted at a discount of up to 40
per cent below their net asset value.

2. OPEN-ENDED FUNDS

It is just the opposite of close ended funds. Under this scheme, the size of the fund and /or the
period of the fund are not predetermined. The investors are free to buy and sell any number of
units at any point of time. For instance, the unit scheme 1964 of the unit trust of India is an
open-ended one, both in terms of period and target amount .anybody can buy this unit at any
time and sell it also at any time at his discretion.

The main features of open-ended funds are:

• There is complete flexibility with regards to one’s investment or disinvestment. In

other words, there free entry and exit of investors in open ended funds. There is no
time limit. The investor can join in and come out from the fund as and when he
desires.
• These units are not publicly traded but the fund is ready to repurchase them and resell
anytime.
• The investor is offered instant liquidity in the sense that the unit can be sold on any
working day. In fact, the fund operates just like a bank account, wherein one can get
cash across the counter for any number of units sold.
• The main objective of this fund is income generation. The investors get dividend,
right or bonuses as rewards for their investment.

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 • Since the unit are not listed on the stock market, there prices are linked to the net asset
value of the units. The NAV is determined by the fund and it varies from time to time.
• Generally, the listed prices are very close to their net asset value .the fund fixes a
different price for their purchase and sales.
• The fund manager has to be very careful in managing the investment because he has
to meet the redemption demands at any time made during the life of the scheme.

ON THE BASIS OF YIELD AND INVESTMENT PLAN

1. INCOME FUNDS

As the name suggest , this fund aims at generating and distributing regular income to the
members on a periodical basis .it concentrate more on the distribution of regular income and
it also sees that the average return is higher than that of income from bank deposit .

The main features are:

• The investor is assured of regular income at periodic interval, say half yearly or yearly
and so on.
• The objective of this type of fund is to declare regular dividend and not capital
appreciation.
• The pattern of investment is oriented towards high and fixed income yielding
securities like debentures, bonds, etc.
• This is best suited to the old and retired people who may not have any regular income.
• It concerns itself with short run gain only.

2. PURE GROWTH ORIENTED FUNDS

Unlike the income funds, growth funds concentrate mainly on long run gains, i.e., capital
appreciation. They do not offer regular income and they aim at capital appreciation in the
long run. Hence, they have been described as ‘nest eggs’ investments.

The main features are:

• The growth oriented funds aims at meeting the investors need for capital appreciation.

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 • The investment strategy, therefore, confirms to the fund objective by investing the
fund predominantly on equities with high growth potential.
• The fund tries to get capital appreciation by taking much risk and investing on risk
bearing equities and high growth equity shares.
• The fund may declare dividend, but its principle objective is only capital appreciation.
• This is best suited to salaried and business people who have high risk bearing capacity
and ability to differ liquidity. They can accumulate wealth for future needs.

3. BALANCED FUNDS

This is otherwise called “income-cum-growth” fund. It is nothing but a combination of both

income and growth funds. It aims at distributing regular income as well as capital
appreciation. This is achieved by balancing the investments between the high growth equity
shares and also the fixed income-earning securities.

4. SPECIALISED FUNDS

These funds offer special schemes so as to meet the specific needs of specific categories of
people like pensioners, widows, etc. There are also funds for investments in securities of
specified areas.

5. MONEY MARKET MUTUAL FUNDS (MMMFs)

These funds are basically open-ended mutual funds. But, they invest in highly liquid and safe
securities like commercial paper, bankers’ acceptances, certificates of deposits, treasury bills,
etc. These instruments are called money market instruments. They take the place of shares,
debentures and bonds in a capital market. They pay money market rates of interest.

6. TAXATION FUNDS

A taxation fund is basically a growth-oriented fund. But, it offers tax rebates to the investors
either in the domestic or foreign capital market. It is suitable to salaried people who want to
enjoy tax rebates particularly during the month of February and March. In India, at present,
the law relating to tax rebates is covered under sec.88 of the Income Tax Act, 1961. An
investor is entitled to get 20 per cent rebate in income for investments made under this fund
subject to a maximum investment of Rs. 10,000 per annum.

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OTHER CLASSIFICATIONS

1. LEVERAGED FUNDS

These funds are also called borrowed funds since they are used primarily to increase the size
of the value of portfolio of mutual fund. When the value increases, the earning capacity of the
fund also increases.

2. DUAL FUNDS

This is a special kind of close-ended fund. It provides a single investment opportunity for two
different types of investors. For this purpose, it sells two types of investment stocks, viz.,
income shares and capital shares. Those investors who seek current investment income can
purchase income shares. They receive all the interest and dividends earned from the entire
investment portfolio. The holders of capital shares receive all the capital gains earned on
those shares and they are not entitled to receive any dividend of any type. In this respect, the
dual fund is different from a balanced fund.

