SUCM208

SUCM 208
UNDERGRADUATE COURSE
B.COM. - GENERAL COMMERCE
SECOND YEAR
FOURTH SEMESTER
PAPER - X
FINANCIAL SERVICES
INSTITUTE OF DISTANCE EDUCATION

UNIVERSITY OF MADRAS
B.COM. GENERAL COMMERCE PAPER - X
SECOND YEAR FINANCIAL SERVICES
FOURTH SEMESTER
WELCOME
Warm Greetings.
It is with a great pleasure to welcome you as a student of Institute of Distance Education,

University of Madras. It is a proud moment for the Institute of Distance education as you are
entering into a cafeteria system of learning process as envisaged by the University Grants
Commission. Yes, we have framed and introduced Choice Based Credit System(CBCS) in
Semester pattern from the academic year 2018-19. You are free to choose courses, as per the
Regulations, to attain the target of total number of credits set for each course and also each
degree programme. What is a credit? To earn one credit in a semester you have to spend 30
hours of learning process. Each course has a weightage in terms of credits. Credits are assigned
by taking into account of its level of subject content. For instance, if one particular course or
paper has 4 credits then you have to spend 120 hours of self-learning in a semester. You are
advised to plan the strategy to devote hours of self-study in the learning process. You will be
assessed periodically by means of tests, assignments and quizzes either in class room or
laboratory or field work. In the case of PG (UG), Continuous Internal Assessment for 20(25)
percentage and End Semester University Examination for 80 (75) percentage of the maximum
score for a course / paper. The theory paper in the end semester examination will bring out your
various skills: namely basic knowledge about subject, memory recall, application, analysis,
comprehension and descriptive writing. We will always have in mind while training you in
conducting experiments, analyzing the performance during laboratory work, and observing the
outcomes to bring out the truth from the experiment, and we measure these skills in the end
semester examination. You will be guided by well experienced faculty.
I invite you to join the CBCS in Semester System to gain rich knowledge leisurely at
your will and wish. Choose the right courses at right times so as to erect your flag of success.
We always encourage and enlighten to excel and empower. We are the cross bearers to make
you a torch bearer to have a bright future.
With best wishes from mind and heart,
DIRECTOR
(i)
B.COM. GENERAL COMMERCE PAPER - X
SECOND YEAR FINANCIAL SERVICES
FOURTH SEMESTER
COURSE WRITER
Dr. D. Udaya Suriyan

Reader and Head
Department of Commerce,
Manonmaniyam Sundaranar University
Tirunelveli - 627 012.
EDITING
Dr. R. Panchalan Dr. P. Hemavathy

Professor in Commerce Assistant Professor in Commerce (T)
Institute of Distance Education Institute of Distance Education
University of Madras, University of Madras,
Chennai - 600 005. Chennai - 600 005.
© UNIVERSITY OF MADRAS, CHENNAI 600 005.
(ii)
B.Com., DEGREE COURSE
SECOND YEAR
FOURTH SEMESTER
Paper - X
FINANCIAL SERVICES
SYLLABUS
UNIT I: Introduction
Financial Services - Concept - Objectives - Functions - Characteristics - Financial Services

Market - Concept - Constituents - Growth of Financial Services in India - Financial Services
Sector Problems - Financial Services Environment - The Forces - Players in Financial Markets
- Interest Rate Determination - Macro Economic Aggregates in India.
UNIT II: Merchant Banking and Public Issue Management
Definition - Functions - Merchant Bankers Code of Conduct - Public Issue Management -

Concept - Functions - Categories of Securities Issue - Mechanics of Public Issue Management
- Issue Manager - Role of lssue Manager - Marketing of Issue - New Issues Market Vs Secondary
Market - Underwriting - Types - Benefits Functions.
UNIT III: Money Market and Stock Exchange
Characteristics - Functions - Indian Capital Market - Constituents of Indian Capital Market

- New Financial Institutions and Instruments - Investor Protection - Stock Exchange - Functions
- Services - Features - Role - Stock Exchange Traders -Regulations of Stock Exchanges -
Depository - SEBI - Functions and Working.
UNIT IV: Leasing
Characteristics - Types - Participants - Myths about Leasing - Hire Purchase - Lease

Financing Vs Hire Purchase Financing - Factoring - Mechanism - Functions of a Factor-
Factoring - Players - Types - Operational Profile of Indian Factoring - Operational Problems in
Indian Factoring - Factoring Vs bills Discounting - Consumer Finance - Mechanics - Sources -
Modes - Demand for Consumer Finance - Factors - Consumer Finance Insurance.
(iii)
UNIT V: Venture Capital
Origin and Growth of Venture Capital - Investment Nurturing Methods - Mutual Funds -
Portfolio Management Process in Mutual Funds - Credit Rating System - Growth Factors -
Credit Rating Process - Global and Domestic Credit Rating agencies - Principles of Insurance
- Life and Non - Life Insurance - IRDA - Powers - Pension Fund - Objectives - Functions -
Features - Types - Chilean Model - Pension Investment Policy - Pension Financing.
SUGGESTED READINGS:
1. Gurusamy S, Essentials of Financial Services, Vijay Nicole Imprints, Chennai, 2014
2. Gomez Clifford, Prentice Hall of India, Financial Markets, Institutions and Financial
Services, 2008
3. Meir Kohn, Financial Institutions and Markets, Oxford University Press
4. Rajesh Kothari, Financial Services in India: Concept and Application, Sage publications,
2012, New Delhi.
5. Madhu Vij & Swati Dhawan, Merchant Banking and Financial Services, Jain Book Agency,
2000, Mumbai
6. Vasant Desai, Financial Markets and Financial Services, Himalayan Publishing House
Pvt Ltd, 2000, Mumbai
7. Santhanam B, Financial Services, Margam Publications
(iv)
B.Com., DEGREE COURSE
SECOND YEAR - FOURTH SEMESTER
Paper - X
FINANCIAL SERVICES
SCHEME OF LESSONS
Sl.No. Title Page
1. Financial Services 001
2. Financial Market 011
3. Derivatives Market 016
4. Capital Market 021
5. Securities and Exchange Board of India (SEBI) 026
6. Stock Exchange 045
7. New Issue Market 057
8. Bankers to an Issue 067
9. Underwritiers 073
10. SEBI Guidelines on New Issue 080
11. Over the Counter Exchange of India (OTCEI) 089
12. National Stock Exchange (NSE) 099
13. Trading Mechanism 106
14. Financial Securities 112
15. Derivatives 117
16. Financial Services 123
17. Merchant Banking 130
18. Leasing and Hire Purchase 136
19. Factoring and Consumer's Finance 143
20. Venture Capital and Mutual Funds 149
21. Credit Rating and Insurance 158
22. Insurance Policies and IRDA 167
23. Pension Fund 178
(v)
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LESSON - 1
FINANCIAL SERVICES
Learning Objectives
After studying this unit, you will be able to:
• explain the meaning and importance of financial services
• describe the functions of financial institutions
• enumerate the constituent of the financial services.
Structure
1.1 Introduction
1.2 Meaning and Scope of Financial Service
1.3 Importance of Financial Services
1.4 Classification of Financial Service Industry
1.5 Functions of Financial Service Institutions
1.6 Constituent of Financial Service
1.7 Summary
1.8 Review Questions
1.1 Introduction
The Indian financial services industry has undergone a metamorphosis since 1990. During the
late seventies, the Indian financial services industry was dominated by we and other financial
institutions which cater to the requirement of the commercial bank and other financial institutions
which cate Indian industry.
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However, after the economic liberalisation, the entire financial sector has undergone a sea-
saw change and now we are witnessing the emergence of new financial products and services
almost everyday. Thus, the present scenario is characterized by financial creativity and before
going deep in to its imperative that one should understand the meaning and scope of financial
services.
1.2 Meaning and Scope of Financial Service
The term financial service means mobilizing and allocating savings and all activities in the
transformation of savings into investment. Thus it refers to all those kinds of services provided
in financial or monetary term, where the essential commodity is money. These services include
Leasing, Hire purchase, Venture capital, Merchant banking, Insurance, Housing Finance, Mutual
funds, Factoring Stock broking and others.
Financial services otherwise called as ‘Financial Intermediation’. It is a process of mobilising

savings from large base and providing financial assistance to the corporate, Government and
others. Insurance and insurance related services, banking and financial services are important
financial intermediation that not only facilitate in the flow of financial resources but also in
international trade.
Apart from the institutions that provide financial services there are some regulatory and
specialized institutions that are also involved in the financial services such as SEBI, Stock
Exchanges, Credit rating agencies etc.
Financial institutions consist of financial market and instruments. The range of services provided
by the financial institutions stretches from rural to international financial reach and has contributed
significantly to the growth. In short, a well financial service industry absolutely necessary to
mobilize the savings and to allocate them to various ingestible channels. Industrial and economic
development of a nation largely depends on the efficiency of the financial service sector. It is a
key area and very vital for development of a nation and comprising all the activities that uses
money as commodity.
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1.4 Classification of Financial Service Industry
The term financial service industry includes all kinds of organisation which intermediate and
facilitate financial transactions of both individuals and corporate customers. The financial
intermediaries in India can by traditional classified into two. They are (i) Capital Market
Intermediaries and (ii) Money Market Intermediaries. However, based on the charge they are
also classified into (i) Fund based financial services and (ii) Fee based financial services.
1. Traditional Classification
(i) Capital Market Intermediaries
Capital market is a market where long-term funds are available. Capital market intermediaries
transform the funds from saver to corporate, government, etc. Thus, it consist of term lending
institutions and investing institution which are mainly provide long term funds including primary
and secondary market. Primary market deals with the issue of new instruments by the corporate
sector such as equity shares, preference shares and debentures. The secondary market consists
of 23 stock exchanges including the NSE and OTCE. Capital formation occurs in the primary
market while the secondary market provides a continuous market for the securities already
issued to be bought and sold
(ii) Money Market Intermediaries
Money market is a market where short term funds are available. They mobilize the savings of
people and provide financial assistance to the government and business organisations. It consists
of organised and unorganised components. Among the organized components commercial
banks occupies a dominant position and supply short term funds. The core of money market is
the Inter-bank Call money market. The Reserve Bank of India plays important role in controlling
the organised money market operations by varying the liquidity. The unorganised money market
consists of money lenders and indigenous bankers
2. Classification based on Charges/Fund
(i) Fund Based Financial Services
It consists of the financial services: Equipment leasing, hire purchasing, bill discounting, loans
investments, venture capital, housing finance, factoring, etc.
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(ii) Fee Based Financial Services
It consists of the financial services: Issue management, portfolio management. corporate

counselling, loan base syndication, arranging foreign collaboration mer acquisition and capital
restructuring.
1.5 Functions of Financial Service Institutions
The main function of financial service institution is to provide maximum financial advantages to
the public by rendering the following functions.
(1) Promoting the overall savings of the economy
(2) Distribute the savings efficiently to and cater to the social-economical needs and,
(3) To facilitate trade transaction and credit facilities.
(4) Providing assistance in deciding the financial mix of a firm
(5) Providing other value added services such as e-commerce, bill discounting, etc.
(6) Providing specialized services like credit rating, venture capital, lease financing, factoring,
mutual funds, merchant banking, stock leading, depository, credit cards, housing finance,
and so on. These services are generally provided by banking companies, insurance
companies, stock exchanges and non-banking companies.
1.6 Constituent of Financial Service
The major constituent in the financial system are comprised of the following financial services:
(1) Financial Instruments
(2) Market Players
(3) Specialized Institutions
(4) Regulatory Bodies.

