UNIT-I

Indian capital markets have been receiving global attention, especially from sound investors,
due to the improving macroeconomic fundamentals. The presence of a great pool of skilled labor
and the rapid integration with the world economy increased India’s global competitiveness. No
wonder, the global ratings agencies Moody’s and Fitch have awarded India with investment
grade ratings, indicating comparatively lower sovereign risks.
The Securities and Exchange Board of India (SEBI), the regulatory authority for Indian securities
market, was established in 1992 to protect investors and improve the microstructure of capital
markets. In the same year, Controller of Capital Issues (CCI) was abolished, removing its
administrative controls over the pricing of new equity issues. In less than a decade later, the
Indian financial markets acknowledged the use of technology (National Stock Exchange started
online trading in 2000), increasing the trading volumes by many folds and leading to the
emergence of new financial instruments. With this, market activity experienced a sharp surge
and rapid progress was made in further strengthening and streamlining risk management, market
regulation,andsupervision.
The securities market is divided into two interdependent segments:

 The primary market provides the channel for creation of funds through issuance of new
securities by companies, governments, or public institutions. In the case of new stock
issue, the sale is known as Initial Public Offering (IPO).

 The secondary market is the financial market where previously issued securities and
financial instruments such as stocks, bonds, options, and futures are traded.
Broad Constituents in the Indian Capital Markets

Fund Raisers are companies that raise funds from domestic and foreign sources, both
public and private. The following sources help companies raise funds

Fund Providers are the entities that invest in the capital markets. These can be
categorized as domestic and foreign investors, institutional and retail investors. The list
includes subscribers to primary market issues, investors who buy in the secondary
market, traders, speculators, FIIs/ sub accounts, mutual funds, venture capital funds,
NRIs ,ADR/GDR investors, etc.

Intermediaries are service providers in the market, including stock brokers, sub-brokers,
financiers, merchant bankers, underwriters, depository participants, registrar and transfer
agents, FIIs/ sub accounts, mutual Funds, venture capital funds, portfolio managers,
custodians,etc.

Organizations include various entities such as MCX-SX, BSE, NSE, other regional
stock exchanges, and the two depositories National Securities Depository Limited
(NSDL) and Central Securities Depository Limited (CSDL).

Market Regulators include the Securities and Exchange Board of India (SEBI), the
Reserve Bank of India (RBI), and the Department of Company Affairs (DCA).
 REFORMS IN INDIAN CAPITAL MARKET
Indian Capital Market is exposed to tremendous reforms in the last decade. The reforms
are triggered by changes in policy by Union Government and the same is accepted and
stimulated by introduction of new financial products by stock exchanges, better legal
frame work by the regulator and active participation by depository participants, share
brokers, domestic as well as foreign investors.
Primary Market IPO is the major source of raising finance for a corporate. Investor
sentiment towards the corporate as well as the share price plays a major role in the
success of IPOs. SEBI played a mojor role in the development of IPOs. Indian IPO
market witnessed maximum growth and success from 2000 to 2007. The growth in major
indices in India, viz, SENSEX and NIFTY and positive sentiment towards Indian stock
market supported by domestic as well as foreign institutional investors are the main
reason for the IPO boom between 2000 and 2007. This boom continued till the sub prime
crises in 2008 and the investor sentiment became negative after that. The following table
gives the details of IPO market in India in the last few years:
Secondary Market BSE is the oldest stock exchange in India which is stared in the year
1875. SENSEX is the index of BSE (created based on the average price movement of 50
stocks) is the representative of stock performance of the shares listed at BSE as well as
considered the representative of price movement of the Indian stock market. The
introduction of derivatives changed the scenario and now NSE is leading in the Indian
market. MCXSX (stock trading wing of Multi Commodities Exchange which is now
called Metropolitan Stock Exchange of India Ltd) also started its operation last year and
it’s yet to capture the market. NIFTY (which shows the average price movement of 50
stocks) and SX-40 (price movement of 40 stocks) are the indices of NSE and MCXSX
respectively. The reforms in the area of capital market can be broadly classified in to 3
heads, viz;
1. Capital Market Reforms from the angle of Regulator’s
2. Capital Market Reforms from the angle of Products’, and
3. Other Initiatives All the 3 sectors contributed positively for the growth of capital
market segment in India as well positively contributed to the interest of market’s
stakeholders
Securities Contracts (Regulation) Amendment Act, 2007
The Securities Contracts Regulation Act, 1956 has been amended to include
securitization instruments under the definition of "securities" and provide for disclosure
based regulation for issue of the securitized instruments and the procedure thereof. This
has been done keeping in view that there is considerable potential in the securities market
for the certificates or instruments under securitization transactions. The development of
the securitized debt market is critical for meeting the humungous requirements of the
infrastructure sector, particularly housing sector, in the country. Replication of the
securities markets framework for these instruments would facilitate trading on stock
exchanges and in turn help development of the market in terms of depth and liquidity.
Permanent Account Number (PAN) PAN is made compulsory for dealing in stock
market. It has become the unique proof of identity as well as proof of signature. This
helped a lot in avoiding lots of frauds liked with IPO as well as in proper accounting of
income and wealth.
IPO Grading SEBI has made it compulsory for companies coming out with IPOs of
equity shares to get their IPOs graded by at least one credit rating agency registered with
SEBI from May 1, 2007. This measure is intended to provide the investor with an
informed and objective opinion expressed by a professional rating agency after analyzing
factors like business and financial prospects, management quality and corporate
governance practices etc.
Investor Protection and Education Fund (IPEF) SEBI has set up the Investor
Protection and Education Fund (IPEF) with the purpose of investor education and related
activities. SEBI has contributed a sum of Rs.10 crore toward the initial corpus of the
IPEF from the SEBI General Fund. In addition following amounts will also be credited to
the IPEF namely: i. Grants and donations given to IPEF by the Central Government, State
Governments or any institution approved by SEBI for the purpose of the IPEF; ii. Interest
or other income received out of the investments made from the IPEF; and iii. Such other
amount that SEBI may specify in the interests of the investors.
American Depository Receipt (ADR) & Global Depository Receipt (GDR)
Government had set up an Expert Committee under the Chairmanship of Mr. Saumitra
Choudhury, Member Economic Advisory Council to Prime Minister to review the extant
ADR / GDR. The committee has recently submitted its report to the Government. The
recommendations of the Committee are under consideration.
Strengthening of Credit Rating Agencies In order to have a greater enforceability of
the regulatory framework relating to issue of capital by companies and to streamline the
disclosures while also taking into account changes in market design, the erstwhile SEBI
(Disclosure and Investor Protection) guidelines (DIP Guidelines) governing public
offerings were replaced by the SEBI (Issue of Capital and Disclosure Requirements)
Regulations, 2009 (ICDR). There were certain changes made in the ICDR regulations
vis-a-vis the provision contained in DIP Guidelines, on account of: (a) Removal of
redundant provisions contained in DIP Guidelines, (b) Modifications on account of
change in market design, and (c) Bringing more clarity in the existing provisions of the
DIP Guidelines.
Capital Market Reforms in the angle of Products’ Products always play an important
role in any market. Indian capital market has seen a positive growth in the variety of
financial products introduced successfully.
Stocks – Delivery Based Trading Delivery based stock trading is the primitive product
in capital market segment. This base product is also in growth face in the last 10 years.
The following table shows the movement of SENSEX in the last 5 years which is also a
reason for the increase in delivery volume
Buy Today Sell Tomorrow (BTST) BTST is a facility provided by the stock broker with
the permission of exchange. T+2 is the settlement cycle followed in India, i.e., if you buy
a stock today then the stock will be credited to your Demat account after 2 day. For
example; if you buy a stock on Monday then the stock will be credited to your account by
Wednesday (provided Monday, Tuesday and Wednesday are not trading holidays). BTST
provides the option to sell the stock before the stock is credited to the investors account.
If any default happens in crediting the stock then the broker buys the stock through
auction which makes the product riskier.