3. INDEX FUNDS

Index funds refer to those funds where the portfolios are designed in such a way that they
reflect the composition of some broad –based market index. This is done by holding
securities in the same proportion as the index itself. The value of these index-linked funds
will automatically go up whenever the market index goes up and vice-versa.

4. BOND FUNDS

These funds have portfolios consisting mainly of fixed income securities like bonds. The
main thrust of these funds is mostly on income rather than capital gains. They differ from
income funds in the sense income funds offer an average returns higher than that from bank
deposits and also capital gains lesser than that in equity shares.

5. AGGRESSIVE GROWTH FUNDS

These funds are just the opposite of bond funds. These funds are capital gains oriented and
thus the thrust area of these funds is “capital gains”. Hence, these funds are generally
invested in speculative stocks. They may also use specialised investment techniques like
short-term trading, option writing, etc. Naturally, these funds tend to be volatile.

6. OFF-SHORE MUTUAL FUNDS

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Off-shore mutual funds are those funds which are meant for non-residential investors. In
other words, the sources of investments for these funds are from abroad. So, they are
regulated by the provisions of the foreign countries where those funds are registered. These
funds facilitate flow of funds across different countries, with free and efficient movement of
capital for investment and repatriation.

7. PROPERTY FUNDS

It is a real estate mutual fund. It is an investment vehicle which buys, develops, manages and
sells real estate assets. Its investment also includes shares/ bonds of companies involved in
real estate and mortgage-backed companies.

8. FUND OF FUNDS

It is a mutual fund scheme that invests in other mutual fund schemes. The concept is widely
prevalent abroad.

ORGANISATION OF THE FUND

The structure of mutual fund operations in India is a three-tier establishment namely:

1. A sponsor institution to promote the fund

2. A team of trustees to oversee the operations and to provide checks for the efficient,
profitable and transparent operations of the fund, and,
3. An Asset Management Company (AMC) to actually deal with the funds.

a) Sponsoring institutions: The Company which sets up the mutual fund is called the
sponsor. The SEBI laid down certain criteria to be met by the sponsor. The criteria mainly
deal with adequate experience, good past track record, net worth, etc.
b) Trustees: They are people with long experience and good integrity in their respective
field. They carry the crucial responsibility of safeguarding the interest of investors. For
this purpose, they monitor the operations of the different schemes. They have wide
ranging powers and they can even dismiss Asset Management Companies with the
approval of SEBI.

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c) Asset Management Company (AMC): The AMC actually manages the funds of the
various schemes. The AMC employs a large number of professionals to make
investments, carry out research and to do agent and investor servicing. In fact, the success
of any mutual fund depends upon the efficiency of this AMC. The AMC submits a
quarterly report on the functioning of the mutual fund to the trustees who will guide and
control the AMC.

RISKS INVOLVED IN MUTUAL FUNDS

Mutual funds are not free from risks. It is so because basically the mutual funds also invest
their funds in the stock market on shares which are volatile in nature and are not risk free.
Hence the following risks are inherent in their dealings:

1. Market Risks: In general, there are certain risks associated with every kind of Investment
on shares. They are called market risks. These market risks can be reduced, but cannot be
completely eliminated even by a good investment management. The prices of shares are
subject to wide price fluctuations depending upon market conditions over which nobody
has a control. Moreover, every economy has to pass through a cycle –Boom, Recession,
Slump and Recovery. The phase of the business cycle affects the market conditions to a
larger extent.
2. Scheme risks: There are certain risks inherent in the scheme itself. It all depends upon
the nature of the scheme. For instance, in a pure growth scheme, risks are greater. It is
obvious because if one expects more returns as in the case of a growth scheme, one has to
take more risks.
3. Investment risks: Whether the mutual fund makes money in shares or loses depends
upon the investment expertise of the Asset Management Company (AMC). If the
investment advice goes wrong, the fund has to suffer a lot. The investment expertise of
various funds are different and it is reflected on the returns which they offer to investors.
4. Business risks: The corpus of a mutual fund might have been invested in a company’s
shares. If the business of that company suffers any setback, it cannot declare any
dividend. It may even go to the extent of winding up its business. Though the mutual fund
can withstand such a risk, its income paying capacity is affected.
5. Political risks: Successive governments bring with them new economic ideologies and
policies. It is often said that many economic decisions are politically motivated. Changes

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 in Government bring in the risk of uncertainty which every player in the financial service
industry has to face. So, mutual funds are no exception to it.

