Module 2 Banks

Dept.
of Management Studies
3rd Semester
Two marks question and answer

Financial Services
Meaning:
All types of activities which are of a financial nature could be brought under the term
financial services.
The term Financial Services in a broad sense means mobilizing and allocating savings.
Thus, it includes all activities involved in the transformation of saving into investment.
The financial service can also be called financial intermediation.
Financial intermediation is a process by which funds are mobilized from a large number of
savers and make them available to all those who are in need of it and particularly to
corporate customers.
A well developed financial services industry is absolutely necessary to mobilize the savings
and to allocate them to various investable channels and thereby to promote industrial
development in a country.
Classification of financial services industry
The financial intermediaries in India can be traditionally classified into two:
i. Capital market intermediaries
ii. Money market intermediaries
The capital market intermediaries consist of term lending institutions and investing
institutions which mainly provide long term funds.
On the other hand, money market consists of commercial banks, co-operative banks and
other agencies which supply only short term funds.
Scope of financial services
Financial services cover a wide range of activities. They can be broadly classified into two
namely:
i. Traditional activities
ii. Modern activities
Traditional activities
Traditionally, the financial intermediaries have been rendering a wide range of services
encompassing both capital and money market activities. They can be grouped under two
heads viz;
i. Fund based activities and
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Dept. of Management Studies
3rd Semester
ii. Non-fund based activities

Fund based activities
The traditional services which come under fund based activities are the following:
i. Underwriting of or investment in shares, debentures, bonds etc. of new issues (primary
market activities)
ii. Dealing in secondary market activities
iii. Participating in money market instruments like commercial papers, certificate of
deposits, treasury bills, discounting of bills etc.
iv. Involving in equipment leasing, hire purchase, venture capital, seed capital etc.
v. Dealing in foreign exchange market activities.
Non-fund based activities

Financial intermediaries provide services on the basis of non-fund activities also. This can
also be called fee based activity. A wide variety of services, are being provided under this
head. They include the following:
i. Managing the capital issues, i.e., management of pre-issue and post-issue activities
relating to the capital issue in accordance with the SEBI guidelines and thus enabling the
promoters to market their issues.
ii. Making arrangements for the placement of capital and debt instruments with investment
institutions.
iii. Arrangement of funds from financial institutions for the clients project cost or his
working capital requirements.
iv. Assisting in the process of getting all government and other clearances.
Modern activities
Besides the above traditional services, the financial intermediaries render innumerable
services in recent times. Most of them are in the nature of non-fund based activity.
i. Rendering project advisory services right from the preparation of the project report till
the raising of funds for starting the project with necessary government approval.
ii. Planning for mergers and acquisitions and assisting for their smooth carry out.
iii. Guiding corporate customers in capital restructuring.
iv. Acting as Trustees to the debenture holders
v. Structuring the financial collaboration/joint ventures by identifying suitable joint
venture partner and preparing joint venture agreement.
vi. Rehabilitating and reconstructing sick companies through appropriate scheme of
reconstruction and facilitating the implementation of the scheme.
vii. Hedging risks due to exchange rate risk, interest rate risk, economic risk and political
risk by using swaps and other derivative products.
viii. Managing the portfolio of large public sector corporations.
ix. Undertaking risk management services like insurance services, buy back options, capital
market etc.
x. Promoting credit rating agencies for the purpose of rating companies which want to go
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public by the issue of debt instruments.

Financial products and services
Today, the importance of financial services is gaining momentum all over the world.
In these days of complex finance, people expect a financial service company to play a very
dynamic role not only as provider of finance but also as a departmental store of finance.
As a result, the clients both corporates and individuals are exposed to the phenomena of
volatility and uncertainty and hence they expect the financial service company to innovate
new products and services so as to meet their varied requirements.
1. Merchant Banking:
A merchant banker is a financial intermediary who helps to transfer capital from those
who possess it to those who need it. Merchant banking includes a wide range of activities
such as management of customers securities, portfolio management, project counseling
and appraisal, underwriting of shares and debentures, loan syndication, acting as banker
for the refund orders, handling interest and dividend warrants etc. Thus merchant banker
renders a host of services to corporates and thus promotes industrial development in the
country.
2. Loan Syndication
This is more or less similar to consortium financing. But, this work is taken up by the
merchant banker as a lead manager. It refers to a loan arranged by a bank called lead
manager for a borrower who is usually a large corporate customer or a government
department. The other banks who are willing to lend can participate in the loan by
contributing a amount suitable to their own lending policies. Since a single bank cannot
provide such a huge sum as loan, a number of banks join together and form a syndicate. It
also enables the members of the syndicate to share the credit risk associated with a
particular loan among themselves.
3. Leasing
A lease is an agreement under which a company or a firm, acquires a right to make use of a
capital asset like machinery, on acquire any ownership to the asset, but he can use it and
have full control over it. He is expected to pay for all maintenance charges and repairing
and operating costs.
4. Mutual Funds
A mutual fund refers to a fund raised by a financial services company by pooling the
savings of the public. It is invested in a diversified portfolio with a view to spreading and
minimizing risk. The fund provides Investment Avenue for small investors who cannot
participate in the equities of big companies. It ensures low risks, steady returns, high
liquidity and better capital appreciation the long run.
5. Factoring
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Factoring refers to the process of managing the sales ledger of a client by a financial service
company. In other words, it is an arrangement under which a financial intermediary
assumes the credit risk in the collection of book debts for its clients. The entire
responsibility of collecting the book debts passes on to the factor. His services can be
compared to a del credre agent who undertakes to collect debts. But, a factor provides
credit information, collects debts, monitors the sales ledger and provides finance against
debts. Thus, he provides a number of services apart from financing.
6. Forfaiting
Forfaiting is a technique by which a forfaitor (financing agency) discounts an export bill
and pay ready cash to the exporter who can concentrate on the export front without
bothering about collection of export bills. The forfeiter does so without any recourse to the
exporter and the exporter is protected against the risk of non-payment of debts by the
importers.
7. Venture capital
A venture capital is another method of financing in the form of equity participation. A
venture capitalist finances a project based on the potentialities of a new innovative project.
It is in contrast to the conventional security based financing. Much thrust is given to new
ideas or technological innovations. Finance is being provided not only for start-up capital
but also for development capital by the financial intermediary.
8. Custodial services
It is yet another line of activity which has gained importance, of late. Under this, a financial
intermediary mainly provides services to clients, particularly to foreign investors, for a
prescribed fee. Custodial services provide agency services like safe keeping of shares and
debentures, collection of interest and dividend and reporting of matters on corporate
developments and corporate securities to foreign investors.
9. Corporate advisory services
Financial intermediaries particularly banks have set up corporate advisory services
branches to render services exclusively to their corporate customers. For instance, some
banks have extended computer terminals to their corporate customers so that they can
transact some of their important banking transactions by sitting in their own office. As new
avenues of finance like Euro loans, GDRs etc. are available to corporate customers; this
service is immense help to the customers.
10. Securitization
Securitization is a technique whereby a financial company converts its ill-liquid, nonnegotiable and high value financial assets into securities of small value which are made
tradable and transferable. A financial institution might have a lot of its assets blocked up in
assets like real estate, machinery etc., which are long term in nature and which are nonnegotiable? In such cases, securitization would help the financial institution to raise cash
against such assets by means of issuing securities of small values to the public. Like any
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other security, they can be traded in the market.

11. Derivative security
A derivative security is a security whose value depends upon the values of other basic
variables backing the security. In most cases, these variables are nothing but the prices of
traded securities. A derivative security is basically used as a risk management tool and it is
restored to cover the risks due to price fluctuations by the investments manager. Derivative
helps to break the risk into various components such as credit risk, interest rate risk,
exchange rates risk and so on. It enables the various risk components to be identified
precisely and priced them and even traded them if necessary.
12. New products in forex market

New products have also emerged in the forex markets of developed countries. Some of
these products are yet to make full entry in Indian markets. Among them the following are
the important ones:
a) Forward contracts
b) Options
c) Swaps
13. Letter of credit (LOC)
LOC is an arrangement of a financing institution/bank of one country with another
institutions / bank / agent to support the export of goods and services so as to enable the
importers to import no deferred payment terms. This may be backed by a guarantee
furnished by the institution / bank in the importing country. The LOC helps the exporters
to get payment immediately as soon as the goods are shipped. The greatest advantage is
that it saves a lot of time and money on mutual verification of bonafides, source of finance
etc. It serves as a source of forex.
Financial Services
Meaning:
All types of activities which are of a financial nature could be brought under the term
financial services.
The term Financial Services in a broad sense means mobilizing and allocating savings.
Thus, it includes all activities involved in the transformation of saving into investment.
The financial service can also be called financial intermediation.
Financial intermediation is a process by which funds are mobilized from a large number of
savers and make them available to all those who are in need of it and particularly to
corporate customers.
A well developed financial services industry is absolutely necessary to mobilize the savings
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3rd Semester
and to allocate them to various investable channels and thereby to promote industrial
development in a country.
Classification of financial services industry
The financial intermediaries in India can be traditionally classified into two:
iii. Capital market intermediaries
iv. Money market intermediaries
The capital market intermediaries consist of term lending institutions and investing
institutions which mainly provide long term funds.
On the other hand, money market consists of commercial banks, co-operative banks and
other agencies which supply only short term funds.
Scope of financial services
Financial services cover a wide range of activities. They can be broadly classified into two
namely:
iii. Traditional activities
iv. Modern activities
Traditional activities
Traditionally, the financial intermediaries have been rendering a wide range of services
encompassing both capital and money market activities. They can be grouped under two
heads viz;
iii. Fund based activities and
iv. Non-fund based activities
Fund based activities
The traditional services which come under fund based activities are the following:
vi. Underwriting of or investment in shares, debentures, bonds etc. of new issues (primary
market activities)
vii. Dealing in secondary market activities
viii. Participating in money market instruments like commercial papers, certificate of
deposits, treasury bills, discounting of bills etc.
ix. Involving in equipment leasing, hire purchase, venture capital, seed capital etc.
x. Dealing in foreign exchange market activities.
Non-fund based activities

Financial intermediaries provide services on the basis of non-fund activities also. This can
also be called fee based activity. A wide variety of services, are being provided under this
head. They include the following:
v. Managing the capital issues, i.e., management of pre-issue and post-issue activities
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3rd Semester
relating to the capital issue in accordance with the SEBI guidelines and thus enabling the
promoters to market their issues.
vi. Making arrangements for the placement of capital and debt instruments with
investment institutions.
vii. Arrangement of funds from financial institutions for the clients project cost or his
working capital requirements.
viii. Assisting in the process of getting all government and other clearances.
Modern activities
Besides the above traditional services, the financial intermediaries render innumerable
services in recent times. Most of them are in the nature of non-fund based activity.
xi. Rendering project advisory services right from the preparation of the project report till
the raising of funds for starting the project with necessary government approval.
xii. Planning for mergers and acquisitions and assisting for their smooth carry out.
xiii. Guiding corporate customers in capital restructuring.
xiv. Acting as Trustees to the debenture holders
xv. Structuring the financial collaboration/joint ventures by identifying suitable joint
venture partner and preparing joint venture agreement.
xvi. Rehabilitating and reconstructing sick companies through appropriate scheme of
reconstruction and facilitating the implementation of the scheme.
xvii. Hedging risks due to exchange rate risk, interest rate risk, economic risk and political
risk by using swaps and other derivative products.
xviii. Managing the portfolio of large public sector corporations.
xix. Undertaking risk management services like insurance services, buy back options,
capital market etc.
xx. Promoting credit rating agencies for the purpose of rating companies which want to go
public by the issue of debt instruments.
Financial products and services
Today, the importance of financial services is gaining momentum all over the world.
In these days of complex finance, people expect a financial service company to play a very
dynamic role not only as provider of finance but also as a departmental store of finance.
As a result, the clients both corporates and individuals are exposed to the phenomena of
volatility and uncertainty and hence they expect the financial service company to innovate
new products and services so as to meet their varied requirements.
14. Merchant Banking:

A merchant banker is a financial intermediary who helps to transfer capital from those
who possess it to those who need it. Merchant banking includes a wide range of activities
such as management of customers securities, portfolio management, project counseling
and appraisal, underwriting of shares and debentures, loan syndication, acting as banker
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for the refund orders, handling interest and dividend warrants etc. Thus merchant banker
renders a host of services to corporates and thus promotes industrial development in the
country.
15. Loan Syndication
This is more or less similar to consortium financing. But, this work is taken up by the
merchant banker as a lead manager. It refers to a loan arranged by a bank called lead
manager for a borrower who is usually a large corporate customer or a government
department. The other banks who are willing to lend can participate in the loan by
contributing a amount suitable to their own lending policies. Since a single bank cannot
provide such a huge sum as loan, a number of banks join together and form a syndicate. It
also enables the members of the syndicate to share the credit risk associated with a
particular loan among themselves.
16. Leasing
A lease is an agreement under which a company or a firm, acquires a right to make use of a
capital asset like machinery, on acquire any ownership to the asset, but he can use it and
have full control over it. He is expected to pay for all maintenance charges and repairing
and operating costs.
17. Mutual Funds
A mutual fund refers to a fund raised by a financial services company by pooling the
savings of the public. It is invested in a diversified portfolio with a view to spreading and
minimizing risk. The fund provides Investment Avenue for small investors who cannot
participate in the equities of big companies. It ensures low risks, steady returns, high
liquidity and better capital appreciation the long run.
18. Factoring
Factoring refers to the process of managing the sales ledger of a client by a financial service
company. In other words, it is an arrangement under which a financial intermediary
assumes the credit risk in the collection of book debts for its clients. The entire
responsibility of collecting the book debts passes on to the factor. His services can be
compared to a del credre agent who undertakes to collect debts. But, a factor provides
credit information, collects debts, monitors the sales ledger and provides finance against
debts. Thus, he provides a number of services apart from financing.
19. Forfeiting
Forfeiting is a technique by which a forfeiter (financing agency) discounts an export bill
and pay ready cash to the exporter who can concentrate on the export front without
bothering about collection of export bills. The forfeiter does so without any recourse to the
exporter and the exporter is protected against the risk of non-payment of debts by the
importers.
20. Venture capital
A venture capital is another method of financing in the form of equity participation. A
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venture capitalist finances a project based on the potentialities of a new innovative project.
It is in contrast to the conventional security based financing. Much thrust is given to new
ideas or technological innovations. Finance is being provided not only for start-up capital
but also for development capital by the financial intermediary.
21. Custodial services
It is yet another line of activity which has gained importance, of late. Under this, a financial
intermediary mainly provides services to clients, particularly to foreign investors, for a
prescribed fee. Custodial services provide agency services like safe keeping of shares and
debentures, collection of interest and dividend and reporting of matters on corporate
developments and corporate securities to foreign investors.
22. Corporate advisory services