Mutual Funds Mutual Funds are one of the oldest products traded in the market. Mutual
Funds eliminate the basic two limitations of Indian investors, viz; lack of big money and
lack of knowledge regarding the price movements. The following table shows the growth
in Assets under Management (AUM) of a few major Asset Management Companies
(AMCs) in India in the last few years:
 INDIAN CAPITAL MARKET REGULATORY FRAMEWORK

SEBI: Securities and Exchange Board of India (SEBI) was set up as an administrative
arrangement in 1988.In 1992, the SEBI Act was enacted, which gave statutory status to SEBI. It
mandates SEBI to perform a dual function: investor protection through regulation of the
securities market and fostering the development of this market. SEBI has been vested most of the
functions and powers under the Securities Contract Regulation (SCR) Act, which brought stock
exchanges, their members, as well as contracts in securities which could be traded under the
regulations of the Ministry of Finance. It has also been delegated certain powers under the
Companies Act. In addition to registering and regulating intermediaries, service providers,
mutual funds, collective investment schemes, venture capital funds and takeovers, SEBI is also
vested with the power to issue directives to any person(s) related to the securities market or to
companies in areas of issue of capital, transfer of securities and disclosures. It also has powers to
inspect books and records, suspend registered entities and cancel registration.

RBI: Reserve Bank of India (RBI) has regulatory involvement in the capital market, but this
has been limited to debt management through primary dealers, foreign exchange control and
liquidity support to market participants. It is RBI and not SEBI that regulates primary dealers in
the Government securities market. RBI instituted the primary dealership of Government
securities in March 1998. Securities transactions that involve foreign exchange transactions need
the permission of RBI.

Stock Exchanges: SEBI issued directives that require that half the members of the governing
boards of the stock exchanges should be non broker public representatives and include a SEBI
nominee. To avoid conflicts of interest, stock brokers are a minority in the committees of stock
exchanges set up to handle matters of discipline, default and investor-broker disputes. The
exchanges are required to appoint a professional, non member executive director who is
accountable to SEBI for the implementation of its directives on the regulation of stock
exchanges. SEBI has introduced a mechanism to redress investor grievances against brokers.
Further, all issues are regulated through a series of disclosure norms as prescribed by SEBI and
respective stock exchanges through their listing agreement. After a security is issued to the
public and subsequently listed on a stock exchange, the issuing company is required under the
listing agreement to continue to disclose in a timely manner to the exchange, to the holders of the
listed securities and to the public any information necessary to enable the holders of the listed
securities to appraise its position and to avoid the establishment of a false market in such listed
securities.

The powers and functions of regulatory authorities for the securities market seem to be
diverse in nature. SEBI is the primary body responsible for regulation of the securities market,
deriving its powers of registration and enforcement from the SEBI Act. There was an existing
regulatory framework for the securities market provided by the Securities Contract Regulation
(SCR) Act and the Companies Act, administered by the Ministry of Finance and the Department
of Company Affairs (DCA) under the Ministry of Law, respectively. SEBI has been delegated
most of the functions and powers under the SCR Act and shares the rest with the Ministry of
Finance. It has also been delegated certain powers under the Companies Act. RBI also has
regulatory involvement in the capital markets regarding foreign exchange control, liquidity
support to market participants and debt management through primary dealers. It is RBI and not
SEBI that regulates primary dealers in the Government securities market. However, securities
transactions that involve a foreign exchange transaction need the permission of RBI. So far,
fragmentation of the regulatory authorities has not been a major obstacle to effective regulation
of the securities market. Rather, lack of enforcement capacity by SEBI has been a more
significant cause of poor regulation. But since the Indian stock markets are rapidly being
integrated, the authorities may follow the global trend of consolidation of regulatory authorities
or better coordination among them.
A security, in a financial context, is a certificate or other financial instrument that has monetary
value and can be traded. Ownership securities are the instruments or insiders funds in which an
investor has full control and influence over operating decisions of the company. One who
purchases the ownership securities has various rights to take decisions of the company affairs.
On the other hand, creditor ship securities are those instruments or outsiders funds in which an
investor does not have the control and influence over the decisions of the company.
A joint stock company divides its capital into units of equal denomination. Each unit is called a
share. These units i.e. shares are offered for sale to raise capital. This is termed as issuing shares.
A person who buys share/ shares of the company is called a shareholder and by acquiring share
or shares in the company he/she becomes one of the owners of the company Thus, a share is an
indivisible unit of capital. It expresses the proprietary relationship between the company and the
shareholder. The denominated value of a share is its face value. The total capital of a company is
divided into number of shares. Kinds of shares According to the Companies Act, a company can
issue the following types of Shares: (i) Preference shares (ii) Equity shares

(i) Preference shares A preference share is one which carries following preferential rights over
other type of shares called equity shares in regard to the following:

l Payment of dividend

2 Repayment of capital at the time of winding up of the company.

(ii) Equity shares All shares which are not preference shares are equity shares. Holders of these
shares receive dividend out of the profits of the company after the payment of dividend has been
made to the preference shareholders. Equity shareholders have the right to elect directors of the
company. Equity shares are the permanent source of capital.

Debenture is an instrument of debt owed by a company. As an acknowledgement of debt, such