PERFORMANCE EVALUATION OF MUTUAL FUNDS

A fund manager’s performance can be assessed with the help of certain benchmarks.
Benchmarks are nothing but independent portfolios that are not managed by any fund
manager. They are purely representative of the behaviour in market returns of selected
securities. For instance, the S&P CNX Nifty is a portfolio of 50 securities traded on the
National Stock Exchange. Similarly, the BSE Sensitive Index is a portfolio of 30 securities
traded on the Bombardier Stock Exchange, These indices and their movement to a large
extent represent the movement in prices as well as returns, of large, actively traded stocks in
the equity market. These independent portfolios can be used to measure the performance of a
fund manager.

INVESTOR’S RIGHTS

The SEBI (MF) Regulations, 1993 contains specific provisions with regard to investor
servicing. Certain rights have been guaranteed to the investors as per the above regulations.
They are as follows:

1. Unit certificates: An investor has a right to receive his unit certificates on allotment
within a period of 10 weeks from the date of closure of subscription lists in the case of a
closed-ended scheme and 6 weeks from the date of closure of the initial offer in the case
of an open-ended scheme.
2. Transfer of units: An investor is entitled to get the unit certificates transferred within a
period of 30days from the date of lodgement of the certificates along with the relevant
transfer forms.
3. Refund of application money: If a mutual fund is not able to collect the statutory
minimum amount (closed-ended funds –Rs 20 crore, open-ended funds – Rs 50 crore or
60 per cent of the targeted amounts whichever is higher), it has to return the application
money as refund within a period of 6 weeks from the date of closure of subscription lists.
If the refund is delayed beyond this period, each applicant is entitled to get the refund
with interest at the rate of 15 per cent p.a. for the period of delay.

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4. Audited annual report: Every mutual fund is under an obligation to its investors to
publish the Audited annual report and unaudited half-yearly report through prominent
newspapers in respect of each of its schemes within 6 months and 3 months respectively
of the date of closure of accounts.
5. Net Asset Value: Again, every investor has the right to receive information about the
NAV at intervals not exceeding 3 months in the case of Open-ended scheme and one
month in the case of closed-ended funds. It must also be published at least in two daily
newspapers.

SELECTION OF A FUND

Mutual funds are not magic institutions which can bring treasure to the millions of their
investors within a short span of time. All funds are equal to start with. But in due course of
time, some excel the other. It all depends on the efficiency with which the fund is being
managed by the professionals of the fund. Hence, the investor has to be very careful in
selecting the fund. He must take into account the following factors for evaluating the
performance of any fund and then finally decide the one he has to choose:

1. Objective of the fund: First of all, he must see the objective of the fund – whether
income-oriented or growth-oriented. Income-oriented are backed mainly by fixed
interest yielding securities like debentures and bonds whereas growth-oriented are
backed by equities. It is obvious that growth-oriented schemes are more risky then
income-oriented schemes, and hence, the returns from such schemes are not
comparable with each other. The investor should compare the particular scheme of
one fund with the same scheme of another fund and make a comparative analysis. His
objective should also coincide with the objective of the scheme which he proposes to
choose.
2. Consistency of Performance: A mutual fund is always intended to give steady long
term returns, and hence, the investor should measure the performance of a fund over a
period of at least three years. Investors are satisfied with a fund that shows a steady
and consistent performance than a fund which performs superbly in one year and then
fails in the next year. Consistency in performance is a good indicator of its investment
expertise.

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 3. Historical background: the success of any fund depends upon the competence of the
management, its integrity, periodicity and experience. The funds integrity should be
above suspicion. A good historical record could be a better horse to bet on than new
funds. It is in accordance with the maxim ‘A known devil is better than an unknown
angel’.
4. Cost of operation: Mutual funds seek to do a better job of investible funds at a lower
cost than the individuals could do for themselves. Hence, the prospective investor
should scrutinise the expense ratio of the fund and compare it with others. Higher the
ratio, lower will be the actual returns to the investor.
5. Capacity for innovation: The efficiency of a fund manager can be tested by means of
the innovative schemes he has introduced in the market so as to meet the diverse
needs of investors. An innovator will be always a successful man. It is quiet natural
that an investor will look for funds which are capable of introducing innovations in
the financial market.
6. Investor servicing: The most important factor to be considered is prompt and
efficient servicing. Services like quick response to investors’ queries, prompt despatch
of unit certificates, quick transfer of units, immediate encashment of units, etc., will
go a long way in creating a lasting impression in the minds of investors.
7. Market trends: Traditionally, it has been found that the stock market index and the
inflation rate tend to move in the same direction, whereas the interest rates and the
stock market index tend to move in the opposite direction. This sets the time for the
investor to enter into the fund and come out of it. A prudent investor must keep his
eyes on the stock market index, interest rate and the inflation rate. Of course, there is
no scientific reasoning behind it.
8. Transparency of the fund management: Again, the success of a mutual fund
depends to a large extent on the transparency of the fund management. In these days
of investor awareness, it is very vital that the fund should disclose the complete
details regarding the operation of the fund. It will go a long way in creating a lasting
impression in the minds of the investors to patronise the fund for ever.