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1. Financial Instruments
Financial instruments are document to the claim in the assets of a firm. Simply, it confers the
holders the right to demand for and receive property which is not in their possession. They
broadly classified into ownership instruments, debt instruments and hybrid instruments.
The ownership of a corporation is divided into various units and is called a share. A shareholder’s
interest is evidenced by a document called stock or share certificate which contains the name
of the shareholder, the class of the share, number of shares owned by the shareholder upon
the share certificate and their distinct numbers. Shares are called as ownership instrument as
the claim of the shareholder is final. These ownership instruments further classified into (a)
Equity shares and Preference shares according to the order of ! claim to dividend and capital.
Debentures and Bonds are acknowledgement of debt by corporation. Hence, “ receives fixed
interest on the paid value and is repayable after certain period.
Hybrid instruments are the combination of the equity and debt instrument.
2. Market Plaversa
Market players are institutions that involved in the collections and distribution of savings of
people to the economic activities.
Maior Players in Financial Services
The following are the important organisations that plays vital role in providing financial services.
i) Government
ii) Non-Banking Financial Institutions
iii) Commercial Banks
iv) Mutual Funds
v) Stock Exchanges
vi) Merchant Bankers

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vii) Portfolio Managers in JSEM
viii) Stock Brokers
ix) Financial Consultants
x) Underwriters
xi) Others
i) Government
Both Central and State government not only regulates the financial services but also mobilise
the savings of the people through different forms and purposes.
ii) Non-Banking Financial Institutions
They inject new blood to the corporate sector and participate in the economic growth. All these
reflection made for the evolution of a vibrant, competitive and dynamic financial system, Non-
Banking Financial (NBF) institutions has recoded marked growth in the recent past. They provide
off-the balance sheet financing to the business organisations that facilitate them to improves
overall profitability.
iii) Commercial Banks
Commercial banks in the developed countries provide term loans to corporate sector by
participating in the capital and equipment finance. The commercial banking has undergone a
number of structural and functional change in the developing countries. The Indian banks have
recently commenced hire purchasing finance, leasing, factoring and other services.
iv) Mutual Funds
Mutual funds are associations of interested members in investment on financial instruments of

the corporate sector for their mutual benefit. They collects savings by selling the units to the
public. The fund so collected was invested in the financial market securities. Thus more funds
available for business organisations at cheaper cost. They are nonbanking and non- depository
intermediary that links the investors and deficit units.
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v) Stock Exchanges
They facilitate the buying and selling of securities already issued and enhances the liquidity in
the investment of stocks, debentures, etc.
vi) Merchant Bankers
They help the business organisations in new issues of shares. They not only provide for long
term finance but also render other services such as underwriting, bill discounting, lease finance,
etc.,
vii) Portfolio Managers
They hold a valid certificate granted by SEBI to advice or undertake on behalf of a client in the
management or administration of a portfolio of securities or the funds of the client.
viii) Stock Brokers
They play an important role in the secondary market. They involve in buying and selling of
securities in a recognised stock exchange. If one wants to work as a broker, a certificate of
registration from the SEBI is mandatory after satisfying all the terms and conditions. SEBI will
grant the registration to the brokers. The membership in the stock exchange can be granted as
individual membership and corporate membership.
ix) Financial Consultant
Consultants are the professionals in the area of financial and providing solutions the problems
faced by the corporate sector. They are pioneer in their field and render the Quality service with
high integrity and standards. A financial constant occupy a key role”. problem solving solution
like in all area of function management such as production, the marketing and human resources.
Their services are intangible and show greater impact on the functional of the company. They
tailor made solution to all the problems irrespective of any area.
x) Underwriters
Underwriting are the intermediaries in the primary market. They provide assurance to the
companies, approach the capital market for raising the financial resources. They render valuable
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services to the newly started companies, which require believable advice. Underwriters assure
the company full subscription for a commission and guarantees the allotment of shares.
Underwriting reduces the under-subscription of new issue.
xi) Other Institutions
Not only the above mentioned institutions but also a number other organised as well as organised
forms of institutions involved in the financial services such as agents, indigenous bankers and
so on.
3. Market Makers
Market makers are associated with the stock exchanges. The market making system is very
much popular in London, New York and Chicago stock exchanges. Their basic · function is to
provide the needed liquidity to particular scrip. They help in eliminating the temporary disparity
between the supply and demand of scrip. They help in maintaining a fair and orderly market.
4. Specialised Institutions
The These institutions are specialist in the field in which they engaged. Institutions like CRISIL,
ICRA are rendering credit rating services in the financial market.
5. Regulatory Agencies
Regulations are the most important factor in any area of financial system. The financial markets
are highly volatile and need a close observation by the Government. The government of India
watches the market affairs in daily basis through its nominee SEBI. The government regulates
the financial system through various legal organs of the administration. The banking affairs are
regulated by the Company Law Board and Board for Industrial and Financial Reconstruction.
Institutions like SEBI & RBI are control and supervise the financial services and to protect the
interest of the investors and value of money.
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Check Your Progress
1. What do you understand by financial services?
2. List out the types of financial service industry.
3. Write a short note on underwriting.
1.7 Summary
Financial services are the important components of Financial System in any country. Financial
services means mobilizing & allocating savings and all activities in the transformation of savings
into investment. Financial services classified as Capital Market intermediaries, Money Market
intermediaries, Fund based and Fee based services. SEBI stock exchanges & credit rating
agencies etc., as a Regulatory & specialized institutions. Industrial & economic development
of a nation largely depends on the financial system like financial institutions, market players,
specialized institutions, regulatory bodies etc are comprised in the financial services. It is a key
area & vital for development of nation & comprising all the activities uses money as commidity.
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1. Explain the importance of financial service.
2. Examine the role of financial services institutions in the economic development of a

nation.
3. Explain in detail the constituents of financial services.
4. Discuss the functions of financial institutions.
5. Explain the scope of financial services.

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LESSON - 2
FINANCIAL MARKET
Learning Objectives
After studying this unit, you will be able to :
• outline the structure of financial market
• enumerate various Financial Instruments used in the financial market
• classify the financial market.
Structure
2.1 Introduction
2.2 Classification of Financial Market
2.2.1 Capital Market
2.2.2 Money Market
2.2.3 Foreign Exchange Market
2.2.4 Government Securities Market
2.3 Instruments Traded
2.4 Summary
2.1 Introduction
Finance market is a market where both short-term as well as long-term finance is available.
They help the economic development of the country by mobilising the funds and providing the
financial assistant to the institutions for economic activities. Hence, it occupies - an important
place in the economy of the country.
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2.2 Classification of Financial Market
Financial Markets consist of (a) Capital Market (both primary and secondary), (bi. Money Market,
(c) Foreign Exchange Market, and (d) Government Securities Markets
Financial Market
Capital Market Money Market Foreign Exchange Market Govt.Securities

Market
2.2.1 Capital Market
This deals in shares and debentures. Companies raise their capital through the issue of shares
and debentures. The capital market can be further divided as
Capital Market
Primary Market Secondary Market
Primary Market : Primary Market refers to the sale of shares, directly by the company at the
time of promotion and the investors directly buy the shares from the company through application.
Hence, the share price will be mostly at par.
Secondary Market : Sale and Purchase of Securities (Shares and Debentures) will take place
through the recognised stock Exchanges. Only authorised persons are allowed to deal in the
securities in the secondary market, which are known as brokers. Only listed securities will be
traded in the Stock Exchanges.
2.2.2 Money Market
As the capital market deals in long-term funds, money market deals in shon em funds. In fact,
there is no fixed place as money market. The term money market refers to a collective name
given to all the institutions which are dealing in short-term funds. They are spread throughout
the country. It is the presence of money market that promores more trading and production in
the country. Money market provides working capital.
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Money Market provides working capital and major role in the Indian money market is played by
the commercial banks. By lending working capital at a lesser rate of interest,
commercial banks promote investment and production in the economy. This lead to more
employment and increase in the income among people. Consequently, demand for goods will
increase, leading to increase in the price level. Businessmen will earn more profit and this will
activate the capital market as companies will be declaring more dividends.
2.2.3 Foreign Exchange Market
Foreign exchange is bought and sold and the different forms of foreign currency are dealt.
Foreign currency can be in the form of currency, cheque, draft, bills, Letter of credit, travellers’
cheques, credit cards, etc. Each form of this foreign exchange and the exchange rate for each
form of foreign currency varies. It depends on the time taken for converting foreign exchange
into foreign currency.
Foreign Exchange Market
Authorised Dealers Foreign Banker Money Changers Importers & Exporters
2.2.4 Government Securities Market
When government is in need of funds to meet its budgetary deficits, it goes for the issue of
Treasury bills and Bonds. Reserve Bank of India is the Central of India. It was started in 1934
as a shareholders’ bank.
Government Securities Market
Treasury Bills Bonds
After independence the Government passed the transfer of Public Ownership Act by which
RBI was nationalised on 1st January 1949. In March The Banking Company Act was passed
which gave more powers to RBI to control and regulate the working of commercial banks.
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2.3 Instruments Traded
Financial Instruments include both products and instruments. In products, the various methods
adopted for raising funds will be dealt. In instruments, we have bills consisting of commercial,
foreign, government and accommodation. Also includes Cheques, Drafts, Letter of Credit,
Travellers’ Cheques, Commercial Papers, Global Deposit Receipts, Bonds, etc. In product,
Credit Cards will be a part of it. Debit Card is also one among the products issued by Commercial
Banks.
Financial Instruments
Negotiable Commercial Bill of Letter of Travellers

Instruments Paper Lading Credit Cheques
Cheques Bill of exchange Promissory Note
Check Your Progress
1. What is meant by capital market?
2. Define money market.

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3. What do you understand by bill of lading?
2.4 Summary
Financial market is a market where both short term as well as long term finance is available.
This occupies important role in the development of a country’s economy. Capital market, Money
market, Foreign Exchange market and Government Securities market are the various financial
markets. Financial products like Credit card & Debit card and Financial instruments like Bills,
Cheques, Drafts, Letter of credit (LOC), Traveller’s cheques, Commercial papers, Global
Depositary Receipt (GDR), Bonds etc., are traded in the Financial market.
1. Outline and explain various types of financial market.
2. Explain in detail the instruments used in financial market.
3. Write short notes on: a) Money Market; b) Foreign Exchange Market; c) Commercial
Paper; d) Letter of Credit
4. Critically examine the recent development in the Indian capital market.
5. Explain the main features of money market.

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LESSON - 3
DERIVATIVES MARKET
Learning Objectives
• explain the functions of derivatives market
• ouline the exchange operations in derivatives market.
Structure
3.1 Introduction
3.2 Derivatives Market - Meaning
3.3 Recommendation of Gupta Committee regarding exchange operations
3.4 Summary
3.1 Introduction
In the previous unit, we have seen the classification of financial market and the instruments
used in the financial market. Now, we are going to discuss the recent developments that are
taking place in the financial market. Derivative is one of the latest developments that are taking
place in the financial market. In this unit, you can learn about derivative market.
3.2 Derivatives Market - Meaning
Derivatives are contracts which emerge out of the main contracts in which one or more assets
are involved. The assets consist of share, foreign currencies, and interest bearing securities or
even commodities.
Banks have derivative deposits which emerge out of primary deposits. When avan receives
deposit in the form of cash from the customer, it is called primary deposit. deposit money is
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utilised by the bank by way of granting loan. The loan creates deposu either in the same bank
or in other banks which are known as derivative deposits.
Similarly, in a stock market for example- A who has 1000 shares of Reliance Company er into
a forward contract with B to sell at Rs. 100 after 3 in securities and this is months. B may
transfer this contract to C at Rs. 150. This is a Derivatives contract securities and this is derived
from the main contract between A and B. C may again ennen into contract with D for selling the
securities at Rs. 200. Thus, the quantity of share which was 1000 now goes up to 3000 due to
3 different contracts (A to B, B to C and C to D).
The above derivative contracts are in securities. The same may take place in foreign exchange
market.
The derivative market provides an opportunity for the buyer and seller to exercise their options,
Hence, it is called Option trading. The option may be a call option or put option. In the call
option, the option of buying is exercised put option the option of selling is exercised. The
purpose of exercising the option is to minimize the risk of loss. If A enters into contract to sell B,
A is exercising put option, while B is exercising call option.
If any one of the party back out due to unfavourable price or due to the possibility of incurring
loss, the party backing out from the contract will have to pay the other party a margin money
which may be the difference in the price contract and price prevailing.
There is also a future contract. But the difference between a forward market and a future
market has been stated already in this subject.
Thus, derivative market has
• Forward market
• Future market
• Option market
In India, the derivative market is confined only to index numbers. We have a derivative exchange
and it is based on online screen based trading system. But the deriùative trading is a separate
segment in the stock market. There should be a minimum of 50 trading member to start
derivative trading.
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There are two type of member, namely, member of a derivative exchange and clearing members.
The net worth of a clearing member should be Rs. 3crores. The minimum contract size for a
derivative contract should Rs. 1 laks. Both futures and option are required for introducing
derivative market.
3.3 Recommendation of Gupta Committee
Committee was appointed in November 1996 to being derivative trading in stock index future
by June 2000. The Committee recommended the following.
1. Rule Regarding Exchange Operations
Screen based trading system with online facilities. Existing stock Exchange can carry out
derivative trading as a separate segment.
2. Membership
A minimum of 50 members are required to start derivative trading and must also have net
wroth of Rs. 3 crores.
3. Product
The derivative product must be approved by SEBI which consist of securities that should protect
the interest of investor.
4. Participants
There should be no restrictions on investment institutions such as mutual funds and other
companies. Margin money will be collected from all the participants.
5. Trading Regulation
There should be a clear disclosure of risk on each security which should be furnished by the
broker.
6. Contract Note
Contract note must be duly stamped and timed.

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7. Clearing Regulation
Rules pertaining to clearing arrangement with the clearing corporation should be made. Deposit
should also be made with the clearing corporation. The purpose of introducina derivatives is to
minimum risk arising out of fluctuations in the price of securities.
Hedging is practiced through call option and put option. These measures will strengthen trading
in securities as well in various foreign currencies. When the volume and increase, the magnitude
of risk faced by the participants also increases. Increases loss will affect trading in securities
as well as currencies. Hence, derivative market is recommended which provides a cover against
fluctuations in the price of securities and currencies.
Check Your Progress
1. What is meant by ‘derivative’?
2. What are the components of derivative market?
3.3 Summary
Financial services basically mean all those kinds of services provided in financial or monetary
term, where the essential commodity is money. ‘Financial Services’ or ‘Financial Intermediation’
is a process by which funds are mobilised from a large number of savers and make them
available to all those who are in need of it and particularly to corporate customers. The financial
services comprise of the major constituents in the financial system such as Financial Instrument,
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Market Players, Specialized Institutions, and Regulatory Bodies. Derivatives are contracts which
emerge out of the main contracts in which one or more assets are involved. The assets consist
of share, foreign currencies, and interest bearing securities or even commodities. Derivative
market provides an opportunity for the buyer and seller to exercise their options. Hence, it is
called Option trading. The option may be a call option or put option.
1. What do you understand by derivatives market?
2. What are the components of derivaties market?
3. Explain the significance of derivatives market.