Financial intermediaries particularly banks have set up corporate advisory services
branches to render services exclusively to their corporate customers. For instance, some
banks have extended computer terminals to their corporate customers so that they can
transact some of their important banking transactions by sitting in their own office. As new
avenues of finance like Euro loans, GDRs etc. are available to corporate customers; this
service is immense help to the customers.
23. Securitization
Securitization is a technique whereby a financial company converts its ill-liquid, nonnegotiable and high value financial assets into securities of small value which are made
tradable and transferable. A financial institution might have a lot of its assets blocked up in
assets like real estate, machinery etc., which are long term in nature and which are nonnegotiable? In such cases, securitization would help the financial institution to raise cash
against such assets by means of issuing securities of small values to the public. Like any
other security, they can be traded in the market.
24. Derivative security
A derivative security is a security whose value depends upon the values of other basic
variables backing the security. In most cases, these variables are nothing but the prices of
traded securities. A derivative security is basically used as a risk management tool and it is
restored to cover the risks due to price fluctuations by the investments manager. Derivative
helps to break the risk into various components such as credit risk, interest rate risk,
exchange rates risk and so on. It enables the various risk components to be identified
precisely and priced them and even traded them if necessary.
25. New products in forex market
New products have also emerged in the forex markets of developed countries. Some of
these products are yet to make full entry in Indian markets. Among them the following are
the important ones:
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d) Forward contracts
e) Options
f) Swaps
26. Letter of credit (LOC)
LOC is an arrangement of a financing institution/bank of one country with another
institutions / bank / agent to support the export of goods and services so as to enable the
importers to import no deferred payment terms. This may be backed by a guarantee
furnished by the institution / bank in the importing country. The LOC helps the exporters
to get payment immediately as soon as the goods are shipped. The greatest advantage is
that it saves a lot of time and money on mutual verification of bonafides, source of finance
etc. It serves as a source of forex.
Module 2 BANKS & INSTITUTIONS

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Banks Operations & Special Role of Banks Specialized Financial Institutions

EXIM, NABARD, HUDCO, SIDBI, IFCI - Universal Banking & Innovations
Securitization RTGS & ECS - Cooperative Banks Features, Types, Structure
and Growth, Small Savings and Provident Funds - Provident Funds- Pension Funds
Life insurance Companies - General Insurance Corporation
Res erv e B an k of Ind i a
E s tab l i s h men t
T h e Res erve B an k of Ind i a w as estab li sh ed on Ap ri l 1, 1935 i n accord an ce
w i th th e p rovi si on s of th e Reserve B an k of In d i a Act, 1934 .
T h e Cen tral O f f i ce of th e Res erve B an k w as in i ti al l y estab l i sh ed in
Cal cu tta b u t w as per man en tl y mov ed to Mu mb ai i n 1937. T h e C en tral
O ff i ce i s w h ere th e Gove rn or si ts an d w h ere p ol i ci es are f ormu l ated .
T h ou gh ori gin al l y p ri vatel y ow n ed , sin ce n ati on al i sati on i n 1949, th e
Res erv e B an k i s fu ll y ow n ed b y th e Govern men t of In d i a.
O b jecti ve
Pri mary ob je cti ve of B FS i s to u n d ertak e con sol i d ated sup ervi si on of th e
f i n an ci al sector co mp ri si n g co mmer ci al b an k s, f in an ci al i n sti tu ti on s and
n on -b ank i n g f i n an ce co mp an i es.
Mon etary Au th ori t y:
For mu l a tes i mp l e men ts an d mon i tors t h e mon e tary p ol i cy .

O b jecti ve: mai n tai n i n g p ri ce stab i l i ty an d en su ri n g ad equ ate f l ow of
cred i t to p rod u cti v e secto rs.
Regu l ator an d su p ervi sor of th e f i n an ci al system:
Pr esc ri b es b road p ara met ers of b an k in g op erati on s w i thin wh i ch th e

cou n try' ' s b an ki n g an d fi n an ci al system f u n cti on s.
O b jecti ve: mai n tai n p ub l i c con f i d en ce i n th e syste m, p rot ect
d ep osi tors' ' i n terest an d p rovi d e cost -ef f ecti ve b an k i n g servi ces to
th e p u b l i c.
Regu l ator an d su p ervi sor of th e p ayme n t syste ms
o Au th ori ses setti n g u p of p aymen t syst e ms
o L ays d ow n stan d ard s f or op erati on of th e p aymen t syste m
o I ssu es d i recti on , cal l s f or retu rn s/ i nf or mati on f rom p ay men t
syste m op era tors.
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Man ager of Fo rei g n E xch an ge
Man ages th e For ei gn E xch an ge Man age men t A ct, 1999.

O b jecti ve: to f aci l i tate ex tern al t rad e an d p aymen t an d pro mote
ord erl y d evel op me n t an d mai n ten an ce of f orei gn exch ange mark et i n
I n d i a.
I s s u er of cu rren cy:
I s s u es an d exch an ges or d estroys cu rr en cy an d coi n s n ot f i t f or

ci rcu l ati on .
O b jecti ve: to gi ve t h e p u b li c ad eq u ate q u an ti ty of su pp l i es of
cu rren cy n ot es an d coi n s an d in good q u al i ty.
Devel op men tal rol e
Pe rf or ms a w i d e ran ge of p romoti on al f u n cti on s to su p p ort n ati on al

ob jecti ves.
Rel ated Fu n cti on s
B an k er to th e Gov e rn men t: p erf or ms merch an t b an k i n g f u n cti on f or

th e cen tral an d th e state gove rn men ts; al so acts as th ei r b an k er.
B an k er to b an k s: mai n tai n s b an k i n g accou n ts of al l sch ed u l ed
b an k s.
ORGANISATION STRUCTURE
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Monetary policy is the process by which monetary authority of a country, generally a

central bank controls the supply of money in the economy by exercising its control over
interest rates in order to maintain price stability and achieve high economic growth.[1] In
India, the central monetary authority is the Reserve Bank of India (RBI). is so designed as
to maintain the price stability in the economy. Other objectives of the monetary policy of
India, as stated by RBI, are:
1. Price Stability
Price Stability implies promoting economic development with considerable
emphasis on price stability. The centre of focus is to facilitate the
environment which is favourable to the architecture that enables the
developmental projects to run swiftly while also maintaining reasonable
price stability.
2. Controlled Expansion Of Bank Credit
One of the important functions of RBI is the controlled expansion of bank
credit and money supply with special attention to seasonal requirement for
credit without affecting the output.
3. Promotion of Fixed Investment
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4.
5.
6.
7.
8.
9.
3rd Semester
The aim here is to increase the productivity of investment by restraining non

essential fixed investment.
Restriction of Inventories
Overfilling of stocks and products becoming outdated due to excess of stock
often results is sickness of the unit. To avoid this problem the central
monetary authority carries out this essential function of restricting the
inventories. The main objective of this policy is to avoid over-stocking and
idle money in the organization
Promotion of Exports and Food Procurement Operations
Monetary policy pays special attention in order to boost exports and
facilitate the trade. It is an independent objective of monetary policy.
Desired Distribution of Credit
Monetary authority has control over the decisions regarding the allocation of
credit to priority sector and small borrowers. This policy decides over the
specified percentage of credit that is to be allocated to priority sector and
small borrowers.
Equitable Distribution of Credit
The policy of Reserve Bank aims equitable distribution to all sectors of the
economy and all social and economic class of people
To Promote Efficiency
It is another essential aspect where the central banks pay a lot of attention. It
tries to increase the efficiency in the financial system and tries to incorporate
structural changes such as deregulating interest rates, ease operational
constraints in the credit delivery system, to introduce new money market
instruments etc.
Reducing the Rigidity
RBI tries to bring about the flexibilities in the operations which provide a
considerable autonomy. It encourages more competitive environment and
diversification. It maintains its control over financial system whenever and
wherever necessary to maintain the discipline and prudence in operations of
the financial system.
Open Market Operations

An open market operation is an instrument of monetary policy which involves
buying or selling of government securities from or to the public and banks. This
mechanism influences the reserve position of the banks, yield on government
securities and cost of bank credit. The RBI sells government securities to contract
the flow of credit and buys government securities to increase credit flow. Open
market operation makes bank rate policy effective and maintains stability in
government securities market.
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CRR Graph from 1992 to 2011[2]

Cash Reserve Ratio
Cash Reserve Ratio is a certain percentage of bank deposits which banks are
required to keep with RBI in the form of reserves or balances .Higher the CRR with
the RBI lower will be the liquidity in the system and vice-versa.RBI is empowered to
vary CRR between 15 percent and 3 percent. But as per the suggestion by the
Narshimam committee Report the CRR was reduced from 15% in the 1990 to 5
percent in 2002. As of November 2012, the CRR is 4.25 percent.[3]
SLR Graph from 1991 to 2011[4]

Statutory Liquidity Ratio
Every financial institute have to maintain a certain amount of liquid assets from
their time and demand liabilities with the RBI. These liquid assets can be cash,
precious metals, approved securities like bonds etc. The ratio of the liquid assets to
time and demand liabilities is termed as Statutory Liquidity Ratio.There was a
reduction from 38.5% to 25% because of the suggestion by Narshimam Committee.
The current SLR is 23%.[5]
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Bank Rate Graph from 1991 to 2011

Bank Rate Policy[6]
Bank rate is the rate of interest charged by the RBI for providing funds or loans to
the banking system. This banking system involves commercial and co-operative
banks, Industrial Development Bank of India, IFC, EXIM Bank, and other
approved financial institutes. Funds are provided either through lending directly or
rediscounting or buying money market instruments like commercial bills and
treasury bills. Increase in Bank Rate increases the cost of borrowing by commercial
banks which results into the reduction in credit volume to the banks and hence
declines the supply of money. Increase in the bank rate is the symbol of tightening of
RBI monetary policy. Bank rate is also known as Discount rate. The current Bank
rate is 6%.
Credit Ceiling
In this operation RBI issues prior information or direction that loans to the
commercial banks will be given up to a certain limit. In this case commercial bank
will be tight in advancing loans to the public. They will allocate loans to limited
sectors. Few example of ceiling are agriculture sector advances, priority sector
lending.
Credit Authorization Scheme
Credit Authorization Scheme was introduced in November, 1965 when P C
Bhattacharya was the chairman of RBI. Under this instrument of credit regulation
RBI as per the guideline authorizes the banks to advance loans to desired sector
Moral Suasion
Moral Suasion is just as a request by the RBI to the commercial banks to take so
and so action and measures in so and so trend of the economy. RBI may request
commercial banks not to give loans for unproductive purpose which does not add to
economic growth but increases inflation.
Securities and Exchange Board of India (frequently abbreviated SEBI) is the regulator for
the securities market in India.
It was formed officially by the Government of India in 1992 with SEBI Act 1992 being
passed by the Indian Parliament. SEBI is headquartered in the business district of Bandra
Kurla Complex complex in Mumbai, and has Northern, Eastern, Southern and Western
regional offices in New Delhi, Kolkata, Chennai and Ahmedabad.
Controller of Capital Issues was the regulatory authority before SEBI came into existence;
it derived authority from the Capital Issues (Control) Act, 1947.
Initially SEBI was a non statutory body without any statutory power. However in 1995, the
SEBI was given additional statutory power by the Government of India through an
amendment to the Securities and Exchange Board of India Act 1992. In April, 1998 the
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SEBI was constituted as the regulator of capital markets in India under a resolution of the
Government of India.
The SEBI is managed by six members, i.e. by the chairman who is nominated by central
government & two members, i.e. officers of central ministry, one member from the RBI &
the remaining two are nominated by the central government. The office of SEBI is situated
at Mumbai with its regional offices at Kolkata, Delhi & Chennai.
Organization structure
Upendra Kumar Sinha was appointed chairman on 18 February 2011 replacing C. B.
Bhave.[2]
The Board comprises
Name
Designation
Upendra Kumar Sinha Chairman
Prashant Saran
Whole Time Member
Rajeev Kumar Agarwal Whole Time Member
Dr. Thomas Mathew
Joint Secretary, Ministry of Finance
V. K. Jairath magya
Member Appointed
Anand Sinha
Deputy Governor, Reserve Bank of India
Naved Masood
Secretary,Ministry of Corporate Affairs
List of former Chairmen

Name
From
C. B. Bhave
M.
Damodaran
G. N. Bajpai
D. R. Mehta
S. S. Nadkarni
G. V.
Ramakrishna
Dr. S. A. Dave
18 February 2008 18 February 2011
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17 January 1994 31 January 1995
24 August 1990
17 January 1994
12 April 1988
23 August 1990
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Functions and responsibilities

The function of SEBI in monitoring the stock exchange:
1. The business of Stock Exchange the regulated.
2. Prevents fraudulent and unfair trade practises in stock exchange.
3. Regulates the acquisition of shares and takeover of companies.
4. Undertakes the checking and inspection of stock exchanges.
5. Conducting enquires and inspection of stock exchange.
6. Protects the interest of the investors.