instruments are issued under the seal of a company and duly signed by authorized signatory. The
debenture instrument specifies nominal/par value, the rate of interest, periodicity of payment, the
tenure of the debentures and terms of redemption.
Bond is similar to that of debenture, both in terms of contents and texture. Traditionally, bonds
had been issued by the government, but these days bonds are also being issued by semi-
government and non-government organizations as an acknowledgment of debt. The significant
difference between bonds and debentures is with respect to the issue condition, i.e., bonds can be
issued without predetermined rate of interest as is in case of deep discount bonds. A deep
discount bond is issued without prefixed rate of interest which is implicitly in-built in the terms
of payment.
A capital market is a market for securities (debt or equity), where business enterprises and
government can raise long-term funds. It is defined as a market in which money is provided for
periods longer than a year, as the raising of short-term funds takes place on other markets (e.g.,
the money market). The capital market is characterized by a large variety of financial
instruments: equity and preference shares, fully convertible debentures (FCDs), non-convertible
debentures (NCDs) and partly convertible debentures (PCDs) currently dominate the capital
market, however new instruments are being introduced such as debentures bundled with
warrants, participating preference shares, zero-coupon bonds, secured premium notes, etc.
 ROLE AND IMPORTANCE OF CAPITAL MARKET IN INDIA:-
Capital market has a crucial significance to capital formation. For a speedy economic
development adequate capital formation is necessary. The significance of capital market in
economic development is explained below:-
1. Mobilization Of Savings And Acceleration Of Capital Formation :-
In developing countries like India the importance of capital market is self evident. In this market,
various types of securities helps to mobilize savings from various sectors of population. The twin
features of reasonable return and liquidity in stock exchange are definite incentives to the people
to invest in securities. This accelerates the capital formation in the country.
2. Raising Long - Term Capital :-
The existence of a stock exchange enables companies to raise permanent capital. The investors
cannot commit their funds for a permanent period but companies require funds permanently. The
stock exchange resolves this dash of interests by offering an opportunity to investors to buy or
sell their securities, while permanent capital with the company remains unaffected.
3. Promotion Of Industrial Growth :-
The stock exchange is a central market through which resources are transferred to the industrial
sector of the economy. The existence of such an institution encourages people to invest in
productive channels. Thus it stimulates industrial growth and economic development of the
country by mobilizing funds for investment in the corporate securities.
4. Ready And Continuous Market :-
The stock exchange provides a central convenient place where buyers and sellers can easily
purchase and sell securities. Easy marketability makes investment in securities more liquid as
compared to other assets.
5. Technical Assistance :-
An important shortage faced by entrepreneurs in developing countries is technical assistance. By
offering advisory services relating to preparation of feasibility reports, identifying growth
potential and training entrepreneurs in project management, the financial intermediaries in
capital market play an important role.

6. Reliable Guide To Performance :-

The capital market serves as a reliable guide to the performance and financial position of
corporate, and thereby promotes efficiency.
 7. Proper Channelization Of Funds :-
The prevailing market price of a security and relative yield are the guiding factors for the people
to channelize their funds in a particular company. This ensures effective utilization of funds in
the public interest.

8. Provision Of Variety Of Services :-

The financial institutions functioning in the capital market provide a variety of services such as
grant of long term and medium term loans to entrepreneurs, provision of underwriting facilities,
assistance in promotion of companies, participation in equity capital, giving expert advice etc.

9. Development Of Backward Areas :-

Capital Markets provide funds for projects in backward areas. This facilitates economic
development of backward areas. Long term funds are also provided for development projects in
backward and rural areas.

10. Foreign Capital :-

Capital markets makes possible to generate foreign capital. Indian firms are able to generate
capital funds from overseas markets by way of bonds and other securities. Government has
liberalized Foreign Direct Investment (FDI) in the country. This not only brings in foreign
capital but also foreign technology which is important for economic development of the country.

11. Easy Liquidity :-

With the help of secondary market investors can sell off their holdings and convert them into
liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when they
are in need of funds
 UNIT-II
Primary Markets
Companies raise funds to finance their projects through various methods. The promoters can
bring their own money of borrow from the financial institutions or mobilize capital by issuing
securities. The funds may be raised through issue of fresh shares at par or premium, preferences
shares, debentures or global depository receipts. The main objectives of a capital issue are given
below:
To promote a new company
To expand an existing company
To diversify the production
To meet the regular working capital requirements
To capitalize the reserves Stocks available for the first time are offered through primary market.
The issuer may be a new company or an existing company. These issues may be of new type or
the security used in the past. In the primary market the issuer can be considered as a
manufacturer. The issuing houses, investment bankers and brokers act as the channel of
distribution for the new issues. They take the responsibility of selling the stocks to the public.
The Function
The main service functions of the primary market are origination, under writing and distribution.
Origination deals with the origin of the new issue. The proposal is analyzed in terms of the
nature of the security, the size of the issue, timing of the issue and floatation method of the issue.
Underwriting contract makes the share predictable and removes the element of uncertainty in the
subscription (underwriting is given in the latter part of this chapter). Distribution refers to the
sale of securities to the investors. This is carried out with the help of the lead managers and
brokers to the issue.
To ensure healthy growth of primary market, the investing public should be protected. The term
investor's protection has a wider meaning in the primary market. The principal ingredients of
investor protection are:
 Provision of all the relevant information,
 Provision of accurate information and
 Transparent allotment procedures without any bias.
To provide the above-mentioned factors several steps have been taken. They are project
appraisal, under writing, clearance of the issue document by the stock exchange and SEBI's
scrutiny of the issue document.
Primary market intermediaries
The following market intermediaries are involved in the Securities Market:
 Merchant Bankers
 Registrars and Share Transfer Agents
 Underwriters
 Bankers to issue
 Debenture Trustees
 Portfolio managers
 Syndicate members
 Stock-brokers and sub-brokers
 Custodians
 Investment Advisers
 Credit Rating Agencies
 Depository Participant

MERCHANT BANKERS ‘Merchant Banker’ means any person engaged in the business of
issue management by making arrangements regarding selling buying or subscribing to securities
or acting as manager/consultant/advisor or rendering corporate advisory services in relation to
such issue management.

REGISTRARS AND SHARE TRANSFER AGENTS ‘Registrar to an Issue’ means the person
appointed by a body corporate or any person or group of persons to carry on the following
activities on its or his or their behalf i.e.:

(i) Collecting application for investor in respect of an issue;

(ii) Keeping a proper record of applications and monies received from investors or paid to the
seller of the securities;

(iii) Assisting body corporate or person or group of persons in determining the basis of
allotment of the securities in consultation with the stock exchange.
‘Share Transfer Agent’ means: (i) any person who on behalf of anybody corporate, maintains the
records of holders of securities issued by such body corporate and deals with all matters
connected with the transfer and redemption of its securities; (ii) the department or division, by
whatever name called, of a body corporate performing the activities as share transfer agents if at
any time the total number of holders of its securities issued exceed one lakh.

UNDERWRITERS Underwriter means a person who engages in the business of underwriting of

an issue of securities of a body corporate. Underwriting is an arrangement whereby certain
parties assure the issuing company to take up shares, debentures or other securities to a specified
extent in case the public subscription does not amount to the expected levels. For this purpose, an
arrangement (agreement) will be entered into between the issuing company and the assuring
party such as a financial institution, banks, merchant banker, broker or other person

DEBENTURE TRUSTEES ‘Debenture Trustee’ means a trustee of a trust deed for securing
any issue of debentures of a body corporate. Debentures, Bonds and other hybrid instruments in
most cases unless otherwise specified, carry securities for the investors unlike in the case of
equity and preference shares. It is necessary that the company makes proper arrangements to
extend assurances and comply with legal requirements in favor of the investors who are entitled
to this type of security.

PORTFOLIO MANAGERS Portfolio manager means any person who pursuant to contract or
arrangement with the client, advises or directs or undertakes on behalf of the client (whether as a
discretionary portfolio manager or otherwise) the management or administration of a portfolio of
securities or the funds of the clients as the case may be. “Discretionary portfolio manager” is
defined as one who exercises or may exercise, under a contract relating to portfolio management,
any degree of discretion as to the investment or the management of the portfolio of the securities
or the funds of the client. “Portfolio” means the total holdings of securities belonging to any
person.