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LESSON - 4
CAPITAL MARKET
Learning Objectives
• explain the structure Indian capital market
• describe the government security and industrial security
• highlight the need for the Capital market.
Structure
4.1 Introduction
4.2 Importance of Capital Market
4.3 Capital Market Structure in India
4.4 Industrial Market Securities
4.5 Summary
4.6 Review Questions that
4.1 Introduction
Financial market deals about the raising of finance by various institutions through the issue of
various securities. Every business concern requires two types of finance. They are short-term
or working capital requirements and long-term or fixed capital requirements. The short-term
working capital requirements are raised or borrowed in the money market through the issue of
different securities such as bills, promissory notes, etc. Even the Government raises the short-
term funds through the issue of treasury bills. Banks play a vital role in providing short-term
funds. The long-term funds or fixed capital are raised by companies by the issue of shares,
debentures and bonds in the capital market.
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4.2 Importance of Capital Market
1. It is only with the help of capital market, long-term funds are raised by the business
community.
2. It provides opportunity for the public to invest their savings in attractive securities which
provide a higher return.
3. A well developed capital market is capable of attracting funds even from foreign country.
Thus, foreign capital flows into the country through foreign investment.
4. Capital market provides an opportunity for the investing public to know the trend of different
securities and the conditions prevailing in the economy.
5. It enables the country to achieve economic growth as capital formation is promoted through
the capital market.
6. Existing companies, because of their performance will be able to expand their industries
and also go in for diversification of their activities due to the capital market.
7. Capital market is the barometer of the economy by which one able to study the economic
conditions of the country and it enables the government to take suitable action.
8. Through the press and different media, the public are informed about the prices of different
securities that enable them to take necessary investment decisions.
9. Capital market provides opportunities for different institutions such as commercial banks,
mutual funds, investment trust, etc., to earn a good return on the investing funds. They
employ financial experts who are able to predict the changes in the market and accordingly
undertake suitable portfolio investments.
4.3 Capital Market Structure in India
In India, the capital market is divided into (a) Gilt-edged market and (b) Industrial security
market.
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Capital Market
Gilt-Edged Market Industrial Security Market
Primary Market Secondary Market
4.3.1 Gilt-Edged Market
The gilt-edged market refers to government securities. They are called gilt-edged because the
documents will have yellow border on the sides. as they can be distinguished as government
securities. These are preferred as they are guaranteed by the government both for the principal
and interest. It is called sovereign guarantee.
4.3.2 Industrial Security Market
This refers to the securities of the companies consisting of share and debentures of old and
new companies. The industrial security market is divided into new issue market and old capital
market. Industrial security market can be subdivided as follows:
1. Primary Market
2. Secondary Market.
1. Primary Market or New Issue Market: A primary market is one in which new securities are
offered to the investing public for the first time. It does not refer to a particular place. The
following are the securities issued in the primary market.
2. Secondary Market: A secondary market refers to the availability of shares from the stock
market through the brokers. Share are purchased or sold according to the returns or expectations
in the future market.
4.4 Industrial Market Securities
1. Equity shares: These are share issued by companies for raising capital. The owners of
these shares are shareholders and owner of the business. Normally, the face value of the
share may be Rs. 10 or Rs. 100/-. A group of fully paid share are called stock and these can be
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transferred. The shareholders are entitled for profit, which are distributed to them in the form of
dividend. The share capital will be refunded to them only during the winding up of the company,
provided the company has sufficient assets.
2. Preference Shares: Preference shares are similar to equity shares but are having preferential
right to claim the dividend and principal before making payment to the equity shareholders.
They are be cumulative, non-cumulative, participating, redeemable, irredeemable, convertible
and non-convertible preference shares. The preference shareholders do not have voting right
in the annual general meeting like equity shareholders.
3. Debentures: It is a loan obtained by the company from the public for a fixed interest rate for
a fixed period. Those investors who do want to take risk and security will as they have less risk
on the repayment compared to shares. There are the repayment compared to shares. There
are debentures which have mortgage charged on the assets of the company and these debenture
holders are assured of the repayment.
Check Your Progress
1. What do you understand by capital market?
2. What is secondary market?

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3. Write short notes on Gilt-edged market.
4.5 Summary
Capital markets helps the companies for raising long terrii funds by issuing Shares, Debentures
or Bonds. Capital market helps the companies, attract public savings, encourage foreign
investment, provides information to the public & investors. Capital market enables the country
to achieve economic growth. Gilt-edged market & Industrial securities market are the types of
capital market.
1. Explain structure of capital market in India.
2. Distinguish between primary and secondary capital market.
3. Discuss the importance of capital market.
4. Explain the industrial market securities.

26
LESSON - 5
SECURITIES AND EXCHANGE

BOARD OF INDIA (SEBI)
Learning Objectives
• objectives the SEBl
• enumerate SEBI’s role in protecting investors
• outline various SEBI guidelines regarding primary market.
Structure
5.1 Introduction
5.2 Organizational Structure
5.3 Objectives of SEBI
5.4 Main Features of SEBI
5.5 Functions of SEBI
5.6 Powers of SEBI
5.7 SEBI Guidelines Regarding Primary Market
5.8 Role of SEBI
5.9 Summary
5.1 Introduction
The functions of the stock exchanges in India has shown many weakness, with long delays,
lack of transparency in procedures and vulnerability to price rigging and insider trading. To
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encounter these short coming and deficiencies and to regulate the capital market, in 1988 the
Securities Exchange Board of India was set up as non-statutory body. However, after the
security scam in 1992 it was made a statutory body through the securities and Exchange
Board of India Act, 1992. The SEBI Act came into force on 30th January, von and with its
establishment, all public issues are aoverned by the rules & regulations soudu by SEBI.. This
Act provides for the establishment of regulatory Board called secure and Exchange Board of
India (SEBI). SEBI is a body corporate, having perpetual succession and a common seal. It
has power to enter into contracts. It can sue and can be suede name. The head office of SEBI
is at Mumbai with power to establish offices at other placca in India. It takes necessary steps to
protect interest of investors and promote me development of and to regulate the securities
market.
5.2 Organizational Structure
The general superintendence, direction and management of the affairs of SEBI vest in a Board
of Members. Securities and Exchange Board of India (SEBI) is a board appointed by the
Government of India in 1992 with its head office at Mumbai. The board is appointed for a five
years term. It can only be removed by parliament. Annual reports are tabled in parliament.
SEBI finances its current expenses through fees and levies and receives government grants
for capital expenditures.
SEBI is a corporate body managed by a board of six members including-
• A chairman,
• Two members from the Ministries of Finance and Law
• Two members appointed by the Central government, and
• One nominated by the reserve bank of India (RBI)
SEBI can take action against anybody involved in the capital markets, if that person or entity
does not act in the best interest of investors or markets. However, SEBI does not have judicial
powers of a court and its rulings can be overturned by the ministry of finance.
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5.3 Objectives of SEBI
Main Objectives
The following are three main objectives of SEBI:
• To protect the interests of the investors in securities
• To promote the development of securities market
• To regulate the securities market
Other Objectives
• Regulate and develop a code of conduct for brokers, merchant bankers etc.,
• To have check on preferential allotment to promoters at a very low price.
• To prevent deviation and violations of rules prescribed by stock exchanges.
• To verify the listing requirement, listing procedures, and ensure compliance of the same
by the companies, so that only financially sound companies are listed.
• To prescribe required standard for merchant bankers.
• To promote healthy growth of security market for the development of capital market in
the country.
5.4 Main Features of SEBI
SEBI is a body corporate with head office at Bombay. The Chairman and the board member
are appointed by the central government. In order to regulate and develop the capital market in
the country SEBI takes necessary steps.
Regulatory
• Registering the brokers and sub-brokers
• Registration of mutual funds

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• Regulation of stock exchanges
• Prohibition of fraudulent and unfair trade practice
• Controlling insider-trading, take-over bids and imposing penalties.
Development
• Educating Investors
• Training intermediaries in stock Market transactions
• Promoting fair transactions
• Undertaking research and publishing useful to all.
5.5 Functions of SEBI
Main Functions
The main functions entrusted with SEBI are as follows:
1. SEBI promotes and regulates stock exchanges and other securities markets.
2. It registers and regulates the working of intermediaries who have registered with SEBI.
The intermediaries includes -stock brokers, sub-brokers, share transfer agents, bankers
to the issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries
who may be associated with securities market-in any manner
3. It registers and regulates the working of Intermediaries who have registered with SEBI.
4. It registers and regulates the working of venture capital funds and collective investment
schemes including mutual funds
5. It prohibits fraudulent and unfair trade practices in the securities market
6. It promotes investors education and training of intermediaries in securities market
7. It prohibits insiders trading in securities

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8. It regulates substantial acquisition of shares and take-over of companies.
9. It undertakes inspection of the stock exchanges, intermediaries and self-regulatory

organizations in the securities market and impose fines
10. It calls for information from stock exchanges, intermediaries and self-regulatory
organizations in the securities market
11. It conducts enquiries and audits of the stock exchanges, intermediaries and self
regulatory organizations in the securities market
12. It performs other functions and exercising such powers under the provisions of Securities
Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government
Government;
13. It levies fees or other charges for carrying out the purpose of this section;
14. It conducts research for the above purposes;
15. It performs such other functions as may be prescribed.
Supervisory Functions
It nas absolute control over the brokers and other intermediaries in the market. It ban or lift ban
on specific stock market operations. SEBI also supervise and regulate the Foreign Investment.
5.6 Powers of SEBI
SEBI acquires the power from SEBI Act. As per the Act, SEBI has power
(i) To file complaint in a court
(ii) To regulate companies in the issue and transfer of shares including bonus and right shares.
(iii) It can levy penalties on companies and on brokers for violating transactions.
(iv) Power to summon any broker or intermediaries and call for documents
(v) It can issue directions to all brokers for protecting the interest of investors.
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In addition to the above powers,
(i) It can call for periodical returns from stock exchange.
(ii) Seek any information from stock exchange.
(iii) It can enquire into the functioning of stock exchange.
(iv) It can grant permission for the change of bye-laws of any stock exchange.
(v) It can compel listing of securities of public company.
(vi) It can control and regulate stock exchanges.
vii) Granting registration to market intermediaries, prohibit insider-trading and prohibit

fraudulent and unfair trade practices.
(viii) Regulating purchases of shares and take-over of companies.
5.7 SEBI Guidelines Regarding Primary Market
Issue of Fresh Share Capital
(i) All applications should be submitted to SEBI in the prescribed form.
(ii) Applications should be accompanied by true copies of industrial license.
(iii) Cost of the project should be furnished with scheme of finance.
(iv) Company should have the shares issued to the public and listed in one ore more
recognized stock exchanges.
(v) Where the issue of equity share capital involves offer for subscription by the public for
the first time, the value of equity capital, subscribed capital privately held by promoters,
and their friends shall be not less than 15% of the total issued equity capital.
(vi) An equity-preference ratio of 3:1 is allowed.
(vii) Capital cost of the projects should be as per the standard set with a reasonable debt-
equity ratio.
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(vii) New company can not issue shares at a premium. The dividend on preference shares
should be within the prescribed list.
(ix) All the details of the underwriting agreement.
(x) Allotment of shares to NRIs is not allowed without the approval of RBI.
(xi) Details of any firm allotment in favour of nay financial institutions.
(xii) Declaration by secretary or director of the company.
First Issue by New Companies
(i) A new company which has not completed 12 months of commercial operations will not
be allowed to issue shares at a premium.
(ii) If an existing company with a 5 years track record of consistent profitability is promoting
a new company, then it is allowed to price its issue.
(iii) A draft of the prospectus has to be given to the SEBI before public issue.
(iv) The shares of the new companies have to be listed either with OTCEI or any other
stock exchange.
5.8 Role of SEBI
Upto 1992, the capital primary market was controlled by the Controller of Capital Issue (CCI)
formed under the Capital Issues Control Act. During that period, the pricing of capital issues
was controlled by CCI.
The CCI guidelines were abolished with the introduction of Securities & Exchange Board of
India (SEBI) formed under the SEBI Act, 1992 with the prime objective of protecting the interests
of investors in securities, promoting and regulating the securities market.
The SEBI Act came into force on 30th January, 1992 and with its establishment, all public
issues are governed by the rules & regulations issued by SEBI.
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• SEBI was formed to promote fair dealing in issue of securities and to ensure that the
capital markets function efficiently, transparently and economically in the better interests
of both the issuers and the investors.
• The promoters should be able to raise funds at a relatively a relatively low cost. At the
same time, investors must be protected from unethical practices and their rights must
be safeguarded so that there is a steady flow of savings into me market. There must be
proper regulation and code of conduct and fair practice by intermediaries to make them
competitive and professional.
• Since, its formation, SEBI has been instrumental in bringing greaterane capital issues.
Under the umbrella of SEBI, companies issuing shares the premium provided adequate
disclosure is made in the offer documents.
5.8.1 Role of SEBI in the Primary Market
To protect the interest of the investors and to bring back the small investors to the market
several measures have been undertaken by SEBI. The unscrupulous promotor tignten entry
and disclosure norms to prevent the exploitation of investors. Allocations or shares and
promoters’ contribution are regulated.
1. Entry Norms
SEBI has issued guidelines to tighten the entry norms for companies accessing the capital
market.
a. A company should have a track record of dividend payments for a minimum period of 3
years preceding the issue.
b. A company whose shares are already listed would fulfill the entry level requirement only
if the post issue net worth becomes more than five times the pre issue net worth.
c. If a manufacturing company does not have such a track record, it could access the
public issue market, provided a public financial institution or a scheduled commercial
bank appraises its project. The appraising entity should also participate in the project
fund.
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d. It would be necessary for a corporate body making a public issue to have at least five
public share holders for every Rs.1 lakh of the net capital offer made to the public.
e. SEBI would not vet offer documents of companies having a track record of 3 years
consistent dividend payment. Likewise, offer documents of companies seeking listing
on OTCEI would not be vetted by SEBI. Further banks are required to satisfy the criteria
of two years of profitability for issues above par.
2) Promoters’ Contribution
Promoters’ contribution means contribution by those described in the prospectus as promoters,