The various powers of stock exchange:
1. Power relating to insider trading.
2. Power relating to stock exchange and dealing in securities.
3. Power relating to violation of rules and regulation.
4. Power to regulate business of stock exchange and control it unfair trade.
5. Power under securities contract act.

SEBI has to be responsive to the needs of three groups, which constitute the market:
The issuers of securities

The investors
The market intermediaries.
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SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasiexecutive. It drafts regulations in its legislative capacity, it conducts investigation and
enforcement action in its executive function and it passes rulings and orders in its judicial
capacity. Though this makes it very powerful, there is an appeals process to create
accountability. There is a Securities Appellate Tribunal which is a three-member tribunal
and is presently headed by a former Chief Justice of a High court - Mr. Justice NK Sodhi.
A second appeal lies directly to the Supreme Court.
SEBI has enjoyed success as a regulator by pushing systemic reforms aggressively and
successively (e.g. the quick movement towards making the markets electronic and
paperless rolling settlement on T+2 basis). SEBI has been active in setting up the
regulations as required under law.
SEBI has also been instrumental in taking quick and effective steps in light of the global
meltdown and the Satyam fiasco It had increased the extent and quantity of disclosures to
be made by Indian corporate promoters. More recently, in light of the global meltdown,it
liberalised the takeover code to facilitate investments by removing regulatory structures. In
one such move, SEBI has increased the application limit for retail investors to Rs 2 lakh,
from Rs 1 lakh at present.
Powers
For the discharge of its functions efficiently, SEBI has been invested with the necessary
powers which are:
1. To approve bylaws of stock exchanges.
2. To require the stock exchange to amend their bylaws.
3. Inspect the books of accounts and call for periodical returns from recognized stock
exchanges.
4. Inspect the books of accounts of a financial intermediaries.
5. Compel certain companies to list their shares in one or more stock exchanges.
6. Levy fees and other charges on the intermediaries for performing its functions.
7. Grant license to any person for the purpose of dealing in certain areas.
8. Delegate powers exercisable by it.
9. Prosecute and judge directly the violation of certain provisions of the companies
Act.
SEBI Committees
1. Technical Advisory Committee
2. Committee for review of structure of market infrastructure institutions
3. Members of the Advisory Committee for the SEBI Investor Protection and
Education Fund
4. Takeover Regulations Advisory Committee
5. Primary Market Advisory Committee (PMAC)
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6. Secondary Market Advisory Committee (SMAC)

7. Mutual Fund Advisory Committee
8. Corporate Bonds & Securitization Advisory Committee
9. Takeover Panel
10. SEBI Committee on Disclosures and Accounting Standards (SCODA)
11. High Powered Advisory Committee on consent orders and compounding of offences
12. Derivatives Market Review Committee
13. Committee on Infrastructure Funds
Role of SEBI in marketing of securities and protection of investor interest

The Securities and Exchange Board of India (SEBI) is a watchdog organization created to
control and ensure the orderly growth and functioning of the Indian capital markets and to
protect investors interest. This formal body began its operations on January 30, 1992, with
its headquarters in Mumbai. SEBI India was created as the Indian economy opened up,
and there was a need to regulate the actively emerging stock market
Foster the development and regulation of the Indian securities market.
Control the functioning of stock exchanges and other securities markets, including IPOs
and mutual funds.
Prohibit the stock markets unfair trade practices and insider trading.
Regulate and register the participants of the securities market, including stock brokers,
share transfer agents, merchant bankers, underwrites, investment advisors, and bankers
and registrars to an issue.
Regulate the working of credit rating agencies, foreign institutional investors and
depositories, among others.
Use its power to seek information from banks or other bodies constituted by the
government
Seek investigation against violation of rules, if any, associated with the securities market.
Judge and penalize violators.
Not entering into an agreement with the clients or not addressing their complaints.
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Fraudulent trade practices.
Not informing about acquisitions and take overs.
Not observing the rules and regulations for a mutual company.
The board may also suspend the trading of a security, and prohibit or restrain certain
persons from dealing in securities.
BANKS
A bank is a financial institution that serves as a financial intermediary
A commercial bank (or business bank) is a type of financial institution and intermediary. It
is a bank that provides transactional, savings, and money market accounts and that accepts
time deposits.
The term "commercial bank" to refer to a bank or a division of a bank primarily dealing
with deposits and loans from corporations or large businesses.
The role of commercial banks
Commercial banks engage in the following activities:
1. processing of payments by way of telegraphic transfer, EFTPOS, internet banking,
or other means.
2. issuing bank drafts and bank cheques.
3. accepting money on term deposit.
4. lending money by overdraft, installment loan, or other means
5. providing documentary and standby letter of credit, guarantees, performance
bonds, securities underwriting commitments and other forms of off balance sheet
exposures.
6. safekeeping of documents and other items in safe deposit boxes
7. distribution or brokerage, with or without advice, of insurance, unit trusts and
similar financial products as a financial supermarket.
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ROLES OF BANKS ON ECONOMY

Banking system and the Financial Institutions play very significant role in the economy.
First and foremost is in the form of catering to the need of credit for all the sections of
society. The modern economies in the world have developed primarily by making best use
of the credit availability in their systems. An efficient banking system must cater to the
needs of high end investors by making available high amounts of capital for big projects in
the industrial, infrastructure and service sectors. At the same time, the medium and small
ventures must also have credit available to them for new investment and expansion of the
existing units. Rural sector in a country like India can grow only if cheaper credit is
available to the farmers for their short and medium term needs
The banks and the financial institutions also cater to another important need of the
society i.e. mopping up small savings at reasonable rates with several options. The
common man has the option to park his savings under a few alternatives, including
the small savings schemes introduced by the government from time to time and in
bank deposits in the form of savings accounts, recurring deposits and time deposits.
Another option is to invest in the stocks or mutual funds.
NEFT refers to National Electronic Funds Transfer. It is an online system for
transferring funds from one financial institution to another within India (usually
banks). The system was launched in November 2005.
RTGS is an acronym that stands for Real Time Gross Settlement. RTGS is a funds
transfer system where money is moved from one bank to another in real-time, and
on gross basis. When using the banking method, RTGS is the fastest possible way to
transfer money. Real-time means that the payment transaction isnt subject to any
waiting period
The fundamental difference between RTGS and NEFT, is that while RTGS is based
on gross settlement, NEFT is based on net-settlement. Gross settlement is where a
transaction is completed on a one-to-one basis without bunching with other
transactions
RTGS transactions involve large amounts of cash, basically only funds above Rs
100,000 may be transferred using this system. For NEFT, any amount below Rs
100,000 may be transferred, and this system is generally for smaller value
transactions involving smaller amounts of money.
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NABARD was established on the recommendations of Shivaraman Committee, by an act of

Parliament on 12 July 1982 to implement the National Bank for Agriculture and Rural
Development Act 1981
NABARD has following roles to implement:
Serves as an apex financing agency for the institutions providing investment and
production credit for promoting the various developmental activities in rural areas
Takes measures towards institution building for improving absorptive capacity of
the credit delivery system, including monitoring, formulation of rehabilitation
schemes, restructuring of credit institutions, training of personnel, etc.
Co-ordinates the rural financing activities of all institutions engaged in
developmental work at the field level and maintains liaison with Government of
India, State Governments, Reserve Bank of India (RBI) and other national level
institutions concerned with policy formulation
Undertakes monitoring and evaluation of projects refinanced by it.
EXIM BANK
Export-Import Bank of India is the premier export finance institution of the country,
established in 1982 under the Export-Import Bank of India Act 1981.[2]
The Export-Import (EXIM) Bank of India is the principal financial institution in India for
coordinating the working of institutions engaged in financing export and import trade. It is
a statutory corporation wholly owned by the Government of India. It was established on
January 1, 1982 for the purpose of financing, facilitating and promoting foreign trade of
India.
Capital:
The authorised capital of the EXIM Bank is Rs. 200 crore and paid up capital is Rs. 100
crore, wholly subscribed by the Central Government. The bank can raise additional
resources through:
(i) Loans/grants from Central Government and Reserve Bank of India ;
(ii) Lines of credit from institutions abroad ;
(iii) Funds raised from Euro Currency markets ;
(iv) Bonds issued in India.
What are the functions of Export-Import Bank of India:
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The main functions of the EXIM Bank are as follows:

(i) Financing of exports and imports of goods and services, not only of India but also of the
third world countries;
(ii) Financing of exports and imports of machinery and equipment on lease basis;
(iii) Financing of joint ventures in foreign countries;
(iv) Providing loans to Indian parties to enable them to contribute to the share capital of
joint ventures in foreign countries;
(v) to undertake limited merchant banking functions such as underwriting of stocks,
shares, bonds or debentures of Indian companies engaged in export or import; and
(vi) To provide technical, administrative and financial assistance to parties in connection
with export and import.
The Housing and Urban Development Corporation Limited (HUDCO) is a governmentowned corporation in India. One of the public sector undertakings, it is wholly owned by
the Union Government and is under the administrative control of the Ministry of Housing
and Urban Poverty Alleviation. It is charged with building affordable housing and carrying
out urban development. HUDCO describes its mission as:
To provide long term finance for construction of houses for residential purposes or
finance or undertake housing and urban development programmes in the country;
to finance or undertake, wholly or partly, the setting up of new or satellite towns;
to subscribe to the debentures and bonds to be issued by the State Housing (and/or
Urban Development) Boards, Improvement Trusts, Development Authorities etc.;
specifically for the purpose of financing housing and urban development
programmes;
to finance or undertake the setting up of industrial enterprises of building material;
to administer the moneys received, from time to time, from the Government of India
and other sources as grants or otherwise for the purposes of financing or
undertaking housing and urban development programmes in the country and;
to promote, establish, assist, collaborate and provide consultancy services for the
projects of designing and planning of works relating to Housing and Urban
Development programmes in India and abroad
HUDCO was incorporated on April 25, 1970

. The stated objectives of the conference are as follows
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To make urban, applied research relevant to an increased spectrum of stakeholders

including academics, civil societies, policy think tanks, research institutes, media,
private sector, and citizens.
To leverage experience to generate useful evidence to promote applied research and
responsive policy-making.
To create new research initiatives and/ or collaborations with a potential for
creating tangible changes/ reforms for the benefit of urban India and its context.
To identify and explore research issues affecting urban India, by exploring through
a perspective of eight selected themes.
Publish research papers and evidence presented/ discussed in the form of casebooks, web publications, and potentially a special issue of a journal.
Small Industries Development Bank of India is an independent financial institution aimed

to aid the growth and development of micro, small and medium-scale enterprises (MSME)
in India. Set up on April 2, 1990 through an act of parliament, it was incorporated initially
as a wholly owned subsidiary of Industrial Development Bank of India. Current
shareholding is widely spread among various state-owned banks, insurance companies and
financial institutions. Beginning as a refinancing agency to banks and state level financial
institutions for their credit to small industries, it has expanded its activities, including
direct credit to the SME through 100 branches in all major industrial clusters in
India.Besides, it has been playing the development role in several ways such as support to
micro-finance institutions for capacity building and onlending. Recently it has opened
seven branches christened as Micro Finance branches, aimed especially at dispensing loans
up to Rs. 5.00 lakh.
It is the Principal Financial Institution for the Promotion, Financing and

Development of the Micro, Small and Medium Enterprise (MSME) sector and for
Co-ordination of the functions of the institutions engaged in similar activities SIDBI
has also floated several other entities for related activities. Credit Guarantee Fund
Trust for Micro and Small Enterprises provides guarantees to banks for collateralfree loans extended to SME. SIDBI Venture Capital Ltd.is a venture capital
company focussed at SME. SME Rating Agency of India Ltd. provides composite
ratings to SME. Another entity founded by SIDBI is ISARC - India SME Asset
Reconstruction Company in 2009, as specialized entities for NPA resolution for
SME.
Mr. Sushil Mahnot is the chairman of SIDBI since April 4, 2012