SYNDICATE MEMBERS Syndicate Member means an intermediary registered with SEBI and
who is permitted to carry on the activity as an underwriter. The Book Runner(s) may appoint
those intermediaries who are registered with the SEBI and who are permitted to carry on activity
as an ‘Underwriter’ as syndicate members. The syndicate members are mainly appointed to
collect the entire bid forms in a book built issue.
STOCK BROKERS & SUB-BROKER Stock-broker means a member of stock exchange and
they are the intermediaries who are allowed to trade in securities on the exchange of which they
are members. They buy and sell on their own behalf as well as on behalf of their clients. A sub-
broker is one who works along with the main broker and is not directly registered with the stock
exchange as a member. Sub-broker means any person not being a member of stock exchange
who acts on behalf of a stock broker as an agent or otherwise for assisting the investors in
buying, selling or dealing in securities through such stock brokers

CUSTODIANS A custodian is a person who carries on the business of providing custodial

services to the client. The custodian keeps the custody of the securities of the client. The
custodian also provides incidental services such as maintaining the accounts of securities of the
client, collecting the benefits or rights accruing to the client in respect of securities.

INVESTMENT ADVISER “Investment Adviser” means any person, who for consideration, is
engaged in the business of providing investment advice to clients or other persons or group of
persons and includes any person who holds out himself as an investment adviser, by whatever
name called. Investment advisers are those, who guide one about his or her financial dealings
and investments.

CREDIT RATING AGENCY Credit Ratings Agency means a body corporate engaged in or
proposes to be engaged in the business of rating of securities offered by way of public or rights
issue. Credit ratings establish a link between risk and return. They thus provide a yardstick
against which to measure the risk inherent in any instrument. An investor uses the ratings to
assess the risk level and compares the offered rate of return with his expected rate of return (for
the particular level of risk) to optimize his risk-return trade-off.

DEPOSITORY PARTICIPANT The Depositories Act, 1996 defines a depository to mean “a

company formed and registered under the Companies Act, 2013 and which has been granted a
certificate of registration under sub-section (IA) of section 12 of the Securities and Exchange
Board of India Act, 1992. A Depository Participant (DP) is described as an agent of the
depository. They are the intermediaries between the depository and the investors. The
relationship between the DPs and the depository is governed by an agreement made between the
two under the Depositories Act, 1996. In a strictly legal sense, a DP is an entity who is registered
as such with SEBI under the provisions of the SEBI Act. As per the provisions of this Act, a DP
can offer depository related services only after obtaining a certificate of registration from SEBI.
 METHODS OF RAISING CAPITAL IN PRIMARY MARKET

1. Public Issue

Here prospectus is issued, and a public appeal is made to subscribe the new shares / debentures
issued by the company. Shares are allocated in response to application received. Some
companies sell shares directly to the public while some take help of share brokers. The company
appoints an advertising agency to advertise about the issue of shares.

2. Rights Issue

Rights issue means new shares are offered to the existing shareholders on the pro-rata basis.
When company wants to raise additional capital, securities are first offered to the existing
shareholders. If the shareholders do not want to buy shares, then the company can sell the shares
to the outside public.

3. Private Placement

Private Placement of shares means the company sells its shares to a small group of investors. It
can sell to banks, insurance companies, financial institutions, etc. It is an economical and quick
method of selling securities. The company does not sell its shares to the public.

REFORMS IN SECONDARY MARKET

Establishment of SEBI: The Securities and Exchange Board of India (SEBI) was established in
1988. It got legal status in 1992. SEBI was primarily set up to regulate the activities of the
merchant banks, to control the operations of mutual funds, to work as a promoter of the stock
exchange activities and to act as a regulatory authority of new issue activities of companies. The
SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a) protecting the
interests of investors in securities) promoting the development of the securities market, and (c)
regulating the securities market. Its regulatory jurisdiction extends over corporate in the issuance
of capital and transfer of securities, in addition to all intermediaries and persons associated with
the securities market. It can conduct enquiries, audits, and inspection of all concerned, and
adjudicate offences under the Act. It has the powers to register and regulate all market
intermediaries, as well as to penalize them in case of violations of the provisions of the Act,
Rules, and Regulations made the under. SEBI has full self-government and the authority to
regulate.

Establishment of Creditors Rating Agencies: Three creditors rating agencies viz. The Credit
Rating Information Services of India Limited (CRISIL - 1988), the Investment Information and
Credit Rating Agency of India Limited (ICRA - 1991) and Credit Analysis and Research Limited
(CARE) were set up in order to assess the financial health of different financial institutions and
agencies related to the stock market activities. It is a guide for the investors also in evaluating the
risk of their investments. Among the credit rating agencies in India, CRISIL is one of the leading
credit ratings agencies which cover extensive sectors of industries and follow procedures for fair
rating through substantial analyses in India. CRISIL was established as an independent body in
1992, and became affiliates of S & P in 1996. CRISIL was taken over by S&P in 2004, which
holds stake of 51% of CRISIL. As one of the major characteristics of CRISIL on credit ratings
and default study, CRISIL has default rate for company analyses in credit rating exercises. Other
credit rating agencies are mainly focusing on failures of debt. Unlike ICRA (affiliate of
Moody’s), CRISIL has an independent committee on the local credit ratings and not much
involved by S&P in local bond ratings. The rating methods have been established through the
relatively long experience of credit rating. To cater for uniform valuations CRISIL launched the
CRISIL Bond Valuation Matrix (CRISIL BVM), which has since been mandated by SEBI/AMFI
as a uniform pricing standard for the mutual fund industry. As of date nearly Rs. 80,000 crore
(US $ 18 billion) of fund portfolio holdings are marked-to-market every day, based on the
CRISIL Bond Valuation Matrix. The launch of the CRISIL BVM has not only set a uniform
pricing standard but has also led to a considerable deepening of the corporate bond market and
helped develop the broader concept of identifying and pricing “risk” inherent in securities of a
portfolio.

Increasing of Merchant Banking Activities: Many Indian and foreign commercial banks have
set up their merchant banking divisions in the last few years. These divisions provide financial
services such as underwriting facilities, issue organizing, consultancy services, etc.

Using Electronic Transactions: Due to technological development in the last few years. The
physical transaction with more paper work is reduced. It saves money, time and energy of
investors. Thus it has made investing safer and hassle free encouraging more people to join the
capital market.

Rowing Mutual Fund Industry: The growing of mutual funds in India has certainly helped the
capital market to grow. Public sector banks, foreign banks, financial institutions and joint mutual
funds between the Indian and foreign firms have launched many new funds. A big diversification
in terms of schemes, maturity, etc. has taken place in mutual funds in India. It has given a wide
choice for the common investors to enter the Capital market.

Rowing Stock Exchanges: The numbers of various Stock Exchanges in India are increasing.
Initially the BSE was the main exchange, but now after the setting up of the NSE and the
OTCEI, stock exchanges have spread across the country. Recently a new Inter-connected Stock
Exchange of India has joined the existing stock Exchanges.

Investor’s Protection: Under the purview of the SEBI the Central Government of India has set
up the Investors Education and Protection Fund (IEPF) in 2001. It works in educating and
guiding investors. It tries to protect the interest of the small investors from frauds and
malpractices in the capital market.

Growth of Derivative Transactions: Since June 2000, the NSE has introduced the derivatives
trading in the equities. In November 2001 it also introduced the future and options transactions.
These innovative products have given variety for the investment leading to the expansion of the
capital market.