In fact, the wider range of products/services offered by the different funds, have made the
investor quality conscious. He is now in a position to assess the quality of the products
offered by MF’S in the financial market. MF’S cannot simply attract savings by mere

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lucrative advertisements. The cult of the equity has spread to many small investors who have
become very discerning in selecting mutual funds.

REASONS FOR SLOW GROWTH OF MUTUAL FUNDS IN INDIA

Of late, mutual funds find their going very tough. Most of the funds are not able to collect the
targeted amount from small investors. Investors tend to keep out of the new issue mutual
funds and they prefer to buy units from the secondary market even by paying a brokerage fee
of 3 per cent. The mutual fund industry has to face many problems also, some of them are:

1. Disparity between NAV and listed price: Small investors are really bewildered at the
lack of proper pricing for their units. Though the NAV seems to be good, the listed prices
are awfully poor. Of course, the NAV is used as a parameter to rate the performance of
the mutual funds. However, in practice, almost all the mutual fund schemes are deeply
discounted to their NAV by as much as 30 to 40 per cent. Thus, the real dilemma for the
investor is this disparity between the NAV and the listed price. Due to this factor,
investors are not able to dispose of their units in the market and hence there is no liquidity
at all. As on 30.9.95, nearly 23 funds were traded at a discount to their NAV ranging from
5 per cent to 35 per cent.
2. No uniformity in the calculation of NAV: It is interesting to note that there is no
standard formula for the calculation of the NAV. With the result, different companies
apply different formula, and hence, any fruitful comparison of one fund with another is
not at all possible. Hence, small investors cannot format a concrete opinion on the
performance of different funds.
3. Lack of transparency: Mutual funds in India are not providing adequate information and
materials to the investors. It was expected that they would provide a detailed investment
pattern of their various schemes. They would also have frequent and continuing
communications with the unit holders. Unfortunately, most of the funds are not able to
send even quarterly report to their members. For the success of mutual funds, it is very
essential that they should create a good rapport with the investors by declaring their entire
holdings to them.
4. Poor investor servicing: Mutual funds have failed to build up investor confidence by
rendering poor services. Due to the recurring transfer problems and non- receipt of
dividend in time, people are hesitant to touch the mutual fund scrip. Instances are there

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 where people have to wait for more than six months to get their unit certificates. Again,
the percentage of units under objection with the fund is a so very high ranging between 3
per cent and 10 per cent. It is also said that the fake certificates are also very high. This
deteriorated after sales service to the investors has positively affected the growth of this
industry. Many investors have been driven out of this mutual fund industry due to this
poor servicing. In the case of a company, there is a statutory obligation to convene the
meeting of the shareholders and place before them important matters for discussion.
There is no such meeting in the case of a mutual fund company.
5. Too much dependence on outside agencies: In India, most of the funds depend upon
outside agencies to collect data and to do research. There is no doubt that research-driven
funds can ensure good returns to its members. But, one should not rely on borrowed
research. Since research involves a lot of money, mutual funds think that their overhead
cost will go up and thereby their administrative expenses will go beyond the 3 per cent
level fixed by the SEBI. In practice, it may not be so. In fact, they have to pay more for
borrowed research and even that cannot be fully relied upon. Unless they set up their own
research cell, they cannot succeed in the business.
6. Investors’ psychology: Investors often compare units with that of shares and expect a
high listing price. They don’t realise that unit is a low-risk long-term instrument. Indeed,
mutual funds are only for those who have the patience to wait for a long period say 3 to 5
years. But, in practise, people don’t have the patience. Hence, units are not popular
among the public.
7. Absence of qualified sales force: Efficient management of a fund requires expertise
knowledge in portfolio management and skill in execution. Without professional agents
and intermediaries, it cannot be managed efficiently. Unfortunately, such professional
people are rare. One can find a network of qualified brokers to deal in shares and stocks.
Such persons are conspicuously absent in the mutual fund industry and this absence of
large and qualified sales force makes the industry suffer a setback.
8. Other reasons: Few funds which have not performed well have actually demoralised the
investing public. Moreover, the listing of closed-ended funds on the stock exchanges has
compelled the medium and small investors to go back to the stock market and face the
hassles and headaches of its dealing. Above all, there is a lack of investor education in the
country. Most of the investors are not aware of the mutual fund industry and the various
products offered by it.