Industrial Finance Corporation of India
At the time of independence in 1947, India's capital market was relatively underdeveloped.
Although there was significant demand for new capital, there was a dearth of providers.
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Merchant bankers and underwriting firms were almost non-existent. And commercial
banks were not equipped to provide long-term industrial finance in any significant manner.
It is against this backdrop that the government established The Industrial Finance
Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution
in the country to cater to the long-term finance needs of the industrial sector. The newlyestablished DFI was provided access to low-cost funds through the central bank's Statutory
Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to
corporate borrowers at concessional rates.
This arrangement continued until the 1990s when it was recognized that there was need for
greater flexibility to respond to the changing financial system. It was also felt that IFCI
should directly access the capital markets for its funds needs. It is with this objective the
constitution of IFCI was changed in 1993 from a statutory corporation to a company under
the Indian Companies Act, 1956. Subsequently the name of the company was also changed
to 'IFCI Limited ' with effect from October 1999.
IFCI has fulfilled its original mandate as a DFI by providing long term financial support to
all segments of Indian Industry. It has also been chiefly instrumental in translating the
government's development priorities into reality. Until the establishment of ICICI in 1956,
IFCI remained solely responsible for implementation of the government's industrial policy
initiatives. Its contribution to the modernization of Indian Industry, export promotion,
import substitution, entrepreneurship development, pollution control, energy conservation
and generation of both direct and indirect employment is noteworthy.
At the time of independence in 1947, India's capital market was relatively underdeveloped.
Although there was significant demand for new capital, there was a dearth of providers.
Merchant bankers and underwriting firms were almost non-existent. And commercial
banks were not equipped to provide long-term industrial finance in any significant manner.
It is against this backdrop that the government established The Industrial Finance
Corporation of India (IFCI) on July 1, 1948, as the first Development Financial Institution
in the country to cater to the long-term finance needs of the industrial sector. The newlyestablished DFI was provided access to low-cost funds through the central bank's Statutory
Liquidity Ratio or SLR which in turn enabled it to provide loans and advances to
corporate borrowers at concessional rates.
This arrangement continued until the 1990s when it was recognized that there was need for
greater flexibility to respond to the changing financial system. It was also felt that IFCI
should directly access the capital markets for its funds needs. It is with this objective the
constitution of IFCI was changed in 1993 from a statutory corporation to a company under
the Indian Companies Act, 1956. Subsequently the name of the company was also changed
to 'IFCI Limited ' with effect from October 1999.
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IFCI has fulfilled its original mandate as a DFI by providing long term financial support to
all segments of Indian Industry. It has also been chiefly instrumental in translating the
government's development priorities into reality. Until the establishment of ICICI in 1956,
IFCI remained solely responsible for implementation of the government's industrial policy
initiatives. Its contribution to the modernization of Indian Industry, export promotion,
import substitution, entrepreneurship development, pollution control, energy conservation
and generation of both direct and indirect employment is noteworthy.
Formation of IFCI
The IFCI was the 1st specialised financial institution setup in India to provide term finance
to large industries in India. It was established on 1st July, 1948 under The Industrial
Finance Corporation Act of 1948. In 1993 it was reconstituted as a company to impart
higher degree of operational flexibility.
Objectives of IFCI
The main objective of IFCI is to provide medium and long term financial assistance to
large scale industrial undertakings, particularly when ordinary bank accommodation does
not suit the undertaking or finance cannot be profitably raised by the concerned by the
issue of shares.
Functions of IFCI
1) For setting up a new industrial undertaking.
2) For expansion and diversification of existing industrial undertaking.
3) For renovation and modernisation of existing concerns.
4) For meeting the working capital requirements of industrial concerns in some exceptional
cases.
Definition of 'Universal Banking'
A banking system in which banks provide a wide variety of financial services, including
both commercial and investment services. Universal banking is common in some
European countries, including Switzerland. In the United States, however, banks are
required to separate their commercial and investment banking services. Proponents of
universal banking argue that it helps banks better diversify risk. Detractors think
dividing up banks' operations is a less risky strategy
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A securitization is a financial transaction in which assets are pooled and securities

representing interests in the pool are issued
Securitization is the financial practice of pooling various types of contractual debt such
as residential mortgages, commercial mortgages, auto loans or credit card debt
obligations and selling said consolidated debt as bonds, pass-through securities, or
Collateralized mortgage obligation (CMOs), to various investors. The principal and
interest on the debt, underlying the security, is paid back to the various investors
regularly. Securities backed by mortgage receivables are called mortgage-backed
securities (MBS), while those backed by other types of receivables are asset-backed
securities (ABS).
According to the International Co-operative Alliance Statement of co-operative identity, a

co-operative is an autonomous association of persons united voluntarily to meet their
common economic, social, and cultural needs and aspirations through a jointly-owned and
democratically-controlled enterprise. Co-operatives are based on the values of self-help,
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self-responsibility, democracy, equality, equity and solidarity. In the tradition of their

founders, co-operative members believe in the ethical values of honesty, openness, social
responsibility and caring for others.
The 7 co-operative principles are :
1. Voluntary and open membership
2. Democratic member control
3. Member economic participation
4. Autonomy and independence
5. Education, training and information
6. Co-operation among Co-operatives
7. Concern for Community
A co-operative bank is a financial entity which belongs to its members, who are at the same
time the owners and the customers of their bank. Co-operative banks are often created by
persons belonging to the same local or professional community or sharing a common
interest. Co-operative banks generally provide their members with a wide range of banking
and financial services (loans, deposits, banking accounts...).
Co-operative banks differ from stockholder banks by their organization, their goals, their
values and their governance. In most countries, they are supervised and controlled by
banking authorities and have to respect prudential banking regulations, which put them at
a level playing field with stockholder banks. Depending on countries, this control and
supervision can be implemented directly by state entities or delegated to a co-operative
federation or central body.
Even if their organizational rules can vary according to their respective national
legislations, co-operative banks share common features :
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Customer's owned entities : in a co-operative bank, the needs of the customers meet the
needs of the owners, as co-operative bank members are both. As a consequence, the first
aim of a co-operative bank is not to maximise profit but to provide the best possible
products and services to its members. Some co-operative banks only operate with their
members but most of them also admit non-member clients to benefit from their banking
and financial services.
Democratic member control : co-operative banks are owned and controlled by their
members, who democratically elect the board of directors. Members usually have equal
voting rights, according to the co-operative principle of "one person, one vote".
Profil allocation : in a co-operative bank, a significant part of the yearly profit, benefits or
surplus is usually allocated to constitute reserves. A part of this profit can also be
distributed to the co-operative members, with legal or statutory limitations in most cases.
Profit is usually allocated to members either through a patronage dividend, which is
related to the use of the co-operative's products and services by each member, or through
an interest or a dividend, which is related to the number of shares subscribed by each
member.
Co-operative banks are deeply rooted inside local areas and communities. They are
involved in local development and contribute to the sustainable development of their
communities, as their members and management board usually belong to the communities
in which they exercise their activities. By increasing banking access in areas or markets
where other banks are less present - SMEs, farmers in rural areas, middle or low income
households in urban areas - co-operative banks reduce banking exclusion and foster the
economic ability of millions of people. They play an influential role on the economic growth
in the countries in which they work in and increase the efficiency of the international
financial system. Their specific form of enterprise, relying on the above-mentioned
principles of organization, has proven successful both in developed and developing
countries.
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Module 3 NON-BANKING FINANCE COMPANIES 8 hrs

NBFCS. an Overview - Loan Companies - Investment Companies Leasing & Hire
Purchase - Housing Finance Chit Funds - Mutual Benefit Financial Companies
-Venture Capital Funds - Factors & Forfeiting - Credit Rating - Depository and Custodial
Services
INTRODUCTION
The activities of non-banking financial companies (NBFCs) in India have undergone
qualitative changes over the years through functional specialization. The role of NBFCs as
effective financial intermediaries has been well recognized as they have inherent ability to
take quicker decisions, assume greater risks, and customize their services and charges
more according to the needs of the clients. While these features, as compared to the banks,
have contributed to the proliferation of NBFCs, their flexible structures allow them to
unbundled services provided by banks and market the components on a competitive basis.
The importance of NBFCs in delivering credit to the unorganized sector and to small
borrowers at the local level in response to local requirements is well recognized. The rising
importance of this segment calls for increased regulatory attention and focused supervisory
scrutiny in the interests of financial stability and depositor protection.
Non-Banking Financial Entities

Regulated by the RBI
Non-banking financial entities partially or wholly regulated by the RBI include: (a) NBFCs
comprising equipment leasing (EL), hire purchase
finance (HP), loan (LC), investment (1C) (including primary dealers3 (PDs)) and residuary
nonbanking (RNBC) companies; (b) mutual benefit
financial company (MBFC), i.e. nidhi company; (c) mutual benefit company (MBC), i.e.
potential nidhi company; (d) miscellaneous non-bankingcompany (MNBC), i.e. chit fund
company
What is the difference between Commercial Bank and NBFI?

In spite of certain similarities, the commercial banks basically differ from non bank
financial intermediaries on the following grounds:
(i) Bank is a financial institution whose liabilities (i.e., deposits) are widely accepted as a
means of payment in the settlement of debt. Non-bank financial intermediaries, on the
other hand, are those institutions whose liabilities are not accepted as means of payment
for the settlement of debt.
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(ii) Commercial banks have the ability to generate multiple expansion of credit. The nonbank intermediaries do not have such ability. They simply mobilize savings for investment.
(iii) The credit creation activities of the commercial banks are determined by the excess
reserves and the cash-reserve ratio of the banks. The activities of the non-bank
intermediaries (i.e., saving mobilization, lending activities, etc.) are largely governed by the
structure of interest rates.
(iv) Credit creation activities of the banks involve lesser time, while the lending activities of
the non-bank intermediaries involve longer time.
(v) The credit creation activities of the commercial banks are regulated and controlled by
the central bank. The non bank intermediaries are not generally under the control of
central bank, and thus, then1 activities may create hurdles in the way of effective
implementation of monetary policy.
(vi) Non bank intermediaries can influence liquidity and create economic destabilisation in
the economy. Destabilisation occurs when the financial claims on the non bank
intermediaries increase at the cost of demand deposits of the banks.
(vii) Commercial banks raise funds costless because no interest is paid on demand deposits.
Non bank intermediaries, on the other hand, have to pay higher interest to attract more
funds.
(viii) People deposit money in the banks for safety, convenience and liquidity
considerations. However, they invest their savings in the non bank intermediaries with the
motive of earning extra income.
(ix) Banks form a homogeneous group, while non bank intermediaries form a
heterogeneous group in the financial structure of the economy.
(x) Bank generally deals with short-term loans in the money market, whereas the non bank
intermediaries mostly deal with all types of loans i.e., short-term, medium-term and longterm loans.
The role of non-banking financial intermediaries

Non-banking Financial Institutions carry out financing activities but their resources are
not directly obtained from the savers as debt. Instead, these Institutions mobilise the public
savings for rendering other financial services including investment. All such Institutions
are financial intermediaries and when they lend, they are known as Non-Banking Financial
Intermediaries (NBFIs) or Investment Institutions.
Ex:
UNIT TRUST OF INDIA
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LIFE INSURANCE CORPORATION (LIC)

GENERAL INSURANCE CORPORATION (GIC)
CONCEPT AND MEANING OF HIRE
PURCHASE
Hire purchase is a type of instalment credit under which the hire purchaser, called the
hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the
repayment of principal as well as interest, with an option to purchase. Under this
transaction, the hire purchaser acquires the property (goods) immediately on signing
the hire purchase agreement but the ownership or title of the same is transferred only
when the last instalment is paid. The hire purchase system is regulated by the Hire
Purchase Act 1972. This Act defines a hire purchase as an agreement under which goods
are let on hire and under which the hirer has an option to purchase them in accordance
with the terms of the agreement and includes an agreement under which:
1) The owner delivers possession of goods thereof to a person on condition that
such person pays the agreed amount in periodic installments. 233
2) The property in the goods is to pass to such person on the payment of the last of such
installments, and
3) Such person has a right to terminate the agreement at any time before the property so
passes. Hire purchase should be distinguished from installment sale wherein property
passes to the purchaser with the payment of the first installment. But in case of HP
(ownership remains with the seller until the last installment is paid) buyer gets ownership
after paying the last installment. HP also differs form leasing.
Hire Purchase
"Finance of Plant & Machinery to small scale
industrial units/ enterprises on installment
terms."
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DIFFERENCE BETWEEN LEASE FINANCING

AND HIRE PURCHASE
BASIS
LEASE FINANCING
HIRE PURCHASE
Meaning
A lease transaction is a
commercial arrangement,
whereby an equipment
owner or manufacturer
conveys to the equipment
user the right to use the
equipment in return for a
rental.
Hire purchase is a type of

installment credit under
which the hire purchaser
agrees to take the goods
on
hire at a stated rental,
which is inclusive of the
repayment of principal as
well as interest, with an
option to purchase
Option to user
No option is provided to
the lessee (user) to
purchase the goods
Option is provided to the

hirer (user).
Nature of expenditure
Lease rentals paid by the

lessee are entirely revenue
expenditure of the lessee.
Components
Lease rentals comprise of

2 elements
(1) finance charge and (2)
capital
Only interest element

included in the HP
installments is revenue
expenditure by nature.
HP installments comprise
of 3 elements (1) normal
trading profit (2) finance
charge and (3) recovery of
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recovery.
cost of goods/assets.
CONCEPT 0F LEASE FINANCING

Lease financing denotes procurement of assets through lease. The subject of leasing falls in
the category of finance. Leasing has grown as a big industry in the USA and UK and
spread to other countries during the present century. In India, the concept was pioneered
in 1973 when the First Leasing Company was set up in Madras and the eighties have seen a
rapid growth of this business.
Lease as a concept involves a contract whereby the ownership, financing and risk taking of
any equipment or asset are separated and shared by two or more parties. Thus, the lessor
may finance and lessee may accept the risk through the use of it while a third party may
own it. Alternatively the lessor may finance and own it while the
lessee enjoys the use of it and bears the risk. There are various combinations in which the
above characteristics are shared by the lessor and lessee.
MEANING 0F LEASE FINANCING

A lease transaction is a commercial arrangement whereby an equipment owner or
Manufacturer conveys to the equipment user the right to use the equipment in return for a
rental. In other words, lease is a contract between the owner of an asset (the lessor) and its
user (the lessee) for the right to use the asset during a specified period
in return for a mutually agreed periodic payment (the lease rentals).
The important feature of a lease contract is separation of the ownership of the asset from
its usage.
Lease financing is based on the observation made by Donald B. Grant: Why own a cow
when the milk is so cheap? All you really need is milk and not the cow.
IMPORTANCE 0F LEASE FINANCING
Leasing industry plays an important role in the economic development of a country by
providing money incentives to lessee. The lessee does not have to pay the cost of asset at the
time of signing the contract of leases. Leasing contracts are more flexible so lessees can
structure the leasing contracts according to their needs for finance. The lessee can also pass
on the risk of obsolescence to the lessor by acquiring those appliances, which have high
technological obsolescence. To day, most of us are familiar with leases of houses,
apartments, offices, etc.
TYPES OF LEASE AGREEMENTS