Creating Investment Opportunities For Small Investors: As opposed to other businesses that
require huge capital outlay, investing in shares is open to both the large and small stock investors
because a person buys the number of shares they can afford. Therefore the Stock Exchange
provides the opportunity for small investors to own shares of the same companies as large
investors.

Bombay Stock Exchange (BSE): BSE is the oldest stock exchange in Asia. The extensiveness
of the local equity broking industry in India led to the formation of the Native Share Brokers
Association in 1875, which later became Bombay Stock Exchange Limited (BSE). BSE is
widely recognized due to its pivotal and preeminent role in the development of the Indian capital
market. , In 1995, the trading system transformed from open outcry system to an online screen-
based order driven trading system.
Primary market facilitates government as well corporate in raising capital to meet their
requirements of capital expenditure and/or discharge of other obligation such as exit opportunity
for venture capitalist/ Private Equity firm. The most common primary mechanism for raising
capital is an Initial Public Offer (IPO), under which shares are offered to common public as
precursor to the trading in secondary market of an exchange. When securities are exclusively
offered to the existing shareholders of company, as opposed to the general public it is called
Rights Issue. Another mechanism whereby a listed company can issue equity shares, fully and
partly convertible debentures which can be converted into equity shares later on, to a Qualified
Institutional Buyer (QIB) is termed as Qualified Institutional Placement. Apart from raising
capital in domestic market, companies can also issue securities in international market through
ADR/GDR/ECB route and raise capital.

TRADING AND SETTLEMENT OF SECURITIES:

Clearing: the process of transmitting, reconciling and, in some cases, confirming payment
orders or security transfer instructions prior to settlement, possibly including the netting of
instructions and the establishment of final positions for settlement.

Settlement: the completion of a transaction, wherein the seller transfers securities or financial
instruments to the buyer and the buyer transfers money to the seller

Capital market could be defined as a financial market that works as a conduit for demand and
supply of (primarily) long-term debt and equity capital. It channels the money provided by
savers and depository institutions (banks, credit unions, insurance companies, etc.) to borrowers
and investees through a variety of financial instruments (bonds, notes, stocks) called securities. A
capital market is not a compact unit, but a highly decentralized system made up of three major
parts:

(1) Stock market,

(2) Bond market, and

(3) Money market.

Some entities within the Capital Market: ·

 Securities & Exchange Commission – The Regulator ·

  Stock Exchange – Self Regulatory Organization (SRO) ·
 Central Securities Depository (CSD) ·

Other operators such as: Brokers; Settlement Banks; Custodians; Registrars; Lawyers etc.

Securities & Exchange Commission: The mission of any Securities and Exchange Commission
is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital
formation The SEC has broad authority over the securities industry. This includes the power to
register, regulate, and oversee brokerage firms, transfer agents, and clearing agencies as well as
the nation's self regulatory organizations (SROs). The SEC oversees the key participants in the
securities world, including securities exchanges, securities brokers and dealers, investment
advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure
of important market-related information, maintaining fair dealing, and protecting against fraud.

Stock Exchange: ·

 Established for the purpose of assisting, regulating and controlling business of buying,
selling and dealing in securities ·
 Provides a market for the trading of securities to individuals and organizations seeking to
invest their saving or excess funds through the purchase of securities ·
 Provides a physical location for buying and selling securities that have been listed for
trading on that exchange ·
 Establishes rules for fair trading practices and regulates the trading activities of its
members according to those rules · The exchange itself does not buy or sell the
securities, nor does it set prices for them.

Central Securities Depository – basic functions: ·

 Maintaining register of securities.

 Issuance of international securities identification number (ISIN) for all issues of
securities.
 Clearance and settlement of securities on the principle "Delivery versus Payment.
 Provision of additional services to issuer of securities

Historically, stock markets were physical locations where buyers and sellers met and negotiated.
With the improvement in communications technology in the late 20th century, the need for a
physical location became less important, as traders could transact from remote locations. Stock
trading is the process of buying or selling of shares on a stock exchange, where investors are
represented by stock brokers. A company that floats its stocks is called a public company and is
listed on a stock exchange. Stock trading can be done either physically or virtually (online).

Stock Trading: Approaches

There are two main approaches to stock trading:

Active approach: This is the more common of the two approaches. The decision to buy stocks
involves analyzing the company, reviewing the historical share price trends and understanding
the current forecasts. Active investors are guided by the growth and intrinsic value of the stocks.
This approach is mostly applied by the investment managers who manage mutual funds, pension
funds and separately managed individual accounts.

Passive approach: This approach is opted for by investors who prefer low-risk, high-yielding
stocks and invest money in them mainly for their retirement accounts. This approach assumes the
efficiency of markets in the longer term. It is, however, not synonymous with the strategy of
‘buy-and-hold.’ Rather, it implies buying at low prices and selling when the stocks have reached
a high price level.

Some Trading methods:

Open outcry is the name of a method of communication between professionals on a Stock

exchange or futures exchange which involves shouting and the use of hand signals to transfer
information primarily about buy and sell orders. The part of the trading floor where this takes
place is called a pit. Examples of markets which used this system are the New York Mercantile
Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade, the Chicago Board
Options Exchange.

A "trading floor" is a trading venue. This expression often refers to a place where traders or stock
brokers meet in order to buy and sell equities, also called a pit. Sometimes, the expression
"trading floor" is also used to refer to the "trading room" or "dealing room", i.e. the office space
where market activities are concentrated in investment banks or brokerage houses.

Electronic trading: It is sometimes called Etrading. It is a method of trading securities (such as

stocks and bonds), foreign currency, and exchange traded derivatives electronically. It uses
 information technology to bring together buyers and sellers through electronic media to create a
virtual market place. Etrading is widely believed to be more reliable than older methods of trade
processing.

LISTING OF SECURITIES:

Listing refers to the admission of the securities of a company on a recognized stock exchange for
trading. Listing of securities is undertaken with the primary objective of providing marketability,
liquidity and transferability of shares. Listing is done as per the compliance of SEBI, companies
act, SCRA (securities contract regulation act), rules and regulations of exchange etc.

Objectives of Listing

 Provide ready marketability

 liquidity & negotiability to securities
 Mobilize savings for economic development
 Ensure proper supervision and control of dealing
 Protect interest of investors by ensuring full disclosures.
 Transparency in dealing with securities
 To gain national importance and widespread recognition.

Listing is done with the help of an application filed with the necessary documents with regional
stock exchange. For this purpose companies have been classified into 2 groups:- 1. Large Cap
Companies (minimum issue size of Rs.10 Crores and market capitalization of not less than Rs.25
Crores) 2. Small Cap Companies (minimum issue size of Rs.3 Crores and market capitalization
of not less than Rs.5 Crores. The SEC and SEBI decide whether the security of the company
qualifies for listing or not.

Procedure to list securities:

The process of security listing on the Exchange consists of several steps and process is specific
to stock exchange. Preliminary discussion with stock exchange followed by articles of
association approval. Draft prospectus approval is the essential pre-requisite for the security to be
listed.