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 CHAPTER 5

RECENT TREND IN FINANCIAL SERVICES

PERSONALISED BANKING

Personalised financial and banking services are traditionally offered to a bank's rich, high net
worth individuals (HNWIs). For wealth management purposes, HNWIs have accrued far
more wealth than the average person, and therefore have the means to access a larger variety
of conventional and alternative investments. Private Banks aim to match such individuals
with the most appropriate options.

ATM

An automated or automatic teller machine (ATM) a cash machine, is a computerized

telecommunications device that enables the clients of a financial institution to
perform financial transactions without the need for a cashier, human clerk or bank teller.
ATMs are known by various other names including ATM machine, automated banking
machine and various regional variants derived from trademarks on ATM systems held by
particular banks.

On most modern ATMs, the customer is identified by inserting a plastic ATM card with
a magnetic stripe or a plastic smart card with a chip that contains a unique card number and
some security information such as an expiration date .Authentication is provided by the
customer entering a personal identification number (PIN).

Using an ATM, customers can access their bank accounts in order to

make cash withdrawals, debit card cash advances, and check their account balances as well as
purchase pre-paid mobile phone credit. If the currency being withdrawn from the ATM is
different from that which the bank account is denominated in (e.g.: Withdrawing Japanese
Yen from a bank account containing US Dollars), the money will be converted at an official
wholesale exchange rate. Thus, ATMs often provide one of the best possible official
exchange rates for foreign travelers, and are also widely used for this purpose.

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TELE-BANKING AND E-BANKING

Telephone banking is a service provided by a bank or other financial institution, that

enables customers to perform financial transactions over the telephone, without the need to
visit a bank branch or automated teller machine. Telephone banking times can be longer than
branch opening times, and some financial institutions offer the service on a 24 hour basis.
From the bank's point of view, telephone banking reduces the cost of handling transactions by
reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit
transactions.

Operation

To use a financial institution's telephone banking facility, a customer must first register with
the institution for the service, and set up some password (under various names) for customer
verification.

To access telephone banking, the customer would call the special phone number set up by the
financial institution. The service can be provided using an automated system, using speech
recognition and DTMF technology or by live customer service representatives.

The types of financial transactions which a customer may transact through telephone banking
include obtaining account balances and list of latest transactions,

Electronic bill payments, Funds transfers between a customer's or another's accounts. Cash
withdrawals and deposits require the customer to visit an automated teller machine or bank
branch.

Authentication

The password for telephone banking is normally not the same as for online banking.
Financial institutions routinely allocate customer numbers (also under various names),
whether or not customers intend to access their telephone or online banking facility.
Customer numbers are normally not the same as account numbers, because a number of
accounts can be linked to the one customer number. Customer numbers are also not the same
as any card number which may have been issued to the customer by the financial institution.
The customer will link to the customer number any of those accounts which the customer

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controls, which may be cheque, savings, loan, credit card and other accounts. Some financial
institutions have restrictions on which accounts may be access via telephone banking.

E-banking

The provision of banking service through electronic channels and the customer can access the
data without time and geographical limitation.

Different services provided under e-banking:

• Online bill payment

• Shopping

• Ticket booking

• Pre paid mobile recharge

• Market watch

• Personal home page

• Investment services

• Online applications

• Personal update

Advantages of e-banking
1. Benefits for Banks
Benefits for Banks Larger customer coverage reducing the costs of operations,
promoting their services and products internationally increasing the customer
satisfaction and providing a personalized relationship with customers
2. Benefits for Small to Medium Businesses
Benefits for Small to Medium Businesses to run its operations more effectively Lower
cost than traditional financial management mechanisms
3. Benefits for Customers
Benefits for Customers Convenience 24 hours a day, seven days a week Cost
Reducing transfer fees Speed Faster circulation of assets Competitiveness - Fostering
competition in financial market

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 4. Benefits for Customers
Benefits for Customers Communication communicate easily Environmental
abolishing the uses of paper others - Offering one-stop-shop solutions

Disadvantages of e-banking

1. Security Risk
Security Risk increasing number of fraudulent bank websites Fake emails purporting
to be sent from banks Use of Trojan Horse programs to capture user IDs and
passwords