Lease agreements are basically of two types. They are (a) Financial lease and (b) Operating
lease. The other variations in lease agreements are (c) Sale and lease back
(d) Leveraged leasing and (e) Direct leasing
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FINANCIAL LEASE
Long-term, non-cancellable lease contracts are known as financial leases. The essential
point of financial lease agreement is that it contains a condition whereby the lessor agrees
to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it
must give an option to the lessee to purchase the asset he has used at the expiry of the lease.
Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and
the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable.
Practically all the risks incidental to the asset ownership and all the benefits arising there
from are transferred to the lessee who bears the cost of maintenance, insurance and
repairs. Only title deeds remain with the lessor. Financial lease is also known as capital
lease. In India, financial leases are very popular with high-cost and high technology
equipment.
OPERATING LEASE
An operating lease stands in contrast to the financial lease in almost all aspects. This lease
agreement gives to the lessee only a limited right to use the asset. The lessor is responsible
for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase
the asset at the end of the lease period. Normally the lease is for a short period and even
otherwise is revocable at a short notice. Mines, Computers hardware, trucks and
automobiles are found suitable for operating lease because the rate of obsolescence is very
high in this kind of assets.
ADVANTAGES OF LEASING
There are several extolled advantages of acquiring capital assets on lease:
(1) SAVING OF CAPITAL: Leasing covers the full cost of the equipment used in the
business by providing 100% finance. The lessee is not to provide or pay any margin
Manufacturer Lessor Lessee Lender money as there is no down payment. In this way the
saving in capital or financial resources can be used for other productive purposes e.g.
purchase of inventories.
(2) FLEXIBILITY AND CONVENIENCE: The lease agreement can be tailor- made in
respect of lease period and lease rentals according to the convenience and requirements of
all lessees.
(3) PLANNING CASH FLOWS: Leasing enables the lessee to plan its cash flows properly.
The rentals can be paid out of the cash coming into the business from the use of the same
assets.
(4) IMPROVEMENT IN LIQUADITY: Leasing enables the lessee to improve their
liquidity position by adopting the sale and lease back technique.
An investment company is a company whose main business is holding securities of other

companies purely for investment purposes. The investment company invests money on
behalf of its shareholders who in turn share in the profits and losses.
Role of Investment Companies in Financial Markets
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Investment companies have been among the largest investors in the domestic financial
markets for much of the past 20 years. They held a significant portion of the outstanding
shares of U.S.-issued stocks, bonds, and money market securities at year-end 2011.
Investment companies as a whole were one of the largest groups of investors in U.S.
companies, holding 29 percent of their outstanding stock at year-end 2011
Investment Companies Channel Investment to Stock, Bond, and Money Markets

Percentage of total market securities held by investment companies, year-end 2011
(Figure 1.5)
Investment companies continued to be the largest investor in the U.S. commercial paper
marketan important source of short-term funding for major U.S. and international
corporations. However, mutual funds share of the commercial paper market decreased to
43 percent of outstanding commercial paper at year-end 2011 from 45 percent at year-end
2010. Money market funds account for the majority of funds commercial paper holdings,
and the share of outstanding commercial paper these funds hold tends to fluctuate with
investor demand for prime money market funds and the overall supply of commercial
paper. While 2011 marked the fifth year in a row that the total dollar amount of
outstanding commercial paper contracted, prime money market funds, which invest in
commercial paper, also experienced larger-than-average outflows from their funds.
At year-end 2011, investment companies held 26 percent of tax-exempt debt issued by U.S.
municipalities (Figure 1.5). Funds share of the tax-exempt market has remained fairly
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stable in the past several years despite changes in the demand for tax-exempt funds and the
overall supply of tax-exempt debt. Funds held 13 percent of U.S. Treasury and government
agency securities at year-end 2011. Funds role in the corporate bond market continued to
expand in 2011, holding 15 percent of the outstanding debt securities in this market
compared to 14 percent at year-end 2010
Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk,
growth startup companies. The venture capital fund makes money by owning equity in the
companies it invests in, which usually have a novel technology or business model in high
technology industries, such as biotechnology, IT, software, etc. The typical venture capital
investment occurs after the seed funding round as growth funding round (also referred to
as Series A round) in the interest of generating a return through an eventual realization
event, such as an IPO or trade sale of the company. Venture capital is a subset of private
equity. Therefore, all venture capital is private equity, but not all private equity is venture
capital
Need of venture capital
There are entrepreneurs and many other people who come up with bright ideas but
lack the capital for the investment. What these venture capitals do are to facilitate
and enable the start up phase.
When there is an owner relation between the venture capital providers and
receivers, their mutual interest for returns will increase the firms motivation to
increase profits.
Venture capitalists have invested in similar firms and projects before and, therefore,
have more knowledge and experience. This knowledge and experience are the
outcomes of the experiments through the successes and failures from previous
ventures, so they know what works and what does not, and how it works. Therefore,
through venture capital involvement, a portfolio firm can initiate growth, identify
problems, and find recipes to overcome them
These are venture capital companies in India.
responsAbility India
Accel Partners India
Artheon Ventures
Artiman Ventures
August Capital Partners
BlueRun Ventures
DFJ India
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Epiphany Ventures
Helion Venture Partners
IFCI Venture Capital Funds
India Innovation Investors
Inventus (India) Advisory Company
JAFCO Asia
Netz Capital
Nexus India Capital
Ojas Venture Partners
Reliance Venture
SAIF Partners
Structure of venture capital firms

Venture capital firms are usually partnership in nature, where the partners function as
managers of the firm. They also serve as investment advisors to the collected venture
capital. Instances of limited liability venture capital companies are also existent, where the
firms managers are called managing members. Investors investing in these limited liability
companies are termed limited partners.
Venture capital was started as early stage financing of relatively small but rapidly growing
companies. However various reasons forced venture capitalists to be more and more
involved in expansion financing to support the development of existing portfolio
companies. With increasing demand of capital from newer business, Venture capitalists
began to operate across a broader spectrum of investment interest. This diversity of
opportunities enabled Venture capitalists to balance their activities in term of time
involvement, risk acceptance and reward potential, while providing on going assistance to
developing business.
Different venture capital firms have different attributes and aptitudes for different types of
Venture capital investments. Hence there are different stages of entry for different Venture
capitalists and they can identify and differentiate between types of Venture capital
investments, each appropriate for the given stage of the investee company, These are:-
1. Early Stage Finance
Seed Capital
Start up Capital
Early/First Stage Capital
Later/Third Stage Capital
2. Later Stage Finance

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Expansion/Development Stage Capital

Replacement Finance
Management Buy Out and Buy ins
Turnarounds
Mezzanine/Bridge Finance
The table below shows risk perception and time orientation for different stages of
venture capital financing.
Financing Stage
Early stage finance
Seed
Period (funds
locked in years)
7-10
Start up
5-9
First stage
3-7
Second stage
3-5
Later stage finance
1-3
Buy out-in
Turnaround
1-3
3-5
Mezzanine
1-3
Risk perception Activity to be financed

Extreme
For supporting a concept or

idea or R & D for product
development
Very high
Initializing operations or
developing prototypes
High
Start commercial production
and marketing
Sufficiently high Expand market & growing
working capital need
Medium
Market expansion,
acquisition & product
development for profit
making company
Medium
Acquisition financing
Medium to high Turning around a sick
company
Low
Facilitating public issue
What is factoring?
Factoring is a financial option for the management of receivables. In simple definition it is
the conversion of credit sales into cash. In factoring, a financial institution (factor) buys the
accounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the
amount immediately on agreement. Factoring company pays the remaining amount
(Balance 20%-finance cost-operating cost) to the client when the customer pays the debt.
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Collection of debt from the customer is done either by the factor or the client depending
upon the type of factoring. We will see different types of factoring in this article. The
account receivable in factoring can either be for a product or service. Examples are
factoring against goods purchased, factoring for construction services (usually for
government contracts where the government body is capable of paying back the debt in the
stipulated period of factoring. Contractors submit invoices to get c
ash instantly), factoring against medical insurance etc. Let us see how factoring is done
against an invoice of goods purchased.
Customer
credit sale of
goods
Client
Invoice
Pays the balance

amount
Pays the amount (In recourse type

customer pays through client)
Submit invoice
copy
Payment up to
80% initially
Factor
Factoring companies in India

Canbank Factors Limited
SBI Factors and Commercial Services Pvt. Ltd:
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The Hongkong and Shanghai Banking Corporation Ltd:

Foremost Factors Limited:
Global Trade Finance Limited:
Characteristics of factoring
1. Usually the period for factoring is 90 to 150 days. Some factoring companies allow
even more than 150 days.
2. Factoring is considered to be a costly source of finance compared to other sources of
short term borrowings.
3. Factoring receivables is an ideal financial solution for new and emerging firms
without strong financials. This is because credit worthiness is evaluated based on the
financial strength of the customer (debtor). Hence these companies can leverage on
the financial strength of their customers.
4. Bad debts will not be considered for factoring.
5. Credit rating is not mandatory. But the factoring companies usually carry out credit
risk analysis before entering into the agreement.
Different types of Factoring
1. Disclosed and Undisclosed
2. Recourse and Non recourse
A single factoring company may not offer all these services.
Disclosed
In disclosed factoring client's customers are notified of the factoring agreement. Disclosed
type can either be recourse or non recourse.
Undisclosed
In undisclosed factoring, client's customers are not notified of the factoring arrangement.
Sales ledger administration and collection of debts are undertaken by the client himself.
Client has to pay the amount to the factor irrespective of whether customer has paid or not.
But in disclosed type factor may or may not be responsible for the collection of debts
depending on whether it is recourse or non recourse.
Recourse factoring
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In recourse factoring, client undertakes to collect the debts from the customer. If the
customer don't pay the amount on maturity, factor will recover the amount from the client.
This is the most common type of factoring. Recourse factoring is offered at a lower interest
rate since the risk by the factor is low. Balance amount is paid to client when the customer
pays the factor.
Non recourse factoring
In non recourse factoring, factor undertakes to collect the debts from the customer.
Balance amount is paid to client at the end of the credit period or when the customer pays
the factor whichever comes first. The advantage of non recourse factoring is that
continuous factoring will eliminate the need for credit and collection departments in the
organization.
Benefits of Factoring
Enhanced cash flow

Opportunities for increased sales volume
Elimination of bad debt
Reduced operation costs
Receivables management
FACTORING
Factoring is the process of purchasing invoices from a business at a certain discount.
Factors provide financing service to small an medium-sized companies who need cash. For
this the factor charges a fee equal to a percentage of the invoices purchased generally 5%.
Factoring is a low value short term financing forms. It involves the purchase of invoices,
for an amount less than $10,000 an 90-120 days payment terms. After shipping your goods
or services, the factor purchases the invoices, and advances cash to you company. Factoring
provide liquid assets to small business. In fact banks have strict criteria when lending
money so it is difficult for these companies to obtain loans.
FORFAITING
Forfeiting is the purchase of a series of credit instruments such as drafts, bills of exchange,
other freely negotiable instruments on a nonrecourse basis. Nonrecourse means that if the
importer does not pay, the forfeiter cannot recover payment from the exporter.
The exporter gets immediate cash on presentation of relevant documents and the importer
is the liable for the cost of the contract and receives credit for x years and at certain per
cent interest.
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The forfeiter deducts interest at an agreed rate for credit period. The debt instruments are
drawn by the exporter, accepted by the importer, and will bear an aval or unconditional
guarantee, issue by the importers bank. The forfeiter takes over responsibility for claiming
the debt from the importer. The forfeiter holds the notes until maturity, or sells them to
another investor. The holder of the notes presents each note to the bank at which they are
payable, as that fall due.
Forfeiting is a high-value medium and long term financing form. It involves the purchase
of negotiable instruments for not less than $100.000 and from six month to five years
payment terms. The forfeiter needs to know some important information, such as:
who the buyer is and his nationality
what goods are being sold
date and duration of the contract
interest rate already agreed with the buyer
negotiable instruments used identity of the guarantor of payment
Credit Rating
Definition of 'Credit Rating'
An assessment of the credit worthiness of individuals and corporations. It is based upon the
history of borrowing and repayment, as well as the availability of assets and extent of
liabilities
A credit rating evaluates the credit worthiness of a debtor, especially a business (company)
or a government. It is an evaluation made by a credit rating agency of the debtor's ability
to pay back the debt and the likelihood of default.
Credit ratings are determined by credit ratings agencies. The credit rating represents the
credit rating agency's evaluation of qualitative and quantitative information for a company
or government; including non-public information obtained by the credit rating agencies
analysts.
Credit ratings are not based on mathematical formulas. Instead, credit rating agencies use
their judgment and experience in determining what public and private information should
be considered in giving a rating to a particular company or government. The credit rating
is used by individuals and entities that purchase the bonds issued by companies and
governments to determine the likelihood that the government will pay its bond obligations.
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Credit Ratings
Rating Agency
Instrument
Rating
CRISIL
Long Term Debt
AAA
Fitch
Long Term Debt
Ind AAA
CRISIL
Short Term Debt
P1+
CRISIL
Working Capital Debt
AAA
Moody's
International Debt
Baa2
S&P
International Debt
BBB
Fitch
International Debt
BBB -
CRISIL Rating Process

CRISIL's ratings process is designed to ensure that all ratings are based on the highest
standards of independence and analytical rigour
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A detailed flow chart of rating process is as below:
Benefits of Credit Rating to Investors