directors, friends, relatives and associates.
a) Promoter’s contribution should not be less than 20 % of the issued capital irrespective
of the issue size.
b) The entire promoters’ contribution should be received before the public issue. If the
issue size exceeds Rs. 100 crores, the promoters can bring in not less than 50% of
their contribution before opening of the issue and bring in the balance before the calls
are made on the shareholders.
c) SEBI announced that not more than 20 per cent of the entire contribution brought in by
promoters cumulatively in public or preferential issue would be locked in for 5 years.
SEBI lifted the provision of lock in period for promoters, contribution in case of listed
companies with 3 years track record of dividend payment.
d) According to the decision taken by the SEBI Board, in case of non-under written public
issue promoters could bring their own money or procure subscription from elsewhere
within 60 days of the closure of the issue subject to such disclosures in the offer
document.
3) Disclosure
The draft prospectus filed with SEBI is made as a public document to enhance transparency.
The draft prospects should provide all the needed information to the investor regarding: the
present position of the company, the future prospect and the risk factors ** associated with the
35
investment of the company. SEBI has advised all the listed companies to publish unaudited
financial results on a quarterly basis.
4) Book Building
Book building has been accepted as one of the modes of public issue. SEBI issued guidelines
relating to 100 per cent book-building in an issue of security to the public through prospectus.
It recommended a two-tier underwriting system for book built issues. The syndicate members
would be responsible for the primary underwriting and the book runners would take on their
liability in case of default. SEBI also stipulated that there should be at least 30 book-building
centres with the syndicate members being present at each center.
5) Allocation of Shares
To bring back the small investors to the primary market, the minimum application of share has
been reduced from 500 to 200. Proportionate allotment of shares is made. A reservation of
minimum 50 % of net offers to the small investors is being made. Small investors mean those
who have applied for 1000 or fewer shares or securities. The companies were required to
complete the allotment of securities within 30 days of the closure of the public issue. There
after, they would be required to pay an interest at the rate of 15 per cent per annum, if refund
of application money is not made within the specified period.
6) Market Intermediarios
Licensing of merchant bankers or authorization by SEBI was the first step undertaken to regulate
the intermediaries. This licensing of merchant bankers is based on the capital adequacy as
well as the track record of the capital market related activities. In course of time, other financial
intermediaries such as underwriters, registrars and transfer agents came to be licensed. SEBI
has the right to inspect the records of the intermediaries.
5.8.2 Role of SEBI in Secondary Market
SEBI has introduced a wide range of reforms in the secondary market. The important areas
are as given below:
1. Governing Board
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2. Infrastructure
3. Settlement and Clearing
4. Debt Market
5. Price Stabilization
6. Delisting with
7. Brokers
8. Insider Trading
1. Governing Board
• Governing Board of the stock exchanges was reconstituted according to the SEBI’s
directives.
• Broker and non-broker representations are made 50:50.
• Sixty percent of non-broker representation was given in the arbitration, disciplinary and
default committees of the exchanges.
• Regulations regarding the public representatives and the government nominees on the
Governing Boards of stock exchanges were issued. As non-participants in the market,
they have to ensure impartial and fair governance in the stock exchanges.
• As per the new guidelines of SEBI, trading members will be given only 40%
representation in the governing council of derivatives.
2. Infrastructure
To sophisticate the trade on the stock exchange NSE was established with the screen based
trading. Then SEBI has allowed the stock exchanges to expand its on-line screen based trading
terminals to locations outside their jurisdiction subjected to certain criteria. SEBI decided that
recognition to new stock exchanges would be allowed subject to the conditions of On Line
Screen Based trading for trade purpose.
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3. Settlement and Clearing
Carry forward transactions were withdrawn and reintroduced by SEBI with modified regulations.
SEBI notified all stock exchanges to introduce weekly settlement. Besides, auctions have to be
conducted by stock exchanges within eight days of the settlement in case members fail to
deliver the shares. The renewal of contract in cash groups from one settlement to another is
not permitted.
4. Debt Market Segment
Wholesale debt market segment in the NSE enables the traders to trade in debt instruments.
To expedite the settlement SEBI (Depository and participants) Regulations 1996 has been
amended. It allowed dematerialization of Government securities. SEBI has allowed the listing
of debt instrument on the stock exchange even if the company’s equity was not listed earlier.
Fils were allowed to invest up to 100 per cent of the funds in debt instruments of Indian companies
through 100 per cent dedicated debt fund.
SEBI has made it mandatory for all the debt instruments to be rated from anyone of the authorized
credit rating company. Recently, SEBI made dual rating mandatory for the issues of size above
Rs.500 million. By doing this SEBI expects to put an end to credit rating shopping, which allows
a company not to disclose an adverse rating and instead seek a favorable rating from other
agency. A company will not be allowed to get a rating from an agency which is its associated
firm.
5. Price Stabilization
SEBI has set up a division to monitor the unusual movements in prices, in coordination with the
stock exchanges. SEBI has asked stock exchanges to monitor the prices of newly listed
permitted scripts from the first day of trading. Necessary circuit breaker system and other
market monitoring restrictions could be applied. In case of newly listed scrips, when there is an
abnormal price variation, the exchange would impose a spec per cent or more on purchase in
addition to regular margin.
The penal margin is retained by the exchanges for a period of three months or one month after
delivery. Intra day margin, gross exposure margin, net exposure margin, mark to market margin,
concentration margin and special margins are also imposed on the traders by the stock
exchanges to reduce the price volatility.
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To prevent circular trading and price rigging, SEBI has introduced a host of price filters. Intra
day price band permits the stock to be traded within a range during a trading session. It aims
at preventing intra day price swings. Inter week price band has a wide range within that stocks
are permitted to be traded in a week. It prevents wild swings in prices rippling into the next
settlement cycle. SEBI imposed a uniform intra-day price band of 10 percent for all securities
on all stock exchanges, in addition to the 25 per cent weekly price cap being followed by all
exchanges.
6. Delisting
SEBI tightened the delisting norms by permitting delisting only in accordance with the norms
specified by Chandratre committee. The norms are:
• On voluntary de-listing from regional stock exchanges the company would have to
make a buy offer to all the shareholders in the particular region.
• The promoters would have to buy or arrange buyers for the security and
• The listing fees for three years should be taken from the companies at the time of
delisting and be kept in Escrow Account with the stock exchange.
7. Brokers and SEBI
All the brokers are to be compulsorily registered with SEBI. The registration is given on the
basis of the infrastructure facilities like adequate office space, equipment and manpower. He
should have past experience in the business of buying, selling or dealing in securities. Capital
adequacy norms are laid down depending on the stock exchanges and the member’s turnover.
Registration fees also have to be paid by the brokers.
Note:
• Code of conduct is laid down for every stockbroker to be registered with SEBI.
• The code seeks to ensure that a broker should not indulge in malpractice and
manipulation. The code of conduct deals with broker’s duty towards: execution of orders,
issue of contract note. breach of trust, fairness to clients and investment advice. Contract
notes are to show transparency in deals regarding price, brokerage and service tax.
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• Brokers shall have to furnish SEBI a copy of the audited balance sheet and profit and
loss account within six months of each accounting period. Brokers are expected to
preserve the books of account and other records for a minimum period of five years.
SEBI has the right to inspect brokers’ books of account, other records and documents
and can appoint qualified auditors to investigate into the books of accounts.
8. Cancellation of Registration
The registration of the stock broker will be cancellation on the following situations:
• The stock-broker violates any provisions of insider trading regulations or takes over
regulations.
• Stock-broker is guilty of fraud, or is convicted of a criminal offense and cancellation of

membership of the stock broker by the stock exchange
9. Sub-Broker
SEBI has made it mandatory for a sub-broker to obtain a certificate of registration from SEBI.
The affiliating stockbroker and the sub-broker should enter into an agreement specifying the
obligation of both. In May 1997, SEBI permitted the security deposit received from the sub-
broker to be kept with the share broker. SEBI advised that transfer deed bearing stamps of
unregistered such-brokers would be treated as bad deliveries.
10. Corporate Members
Corporate membership is allowed in the stock exchanges. SEBI has laid down capital adequacy
norm and maintenance of net worth for them. Multiple memberships are permitted but separate
accounts have to be kept. SEBI can inspect their accounts and take positive actions in case of
default.
11. Insider Trading
The most profitable technique employed in the stock market is using one’s access ion ahead of
others. It refers to the buying and selling or dealing in the securities of a listed company by
persons information. Once the information became public, the trading volume and price goes
negative, Insider trading is illegal. To prevent this SEBI has come out with the SEBI Insider
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Trading Regulation 1992. In 2002, SEBI Act was amended to make insider trading punishable
as a serious offence. The penalty rate has been enhances to Rs.1 lakh per day and the maximum
penalty can go up to Rs.25 Crores.
The act has defined the insider and the price sensitive information as
• Who is or was connected with the company
• Who is deemed to have been connected with the company and is reasonably expected
to have access by virtue of such connection to unpublished price information or
• Who has received or has had access to unpublished price sensitive information.
Connected person is any person:
• Who is a director or is deemed to be a director as per the definition in the Companies

Act.
• who is an officer or employee of the company?
• Who holds a position involving a professional or business relationship with the company
and who may reasonably be expected to have access to unpublished price sensitive
information?
Unpublished price sensitive information areas are given below:
• Financial results of the company
• Intended declaration of dividends
• Rights or bonus share offers
• bonus share offers
• Major expansion plans or execution of new projects Amalgamation, mergers and

takeovers
• Disposal of the whole of the undertaking

41
• Such other information as may affect the earnings of the company Any changes in
policies, plans or operations.of the company
12. Prohibition of Dealings
SEBI prohibits an insider from dealings. SEBI is empowered to investigate cases of insider
trading. The person being investigated by SEBI is required to produce BOONS accounts and
other documents, which the investigating authority may require. SEBI has the authority to
restrain the insider from dealing in securities. Any person violating the provision of the insider
trading regulation is liable to be punished with fine or imprisonmen under the Securities and
Exchange Board of India Act, 1992.
Companies now have to disclose immediately to the stock exchanges any changes in material
events that will have impact on the share prices. Companies now be required to disclose
immediately all information concerning litigation, revision in debt or equity ratings in India or
abroad, commencement of commercial production, issue of any class of securities, mergers,
demerger, acquisitions, cancellation of dividends, rights or bonus and alteration in the terms of
redemption of terms of any security issued.
5.8.3 Guidelines by SEBI for protection of Interest of Investors
The main object of SEBI is not only to regulate stock market but also to protect the interest of
investors. For this purpose, SEBI has taken following measures:
(i) SEBI has been encouraging investor-education. For this purpose, certain investors’
associations have been registered.
(ii) Companies raising deposit as well as huge capital must undergo credit rating. Credit
rating by an authorized authority given a fair view about the financial strength of the
organization. For this purpose, there are four credit rating agencies. (i) CRISIL (ii) ICRA
(iii) CARE and (iv) Duff and Phelps Credit Rating India Pvt. Ltd.
(iii) SEBI has taken the responsibility of disclosing fair and adequate information for investors
for the purpose of investment decisions.
(iv) For the benefit of the investors, company has to disclose its capacity utilization, advise
events and material changes of key personnel.
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(v) Disclosure on market prices for listed company.
(vi) Arrangement for disclosing investors’ grievances and redressed system.
(vii) Compulsory disclosure in the prospectus.
(viii) Contributions by promoters whose name figure in the prospectus.
(ix) In case of over subscription of any company issue, SEBI’s representatives will present
there to take into the allotment process.
(x) Setting up of investors’ grievances cell for handling complaints or investors.
(xi) SEBI had right to cancel registration any underwriter who fails to tumis bumess details
to SEBI.
(xii) Merchant bankers have to attach diligence certificate with the prospectus tor extending
their accountability to the investors. The diligence certificate gives a detailed position of
the issue of share. Only by such certificate, the investor can files a case of incorrect
statement in the prospectus on erring companies.
(xiii) There is an advertisement code by SEBI which has to be followed by companies or