1. As per S. 73 of the companies Act, 1956, a company seeking listing of its securities on a
stock exchange is required to submit a Letter of application to all the stock exchanges where
 it proposes to have its securities listed before filing the prospectus with the registrar of
companies.
2. Every issuer, depending on the category and type of security has to submit supporting
documents required for specific stock exchange along with application.
3. All listing are subject to compliance with Bye laws, Rules and other requirements framed by
the Exchange from time to time in addition to the SEBI and other statutory requirements.
4. Companies making public/rights issues are required to deposit 1 % of the issue amount with
the designated stock exchange before the issue price.
5. On getting an in-principle consent of the exchange the issuer has to enter into a listing
agreement specific to Stock Exchange.
6. On getting an in-principle consent of the exchange the issuer has to enter into a listing
agreement.
7. The companies are also required to pay to the exchange some listing fee as prescribed by the
exchange every financial year.

STOCK MARKET INDEX

A stock index or stock market index is a measurement of the value of a section of the stock
market. It is computed from the prices of selected stocks (typically a weighted average). It is a
tool used by investors and financial managers to describe the market, and to compare the return
on specific investments. Stock market index is a method of measuring a section of the stock
market. Many indices are cited by news or financial services firms and are used as benchmarks,
to measure the performance of portfolios such as mutual funds. Alternatively, an index may also
be considered as an instrument (after all it can be traded) which derives its value from other
instruments or indices. The index maybe weighted to reflect the market capitalization of its
components, or may be a simple index which merely represents the net change in the prices of
the underlying instruments. Most publicly quoted stock market indices are weighted. Stock
market indices are useful in understanding the level of prices and the trend of price movements
of the market. A stock market index is created by selecting a group of stocks that are capable of
representing the whole market or a specified sector or segment of the market. The change in the
prices of this basket of securities is measured with reference to a base period. There is usually a
provision for giving proper weights to different stocks on the basis of their importance in the
economy. A stock market index act as the indicator of the performance of the economy or a
sector of the economy.
 There are various indexes of stocks but in India we have only two.
 NIFTY 50
 SENSEX
Nifty is the index of National stock Exchange operating 50 stocks of the companies in India.
Nifty 50 checks the price fluctuations based on weighted average on daily basis.
Whereas sensex is the index of Bombay Stock Exchange operating 30 stocks of the companies in
India. Sensex also applies the same method.
Market capitalization is the total worth of all outstanding (issued) shares of a company. It
represents the total worth of a company. Market capitalization=No of shares outstanding x
market price of share Free Float Market Capitalization Free float concept is an index
construction methodology which makes use of free float shares in the market. Free float market
capitalization is the total worth of all shares of a company which are available for trading in the
open market. Theses hares are called free float shares and are available for trading by anyone.

SEBI TO INCREASE LIQUIDITY IN THE STOCK MARKET

The SEBI regulation of stock exchanges and their members had started as early as February 1992
and the reforms later introduced have been on a continuous basis. It was started with the
licensing and registration of brokers and sub-brokers in the recognized stock exchanges. This
was later extended to underwriters, portfolio managers and other categories of players in the
stock market including foreign securities firms, FFIs, OCBs, FIIs, Debenture Trustees,
Collecting Bankers, etc. The other reforms are briefly summarized below:
 Compulsory audit and inspection of stock exchanges and their member brokers and their
accounts.
 Transparency in the prices and brokerage charged by brokers by showing them in their
contract notes.
 Broker accounts and client accounts are to be kept separate and clients' money is to be
separately maintained in bank's accounts and the same to be reported to the stock
exchanges.
  Board of Directors of stock exchanges has to be reconstituted so as to include non-
brokers, public representative, and Government representatives to the extent 126 of 50%
of the total number of members.
 Capital adequacy norms have been laid down for members of various stock exchanges
separately and depending on their turnover of trade and other factors.
 Guidelines have been laid down for dealings of FIIs and Foreign broker firms in the
Indian stock exchanges through Indian brokers.
 New guidelines for corporate members have been laid down with limited liability of
directors and opening up of their membership to more than one stock exchange without
the limiting requirement of experience of five years in one exchange, as imposed earlier.
The term "Investor Protection" is a wide term encompassing various measures designed to
protect the investors from malpractices of companies, brokers, merchant bankers, issue
managers, Registrars of new issues, etc. "Investors Beware" should be the watchword of all
programs for mobilization of savings for investment. As all investments have some risk element,
this risk factor should be borne in mind by the investors and they should take all precautions to
protect their interests in the first place. If caution is thrown to the winds and they invest in any
venture without a proper assessment of the risk, they have only to blame themselves. But if there
are malpractices by companies, brokers etc., they have every reason to complain. Such
grievances have been increasing in number in recent years.
The complaints of investors come from two major sources:
 Against member broker of Stock Exchanges;
 Against companies listed for trading on the Stock Exchanges.
Besides, there can be complaints against sub-brokers, agents, merchant bankers, issue managers,
etc., which cannot be entertained by the stock exchanges as per their rules.
 UNIT-III
MEANING, NEED AND BENEFITS OF DEPOSITORY SYSTEM
Depositories The Indian Capital Markets were notorious for their outdated ways of doing
business. It was a major relief when NSE and BSE had introduced on line trading that
transformed the trading from scream based to screen based. But the clumsy procedures of
handling share certificates and the recurring problem of bad deliveries made life horrendous not
for just an amateur investor but even for a professional broker. With the paper work nightmare
looming large, securities business was never a pleasant job. That's till; the new method of
holding stocks in the electronic form was introduced in 1996. The new system called a
depository was put in place to hold stocks of all companies in electronic form on behalf of the
investors and maintain a record of all "buy" and "sell" transactions. Technology had made it
possible to provide bank like ease and convenience. As it alleviated the hardships associated with
handling physical stocks, investors experiencing the relief, have begun to slowly come back to
the stock markets. Investing in stocks has now become much more convenient and safe.
The organization responsible for holding and handling securities on behalf of investors is known
as a Depository. It caters to both large and small investors through a network of intermediaries
called Depository Participants or DPs for short. Well-developed capital markets all over the
world have depositories.
In India, National Securities Depository Limited (NSDL) as a joint venture between IDBI, UTI
and the National Stock Exchange has set up the first depository. The second depository has been
set up by Central Depository Services Limited (CDSL), which was promoted by the Bombay
Stock Exchange and Bank of India. Both the depositories have a network of Depository
Participants (DPs) who are electronically connected to the depository and serve as contact points
with the investors.
Dematerialization: Dematerialization or Demat for short, is a process where securities held by
you in physical form are cancelled and credited to your DP account in the form of electronic
balances.
Cost of transactions would be less, as you don't have to pay for the stamp duty on transfer of
shares. As there are no bad deliveries, you need not waste time and money unlike in physical
segment where shares keep coming back to the seller due to Company Objections. You would
save expenses associated with notarization and follow up.
For convenience, there is nothing like Demat holding. It offers you a host of possibilities just
like a bank account does. You can convert your physical stock into electronic form
(Dematerialization) or reconvert electronic holdings into physical certificates
(Rematerialization), transfer your shares to some other account and ensure settlement of all your
trades through a single account by simply giving the necessary instructions to your Depository
Participant.