The advantages, importance or benefits of credit rating to the investors are:-
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Benefits of Credit Rating to Company
The merits, advantages, benefits of credit rating to the issuing company are:-
A custodian bank, or simply custodian, is a specialized financial institution responsible for

safeguarding a firm's or individual's financial assets and is not necessarily engaged in
"traditional" commercial or consumer/retail banking such as mortgage or personal
lending, branch banking, personal accounts, ATMs and so forth. The role of a custodian in
such a case would be to:
hold in safekeeping assets/securities such as stocks, bonds, commodities such as

precious metals and currency (cash), domestic and foreign
arrange settlement of any purchases and sales and deliveries in/out of such securities
and currency
collect information on and income from such assets (dividends in the case of
stocks/equities and coupons (interest payments) in the case of bonds) and administer
related tax withholding documents and foreign tax reclamation
administer voluntary and involuntary corporate actions on securities held such as
stock dividends, splits, business combinations (mergers), tender offers, bond calls,
etc.
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provide information on the securities and their issuers such as annual general
meetings and related proxies
maintain currency/cash bank accounts, effect deposits and withdrawals and manage
other cash transactions
perform foreign exchange transactions
often perform additional services for particular clients such as mutual funds;
examples include fund accounting, administration, legal, compliance and tax
support services
Custodian banks are often referred to as global custodians if they safekeep assets for their
clients in multiple jurisdictions around the world, using their own local branches or other
local custodian banks with which they contract to be in their "global network" in each
market to hold accounts for their respective clients. Assets held in such a manner are
typically owned by larger institutional firms with a considerable amount of investments
such as banks, insurance companies, mutual funds, hedge funds and pension funds.
Examples
The following companies offer custodian bank services:
Asia Pacific Banking Investment Group

Banco de Oro Unibank
Bank of America
Bank of China (Hong Kong) Limited[1]
Bank of Ireland Securities Services
Bank of New York Mellon
BBVA Compass
BNP Paribas Securities Services
Depositories
Depository is an organization where the securities of the shareholders are held in electronic
form at the request of the shareholder through the medium of a Depository Participant. In the
following article we are going to learn more about depository and depository participant.
Definition of Depository: Depository means a company formed and registered under the
companies act, 1956 and it has been granted a certificate of registration under section 12(1A)
of SEBI Act, 1992.
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Two Depositories are regulated in India:

1. National Securities Depository limited (NSDL)
2. The Central Depository Services (India) Limited (CDS)
Functions of Depository:
1. Services to investors
2. Services to Participants in the capital market such as clearing members, stock exchanges ,
investment institution, banks and issuing corporate
3. Account opening
4. Dematerialization
5. Rematerialization
6. Settlement of trades
7. Advanced facilities like pledging, distribution of non- cash corporate actions, distribution of
securities to allot tees in case of public issues etc.
Benefits of Depository System:
1. This system will eliminate paper work as the book entry system does not need physical
movement of certificates for transfer process.
2. The risk of bad deliveries, fraud and misplaced, mutilated and lost share certificates will not
exist.
3. The electronic media will shorten settlement time and hence the investor can save time and
increase the velocity of security movement.
4. Investors will be able to change portfolio more frequently.
5. The capital market will be more transparent as the trading, clearing and settlement
mechanism have to be highly automated and interlinked with the depository among
themselves.
6. The market will be highly automated and efficient due to the usage of computing and
telecommunication technology for the back office activities for all the capital market players.
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Difference between Depository and Custodian :

Function
Position
ACT
It a part from keeping the

It function is merely safe
shares in e-form , manages the keeping of shares. It handle
shares on behalf of investor
Huge paper work.
It is a institution or can be
It is an in term diary.
called as an organization itself.
There is a separate Act i.e.
There is no separate Act and it
Depositories Act 1956, a part is regulated by SEBI
from SEBI (depositories and (Custodian of Securities) Reg.
participant ) Reg . 1996
1996
Models of Depository :
1. Dematerialization: It is a process of conversion of physical share certificate into electronic
form . So, when a shareholder uses the dematerialization facility, company take back the
shares, through depository system and equal number of shares are credited in his account in
e-form.
2. Immobilisation : It is a process of storing of physical share certificates, with depository for
safe custody. In this model the original share certificates, can be withdrawn, as it is lodged in
depository method.
Meaning of Depository Participant and its characteristics:
Depository Participant (DP): is the representative or agent of the investor in the depository
system providing the link between the Company and investor through the Depository
Characteristics of depository participant:
1. Acts as an Agent of Depository
2. Directly deal with customer
3. Functions like Securities Bank
4. Account opening
5. Facilitates dematerialization
6. Instant transfer on pay out
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7. Credits to investor in IPO, rights, bonus

8. Settles trades in electronic segment
Difference between dematerialization and remateriaisation :
Difference
Definition
Conversion
Sequence
Use of form
Dematerialisation
Re materialisation
It is a process of conversion of It is a process of conversion of
physical shares certificates into electronic shares into physical
electronic form. So, under
shares. When a beneficial
dematerialization facility,
owner opt out of a depository,
company take back the shares, he will inform about it, to the
through depository system
company, through depository.
and equal number of shares
The company will issue fresh
are credited in account in eshare certificate to the
form.
beneficial owner, within 30
days from the date of request.
In this, physical share
In this, e- records are
certificates converted into e- converted into physical
records.
shares certificate.
Firstly shares are
Firstly shares are
dematerialize, so it is primary dematerialize then it is
and principal
rematerialize, so it is secondary
and supporting function of
depository.
In this process it requires
In this process it requires
Dematerialization Request
Rematerialisation Request
Form
form (RRF)
Rights and Obligations of Depositories and its constituents :

1. Every depository has to enter into an agreement with the issuer in respect of securities to
become eligible to held the securities in demat form.
2. Every depository is to maintain the following records and documents:
(a) Records of securities dematerialised and dematerialized
(b) Names of the transferor, transferee, and the dates of transfer of securities
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(c) A register and an index of beneficial owners

(d) Details of holding of the securities of the beneficial owners as at the end of every day.
(e) Records of instruction received from and sent to participants, issuers agents and beneficial
owners,
3. Details and the maintenance of records and documents should be intimated to Board.
4. All the records and documents should be preserved for minimum 5 years.
A custodian is a person charged with the safekeeping of something valuable, typically a
building and its contents. A depository is typically a building where valuable objects are
stored for safekeeping. However, there are other differences between a custodian and a
depository.
The Custodian
A custodian is a person or a corporation that legally has custody of something or

someone, from artifacts in a museum to the records of a hospital or law firm to
financial information and instruments. People who are held in custody are almost
always prisoners, whether military or civilian. Typically, an individual legally
responsible for another human being who is not their own minor child is called a
guardian, not a custodian
The Depository
A depository is a place where things are deposited for safe-keeping. Libraries are one of the
most important types of depositories. The role of the library in safeguarding and
maintaining information is so important that the United States government has distributed
a wide variety of materials, from bound print journals to microfiche, to some 1,250
libraries across the United States. There are also genetic depositories such as Norway's
Svalbard Seed Bank.
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Module 5 MUTUAL FUNDS 8 hrs

Organization - Types of Funds - Valuation of Units - Structure and Size Investment
Pattern - Return on Investment in Units Regulations
Mutual funds in India
The first introduction of a mutual fund in India occurred in 1963, when the Government of
India launched Unit Trust of India .
A mutual fund is a trust that pools the savings of several investors and then invests these
into different kinds of securities (shares, debentures, money market instruments, or a
combination of these) in keeping with a pre-stated investment objective. The income thus
generated and the capital appreciation is distributed among mutual fund unit holders in
proportion to the number of units held by them.
OR
Mutual Funds refer to a fund, managed by an investment company with the financial
objective of generating high Rate of Returns. These asset management or investment
management companies collects money from the investors and invests those money in
different Stocks, Bonds and other financial securities in a diversified manner. Before
investing they carry out thorough research and detailed analysis on the market conditions
and market trends of stock and bond prices. These things help the fund managers to
speculate properly in the right direction.
The wide choices in Mutual Funds go as the following:
Equity Funds or Stock Funds
These types of Mutual Funds generally invest
in stocks which are publicly traded. Amount
of risk, involved with these funds vary
according to different types of Equity Funds.
Bond Funds
Money Market Funds
Balanced Fund
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These funds invest in government bonds and

corporate bonds. These Bond Funds offer a
steady source of income and in many times
these incomes get the advantage of Tax
Exemption.
These funds invest in the money market.
These funds involve low level of risk and
promises comparatively low rate of return.
These funds invest both in Stocks and Bonds
and thus offer a well diversified investment
portfolio.
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ORGANISATION OF MUTUAL FUND
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The Organization of a Mutual Fund contains entities such as
Mutual Fund Shareholders: The Mutual Fund Shareholders, like the other share
holders have the right to vote. The voting rights include, the right to elect directors
during the directorial elections, voting right to approve the alterations investment
advisory contract pertaining to the fund and provide approval for changing
investment objectives or policies.
Board of directors: The Board of directors supervise the functional activities, which
include approval of the contract Asset Management Company and other various
service providers.
Investment management company or Asset Management Company: This body

handles the mutual fund portfolio as per the objectives and policies mentioned in the
prospectus of the mutual funds.
Custodians: The custodians protect the portfolio securities. Mostly qualified bank
custodians are used for mutual funds.
Transfer Agents: The transfer agent for the purpose of maintaining records and
similar functions. The maintenance of the shareholder's accounts, calculation of
dividends to the be disbursed, sending information to the shareholders about the
account statements, notices, and income tax information. Some of the transfer agent
sends information to the share holders about the shareholder transactions and
account balances. They also maintain customer service departments in order the
cater to the queries of the shareholders.
SEBI: The primary aim of the Securities Exchange Board of India is to protect the
interest of the mutual fund investors. The SEBI has formulated several policies for
better functioning and controls the mutual funds. In the year 1993, SEBI issued
guidelines pertaining to the mutual funds. All mutual funds, private sector and
public sector are regulated by the guidelines of the SEBI. The Asset Management
Company managing the funds has to be approved by the SEBI
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Advantages of Mutual Funds-Overview
Flexibility: The investments pertaining to the Mutual Fund offers the public a lot of
flexibility by means of dividend reinvestment, systematic investment plans and
systematic withdrawal plans.
Affordability: The Mutual funds are available in units. Hence they are highly
affordable and due to the very large principal sum, even the small investors are
benefited by the investment scheme.
Liquidity: In case of Open Ended Mutual Fund schemes, the investors have the
option of redeeming or withdrawing money at any point of time at the current rate
of net value asset.
Diversification: The risk pertaining to the Mutual Funds is quite low as the total
investment is distributed in several industries and different stocks.
Professional Management: The Mutual Funds are professionally managed. The

experienced Fund Managers pertaining to the Mutual Funds examine all options
based on research and experience.
Potential of return: The Fund Managers of the Mutual Funds gather data from
leading economists and financial analysts. So they are in a better position to analyze
the scopes of lucrative return from the investments.
Low Costs: The fees pertaining to the custodial, brokerage, and others is very low.
Regulated for investor protection: The Mutual Funds sector is regulated by the
Securities Exchange Board of India (SEBI) to safeguard the rights of the investor.
Types of mutual fund schemes

1)
2)
By structure
Open-end schemes
Close-end schemes
By investment objectives
Equity funds
Debt funds
Balanced funds
Money market funds
1. Based on investment objective,mutual fund schemes can be classified into three
broad categories:
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1. Equity Funds
2. Debt Funds and
3. Balanced Funds
Equity Funds are invested in equity shares of companies available in stock market. Within
equity funds, there can be diversified equity funds, sector funds, ELSS funds, index funds
etc.
Debt Funds/Income Funds are invested in fixed interest bearing instruments like bonds,
debentures, government securities, treasury bill, certificate of deposits, commercial paper
etc issued by corporate and government.
The combination of above two is Balanced Funds, which take minimum of 65% exposure to
equity shares and remaining 35% in debt instrument.
1. Open-ended schemes
Open-ended or open mutual funds are much more common than closed-ended funds and
meet the true definition of a mutual fund a financial intermediary that allows a group of
investors to pool their money together to meet an investment objective to make money! An
individual or team of professional money managers manage the pooled assets and choose
investments, which create the funds portfolio. They are established by a fund sponsor,
usually a mutual fund company, and valued by the fund company or an outside agent. This
means that the funds portfolio is valued at fair market value, which is the closing
market value for listed public securities. An open-ended fund can be freely sold and
repurchased by investors.
2. Close-ended schemes
Close-ended or closed mutual funds are really financial securities that are traded on the
stock market. Similar to a company, a closed-ended fund issues a fixed number of shares in
an initial public offering, which trade on an exchange. Share prices are determined not by
the total net asset value (NAV), but by investor demand. A sponsor, either a mutual fund
company or investment dealer, will raise funds through a process commonly known as
underwriting to create a fund with specific investment objectives. The fund retains an
investment manager to manage the fund assets in the manner specified.
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Module 4 MERCHANT BANKING & FINANCIAL SERVICES