2. Fraudulent Bank Websites

Fraudulent Bank Websites A suspicious bank website: www.sbionline.com Original
bank websitewww.onlinesbi.com these website are believed to aim to trick persons
into disclosing their sensitive personal information

3. Fake e-mails
Fake e-mails Email send from fraudulent bank Verify the personal information Guide
customer enter the fraud link disclosing their ATM card numbers and their passwords

4. Viruses and Worms-Trojan Horse Program

Viruses and Worms-Trojan Horse Program When we open some suspicious websites
or email Trojan Horse Program will install our computer secretly Hidden in the
computer When you access bank websites Capture our account and the password

CREDIT AND DEBIT CARD

Debit card

Debit card is a plastic card which provides an alternative payment method to cash when
making purchases.

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Functionally, it can be called an electronic check, as the funds are withdrawn directly from
either the bank account or from the remaining balance on the card.

It is also known as BANK CARD or CHECK CARD.

Debit cards can also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash and as a cheque guarantee card. Merchants can also offer "cash back"/"cash
out" facilities to customers, where a customer can withdraw cash along with their purchase.

Uses of debit card

• It is used instead of a check to make purchases, anywhere Visa is accepted

• It is used instead of a credit card to pay bills such as utilities, insurance and car
payments
• Point-of-sale funds are drawn from primary checking account
• PIN-system security
• Change your PIN at any Merchants Bank branch
• No annual fee
• Choose from three card designs

Types of debit card

1. Online debit card

2. Offline debit card
3. Prepaid debit card
4. Electronic purse card
5. Cards for mail, telephone & internet use only

1. Online debit card

Online debit cards require electronic authorization of every transaction. The debits are
reflected in the user’s account immediately. The transaction may be additionally secured with
the personal identification number (PIN) authentication system and some online cards require
such authentication for every transaction, essentially becoming enhanced automatic teller
machine (ATM) cards. One difficulty in using online debit cards is the necessity of an
electronic authorization device at the point of sale (POS) and sometimes also a separate PIN

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pad to enter the PIN, although this is becoming common place for all card transactions in
many countries.

Banks in some countries, such as Canada and Brazil, only issue online debit cards. In the
United Kingdom, Solo and Visa Electron are examples of online debit cards, which are
typically issued by banks to customers whom the bank does not want to go overdrawn under
any circumstances, for example under-18s.

2. Offline debit card

Offline debit cards have the logos of major credit cards or major debit cards and are used at
the point of sale like a credit card. This type of debit card may be subject to a daily limit,
and/or a maximum limit equal to the current/checking account balance from which it draws
funds. Transactions conducted with offline debit cards require 2–3 days to be reflected on
users’ account balances.

In the United Kingdom, Maestro (formerly Switch) and Visa Debit (formerly Delta) are
examples of offline debit cards.

3. Prepaid debit card

Prepaid debit cards, also called reloadable debit cards or reloadable prepaid cards, are often
used for recurring payments. The payer loads funds to the cardholder's card account.
Particularly for US-based companies with a large number of payment recipients abroad,
prepaid debit cards allow the delivery of international payments without the delays and fees
associated with international checks and bank transfers.

4. Electronic purse card

Smart-card-based electronic purse systems (in which value is stored on the card chip, not in
an externally recorded account, so that machines accepting the card need no network
connectivity) were tried throughout Europe from the mid-1990s, most notably in Germany.

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5. Cards for mail telephone and internet use only

Special pre-paid Visa cards for Mail Order/Telephone Order (MOTO) and Internet use only
are made available by a small number of banks. They are sometimes called "virtual Visa
cards", although they usually do exist in the form of plastic. An example is 3V.

Such a card prevents fraud by a card number thief even if the card is not blocked, because the
customer normally does not store any money on the sub-account and fraudulent transactions
do not get authorized by the bank

Advantages

1. A consumer who is not credit worthy and may find it difficult or impossible to obtain
a credit card can more easily obtain a debit card.
2. Use of a debit card is limited to the existing funds in the account to which it is linked.
3. For most transactions, a check card can be used to avoid check writing altogether.
4. Like credit cards, debit cards are accepted by merchants with less identification.
5. Unlike a credit card, which charges higher fees and interest rates when a cash advance
is obtained, a debit card may be used to obtain cash from an ATM or a PIN-based
transaction at no extra charge, other than a foreign ATM fee.