DIFFERENCE BETWEEN DMAT AND PHYSICAL ACCOUNT

S no DMAT ACCOUNT s.no PHYSICAL ACCOUNT
1 It maintains the record of securities 1 It maintains the records of securities
electronically physically
2 It requires less paper work for opening 2 Lot of paper work is required.
3 Less prone to errors 3 More prone to errors in handling large
records
4 Convenient and easy to operate 4 Less convenient
5 Less human effort is required 5 More human effort is required
6 More accurate 6 Less accurate

IMPORTANCE OF DEBT MARKET IN CAPITAL MARKET

Debt markets are markets for the issuance, trading and settlement of various types and features of
fixed income securities. Fixed income securities can be issued by any legal entity like central and
state governments, public bodies, statutory corporations, banks and institutions and corporate
bodies.
The debt market in India comprises mainly of two segments viz.,
 the Government securities market consisting of Central and State Governments
securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and

 The corporate securities market consisting of FI bonds, PSU bonds, and

Debentures/Corporate bonds. Government securities form the major part of the market in
terms of outstanding issues, market capitalization and trading value

The trading of government securities on the Stock exchanges is currently through Negotiated
Dealing System using members of Bombay Stock Exchange (BSE) / National Stock Exchange
(NSE) and these trades are required to be reported to the exchange. The bulk of the corporate
bonds, being privately placed, were, however, not listed on the stock exchanges. Two
Depositories, National Securities Depository Limited (NSDL) and Central Depository Services
(India) Limited (CDSL) maintain records of holding of securities in a dematerialized form.
Records of holding of government securities for wholesale dealers like banks/Primary Dealers
(PDs) and other financial institutions are maintained by the RBI.

The key role of the debt markets in the Indian Economy stems from the following reasons:

 Efficient mobilization and allocation of resources in the economy

 Financing the development activities of the Government
 Transmitting signals for implementation of the monetary policy
 Facilitating liquidity management in tune with overall short term and long term
objectives
 Reduction in the borrowing cost of the Government and enable mobilization of resources
at a reasonable cost.
 Provide greater funding avenues to the public-sector and private sector projects and
reduce the pressure on institutional financing.
 Enhance mobilization of resources by unlocking illiquid retail investments like gold.
 Development of heterogeneity of market participants
 Assist in the development of a reliable yield curve.

PARTICIPANT IN THE DEBT MARKET

Primary Dealers Primary dealers (PDs) are important intermediaries in the government
securities markets. They act as underwriters in the primary market, and as market makers in the
secondary market. PDs underwrite a portion of the issue of government security that is floated
for a predetermined amount. The underwriting commitment of each PD is broadly decided on the
basis of its size in terms of its net owned funds, its holding strength, the committed amount of
bids and the volume of turnover in securities.

Brokers play an important role in secondary debt market by bringing together counterparties and
negotiating terms of the trade. It is through them that the trades are entered on the stock
exchanges. The brokers are regulated by the stock exchanges and also by SEBI.
TYPES OF INSTRUMENT TREATED IN THE DEBT MARKET

Corporate debenture A Debenture is a debt security issued by a company, which offers to pay
interest in lieu of the money borrowed for a certain period. In essence it represents a loan taken
by the issuer who pays an agreed rate of interest during the lifetime of the instrument and repays
the principal normally, unless otherwise agreed, on maturity. These are long-term debt
instruments issued by private sector companies, in denominations as low as ` 1000 and have
maturities ranging between one and ten years. Debentures enable investors to reap the dual
benefits of adequate security and good returns. Unlike other fixed income instruments such as
Fixed Deposits, Bank Deposits, Debentures can be transferred from one party to another.
Debentures can be divided into different categories on the basis of convertibility of the
instrument and Security. The debentures issued on the basis of Security includes

 Non-Convertible Debentures (NCDs)

 Partly Convertible Debentures (PCDs)
 Fully convertible Debentures (FCDs)
 Optionally Convertible Debentures (OCDs)
 Secured Debentures
 Unsecured Debentures

FIXED INCOME PRODUCTS

Deposit: Deposits serve as medium of saving and as a means of payment and are a very
important variable in the national economy. A bank basically has three types of deposits, i.e.
time deposit, savings deposit and current account.
Fixed Deposit: Fixed Deposits are sums accepted by most of the NBFCs and banks. The amount
of deposits that may be raised by NBFCs is linked to its net worth and rating. However, the
interest rate that may be offered by a NBFC is regulated. The deposits offered by NBFCs are not
insured whereas the deposits accepted by most banks are insured up to a maximum of `1,00,000.
INTEREST BASED BONDS
Coupon Bonds Coupon Bonds typically pay interest periodically at the pre specified rate of
interest. The annual rate at which the interest is paid is known as the coupon rate or simply the
coupon. Interest is usually paid half-yearly though in some cases it may be monthly, quarterly,
annually or at some other periodicity. The dates on which the interest payments are made, are
known as the coupon due dates. Zero Coupon Bonds A plain bond is offered at its face value,
earns a stream of interest till redemption and is redeemed with or without a premium at maturity.
A zero coupon bond is issued at a discount to its face value, fetches no periodic interest and is
redeemed at the face value at maturity.

MONEY MARKET INSTRUMENTS

Call Money Call/Notice money is an amount borrowed or lent on demand for a very short
period. If the period is more than one day and up to 14 days it is called ‘Notice money’ otherwise
the amount is known as Call money. No collateral security is required to cover these
transactions. The call market enables the banks and institutions to even out their day to day
deficits and surpluses of money. Commercial banks, Co-operative Banks and primary dealers are
allowed to borrow and lend in this market for adjusting their cash reserve requirements.
Treasury Bills In the short term, the lowest risk category instruments are the treasury bills. RBI
issues these at a prefixed debt and a fixed amount. These include 91-day T-bills, 182-Day T-
bills, and 364-day T-bills. The usual investors in these instruments are banks who invest not only
to part their short-term surpluses. These T-bills, which are issued at a discount, can be traded in
the market. The transaction cost on T-bills is nonexistent and trading is considerably high in each
bill, immediately after its issue and immediately before its redemption.
Term Money Market Inter-bank market for deposits of maturity beyond 14 days and up to three
months is referred to as the term money market.
Certificates of Deposits (CDs) after treasury bills, the next lowest risk category investment
option is the certificate of deposit (CD) issued by banks and Financial Institutions. CDs are
issued by banks and FIs mainly to augment funds by attracting deposits from corporate, high net
worth individuals, trusts, etc. The foreign and private banks, especially, which do not have large
branch networks and hence lower deposit base use this instrument to raise funds.
Commercial Papers (CP) CPs are negotiable short-term unsecured promissory notes with fixed
maturities, issued by well rated companies generally sold on discount basis. Companies can issue
CPs either directly to the investors or through banks / merchant banks (called dealers). These are
basically instruments evidencing the liability of the issuer to pay the holder in due course a fixed
amount i.e. face value of the instrument, on the specified due date. These are issued for a fixed period
of time at a discount to the face value and mature at par.
 UNIT-IV

“A development bank is like a living organism that reacts to the social economic environment
and its success depends on reacting most aptly to that environment”Development Bank
Development banks are unique financial institution that act as catalytic agents in promoting
balanced development of the country and thereby aid in the economic growth of the country.
Development Bank is a financial institution dedicated to fund new and upcoming businesses and
economic development projects by equity capital or loan capital. Development banks are those
financial institutions engaged in the promotion and development of industry, agriculture and
other key sectors.