Project appraisal, Designing capital structure and instruments, issue pricing, preparation
of prospectus, Issue Management, Underwriting, Mergers & Amalgamations, Corporate
Advisory Services, Bought out deals, Private Placement, Institutional Placement, Debt
Syndication, Regulation of Merchant Bankers,
Project appraisal
Project appraisal is a generic term that refers to the process of assessing, in a structured
way, the case for proceeding with a project or proposal. In short, project appraisal is the
effort of calculating a project's viability. It often involves comparing various options, using
economic appraisal or some other decision analysis technique.
Process
Initial Assessment
Define problem and long-list
Consult and short-list
Develop options
Compare and select Project
Types of appraisal
technical appraisal
commercial and marketing appraisal
Financial?economic appraisal
organisational or management appraisal
Cost-benefit analysis
A merger is a corporate strategy of combining different companies into a single

company in order to enhance the financial and operational strengths of both
organizations.
How It Works/Example:
A merger usually involves combining two companies into a single larger company.
The combination of the two companies involves a transfer of ownership, either
through a stock swap or a cash payment between the two companies. In practice,
both companies surrender their stock and issue new stock as a new company.
There are several types of mergers. For example, horizontal mergers may happen
between two companies in the same industry, such as banks or steel companies.
Vertical mergers occur between two companies in the same industry value chain,
such as a supplier or distributor or manufacturer. Mergers between two companies
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in related, but not the same industry are called concentric mergers. These mergers
can use the same technologies or skilled workforce to work in both industry
segments, such as banking and leasing. Finally, conglomerate mergers occur
between two diversified companies that may share management to improve
economies of scale for both companies.
A merger sometimes involves new branding or identity of the merged companies.
Otherwise, a merger may lead to a combination of the names of the two companies,
capitalizing on the brand identity of both companies.
There are many types of mergers and acquisitions that redefine the business world with
new strategic alliances and improved corporate philosophies. From the business structure
perspective, some of the most common and significant types of mergers and acquisitions
are listed below:
Horizontal Merger
This kind of merger exists between two companies who compete in the same industry
segment. The two companies combine their operations and gains strength in terms of
improved performance, increased capital, and enhanced profits. This kind substantially
reduces the number of competitors in the segment and gives a higher edge over
competition.
Vertical Merger
Vertical merger is a kind in which two or more companies in the same industry but in
different fields combine together in business. In this form, the companies in merger decide
to combine all the operations and productions under one shelter. It is like encompassing all
the requirements and products of a single industry segment.
Conglomerate Merger
Conglomerate merger is a kind of venture in which two or more companies belonging to
different industrial sectors combine their operations. All the merged companies are no way
related to their kind of business and product line rather their operations overlap that of
each other. This is just a unification of businesses from different verticals under one
flagship enterprise or firm.
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EXAMPLES
Tata Chemicals buys British salt
Tata Chemicals bought British Salt; a UK based white salt producing company for about
US $ 13 billion. The acquisition gives Tata access to very strong brine supplies and also
access to British Salts facilities as it produces about 800,000 tons of pure white salt every
year
Reliance Power and Reliance Natural Resources merger
This deal was valued at US $11 billion and turned out to be one of the biggest deals of the
year. It eased out the path for Reliance power to get natural gas for its power projects
Airtels acquisition of Zain in Africa
Airtel acquired Zain at about US $ 10.7 billion to become the third biggest telecom major
in the world. Since Zain is one of the biggest players in Africa covering over 15 countries,
Airtels acquisition gave it the opportunity to establish its base in one of the most important
markets in the coming decade
Abbotts acquisition of Piramal healthcare solutions
Abbott acquired Piramal healthcare solutions at US $ 3.72 billion which was 9 times its
sales. Though the valuation of this deal made Piramals take this move, Abbott benefited
greatly by moving to leadership position in the Indian market
GTL Infrastructure acquisition of Aircel towers
This acquisition was worth about US $ 1.8 billion and brought GTL Infrastructure to the
third position in terms of number of mobile towers 33000. The money generated gave
Aircel the funds for expansion throughout the country and also for rolling out its 3G
services
ICICI Bank buys Bank of Rajasthan
This merger between the two for a price of Rs 3000 cr would help ICICI improve its
market share in northern as well as western India
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Merger and acquisition has become the most prominent process in the corporate world.
The key factor contributing to the explosion of this innovative form of restructuring is the
massive number of advantages it offers to the business world.
Following are some of the known advantages of merger and acquisition:
The very first advantage of M&A is synergy that offers a surplus power that enables
enhanced performance and cost efficiency. When two or more companies get together and
are supported by each other, the resulting business is sure to gain tremendous profit in
terms of financial gains and work performance.
Cost efficiency is another beneficial aspect of merger and acquisition. This is because any
kind of merger actually improves the purchasing power as there is more negotiation with
bulk orders. Apart from that staff reduction also helps a great deal in cutting cost and
increasing profit margins of the company. Apart from this increase in volume of
production results in reduced cost of production per unit that eventually leads to raised
economies of scale.
With a merger it is easy to maintain the competitive edge because there are many issues
and strategies that can be well understood and acquired by combining the resources and
talents of two or more companies.
A combination of two companies or two businesses certainly enhances and strengthens the
business network by improving market reach. This offers new sales opportunities and new
areas to explore the possibility of their business.
With all these benefits, a merger and acquisition deal increases the market power of the
company which in turn limits the severity of the tough market competition. This enables
the merged firm to take advantage of hi-tech technological advancement against
obsolescence and price wars.
Acquisition refers to the process of acquiring a company at a price called the acquisition
price or acquisition premium. The price is paid in terms of cash or acquiring company's
shares or both.
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There are two types of business acquisitions, friendly acquisition and hostile acquisition. In
a friendly acquisition, a company invites other companies to acquire its business. In a
hostile acquisition, the company does not want to sell its business. However, the other
company determined to acquire the business takes the aggressive route of buying the equity
shares of the target company from its existing shareholders.
In finance, capital structure refers to the way a corporation finances its assets through
some combination of equity, debt, or hybrid securities. A firm's capital structure is then the
composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in
equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed
Issue Price
The price at which a companys shares are offered to the market for the first time, which
might be at par or at a premium or discount. When they begin to be traded, the market
price may be above or below the issue price.
Preparation of prospectus
In finance, a prospectus is a document that describes a financial security for potential
buyers. A prospectus commonly provides investors with material information about
mutual funds, stocks, bonds and other investments, such as a description of the company's
business, financial statements, biographies of officers and directors, detailed information
about their compensation, any litigation that is taking place, a list of material properties
and any other material information. In the context of an individual securities offering, such
as an initial public offering, a prospectus is distributed by underwriters or brokerages to
potential investors.
Preparation of Prospectus:Generally, the public issues of companies are handled by Merchant Bankers who are
responsible for getting the project appraised, finalizing the cost of the project, profitability
estimates and for preparing of Prospectus. The Prospectus is submitted to SEBI for its
approval
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Issue management
The public issues are managed by the involvement of various agencies i.e. underwriters,
brokers, bankers, advertising agency, printers, auditors, legal advisers, registrar to the
issue and merchant bankers providing specialized services to make the issue of the success.
However merchant banker is the agency at the apex level than that plan, coordinate and
control the entire issue activity and direct different agencies to contribute to the successful
marketing of securities. The procedure of the managing a public issue by a merchant
banker is divided into two phases, viz;
Pre-issue management
Post-issue management
Pre-Issue Management:Steps required to be taken to manage pre-issue activity is as follows:(1) Obtaining stock exchange approvals to memorandum and articles of associations.
(2) Taking action as per SEBI guide lines
(3) Finalizing the appointments of the following agencies:
Co-manager/Advisers to the issue

Underwriters to the issue
Brokers to the issue
Bankers to the issue and refund Banker
Advertising agency
Printers and Registrar to the issue
(4) Advise the company to appoint auditors, legal advisers and broad base Board of
Directors
(5) Drafting of prospectus
(6) Obtaining approvals of draft prospectus from the companys legal advisers,
underwriting financial institutions/Banks
(7) Obtaining consent from parties and agencies acting for the issue to be enclosed with the
prospectus.
(8) Approval of prospectus from Securities and Exchange Board of India.
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(9) Filing of the prospectus with Registrar of Companies.

(10) Making an application for enlistment with Stock Exchange along, with copy of the
prospectus.
(11) Publicity of the issue with advertisement and conferences.
(12) Open subscription list.
Post-issue Management:Steps involved in post-issue management are:(1) To verify and confirm that the issue is subscribed to the extent of 90% including
devolvement from underwriters in case of under subscription
(2) To supervise and co-ordinate the allotment procedure of registrar to the issue as per
prescribed Stock Exchange guidelines
(3) To ensure issue of refund order, allotment letters / certificates within the prescribed
time limit of10 weeks after the closure of subscription list
(4) To report periodically to SEBI about the progress in the matters related to allotment
and refunds
(5) To ensure he listing of securities at Stock Exchanges.
(6) To attend the investors grievances regarding the public issue
Underwriting
Underwriting of shares and debentures is a contract between company and second party.
Second party is called underwriters. They promise to sell all the shares of company to
public, if any shares or debentures will be unsold, they will buy all these shares or
debentures. For this service, they get underwriting commission
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What is Underwriting Commission
Underwriting commission is payment which is given by company to underwriters for their

services of underwriting. Actually, contract of underwriting is same as the contract of
insurance. Company gives maximum 5% commission to underwriter for selling his shares.
Underwriter will take the risk of takeover the shares which will not be subscribed by
public.
Bought deal
A bought deal occurs when an underwriter, such as an investment bank or a syndicate,
purchases securities from an issuer before a preliminary prospectus is filed. The
investment bank (or underwriter) acts as principal rather than agent and thus actually
"goes long" in the security. The bank negotiates a price with the issuer (usually at a
discount to the current market price, if applicable).
The advantage of the bought deal from the issuer's perspective is that they do not have to
worry about financing risk (the risk that the financing can only be done at a discount too
steep to market price.) This is in contrast to a fully-marketed offering, where the
underwriters have to "market" the offering to prospective buyers, only after which the
price is set.
The advantages of the bought deal from the underwriter's perspective include:
1. Bought deals are usually priced at a larger discount to market than fully
marketed deals, and thus may be easier to sell; and
2. The issuer/client may only be willing to do a deal if it is bought (as it eliminates
execution or market risk.)
The disadvantage of the bought deal from the underwriter's perspective is that if it
cannot sell the securities, it must hold them. This is usually the result of the market price
falling below the issue price, which means the underwriter loses money. The underwriter
also uses up its capital, which would probably otherwise be put to better use (given sellside investment banks are not usually in the business of buying new issues of securities
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Private placement (or non-public offering) is a funding round of securities which are sold
not through a public offering, but rather through a private offering, mostly to a small
number of chosen investors.[1] "Private placement" usually refers to non-public offering
of shares in a public company (since, of course, any offering of shares in a private
company is and can only be a private offering).
Debt syndication is an arrangement made between two or more

banks/financial institutions to provide the borrower a credit facility
using common debt documents. Debt syndication is the process of
dispensing the money advanced in, generally a large loan, to a number
of enterprises or investors. It is general to use debt syndication when
the loan required, in order to fund a company or set aside a company
from bankruptcy.
By employing debt syndication, several banks, investment firms or other
companies share both the profits and the risk of making a large loan. A
decline in the number of available lenders has complicated debt syndication.
While banks are regularly the primary lenders, they can be involved in deals
with less outlay, thus reducing their risk.
Regulatory frame work for mutual fund
Amcs should have a minimum net worth of 10 crores

Amcs can undertake other fund based business such as providing investment
management services
The consent of the investors should be taken by the investors before making any
changes
All the CEFs should be listed from the closure of the issue
MFs have to identified and provide for non performing assets as per SEBI
guidelines
MFs are required to display half yearly financial results
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Module 6 FINANCIAL MARKETS

The stock market in India Primary and secondary markets OTC markets
regulations new issues market underwriting - Call Money Market - Treasury
BillsMarket Commercial Bills Market - Markets for Commercial Paper and
Certificate ofDeposits - The Discount Market - Government (Gilt edge) Securities
Market. Markets for Futures, Options, and Other Financial Derivatives - Foreign
Exchange Markets - Interest Rate Futures Market
The primary market is that part of the capital markets that deals with the issuance of new
securities. Companies, governments or public sector institutions can obtain funding
through the sale of a new stock or bond issue. This is typically done through a syndicate of
securities dealers. The process of selling new issues to investors is called underwriting. In
the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a
commission that is built into the price of the security offering, though it can be found in the
prospectus. Primary markets create long term instruments through which corporate
entities borrow from capital market.
Features of primary markets are:
This is the market for new long term equity capital. The primary market is the
market where the securities are sold for the first time. Therefore it is also called the
new issue market (NIM).
In a primary issue, the securities are issued by the company directly to investors.
The company receives the money and issues new security certificates to the
investors.
Primary issues are used by companies for the purpose of setting up new business or
for expanding or modernizing the existing business.
The primary market performs the crucial function of facilitating capital formation
in the economy.
The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new
issue market may be raising capital for converting private capital into public
capital; this is known as "going public."
The financial assets sold can only be redeemed by the original holder
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1. Public Issue
When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the
public through issue of offer document (prospectus), it is called a public issue
.
IPO(Initial Public Offer)
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As the name suggests, IPOs are fresh issue of shares to the public. When a (unlisted) company makes a public issue for the first time and gets its shares listed on stock exchange, the
public issue is called as initial public offer (IPO). This process is undertaken at the primary
market.
FPO (Further public offer)
Existing companies, who have already issued shares, may require additional money for further expansion. If they wish, they can tap if from the primary market. Such share issues
will be called follow on issues.
2. Offer for sale

Institutional investors like venture funds, private equity funds etc. invest in unlisted company when it is very small or at an early stage. Subsequently, when the company becomes
large, these investors sell their shares to the public, through issue of offer document and the
companys shares are listed in stock exchange. This is called as offer for sale. The proceeds
of this issue go the existing investors and not to the company.
3. Rights issue (RI)
When a company raises funds from its existing shareholders by selling (issuing) them new
shares / debentures, it is called as rights issue. The offer document for a rights issue is
called as theLetter of Offer and the issue is kept open for 3060 days.
Existing shareholders are entitled to apply for new shares in proportion to the number of
shares already held. For e.g. in a rights issue of 1:5 ratio, the investors have the right to
subscribe to one (new) share of the company for every 5 shares held by the investor.
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Secondary market
Secondary market refers to a market where securities are traded after being initially
offered to the public in the primary market. Secondary market comprises of equity markets and debt markets. Secondary market provides liquidity for shares issued in the primary market and determines the fair prices of the security. The platform for trading is
provided by the stock exchanges which are recognized by SEBI.
OTC MARKETS
The Over-The-Counter (OTC) markets are essentially spot markets and are localised for
specific commodities. Almost all the trading that takes place in these markets is delivery
based.
OTC trading is to trade financial instruments such as stocks, bonds, commodities or
derivatives directly between two parties. It is the opposite of exchange trading which occurs
on futures exchanges or stock exchanges.
An over-the-counter contract is a bi-lateral contract, in which two parties agree on how a
particular trade or agreement is to be settled in the future. For derivatives, these
agreements are usually governed by an International Swaps and Derivatives Association
agreement.
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An over-the-counter market is a financial market where products are traded over-thecounter.