investors.
(xiv) To avoid any malpractice in allotment process, SEBI has to be appointed its
representatives to look into allotment process.
(xv) Underwriting, registrar to issue and share transfer agent and portfolio managers have
been brought under SEBI for the first time.
(xvi) Even the mutual funds have been brought under SEBI and they have to disclose NPV
of unit every day.
(xvii) For the benefit of the individual investors, a new scheme called stock invest account
has been introduced in banks. From this invest account the new issue of share will be
applied. In that, the investor will intimate the stock investment account to the company
issuing the shares. In case of allotment, the company will inform the banker and funds
will be released from the stock invest account to the bank.
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Check Your Progress
1. What are the objectives of SEBI?
2. What are the powers of SEBI?
3. Write a short notes on Gilt edged securities.
5.9 Summary
Capital market deals with the long-term funds such as shares and debentures. Companies
raise their capital through the issue of shares and debentures. Capital market in India is divided
into two types (a) Gilt-edged market (b) industrial Security market. Giltedged market refers to
government securities and industrial securities market refers to the securities of the companies
consisting of shares and debentures of old and new companies. SEBI is a regulating body that
controls the security market operations to protect the interest of investors.
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1. How would you classify the Financial Market?
2. What are the Industrial Securities?
3. What are the importances of Capital Market?
4. How would you classify the Capital Market?
5. Explain the organizational structure of SEBI.
6. Explain the role of SEBI in investor protection.
7. Explain the functions of SEBI.
8. Explain powers of SEBI in regulating security market.
10. How SEBI regulates the primary market?
11. How SEBI regulates the secondary market?

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LESSON - 6
STOCK EXCHANGE
Learning Objectives
• explain the meaning and the functions of stock exchanges
• describe the growth of stock exchanges in India
• outline the measures of govt. to promote capital market.
Structure
6.1 Introduction
6.2 Meaning of Stock Exchange
6.3 Advantages of Stock Exchanges
6.4 History of Stock Exchanges in India
6.5 Need for the Control of Stock Exchanges in India
6.6 Functions of a Stock Exchange
6.7 Steps taken by Government for Promoting Capital Market in India
6.8 Summary
6.1 Introduction
Indian economic scene has undergone a metamorphosis in the last decade of 20th century.
The major driving factor behind the same has been the impact of globalisation Liberalization
and privatization taking place not only in the country but also globally, which has lent it all the
dynamism. Effectually, one can see major structural changes in India, the most striking being
those in the Indian Capital Market.
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Earlier, marked by numerous thriving Regional Bourses, which were the vehicles of earning
and ease for the investors, the Capital Market today stands with a few proud (or not so proud)
Stock Exchanges with a national wide reach such as National Stock Exchange (NSE) and
Bombay Stock Exchange (BSE). The turnover of old buddies has dwindled, their working reduced
to stillness and they are on the brink of a miserable farewell from the Capital Market Campus.
The capital market apart from the primary market also includes the secondary market where
issues are traded. These secondary markets – also known as stock market- pre* dominantly
deal in stock or equity shares.
6.2 Meaning of Stock Exchange
An individual desires to invest whatever he has saved. The best financial derivates, which give
a mammoth yield, are the stocks of corporate companies. In order to bring liquidity these
instruments are traded systematically in a stock exchange. In a stock exchange a person who
wishes to sell his security is called a seller, and a person who is willing to buy the particular
stock is called buyer.
Any trading of a share subsequent to is primary offering, is a secondary transactions. The

initial buyer may reoffer the securities to an interested buyer at a price which is mutually
satisfactory. The rate of stock depends on the simple Law of demand and supply. Stock exchange
is an organized secondary market where securities like shares, debentures of public companies.
Government securities and bonds issued by municipalities, public corporations, utility
undertakings, port trusts and such other local authorities are purchased and sold. The securities
and Contract (Regulation) Act 1956 defined stock exchange as an association or organization
or body of individuals, whether or not established for the purpose of assisting, regulating, and
controlling business in transacting securities.
The share prices over a period are indicated as index of the financial status of an organization.
Thus investor can take decision about the suitability of particular securities for investment in
terms of safety, profitability and risk. Besides, he can change his decision when necessary as
liquidity of investment is provided by easy transferability of securities through the stock
exchanges.
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6.3 Advantages of Stock Exchanges
The stock exchange not only offers the best bids but also the following advantages.
One of the key advantages of stock exchanges is that they are an efficient medium for raising
of resources and channelling savings from the general puano ya issue of equity /debt capital
by stock companies which are listed on the stock exchanges.
The second main benefit is the wide-spread dissemination of information and the need to
disclose adequate information - not only the quarterly or year end financial rest but also major
events which have an impact on the working of the company.
Since buying and selling of different types of securities takes place in stock exchanges, the
prices of particular security reflect its relative demand and supply.
The prices of individual security indicate the financial health of individual company.
Stock exchanges provide a ket in fact promotes the growth of the primary market and aids
capital formation. The primary market investors are assured of a continuous market where
their investment can be liquidated.
6.4 History of Stock Exchanges in India
6.4.1 Evolution
Indian stock markets are one of the oldest in Asia. Its history dates back to nearly 200 years
ago. The earliest records of security dealings in India are scanty an obscure. The East India
Company was the dominant institution in those days and business in its loan securities used to
be transacted towards the closed of the eighteenth century.
By 1830’s business on corporate stocks and shares in Bank and Cotton presses took place in
Bombay. Though the trading list was broader in 1839, there were only half a dozen brokers
recognized by banks and merchants during 1840 and 1850. The 1850’s witnessed a rapid
development of commercial enterprise and brokerage business attracted nu men into the field
and by 1860 the number of brokers increased to 60.
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In 1860-61 the American Civil War broke out and cotton supply from United States was stopped;
thus, the 'Share Mania’ in India begun. The number of brokers increased to about 200 to 250.
However, at the end of the American Civil War, in 1965, a disastrous slump began (for example,
Bank of Bombay Share which had touched Rs. 2850 could only be sold at Rs.87).
6.4.2 Indian Stock Exchanges - An Umbrella Growth
There are 24 stock exchanges in the country and their organization varies. Some are public
limited companies (15), while others are limited by guarantees (5) or are voluntary non-profit
making organizations (3). The Bombay Stock Exchange was established in 1875 as a voluntary
non-profit making association of persons and having 540 members in 1992. The stock exchanges
of Calcutta and Chennai were started in 1908 with 650 and 168 members respectively in 1992
and the Delhi Stock Exchange in 1947 as a Public Limited Company and has 321 members in
1992.
The Second World War broke out in 1939. It gave a sharp boom, which was followed by a
slump. But, in 1943, the situation changed radically, when India was fully mobilized a supply
base. On account of the restrictive controls on cotton, bullion, seeds and other commodities,
those dealing in them found the stock market as the only outlet for their activities. They were
anxious to join the trade and their number was swelled by numerous others.
Many stock exchanges, The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock
Exchange Limited (1940) and Hyderabad Stock Exchange Limited (1944) were floated. In
Delhi two stock exchanges - Delhi Stock and Share Brokers’ Association Limited and the Delhi
Stocks and Shares Exchange Limited – were floated and later, in June 1947, amalgamated
into the Delhi Stock Exchange Association Limited.
The Government of India ensures broad uniformity in structure while granting recognition; only
8 have been given permanent recognition. To become a member of the stock exchange one
has to pay an entrance fee or acquire a specified number of shares. the value of which ranges
from Rs.250 to Rs.1,01,000.
Stock exchanges are managed by a governing body. They governing body is responsible for
policy making and for ensuring the smooth functioning of the exchanges. The Securities
Contracts Regulations Act enables the Union government to regulate the stock exchanges and
protect the interest of the investors.
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This Act provides,
• For recognition of stock exchanges and regulation of their functioning
• Licensing dealers
• Recognition of contracts
• Controlling speculation
• Restricting rights of equitable holders of shares
• Empowering government to compel any public limited comany to get its shares listed.
The securities and Exchange Board of India Act, 1992 provides for the establishment of
regulatory body called Securities and Exchange Board of India to protect the interest of investor
and to promote, develop and regulate the security market.
6.4.3 Growth Pattern - Post independence Scenario
• Tne number of stock exchanges has gone up from 7 to 23 during the period 1946-2000.
• The number of listed companies increased from 1125 to 9477 during 1940-1900.
• The largest number of companies listed on stock exchanges in nay one country.
Most of the stock exchanges languished till 1957 when they applied to the central Government
for recognition under the Securities Contract (Regulation) Act 1956. Only Bombay, Calcutta,
Madras, Ahmedbad, Delhi, Hyderabad and Indore, the well-established exchanges, were
recognized under the Act. Some of the members of the other Associations were required to be
admitted by the recognized stock exchanges on a concessional basis, but acting on the principle
of unitary control, all these pseudo stock exchanges were refused recognition by the Government
of India and they thereupon ceased to function. Thus, during early sixties there were eight
recognized stock exchanges in India. The number virtually remained unchanged, for nearly
two decades. During eighties, however, many stock exchanges were established.
Cochin Stock Exchange (1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur,
1982), Pune Stock Exchange Limited (1984), Ludhiana Stock Exchange Association Limited
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(at Mangalore, 1985), Magadh Stock Exchange Association (at Patna 1986), Jaipur Stock
Exchange Limited (1989), Bhubanewar Stock Exchange Association Limited (1989), Saurashtra
Kutch Stock Exchange Limited (at Raikot 1989) Voda Stock Exchange Limited (at Baroda,
1990).
There at present 24 stock exchanges recognized by the Central Government / SEBI under the
Securities Contracts (Regulation) Act, 1956. A list of these 24 recognized the stock exchanges
is given in the Annexure I. The Table 1. given below portrays the overall growth pattern of
Indian stock markets since independence. It is quite evident from the Table that Indian stock
markets have not only grown just in number of exchanges, but also in number of listed companies
and in capital of listed companies.
Table: 1 Growth pattern of Indian Stock Market

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The market value increased many fold the following table shows the market capitalization and
GNP,
The above table indicate that the growth of the stock exchange in terms of capitalization in
many fold after the introduction of New Economic Policy. The remarkable grown after 1985
was due to the favouring government policies towards security market industry. The number of
stock exchanges increased from 11 in 1990 to 24 now. All the exchanges are fully computerized
and offer hundred percent on-line trading. 9644 companies are on hand for trading on stock
exchanges at the end of march 2002. the trading podium of the stock exchanges is accessible
to 9687 members from over 400 cities on the same day. The market capitalization grew ten fold
between 1990-91 and 1999-00. It increased by 221% during 1991-92 and by 107% during
1999-00.
All India market capitalization is estimated at Rs.749,248 crores at the end of march 2002. The
market capitalization ratio, which indicate the size of the market, increased sharply to 57% in
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1991-92 following spurt in share prices. The ratio increased to 85% by March 2000. It, however,
declined to 55% at the end of March 2001 and to 36% by the end of March 2002.
6.4.4 Present Position of Stock Market in India
At present, there are 24 stock exchanges and more than 6,000 stock brokers The secondary
market has undergone lot of change due to Increase in number of listed companies. There
were more institutions promoted by the government such as mutual funds, merchant banks,
investment trust, etc. for speeding up activities has also set up the National Stock Exchange
(NSE) and Over Then India (OTCEI).
These tow stock exchanges are promoting more medium and large companies, In fact, the
National Stock Exchange has even overtaken in volume and value of transactions compared to
Bombay Stock Exchange.
In 1988, Securities Exchange Board of India Act was passed and it gave enormous powers to
the board to regulate transactions in stock exchanges in India.
But with all these measures, we still find some defects exiting in the stock market. The stock
scam of 1990s was a big eye opener to the Government. The five major stock exchanges
namely Bombay, Calcutta, Madras, Delhi and Ahmedabad are responsible for 90% of the
transactions from the stock market.
6.5 Need for the Control of Stock Exchanges in India
• The transactions in the sock exchanges has to be regulated or else fraudulent person
will enter the market and that any fluctuations person will enter the market and manipulate
the transactions to suit their interest.
• All the sock exchange in India must be brought under the common rule and regulation
so that any fluctuation in the market can be tracked.
• To prevent vested interest in the market, a regulatory authority must be set up so that it
can not only take care of the investors, but also prevent cornet or ring formation by few
investors.
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• In the market, during the course of transaction scope for wide fluctuations should be
avoided. Fro this purpose, some control devices should be built in the organisation.
• Speculation and speculative practices should be prevents by prescribing certain

percentage of deposit on the value of securities.
• The difference in the price of securities among the various stock exchanges should
also the kept to the minimum so that there will be equal movement of funds between
the markets.
6.6 Functions of a Stock Exchange
It provides an organised market place for the investors to buy and sell securities freely. For the
purpose of trading in stock market the security must be listed. Only listed securities alone
traded in stock exchanges. Listing is nothing but inclusion of name of the company in the
official record of the stock exchange on payment of a prescribed fee.
1. Widening Market
The efficient functioning of the stock exchange creates a conducive climate for an active and
growing primary market for new issues. An active and healthy secondary market in existing
securities broadening the investment opportunity.
2. Continuous Market
The basic function of a stock market is the creation of a continuous market where securities
are bought and sold in volume with little variation in the current market prices trades succeed
one another. The continuous market provides liquidity through the sale or purchase of securities
at a competitive price.
3. Frequency of Sales
Liquidity occupies an important place in evaluating the efficiency of an exchange. Frequency

of transaction in the stock exchanges and enhances the liquidity and secure the confident of
the investor.
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4. Fair Price Determination
The prices in the stock market are determined by the interplay of the forces of supply and
demand. The two way auction trading in the stock exchange result in near a market for free
trading and free competition.
5. Aid to Financing Industries
Listed companies find it helpful to sell further issues of their shares in the primary market
based on the good performance of their earlier ones. An active market provides good price for
the issue of shares.
6. Other functions
The market prices settled in the stock exchanges are useful in valuing investment for tax
purposes. The stipulation of disclosures and transparency ensures the investors informed.
6.7 Steps Taken by Government for Promoting Capital Market in