Development banks were set up in India at various points of time starting from the late 1940s to
cater to the medium to long term financing requirements of industry as the capital market in
India had not developed sufficiently. The endorsement of planned industrialization at the
national level provided the critical enticement for organization of Development banks at both all
India and state levels. In order to perform their role, Development Banks were extended funds in
the shape of Long Term Operations (LTO) Fund of the Reserve bank of India and government
guaranteed bonds, which constituted main sources of their funds. Funds from these sources were
not only available at concessional rates, but also on a long term basis with their maturity period
ranging from 10-15 years.

Development Banks in India:

Industrial Finance Corporation of India (IFCI)-1948.

The industrial Development Bank of India (IDBI)-1964

The Industrial Reconstruction Bank of India (IRBI)-1971

The Industrial Credit and Investment Corporation of India (ICICI)-1955 Etc.

Features and role of a Development Bank

 A development bank does not accept deposits from the public like commercial banks and
other financial institutions who entirely depend upon saving mobilization.
 It is a specialized financial institution which provides medium term and long-term
lending facilities.
 It is a multipurpose financial institution. Besides providing financial help it undertakes
promotional activities also. It helps enterprises from planning to operational level.
 It provides financial assistance to both private as well as public sector institutions.
 The role of a development bank is of gap filler. When assistance from other sources is not
sufficient then this channel helps. It does not compete with normal channels of finance.
 Development banks primarily aim to accelerate the rate of growth. It helps
industrialization specific and economic development in general.
 The objective of these banks is to serve public interest rather than earning profits.

Functions of development banks

Development banks have been started with the motive of increasing the pace of industrialization.
The traditional financial institutions could not take up this challenge because of their limitations.
In order to help all round industrialization development banks were made multipurpose
institutions. Besides financing they were assigned promotional work also. Some important
functions of these institutions are discussed as follows:

 Financial Gap Fillers Development banks do not provide medium term and long-term
loans only but they help industrial enterprises in many other ways too. These banks
subscribe to the bonds and debentures of the companies, underwrite to their shares and
debentures and, guarantee the loans rose from foreign and domestic sources. They also
help 'undertakings to acquire machinery from within and outside the country.

 Undertake Entrepreneurial Role Developing countries lack entrepreneurs who can take up
the job of setting up new projects. It may be due to lack of expertise and managerial
ability. Development banks were assigned the job of entrepreneurial gap filling. They
undertake the task of discovering investment projects, promotion of industrial enterprises,
 provide technical and managerial assistance, undertaking economic and technical
research, conducting surveys, feasibility studies etc. The promotional role of
development bank is very significant for increasing the pace of industrialization.

 Commercial Banking Business Development banks normally provide medium and long-
term funds to industrial enterprises. The working capital needs of the units are met by
commercial banks. In developing countries, commercial banks have not been able to take
up this job properly. Their traditional approach in dealing with lending proposals and
assistance on securities has not helped the industry. Development banks extend financial
assistance for meeting working capital needs to their loan if they fail to arrange such
funds from other sources. So far as taking up of other functions of banks such as
accepting of deposits, opening letters of credit, discounting of bills, etc. there is no
uniform practice in development banks.

 Joint Finance Another feature of development bank's operations is to take up joint

financing along with other financial institutions. There may be constraints of financial
resources and legal problems (prescribing maximum limits of lending) which may force
banks to associate with other institutions for taking up the financing of some projects
jointly. It may also not be possible to meet all the requirements of a concern by one
institution, So more than one institution may join hands. Not only in large projects but
also in medium-size projects it may be desirable for a concern to have, for instance, the
requirements of a foreign loan in a particular currency, met by one institution and under
writing of securities met by another.

 Refinance Facility Development banks also extend refinance facility to the lending
institutions. In this scheme there is no direct lending to the enterprise. The lending
institutions are provided funds by development banks against loans extended' to industrial
concerns. In this way the institutions which provide funds to units are refinanced by
development banks. In India, Industrial Development Bank of India provides reliance
against ('term loans granted to industrial 'concerns by state financial corporations.
commercial banks and state cooperative banks.
 Credit Guarantee The small scale sector is not getting proper financial facilities due to the
clement of risk since these units do not have sufficient securities to offer for loans,
lending institutions are hesitant to extend them loans. To overcome this difficulty many
countries including India and Japan have devised credit guarantee scheme and credit
insurance scheme.

 Underwriting of Securities Development banks acquire securities of industrial units

through either direct subscribing or underwriting or both. The securities may also be
acquired through promotion work or by converting loans into equity shares or preference
shares. So development banks may build portfolios of industrial stocks and bonds. These
banks do not hold these securities on a permanent basis. They try to disinvest in these
securities in a systematic way which should not influence market prices of these
securities and also should not lose managerial control of the units.

 Development banks have become worldwide phenomena. Their functions depend upon
the requirements of the economy and the state of development of the country. They have
become well recognized segments of financial market. They are playing an important role
in the promotion of industries in developing and underdeveloped countries.
 MUTUAL FUNDS

Mutual funds are investment companies that use the funds from investors to invest in other
companies or investment alternatives. They have the advantage of professional management,
diversification, convenience and special services such as cheque writing and telephone account
service. It is generally easy to sell mutual fund shares/units although you run the risk of needing
to sell and being forced to take the price offered. Mutual funds come in various types, allowing
you to choose those funds with objectives, which most closely match your own personal
investment objectives. A load mutual fund is one that has sales charge or commission attached.
The fee is a percentage of the initial investment. Generally, mutual funds sold through brokers
are load funds while funds sold directly to the public are no-load or low-load. As an investor,
you need to decide whether you want to take the time to research prospective mutual funds
yourself or pay the commission and have a broker who will do that for you. All funds have
annual management fees attached. Mutual Fund Schemes may be classified on the Basis of its
Structure and its Investment Objective.

Open - Ended Mutual Funds An open-ended mutual fund is the one whose units can be freely
sold and repurchased by the investors. Such funds are not listed on bourses since the Asset
Management Companies (AMCs) provide the facility for buyback of units from unit-holders
either at the NAV, or NAV-linked prices. Instant liquidity is the USP of open-ended funds: you
can invest in or redeem your units at will in a matter of 2-3 days. In the event of volatile markets,
open-ended funds are also suitable for investment appreciation in the short-term. This is how
they work: if you expect the interest rates to fall, you park your money in an open-ended debt
fund. Then, when the prices of the underlying securities rise, leading to an appreciation in your
fund’s NAV, you make a killing by selling it off. On the other hand, if you expect the Bombay
Stock Exchange Sensitivity Index – the Sensex – to gain in the short term, you can pick up the
right open-ended equity fund whose portfolio has scrips likely to gain from the rally, and sell it
off once its NAV goes up.

Closed-ended mutual funds have a fixed number of units, and a fixed tenure (3, 5, 10, or 15
years), after which their units are redeemed or they are made open-ended. These funds have
various objectives: generating steady income by investing in debt instruments, capital
appreciation by investing in equities, or both by making an equal allocation of the corpus in debt
and equity instruments.