Disadvantages

1. Some banks are now charging over-limit fees or non-sufficient funds fees based upon
pre-authorizations.
2. Many merchants mistakenly believe that amounts owed can be "taken" from a
customer's account after a debit card (or number) has been presented.
3. In some countries debit cards offer lower levels of security protection than credit
cards.

Credit card

A credit card is part of a system of payments named after the small plastic card issued to
users of the system. It is a card entitling its holder to buy goods and services based on the
holder's promise to pay for these goods and services. The issuer of the card grants a line of
credit to the consumer (or the user) from which the user can borrow money for payment to a

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merchant or as a cash advance to the user. A credit card is different from a charge card, where
a charge card requires the balance to be paid in full each month. In contrast, credit cards
allow the consumers to 'revolve' their balance, at the cost of having interest charged. Most
credit cards are issued by local banks or credit unions, and are the shape and size specified by
the ISO 7810 standard.

Working process

• When a purchase is made, the credit card user agrees to pay the card issuer.
• The cardholder indicates his/her consent to pay by signing a receipt with a record of
the card details and indicating the amount to be paid or by entering a Personal
identification number (PIN).
• Also, many merchants now accept verbal authorizations via telephone and electronic
authorization using the Internet, known as a 'Card/Cardholder Not Present' (CNP)
transaction.
• Electronic verification systems allow merchants to verify that the card is valid.
• The verification is performed using a credit card payment terminal or Point of Sale
(POS) system with a communications link to the merchant's acquiring bank.
• Card is obtained from a magnetic stripe or chip on the card, but is more technically an
EMV card (Europay, MasterCard and VISA). i.e. VSDC – VISA, Mchip –
MasterCard.

Interest charges

Credit card issuers usually waive interest charges if the balance is paid in full each month, but
typically will charge full interest on the entire outstanding balance from the date of each
purchase if the total balance is not paid.

Benefits to customer

Due to intense competition in credit card industry, credit card providers offer incentives such
as

• Frequent flyer points

• Gift certificates

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 • Cash back (1% based on total purchase)
• Low interest credit cards
• Even 0% interest credit cards are available
• Grace period

A credit card's grace period is the time the customer has to pay the balance before interest is
charged to the balance. Grace periods vary, but usually range from 20 to 40 days depending
on the type of credit card and the issuing bank. If a customer is late paying the balance,
finance charges will be calculated and the grace period does not apply.

Benefits to merchants

• A credit card transaction is often more secure than other forms of payment, such as
checks, because the issuing bank commits to pay the merchant the moment the
transaction is authorized, regardless of whether the consumer defaults on the credit
card payment.
• More secure than cash, because they discourage theft by the merchant's employees
and reduce the amount of cash on the premises.
• Prior to credit cards, each merchant had to evaluate each customer's credit history
before extending credit.

Parties involved

1. Cardholder: Used to make a purchase.

2. Card issuing bank: The financial institution or other organization that issues the card
to the cardholder.
3. Merchant: The individual or business accepting credit card payments for products or
services sold to the cardholder.
4. Acquiring bank: The financial institution accepting payment for the products or
services on behalf of the merchant.

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TYPES OF CREDIT CARDS

1. Secured credit cards

A secured credit card is a type of credit card secured by a deposit account owned by
the cardholder. Typically, the cardholder must deposit between 100% and 200% of
the total amount of credit desired.

2. Prepaid “credit” cards

A prepaid credit card is not a credit card, since no credit is offered by the card issuer:
the card-holder spends money which has been "stored" via a prior deposit by the card-
holder or someone else, such as a parent or employer. Prepaid cards can be issued to
minors (above 13) since there is no credit line involved.

3. Balance transfer credit cards

Balance transfer credit cards allow consumers to transfer a high interest credit card
balance onto a credit card with a low interest rate. Typical in the market today are
balance transfer credit cards with an introductory annual percentage rate (APR) of 0
percent, with that introductory or "teaser" rate lasting several months up to a year.

4. Low interest credit cards

Low interest credit cards offer either a low introductory APR that jumps to a higher
rate after a certain period, or a single low fixed-rate APR. Low interest cards can be
very useful when consumers need make a large purchase because it allows several
months to a year to pay it off with very low or no interest.

Security

Credit card security relies on the physical security of the plastic card as well as the privacy of
the credit card number. Whenever a person other than the card owner has access to the card
or its number, security is potentially compromised. i.e. security PIN is required

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Some merchants will accept a credit card number for in-store purchases, where upon access
to the number allows easy fraud, but many require the card itself to be present, and require a
signature.

Thus, a stolen card can be cancelled, and if this is done quickly, will greatly limit the fraud
that can take place in this way. The PCI DSS is the security standard issued by The PCI SSC
(Payment Card Industry Security Standards Council).