India
(1) Legal Measures
(2) Promoting Measures
(3) Regulatory Measures
(4) Liberalization Measures
1. Legal Measures
The passing of Companies Act and Securities (Contract and Regulation) Act were responsible
for the promotions of capital market operations in India.
2. Promoting Measures
The creation of more public sector undertakings and financial institutions was responsible for
improve capital market. Life Insurance Corporation, Unit Trust of India, State Bank of India and
the Development banks such as ICICI, IDBI, and SFC are responsible for the contribution of
enormous funds in the capital market.
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3. Regulatory Measures
The controller of Capital Issue (now abolished) was acted as regulator without its permission,
a company can not issue shares. At present, this function is taken over by (Securities Exchange
Board of India - SEBI. The working of stock exchange was also regulated and there were
penalty provisions for preventing any violation. Companies which are listing their share should
fulfil the conditions by which genuineness of the issue of share ensured: The Directorate of
Stock Exchange enforces the provisions of the Act an streamlines the working of Stock
Exchanges.
4. Liberalization Measures
After 1990, the economic liberalization measures adopted by the Indian government has resulted
in more privation sector expansion. Even the existing public sector undertakings have started
liquidating some of the same the shares to the public. Foreign investments are given more
concession. Expend of private sector is being allowed. An important measure in liberalization
is the entry of the private sector into some of the major infrastructure industries. Example:
Insurance, Transport, Banking and Power.
Check Your Progress
1. Define stock exchangé.
2. What are the objectives of stock exchanges?

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3. Write down any two functions of stock exchanges.
6.8 Summary
Secondary markets are also known as Stock Market. Predominantly deal in stock or equity
shares. Stock exchanges provides absolute liquidity to the instruments & easy transferability of
securities. The rate of stock depends on the simple law or demand and supply. Widening the
market, Continuous market, Frequency of sales, Fair price determination, helps the companies
& investors are its functions which promotes the growth of the primary market & aids capital
formation. Legal measures, Promoting measures, Regulatory measures and Liberalisation
measures are taken by the Government for promoting Capital Markets in India.
1. Explain the functions of stock exchanges.
2. Describe the growth of stock exchanges in India.
3. Explain the need for Control of stock exchanges in India.
4. Outline the steps taken by Government for promoting capital market in India.
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LESSON - 7
NEW ISSUE MARKET

Learning Objectives
• explain the meaning of new issue market
• explain various method of issue of shares
• outline the various types of stock issues and term associated with issue.
Structure
7.1 Introduction
7.2 Functions of New Issue Market
7.3 Prospectus
7.4 Offer for Sale
7.5 Private Placement
7.6 Right Issue
7.7 Bonus Share
7.8 Book Building
7.9 Summary
7.1 Introduction
New Issue Market, also known as Primary Market refers to the sale of shares, directly by the
company at the time of promotion and the investors directly buy the shares from the company
through application. Hence, the share price will be mostly at par.
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7.2 Functions Of New Issue Market
The main functions of the new issue involves
• Origination,
• Underwriting, and
• Distribution
7.2.1 Origination
Under this study, the company takes up
1. Investigation
2. Analysis; and
3. Processing of new proposals.
1. Investigation
Investigation involves a study of technical, economic, financial and legal aspects of the issuing
company. Based on this, Issue House will back the company for the issue of share (Issue
House is one which helps company in the issue of shares, it may be merchant banking company
also.)
2. Analysis
Here quality of capital is analyzed. This includes determination of the class of security, price of
the issue on market condition.
3. Processing of new proposals
Processing of new proposals involves the study of timing and magnitude (volume) of issue,
method of flotation and technique of selling. Here, the new issue market plays a major role.
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7.2.2 Underwriting
The need for underwriting was felt due to the provisions of the company Act, whereby when a
company fails to raise the minimum capital through the issue, then it has to refund the money
to the subscribers and this had led to the failure of the whole issue. Hence, the need for
underwriting was felt. Underwriters enter into an agreement with the company for the sale of
certain minimum quantity of share and debentures to the public. For this purpose, they are
entitled for a commission called underwriting commission. If the issue is fully subscribed, the
underwriter has no liability and will have to fulfil his commitment.
Institutional underwriting in our country helps companies to raise capital in the early stages. In
fact, many companies which may not even come to the notice of the public were promoted due
to the support given by institutional underwriters. Further, many institutional underwriters were
responsible for the promotion of infrastructure companies in the area of steel, chemicals, fertiliser,
etc.
1. Advantage Of Underwriting
Benefits due to professional underwriters are given below
• Large issues could be undertaken successfully.
• Companies with a long gestation period cannot raise capital without the support of
professional underwriters.
• Technocrats could promote companies with their poor financial knowledge.
• New project in the market could be taken boldly.
• Companies project which are not financially viable in the initial stages, especially in
priority sector (agriculture in small scale industry and export-oriented units) could be
promoted with support of institutional underwriters.
7.3 Prospectus
This is a method by which a company directly sells its share to the public. Through the media,
the company advertises and interested persons are given the prospectus which carry full details
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about the company. Based on this, the public apply to the company and shares at the new
company are allotted at the face value. The old company may issue shares at the market value
with the due permission of authorities concerned, (SEBI). The issue of share is guaranteed by
an underwriter who ensures certain minimum quantity of sale of share.
7.4 Offer for Sale
Here the company resorts to the sale of share through intermediaries who are stock broker or
issue house. By this method, the company is able to promote the sale of share and the sale is
also guaranteed with the underwriters. Intermediaries will take more interest in the sale of
shares as they are offered to them at a lesser price and they in turn will sell them at a higher
price to the public. The difference in the price will be the profit earned by the intermediaries.
The drawback of this system is that the company will not be benefited when the share are sold
at a higher price by the intermediaries:
7.5 Private Placement
The shares of the companies are given to the investing public with the public help issue houses.
This method is adopted by certain companies as it prevents the presence of underwriters. The
issue houses are responsible for the share of the share and no prospectus is required under
this system. It also involves minimum expenditure.
The new issue market involves the floatation and disbursement of new issue of shares and
debentures. This market is otherwise known as primary market. Various specialized agencies
undertake issue of security to individual investors. The mobilisation of capital through the sale
of securities can be effected through the techniques of Issuing Prospectus, By Private Placement
or Offer for Sale. Issue of prospectus is discussed in other units and the offer for sale is not in
practice in India. In the following paragraph the private placement technique is discussed.
Private Placement
Private Placement of Securities means offering the Securities of the Company directly to select
persons. This issue is not a public offer and hence does not attract SEBI guidelines. The main
points to be noted are:
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• There is no public offer made
• The offer is only to a specific person
• The offer so made is not transferable
The private placement became popular with the buoyant stock market. The practice adopted
by many was to make a private placement first and then follow it up with a public issue. These
practices led to many cases of malpractice hence the SEBI made the directive not to make any
private placement in case of the first issue of the company.
Advantages of Private Placement
(a) This process of raising funds is accomplished in a comparatively short span of time.
(b) Since the offer is made to only select group of persons, the promoters can ensure that
the shares are not subscribed by undesirable persons.
(c) The cost of making a private placement is much less than the public offerings.
(d) There is no minimum subscription clause and also there is no cap on the collections
versus the issue size.
(e) The private placement give a grater flexibility.
Private Placement are desirable when
(a) The companies are closely held and the promoter do not want the shares to be widely
distributed.
(b) The funds will have to be mobilised in a short time period.
(c) When the funds can be mobilised by a few subscribers
Book-Building
It is a process by which a demand for the securities proposed t be issued by a body corporate
is elicited and built up and the price for such securities is assessed for the determination of the
quantum of such securities to be issued by means of a notice or offer document or otherwise.
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Requirements for book building
1. Percent book building process
In an issue of securities to the public through a prospectus 75% book-building is available

subject to some conditions. The issue of securities through the book-building process should
be separately indicated as placement portion category in the prospectus. The securities available
the public should be separately identified as net offer to the public. Underwriting is mandatory
to the extent of the net offer to the public.
2. Offer to Public through Book-building Process
A company can issue securities to public through a prospectus in following manner
• 100 percent of the net offer to the public through the book-building process or
• 75 percent of the net offer to the public through the book-building process and 25
percent at the price determined through book-building.
The issuer company should appoint eligible merchant banker as book runner and their names
should be mentioned in the draft prospectus. In case the price band is disclosed. the lead book
runner should ensure compliance with the following conditions.
1. The cap of the price band should not exceed 20% of the floor (ie) cap of the price band
should be less than, or equal to, 120% of the floor price of the band.
2. The price band can be revised during the bidding period, subject to a maximum of 20%
either side without affecting the 20% price bank on floor price.
3. Revision in the price band should be widely disseminated by (i) informing the stock
exchange, (ii) issue press releases and (iii) indicating the change on the relevant website
and the terminals of the syndicate members.
4. The bidding period should be extended by 3 days subject to a maximum of bidding

period of 13 days
5. The manner in which the short fall in the project financing resulting from lowering of
priæe band to the extent of 20% would be met should be disclosed.
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The book-runner and the issuer company should determine the issue price based on the bids
received through syndicate members: On determination of price, the number of securities to
be offered should be determined by dividing the issue size by the price that has been determined.
Once the final cut-off price is determined all those bidder whose bids have been found to be
successful, at and above final cut-off price, would entitle for the allotment of securities:
3. Additional Discloser
• Particulars of syndicate members
• amborg Bed PIE ratios and EPS
• Book value of shares and ROI
4. Underwriting
In case the issuer company is making an issue of securities to the public through book-building
the entire net offer should be compulsorily underwritten by the syndicated members or book
funners:
5. Procedure for Bidding
• The bid should be open for at least five days and not more than 10 days which may be
extended to 13 days in case the price band is revised:
• The advertisement should contain
• Date of opening and closing
• Name and address of the syndicate members
• Methods and process of bidding
• Bidding should be permitted only if an electronically kinked transparent facility is used.
6. Bidding Form
There should be a standard bidding form to ensure uniformity and accuracy, It should contain
information about the investor and price and number of securities that the investor wishes to
bid for. The form should be serially numbered at the bidding centers and dates and time stamped
with an automatic numbering machine.
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7. Allocation / Allotment Procedure
In case of 100% of net offer to the public through 100% book-building process (i) at least 25%
of the net offer to the public should be available for allocation to retail individual investors, (ii) at
least 25% to non-institutional investors and (iii) not more than 50% to QIBS.
8. Green Shoe Option
A company making an initial public offer (IPO) of equity shares through the nook building
mechanism can avail of the Green Shoe Option (GSO) for stabilising the postlisting price of its
shares. It is an option of allocating shares in excess of the shares included in the public issue
and operating a post-listing price stabilising mechanism through a stabilising agent. To stabilise
the post-listing prices of the shares, the stabilising agent would determine the timing of buying
them, the quantity to be bought, the prices at which bought and son
7.6 Right Issue
When a company wishes to expand its capital base, it prefers issue shares to the existing
shareholders which are called rights shares. But before the issuing of the right shares, the
company should get permission of the Government (SEBI) and a resolution has to be passed
by the board of directors. The right issue will be based on a proportion of existing shares held
by the shareholders. A company can issue right share only after two year of its formation or
after one year of its first issue of shares, whichever is earlier. There is no need for issue of
prospects or advertisement and this can be adopted only by an existing company and not a
new company. The price right shares may be fixed at a premium also subject to the permission
of the Government.
7.7 Bonus Share
When a company decides to capital its profit, it will issue bonus shares which will be available
only to the existing shareholders. Bonus shares can be issued only by companies which earned
profit, which is a commercial profit arising out of their business or If a company earns profit by
the sale of assets, it will not be construed as profit. For the issue of bonus shares, the company
must fulfil statutory obligations of providing various reserves and declaring dividend to the
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existing shareholders. After meeting the statutory regulations, if the remaining profit is more
than 40%, than the company with the prior permission of Government (SEBI), can go in for the
issue of bonus shares. It will be issued on a proportion to shares held by shareholders.
7.8 Book Building
When a company, instead of offering shares directly to the public, invites bids from the merchant
bankers for the sale of shares, it is called book building. The merchant bankers will take the full
responsible for the issue of the shares. The entire procedure of allotment of listed of shares will
be undertaken by the merchant bankers. The shares price depends on the demand for the
shares in the market. The book runner or the merchant banker will select any stock exchange
and register the shares for issue. If stock exchange is having an on-line computer facility, them
the merchant banker will make available the share through the on-line system. The closing
date for the sale will be fixed by the upon the merchant banker after consulting with the stock
exchange concerned. Depending upon the offers received after the date of closure, the price
will be fixed. On finalisation of the share of the price, the share will be allotted.
Check Your Progress
1. What is meant by new issue market?
2. What do you understand by right issue?