REGULATION OF NEW ISSUES MARKET
The call money market refers to the market for extremely short period loans; say one day
to fourteen days. These loans are repayable on demand at the option of either the lender or
the borrower. As stated earlier, these loans are given to brokers and dealers in stock
exchange. Similarly, banks with surplus lend to other banks with deficit funds in the call
money market. Thus, it provides an equilibrating mechanism for evening out short term
surpluses and deficits. Moreover, commercial bank can quickly borrow from the call
market to meet their statutory liquidity requirements. They can also maximize their profits
easily by investing their surplus funds in the call market during the period when call rates
are high and volatile.
Advantages of call money

In India, commercial banks play a dominant role in the call loan market. They used to
borrow and lend among themselves and such loans are called inter-bank loans. They are
very popular in India. So many advantages are available to commercial banks. They are as
follows:
High Liquidity: Money lent in a call market can be called back at any time when
needed. So, it is highly liquid. It enables commercial banks to meet large sudden
payments and remittances by making a call on the market.
High Profitability: Banks can earn high profiles by lending their surplus funds to
the call market when call rates are high volatile. It offers a profitable parking place
for employing the surplus funds of banks temporarily.
Maintenance Of SLR: Call market enables commercial bank to minimum their
statutory reserve requirements. Generally banks borrow on a large scale every
reporting Friday to meet their SLR requirements. In absence of call market, banks
have to maintain idle cash to meet5 their reserve requirements. It will tell upon their
profitability.
Safe And Cheap: Though call loans are not secured, they are safe since the
participants have a strong financial standing. It is cheap in the sense brokers have
been prohibited form operating in the call market. Hence, banks need not pay
brokers on call money transitions.
Assistance To Central Bank Operations: Call money market is the most sensitive
part of any financial system. Changes in demand and supply of funds are quickly
reflected in call money rates and give an indication to the central bank to adopt an
appropriate monetary policy. Moreover, the existence of an efficient call market
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helps the central bank to carry out its open market operations effectively and
successfully.
Drawbacks of call money
The call market in India suffers from the following drawbacks:
Uneven Development: The call market in India is confined to only big industrial and
commercial centers like Mumbai, Kolkata, Chennai, Delhi, Bangalore and
Ahmadabad. Generally call markets are associated with stock exchanges. Hence the
market is not evenly development.
Lack Of Integration: The call markets in different centers are not fully integrated.
Besides, a large number of local call markets exist without an\y integration.
Volatility In Call Money Rates: Another drawback is the volatile nature of the call
money rates. Call rates very to greater extant indifferent centers indifferent seasons
on different days within a fortnight. The rates very between 12% and 85%. One can
not believe 85% being charged on call loans.
TREASURY BILL MARKET
Treasury Bills are money market instruments to finance the short term
requirements of the Government of India. These are discounted securities and thus
are issued at a discount to face value. The return to the investor is the difference
between the maturity value and issue price.
Types Of Treasury Bills There are different types of Treasury bills based on the
maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 6
months and 12months Treasury bills etc. In India, at present, the Treasury Bills are
issued for the following tenors 91-days, 182-days and 364-days Treasury bills.
Benefits Of Investment In Treasury Bills
No tax deducted at source

Zero default risk being sovereign paper
Highly liquid money market instrument
Better returns especially in the short term
Transparency
Simplified settlement
High degree of tradeability and active secondary market facilitates meeting unplanned
fund requirements.
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What is the Definition of Commercial Paper ? or What is Commercial Paper in India ? or

what is CP ?
We can define Commercial Paper (CP) as an "unsecured money market instrument issued
in the form of a promissory note". These are not usually backed by any form of collaterals
and is allowed to be issued only by corporate with high quality debt ratings.
When was Commercial Paper introduced in India and What is the Commercial Paper used
for in India ?
Commercial Paper were introduced in India in 1990 with a view to enable high rated
corporate borrowers to raise short term borrowers by this additional type of instrument
which was till that at time was not available in India. However, later on other players like
All India Financial Institutions and Primary Dealers too were allowed to issue Commercial
Papers for meeting their short term funding requirements
Who are allowed to invest in Commercial Paper?
The following are allowed to invest in CPs : (a) Individuals, (b) banking companies, (c)
other corporate bodies (registered or incorporated in India) and unincorporated bodies, (d)
Non-Resident Indians (NRIs) and (e) Foreign Institutional Investors (FIIs) etc. However,
investment by FIIs would be within the limits set for them by SEBI.
Discount Market
Discount market refers to the market where short-term genuine trade bills are discounted
by financial intermediaries like commercial banks. When credit sales are effected, the seller
draws a bill on the buyer who accepts it promising to pay the specified sum at the specified
period. The seller has to wait until the maturity of the bill for getting payment. But, the
presence of a bill market enables him to get payment immediately. The seller can ensure
payment immediately by discounting the bill with some financial intermediary by paying a
small amount of money called Discount rate on the date of maturity, the intermediary
claims the amount of the bill from the person who has accept6ed the bill
What is a Government Security?
A Government security is a tradable instrument issued by the Central Government or the
State Governments. It acknowledges the Governments debt obligation. Such securities are
short term (usually called treasury bills, with original maturities of less than one year) or
long term (usually called Government bonds or dated securities with original maturity of
one year or more). In India, the Central Government issues both, treasury bills and bonds
or dated securities while the State Governments issue only bonds or dated securities, which
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are called the State Development Loans (SDLs). Government securities carry practically no
risk of default and, hence, are called risk-free gilt-edged instruments. Government of India
also issues savings instruments (Savings Bonds, National Saving Certificates (NSCs), etc.)
or special securities (oil bonds, Food Corporation of India bonds, fertiliser bonds, power
bonds, etc.). They are, usually not fully tradable and are, therefore, not eligible to be SLR
securities.
Why should one invest in Government securities?
Holding of cash in excess of the day-to-day needs of a bank does not give any return to it.
Investment in gold has attendant problems in regard to appraising its purity, valuation,
safe custody, etc. Investing in Government securities has the following advantages:
Besides providing a return in the form of coupons (interest), Government securities

offer the maximum safety as they carry the Sovereigns commitment for payment of
interest and repayment of principal.
They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating
the need for safekeeping.
Government securities are available in a wide range of maturities from 91 days to as
long as 30 years to suit the duration of a bank's liabilities.
Government securities can be sold easily in the secondary market to meet cash
requirements.
Government securities can also be used as collateral to borrow funds in the repo
market.
The settlement system for trading in Government securities, which is based on
Delivery versus Payment (DvP), is a very simple, safe and efficient system of
settlement. The DvP mechanism ensures transfer of securities by the seller of
securities simultaneously with transfer of funds from the buyer of the securities,
thereby mitigating the settlement risk.
Government security prices are readily available due to a liquid and active
secondary market and a transparent price dissemination mechanism.
Futures and options represent two of the most common form of "Derivatives". Derivatives
are financial instruments that derive their value from an 'underlying'. The underlying can
be a stock issued by a company, a currency, Gold etc., The derivative instrument can be
traded independently of the underlying asset.
The value of the derivative instrument changes according to the changes in the value of the
underlying.
Derivatives are of two types -- exchange traded and over the counter.
Exchange traded derivatives, as the name signifies are traded through organized exchanges
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around the world. These instruments can be bought and sold through these exchanges, just
like the stock market. Some of the common exchange traded derivative instruments are
futures and options.
Over the counter (popularly known as OTC) derivatives are not traded through the
exchanges. They are not standardized and have varied features. Some of the popular OTC
instruments are forwards, swaps, swaptions etc.
Futures
A 'Future' is a contract to buy or sell the underlying asset for a specific price at a predetermined time. If you buy a futures contract, it means that you promise to pay the price
of the asset at a specified time. If you sell a future, you effectively make a promise to
transfer the asset to the buyer of the future at a specified price at a particular time. Every
futures contract has the following features:
Buyer
Seller
Price
Expiry
Some of the most popular assets on which futures contracts are available are equity stocks,
indices, commodities and currency.
The difference between the price of the underlying asset in the spot market and the futures
market is called 'Basis'. (As 'spot market' is a market for immediate delivery) The basis is
usually negative, which means that the price of the asset in the futures market is more than
the price in the spot market. This is because of the interest cost, storage cost, insurance
premium etc., That is, if you buy the asset in the spot market, you will be incurring all these
expenses, which are not needed if you buy a futures contract. This condition of basis being
negative is called as 'Contango'.
Sometimes it is more profitable to hold the asset in physical form than in the form of
futures. For eg: if you hold equity shares in your account you will receive dividends,
whereas if you hold equity futures you will not be eligible for any dividend.
When these benefits overshadow the expenses associated with the holding of the asset, the
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3rd Semester
basis becomes positive (i.e., the price of the asset in the spot market is more than in the
futures market). This condition is called 'Backwardation'. Backwardation generally
happens if the price of the asset is expected to fall.
It is common that, as the futures contract approaches maturity, the futures price and the
spot price tend to close in the gap between them ie., the basis slowly becomes zero.
Options
Options contracts are instruments that give the holder of the instrument the right to buy or
sell the underlying asset at a predetermined price. An option can be a 'call' option or a 'put'
option.
A call option gives the buyer, the right to buy the asset at a given price. This 'given price' is
called 'strike price'. It should be noted that while the holder of the call option has a right to
demand sale of asset from the seller, the seller has only the obligation and not the right. For
eg: if the buyer wants to buy the asset, the seller has to sell it. He does not have a right.
Similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the
buyer. Here the buyer has the right to sell and the seller has the obligation to buy.
So in any options contract, the right to exercise the option is vested with the buyer of the
contract. The seller of the contract has only the obligation and no right. As the seller of the
contract bears the obligation, he is paid a price called as 'premium'. Therefore the price
that is paid for buying an option contract is called as premium.
The foreign exchange market assists international trade and investment by enabling
currency conversion. For example, it permits a business in the United States to import
goods from the European Union member states especially Eurozone members and pay
Euros, even though its income is in United States dollars. It also supports direct speculation
in the value of currencies, and the carry trade, speculation based on the interest rate
differential between two currencies
The foreign exchange market is unique because of the following characteristics:
its huge trading volume representing the largest asset class in the world leading to
high liquidity;
its geographical dispersion;
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3rd Semester
its continuous operation: 24 hours a day except weekends, i.e., trading from 20:15
GMT on Sunday until 22:00 GMT Friday;
the variety of factors that affect exchange rates;
the low margins of relative profit compared with other markets of fixed income; and
the use of leverage to enhance profit and loss margins and with respect to account
size.
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Page 78

Module 2 Banks

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Dept.

Two marks question and answer

Dept. of Management Studies

ii. Non-fund based activities

Non-fund based activities

Dept. of Management Studies

public by the issue of debt instruments.

Dept. of Management Studies

Dept. of Management Studies

other security, they can be traded in the market.

12. New products in forex market

Dept. of Management Studies

Non-fund based activities

Dept. of Management Studies

14. Merchant Banking:

Dept. of Management Studies

Dept. of Management Studies

22. Corporate advisory services

Dept. of Management Studies

Module 2 BANKS & INSTITUTIONS

Dept. of Management Studies

Banks Operations & Special Role of Banks Specialized Financial Institutions

For mu l a tes i mp l e men ts an d mon i tors t h e mon e tary p ol i cy .

Regu l ator an d su p ervi sor of th e f i n an ci al system:

Pr esc ri b es b road p ara met ers of b an k in g op erati on s w i thin wh i ch th e

Dept. of Management Studies

Man ager of Fo rei g n E xch an ge

Man ages th e For ei gn E xch an ge Man age men t A ct, 1999.

I s s u es an d exch an ges or d estroys cu rr en cy an d coi n s n ot f i t f or

Devel op men tal rol e

Pe rf or ms a w i d e ran ge of p romoti on al f u n cti on s to su p p ort n ati on al

Rel ated Fu n cti on s

B an k er to th e Gov e rn men t: p erf or ms merch an t b an k i n g f u n cti on f or

Dept. of Management Studies

Monetary policy is the process by which monetary authority of a country, generally a

Dept. of Management Studies

The aim here is to increase the productivity of investment by restraining non

Open Market Operations

Dept. of Management Studies

CRR Graph from 1992 to 2011[2]

SLR Graph from 1991 to 2011[4]

Dept. of Management Studies

Bank Rate Graph from 1991 to 2011

Dept. of Management Studies

List of former Chairmen

18 February 2008 18 February 2011

18 February 2005 18 February 2008

Dept. of Management Studies

Functions and responsibilities

2. Prevents fraudulent and unfair trade practises in stock exchange.

3. Regulates the acquisition of shares and takeover of companies.

4. Undertakes the checking and inspection of stock exchanges.

5. Conducting enquires and inspection of stock exchange.

6. Protects the interest of the investors.

2. Power relating to stock exchange and dealing in securities.

3. Power relating to violation of rules and regulation.

4. Power to regulate business of stock exchange and control it unfair trade.

5. Power under securities contract act.

The issuers of securities

Dept. of Management Studies

Dept. of Management Studies

6. Secondary Market Advisory Committee (SMAC)

Role of SEBI in marketing of securities and protection of investor interest

Foster the development and regulation of the Indian securities market.