Credit card costs

• Annual Fees
• Interest
• Annual Percentage Rate (APR)
• Average Daily Balance Method
• Cash Advances
• Convenience Checks
• Penalty Rates
• Low Interest Teaser Rates
• Balance Transfers
• Late Fees
• Over Credit Limit Fees

CUSTOMIZATION OF INVESTMENT PORTFOLIOS

Investment Counsel takes a comprehensive approach to investment management, centered on

individual needs and goals. Investment Counselor will look at your wealth in its entirety,
including your assets and liabilities, personal and business wealth, short-term and long-term
needs and how you want your wealth to benefit others during individual lifetime and
afterwards.

Portfolio management

• The art of selecting the right investment policy for the individuals in terms of
minimum risk and maximum return is called as portfolio management.

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 • Portfolio management refers to managing an individual’s investments in the form of
bonds, shares, cash, mutual funds etc so that he earns the maximum profits within the
stipulated time frame.

• Portfolio management refers to managing money of an individual under the expert

guidance of portfolio managers.

• In a layman’s language, the art of managing an individual’s investment is called as

portfolio management.

Need for portfolio management

• Portfolio management presents the best investment plan to the individuals as per their
income, budget, age and ability to undertake risks.

• Portfolio management minimizes the risks involved in investing and also increases the
chance of making profits.

• Portfolio managers understand the client’s financial needs and suggest the best and
unique investment policy for them with minimum risks involved.

• Portfolio management enables the portfolio managers to provide customized

investment solutions to clients as per their needs and requirements.

Types of portfolio management

Portfolio Management is further of the following types:

 Active Portfolio Management: As the name suggests, in an active portfolio

management service, the portfolio managers are actively involved in buying and
selling of securities to ensure maximum profits to individuals.

 Passive Portfolio Management: In a passive portfolio management, the portfolio

manager deals with a fixed portfolio designed to match the current market
scenario.

 Discretionary Portfolio management services: In Discretionary portfolio

management services, an individual authorizes a portfolio manager to take care of
his financial needs on his behalf. The individual issues money to the portfolio
manager who in turn takes care of all his investment needs, paper work,

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 documentation, filing and so on. In discretionary portfolio management, the
portfolio manager has full rights to take decisions on his client’s behalf.

 Non-Discretionary Portfolio management services: In non discretionary portfolio

management services, the portfolio manager can merely advise the client what is
good and bad for him but the client reserves full right to take his own decisions.

Who is a Portfolio Manager?

An individual who understands the client’s financial needs and designs a suitable investment
plan as per his income and risk taking abilities is called a portfolio manager. A portfolio
manager is one who invests on behalf of the client. A portfolio manager counsels the clients
and advises him the best possible investment plan which would guarantee maximum returns
to the individual. A portfolio manager must understand the client’s financial goals and
objectives and offer a tailor made investment solution to him. No two clients can have the
same financial needs.

FINANCIAL ADVISOR

One who provides financial advice or guidance to customers for compensation. Financial
advisors can provide many different services, such as investment management, income tax
preparation and estate planning. Financial advisers provide advice to individuals and small
companies to help them to make decisions in areas such as:

• Investments

• Loans, credit and debt reduction

• Retirement planning

• Insurance

• Estate planning (wills and trusts)

• Cash management

Getting financial advice can help you to make good investment decisions and to reach
your financial goals. It is important when choosing a financial adviser to ensure that you will
receive advice suited to your personal situation and lifestyle

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There are two types of financial advisors:

Registered financial advisor

Registered Financial Advisors are required to be registered but does not need to be
authorised by the Securities Commission because they only provide limited services. They
must belong to a disputes resolution scheme.

A person can go to a registered financial adviser for advice about simple financial products
such as:

• Bank term deposits

• Bonus bonds

• Call debt securities

• Call building society shares

• Call credit union shares

• Shares in co-operative companies

• Consumer credit contracts

• A unit in a cash or term portfolio investment entity

• Insurance contracts, (except investment-linked insurance contracts)

• Life insurance policies issued before 1st January 2009.

Authorised financial advisor

Authorised financial advisers must be registered and belong to a disputes resolution scheme
and also be licensed by the Securities Commission. Only authorised financial advisers can
give advice about complex financial products such as:

• Securities

• Land investment products

• Futures contracts

• Investment-linked insurance contracts.

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An authorised financial adviser is required to attain a minimum level of competence
set by the Securities Commission and must comply with the Code of Professional Conduct
which sets minimum standards of client care and ethical behaviour.

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