66
3. Write a note on bonus share.
7.8 Summary
New Issues Market (NIM) also known as ‘Primary Market is a market, which is characterized
by the presence of a set of all institutions, structures, people, procedures, services and practices
involved in raising of fresh capital funds by both new & existing companies. Organisation,
Underwritting & Distribution are the main functions of NIM. Issuing prospectus, Offer for sale,
Private placement, Right Issues, Bonus share, Book-building are the methods of marketing
securities.
The New Issue Market inolves the floatation and disbursement of new issue of shares and
debentures. Thsi market is otherwise known as primary market. Private placement of securities
means offering the securities of the company directly to selected persons. The gives a greater
flexibility, minimum cost of issue, raising funds in short span of time.
Book buildin is a process of fixing price for an issue of securities on a feedback from potential
investors based upon their perception about a company. It involves selling in ‘issue step-wise
to investors at an acceptable price with the help of new intermediaries/ merchant bankers who
are called book-runners.
1. Explain the functions of new issue market.
2. Explain the methods of issue of shares in the new issue market.
3. Describe in detail private placement method.

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LESSON - 8
BANKERS TO AN ISSUE
Learning Objectives
• explain the meaning and registration of banker to an issue
• describe the registration and obligations of banker to an issue.
Structure
8.1 Introduction
8.2 Registration
8.3 General Obligations and Responsibilities of Banker to Issue
8.4 Summary
8.1 Introduction
The bankers to an issue are engaged in activities such as acceptance of applications along
with application money form the investors in respect of issues of capital and refund of application
money.
8.2 Registration
To carry on activity as a banker to issue, a person must obtain a certificate of registration from
the SEBI, The SEBI grants registration on the basis of all the activities relating to banker to an
issue in particular with reference to the following requirements:
(a) infrastructure, communication and data processing facilities and manpower to effectively
discharge his activities.
(b) The applicant not involved in any litigation connected with the securities market or
convicted.
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(c) The applicant is a scheduled bank and
(d) Grant of a certificate is in the interest of the investors. A banker to an issue can apply
for the renewal of his registration three month before the expiry of the certificate.
8.3 General Obligations and Responsibilities
Furnish Information
When required, a banker to an issue has to furnish to the SEBI the following information:
(a) The number of issues for which he was engaged as a banker to an issue
(b) The number of applications or details of the application money received.
(c) The dates on which applications from investors were forwarded to the issuing company
or registrar to an issue and
(d) The dates / amount of refund to the investors.
Books of Account Record/Documents
A banker to an issue is required to maintain books of accounts/records / documents for a

minimum period of three years in respect of the number of applications received, the names of
the investors, the time within which the applications received were forwarded to the issuing
company/registrar to the issue and dated and amounts of refund money to investors.
Agreement with Issuing Companies
Every banker to an issue enters into agreement with the issuing company. It provides for the
number of collection centres at which applications or applications money received is forwarded
to the registrar for the issue.
Disciplinary Action by the RBI
If the RBI take any disciplinary action against a banker to an issue in relation to issue payment,
the latter should immediately inform the SEBI. If any prohibition of banking activity the registration
automatically deemed as cancelled.
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Code of Conduct for Bankers to Issue
1. Make all efforts to protect the interest of investors
2. In the conduct of its business, observe high standards of integrity and fairness in the
conduct of its business.
3. Fulfil its obligations in a prompt, ethical and professional manner.
4. Al all times exercise due diligence, ensure proper care and exercise independent
professional judgment.
5. Not any time in collusion with other intermediaries or the issuer in a manner that is
detrimental to the investor.
6. No to allow blank applications forms bearing brokers stamp to be kept the bank premises
or peddled anywhere near the entrance of the premises or accept the applications after
office hour or date of closure.
7. Be prompt in disbursing dividend, interest or any such accrual income received or

collected by him on behalf of his clients.
8. Not make any exaggerated statement whether oral or written to eh client, either about
its qualification or capacity to render certain services or its achievements in regard to
services rendered to other clients.
9. Always endeavour to render the best possible advice to the clients having regard to the
clients’ needs and the environments and his own professional skill.
10. No divulge to any body either orally or in writing, directly or indirectly, any confidential
information about its clients which has come to its knowledge, without taking prior
permission of its clients.
11. Avoid conflict of interest and make adequate disclosure of his interest.
12. Make appropriate disclosure to the client of its possible source or potential area of
conflict of duties and interest while acting as banker to an issue which would impair its
ability to render fair, objective and unbiased services.
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13. Not indulge in any unfair competition.
14. Not to discriminate amongst its clients, save and except on ethical and commercial
considerations.
15. Maintain an appropriate level of knowledge an competency and abide by the provisions
of the SEBI Act, regulations, circular, etc.
16. Not suppress any material fact in any documents, reports, etc.
17. Produce the necessary document before SEBI and other regulatory body without any
negligence.
18. Abide by the provisions of the Acts, rules, regulations, guidelines, resolutions,
notifications, direction, circular, correspondence issued from time to time.
19. Not to render any investment advice about any security in the media unless a disclosure
of its interest is made.
20. Provide adequate freedom and powers to its compliance officer for the effective discharge
of is duties.
21. Develop its won internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in the carrying
out of their duties as a banker to an issue.
22. Ensure that it has adequate resources to supervise diligently and does supervise diligently
persons employed or appointed by it to conduct business on is behalf.
23. Be responsible for the acts or omissions of its employees and agents in respect tot en
conduct of is business.
24. Ensure the t the senior management, particularly decision makers has access to all
relevant information about the business on a timely basis.
25. Endeavour to ensure that arms length relationship is maintained in terms of both
manpower and infrastructure between the activities carried out as banker to an issue
and other permitted activities.
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Inspection
Inspection is done by the RBI upon the request of the SEBI. The purpose of inspection is
largely to ensure that the required books of accounts are maintained and to investigate into the
complaints received from the investors against the makers to an issue.
Actions and Case of Default
With a view to ensure effective regulation of the activities of the bankers to an issue the SEBI
is empowered to suspend or cancel their registration certificate under the following grounds:
(a) The banker violates the provision of the SEBI Act, rule/regulation
(b). Fails to/does not furnish the required information or furnishes wrong/ false information
(c) Fails to resolve investor complaints/to give satisfactory replay to SEBI
(d) Is guilty of misconduct / unprofessional conduct inconsistent with the prescribed code
of conduct and
(e) Fails to pay fees and carry out hiss obligations as specified in the regulations.
The SEBI can cancel registration in case of : (a) repeated defaults leading to suspension of a
baker (b) the deterioration in his financial position which likely to adversely affect the interest of
the investors, and (c) he being found guilty of fraud/ convicted of a criminal offence.
Note : The cone of conducts is similar to other financial services except few items applicable to
the particular service. They are essential to discharge one as profession.
Check Your Progress
1. Who is bankers to an issue?

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2. Write down any two obligations of bankers to an issue.
8.4 Summary
The banker to an issue are engaged in activities such as acceptance of application along with
application money & refund the same if allotment was not made. To carry on activity as a
Banker to issue, SEBI issue grant to renew a certificate to a bank after scruntinize the following
Agreement with issuing companies, Fees paid for registration, Adequate steps taken for redressal
of grievances of the investors, SEBI can cancel registration in case of repeated defaults leading
to suspension of a banker, the deterioration in his financial position which likely to adversely
affect the interest of the investor and banker found guilty of fraud! convicted of a criminal
offence.
1. Explain the general obligations and respnosibilities of banker to issue.
2. What are the procedure for registration in SEBI?

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LESSON - 9
UNDERWRITERS
Learning Objectives
• explain who is an underwriters and their importance
• outline the procedure the registration and obligations of underwriters.
Structure
9.1 Introduction
9.2 Need for Underwriting
9.3 Advantages of Underwriting
9.4 Registration
9.5 Obligations and Responsibilities of Underwriter
9.6 Summary
9.1 Introduction
Underwriters are intermediaries in the new issue market who agrees to take up securities
which are not fully subscribed. They make a commitment to get the issue subscribed either by
others or by themselves. Though underwriting is not mandatory after April 1995, its organisation
is an important element of the primary market. Underwriters are appointed by the issuing
companies in consultation with the lead managers or merchant bankers to the issues. A statement
to the effect that in the opinion of the lead manager, the underwriters’ assets are adequate to
meet their obligations should be incorporated in the prospectus.
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9.2 Need for Underwriting
The need for underwriting was felt due to the provisions of the company Act, whereby when a
company fails to raise the minimum capital through the issue, then it has to refund the money
to the subscribers and this had led to the failure of the whole issue. Hence, the need for
underwriting was felt. Underwriters enter into an agreement with the company for the sale of
certain minimum quantity of share and debentures to the public. For this purpose, they are
entitled for a commission called underwriting commission. If the issue is fully subscribed, the
underwriter has no liability and will have to fulfill his commitment.
Institutional underwriting in our country helps companies to raise capital in the early stages. In
fact, many companies which may not even come to the notice of the public were promoted due
to the support given by institutional underwriters. Further, many institutional underwriters were
responsible for the promotion of infrastructure companies in the area of steel, chemicals, fertiliser,
etc.
9.3 Advantages of Underwriting
Benefits due to professional underwriters are given below
• Large issues could be undertaken successfully.
• Companies with a long gestation period cannot raise capital without the support of
professional underwriters.
• Technocrats could promote companies with their poor financial knowledge.
• New project in the market could be taken boldly.
• Companies project which are not financially viable in the initial stages, especially in
priority sector (agriculture in small scale industry and export-oriented units) could be
promoted with support of institutional underwriters.
9.4 Registration
To act as underwriter, certificate of registration must be obtained from the SEBI. In granting the
certificate of registration, the SEBI considers all matters relevant to the underwriting and in
particular:
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(a) The necessary infrastructure like adeguate office space, equipment and manpower to
effectively discharge the activities
(b) Past experience in underwriting/employment of at least two persons with experience i

prin underwriting
(c) Any person directly or indirectly connected with the applicant is not registered with
mecbl as underwriter or a previous application of any such person has been rejected or
any disciplinary action has been taken against such person
(d) Capital adequacy requirement of not less than the net worth of Rs.20 lakhs and Capitale
(e) The applicant has been convicted offence involving moral turpitude or found guilty of
any economic offence.
Underwriters, has to pay Rs2 lakhs for the first and second years and Rs. 1 lakh for the third
year, from the year 1999 the registration fee raised to 5 lakhs. A renewal fee of Rs.20,000 is
also payable every year to SEBI to keep the certificate in force.
9.5 Obligations and Responsibilities
Code of conduct
1. Make all efforts to protect the interest of investors
2. In the conduct of its business, observe high standards of integrity and fairness in the
conduct of its business,
3. Fulfil its obligations in a prompt, ethical and professional manner.
4. Al all times exercise due diligence, ensure proper care and exercise independent
professional judgment.
5. Not any time in collusion with other intermediaries or the issuer in a manner that is
detrimental to the investor.

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7. Put in place a mechanism to resolve any conflict of interest situation that may arise in
the conduct of is business or where any conflict o interest raised, should take reasonable
steps to resolve the same in an equitable manner.
8. Not make any exaggerated statement whether oral or written to eh client, either about
its qualification or capacity to render certain services or its achievements in regard to
services rendered to other clients.
9. Always endeavour to render the best possible advice to the clients having regard to the
clients’ needs and the environments and his own professional skill.
10. No divulge to any body either orally or in writing, directly or indirectly, any confidential
information about its clients which has come to its knowledge, without taking prior
permission of its clients.
12. Make appropriate disclosure to the client of its possible source or potential area of
conflict of duties and interest while acting as banker to an issue which would impair its
ability to render fair, objective and unbiased services.
13. Not indulge in any unfair competition.
14. Not to discriminate amongst its clients, save and except on ethical and commercial
considerations.
15. Maintain appropriate level of knowledge a competency and abide by the provisions of
the SEBI Act, regulations, circular, etc.
16. Not suppress any material fact in any documents, reports, etc.
17. Produce the necessary document before SEBI and otrer regulatory body without any
negligence.
18. Abide by the provisions of the Acts, rules, regulations, guidelines, resolutions,
notifications, direction, circular, correspondence issued from time to time.
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19. Not to render any investment advice about any security in the media unless a disclosure
of its interest is made.
20. Provide adequate freedom and powers to its compliance officer for the effective discharge
of is duties.
21. Develop its won internal code of conduct for governing its internal operations and laying
down its standards of appropriate conduct for its employees and officers in the carrying
out of their duties as a banker to an issue.
22. Ensure that it has adequate resources to supervise diligently and does supervise diligently
persons employed or appointed by it to conduct business on is behalf.
23. Be responsible for the acts or omissions of its employees and agents in respect tot eh
conduct of is business.
24. Ensure the t the senior management, particularly decision makers has access to all
relevant information about the business on a timely basis.
25. Endeavour to ensure that arms length relationship is maintained in terms of both
manpower and infrastructure between the activities carried out as banker to an issue
and other permitted activities.
Agreement with Clients
Every underwriter has to enter into an agreement with the issuing company that provides for
obligations, the period within which the underwriter has to be subscribe to the issue, amount of
commission or brokerage. etc.
General Responsibilities
An underwriter cannot derive any direct or indirect benefit from underwriting the issue other
than by the underwriting commission. The maximum obligations cannot exceed 20 times of
new worth.
Inspection and Disciplinary Proceedings
The framework of the SEBI’s right to undertake the inspection of the books of accounts or
other and documents of the underwriters.
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Action in Case of Default
The liability for action in case of default arising out of (i) non-compliance with any conditions
subject to which registration was grated and (ii) contravention of any provision of the SEBI Act/
regulation involves the suspension or cancellation of registration.
Check Your Progress
1. What is meant by underwriting?
2. Briefly explain the significance of underwriting.
3. Describe the need for underwriting.
9.6 Summary
Underwriters play critical role in the operation of capital market. No person shall act as underwriter
unless he holds a certificate granted by the Board under the regulations. SEBI prescribed
certain conditions for grant or renewal of certificate to underwriter. Every underwriter shall
enter into an agreements with each body corporate whose behalf he acting as underwriter and
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the said agreement shall provide the period for which the agreement shall be in force, the
amount of underwriting obligations, the period, within which the underwriter has to subscribe to
the issue after being intimated by or on behalf of such body corporate, the amount of commission,
etc.
1. What is meant by underwriting? Explain the significance of underwriting.
2. Explain the obligations and responsibilities of underwriters.
3. Explain the procedures for becoming underwriters.
4. Outline the advantages of underwriting.

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LESSON - 10
SEBI GUIDELINES ON NEW ISSUE

Learning Objectives
• explain the functions of new issue market in India
• discuss the role of SEBI in regulating the capital market in India.
Structure
10.1 Introduction
10.2 SEBI Guidlines on New Issues
10.3 SEBI Guidelines for First Issue By New Companies (Primary Market)
10.4 SEBI Guidelines for Secondary Market
10.5 SEBI Guidelines for Issue of Debentures idelines for Issue of Debentures
10.6 Guidelines By SEBI For Protecting The Interest of Investors
10.7 Supervisory Functions
10.8 Securities and Exchange Board of India (Amendment) Bill 2002
10.9 Important Provisions of Securities Contracts and Regulation Act
10.10 Summary
10.1 Introduction
In Unit 7 we have seen the functions of new issue market. The new issue market involves the
floatation and disbursement of new issue of shares and debentures by the allotment of these
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to individuals and organisations. There are various problems in the new issue market. Particularly
the investors face many problems. SEBI has taken various measures to protect the interest of
investors. In this unit, you can learn the quides issued by SEBI on new issue.
10.2 SEBI Guidelines on New Issues
The various guidelines of SEBI regarding New Issues are as follows:
• All application should be submitted to SEBI in the prescribed form.
• Application should be accompanied by true copies of industrial licence
• Cost of the project should be furnished with scheme of finance.
• Company should have the shares issued to the public and listed in one or more
recognised stock exchanges.
• Where the issue of equity share capital involves offer for subscription by the public for
the first time, the value of equity capital, subscription capital privately held by promotes,
and their friends shall be not less than 15% of the total issues equity capital.
• An equity-Preference ratio 3:1 is allowed.
• Capital cost of the projects should be as per the standard set with a reasonable debtequity
ratio.
• New company cannot issue share at a premium. The dividend on preference share
should be within the prescribed list.
• All the details of the underwriting agreement.
• Allotment of share to NRIs is not allowed without the approval of RBI.
• Details of any firm allotment in favour of any financial institutions.
• Declaration by secretary or director of the company.

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10.3 SEBI Guidelines For First Issue By New Companies

(Primary Market)
• A new company which has not completed 12 months of commercial operations will not
be allowed to issue shares at a premium.
• If an existing company with a 5-year track record of consistent profitability is o a new

company, then it is allowed to price its issue.
• A draft of the prospectus has to be given to the SEBI before public issue. The shares of
the new companies have to be listed either with OTCEI or any other stock exchange.
• All the companies entering the capital market should give a statement regarding fund
utilization of previous.
• Brokers are to satisfy capital adequacy norms so that the member firms maintain
adequate capital in relation to outstanding positions.
• The stock exchange authorities have to alter their bye-laws with regard to capital
adequacy norms.
• All the brokers should submit with SEBI their audited accounts.
• The brokers must also disclose clearly the transaction price of securities and the
commission earned by them. This will bring transparency and accountability for the
brokers.
• The brokers should issue within 24 hours of the transaction contract notes to the clients.
• The brokers must clearly mention their accounts details of funds belonging to clients
and that of their own.
• Margin money on certain securities has to be paid by claims so that speculative

investments are prevented.
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• Market makers are introduced for certain scrips by which brokers become responsible
for the supply and demand of the securities and the price of the securities is maintained.
• A broker cannot underwrite more than 5% of the public issue.
• All transactions in the market must be reported within 24 hours to SEBI.
• The brokers of Bombay and Calcutta must have a capital adequacy of Rs. 5 lakhs.
• Members who are brokers have to pay security deposit and this is fixed by SEBI.
10.5 SEBI Guidelines for Issue of Debentures
1. Guidelines have been given for the issue of debentures by SEBI. These are
2. Guidelines will be applicable for the issue of convertible and non-convertible debentures
by public limited as well as public sector companies.
3. Debentures can be issued for the following purposes:
(a) For stating new undertakings
(b) Expansion or diversification
(c) For modernization
(d) Merger/amalgamation which has been approved by financial institutions
(e) Restructuring of capital
(f) For acquiring assets
(g) For increasing resources of long-term finance.
4. Issue of debentures should not exceed more than 20% of gross current assets and
also loans and advarices.
5. Debt-equity ratio should not exceed 2:1. But this condition will be relaxed for capital
intensive projects.
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6. Any redemption of debentures will not commence before 7 years since the
commencement of the company.
7. For small investors for value such as Rs. 5000, payments should be made in one
instalment.
8. With the consent of SEBI, even non-convertible debentures can be converted into equity.
9. A premium of 5% on the face value is allowed at the time of redemption and in case
non-convertible debentures only.
10. The face value of debenture will be Rs.100 and it will be listed in one or more stock
exchanges in the country.
11. Secured debentures will be permitted for public subscription.
10.6 Guidelines by SEBI for Protecting the Interest of Investors
The main object of SEBI is not only to regulate stock markets but also to protect the interest of
investors. For this purpose, SEBI has taken following measures:
1. SEBI has been encouraging investor-education. For this purpose, certain investors’
associations have been registered.
2. Companies raising deposit as well as huge capital must undergo credit rating. Credit
hind hy an authorised authority given a fair view about the financial strength of the
organisation. For this purpose, there are four credit rating agencies. (1) CRISIL (1)
ICRA (iii) CARE and (iv) Duff and Phelps Credit Rating India Pvt. Ltd.
3. SEBI has taken the responsibility of disclosing fair and adequate information for investors
for the purpose of investment decisions.
4. benefit of the investors, company has to disclose its capacity utilisation, adverse events
and material changes of key personnel.
5. Disclosure on market prices for listed company.

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6. Arrangement for disclosing investors’ grievances and redressal system.
7. Compulsory disclosure in the prospectus.
8. Contribution by promoters whose name figure in the prospectus.
9. In case of over subscription of any Company issue, SEBI’s representatives will

presentthere to look into the allotment process.
10. Setting up of investors’ grievances cell for handing complaints of investors.
11. SEBI had right to cancel registration any underwriter who fails to furnish business details
to SEBI.
12. Merchant bankers have to attach diligence certificate with the prospectus for extending
their accountability to the investors. The diligence certificate gives a detailed position of
the issue of share. Only by such certificate, the investor can files a case of incorrect
statement in the prospectus on erring companies.
13. There is an advertisement code by SEBI which has to be followed by companies or

investors.
14. To avoid any malpractice in allotment process, SEBI has to be appointed its
representatives to look into allotment process.
15. Underwritings, registrar to issue and share transfer agent and portfolio managers have
been brought under SEBI for the first time.
16. Even the mutual funds have been brought under SEBI and they have to disclose NPV
(Net Present Value) of unit every day.
17. For the benefit of the individual investors, a new scheme called stock invest account
has been introduced in banks. From this invest account; the new issue of share will be
applied. In that, the investor will intimate the stock invest account to the company issuing
the shares. In case of allotment, the company will inform the banker and funds will be
released from the stock invest account to the bank.
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10.7 Supervisory Functions
As a supervisory body, SEBI has taken absolute control over the broker and other intermediaries
in the market. The brokers and other are made more knowledgeable by prescribing certain
minimum qualification and training. Forward trading have been and Budla trading have been
prevented by SEBI. But from 9th June 2000, it is being introduced.
With introduction of the computer in the market, SEBI has a better control over the transactions.
It is able to closely monitor the transaction taking place every day in the market. It is difficult for
broker to resort to speculation as there is a constant watch on their activities by SEBI.
Stock market which were once considered to be the investors’ haven of rich people have come
within the reachable limit of middle class. There are a large number of small investors who are
able to make a sizeable contribution in various issues of companies, both in the primary and
secondary markets. Thanks to the steps taken by SEBI, shares are now easily tradable and
have a ready liquidity. In view of this and condition, we can definitely say that a sizeable literate
population in our country has switched over from investing in gold to investing in company
securities.
10.8 Securities and Exchange Board of India

(Amendment) Bill 2002
Securities and Exchange Board of India (Amendment) Act replaces the ordinance promulgated
in October to amend the SEBI Act of 1992 by enlarging its Board of Directors, Besides conferring
power of search and seizure with the approval court and enhancing the fine for a better and
hassle-free regulation of the capital market and avoid recurrence of scams and other
malpractices in the capital market by building confidence of investors.
10.9 Important Provisions of Securities Contracts and Regulation

Act
The main object this Act bring uniform control over all the stock exchange in India and also
make them really helpful and instrumental for achieving balanced economic growth. The Act
prevents dealing of stock and share outside the market and transactions outside the market
are treated as illegal.
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Check Your Progress
2. Briefly explain the supervisory functions of SEBI.
3. Write, short notes on securities contracts, and Regulation Act.
10.10 Summary
At present, there are 23 stock exchanges and more than 6,000 stock brokers. The secondary
market has undergone lot of change due to increase in number of listed companies. The
Government has set up National Stock Exchange and OTCEI (Over the Counter Exchange of
India) for promoting more medium and large companies. The transaction in the stock exchange
has to be regulated or else fraudulent person will enter the market and that any fluctuations
person will enter the market and manipulate the transactions to suit their interests.
In the market, during the course of transaction scope for wide fluctuations should be avoided.
For this purpose, come control devices should be built in the organisation. Speculation and
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speculative practices should be prevents by prescribing certain percentage of deposit on the

value of securities. The main functions of the new issue involves (1) Origination, (2) Underwriting,
and (3) Distribution.
When a company wishes to expand its capital base, it prefers issue shares to the existing
shareholders which are called rights shares. But before the issuing of the right shares, the
company should get permission of the Government (SEBI) and a resolution has to be passed
by the board of directors. Bonus shares can be issued only by companies which earned profit,
which is a commercial profit arising out of their business operations. SEBI discharges the
functions to protect the interest of investors.
1. What are the powers enjoyed by SEBI in relation to Stock Exchanges?
2. What are the important functions rendered by Stock Exchanges in India?
3. State the differences between New Issue market and Stock Exchanges Market.
4. State the components of New issue Market.
5. Why do you list a share?
6. Who is underwriter? What is the role played by him in the promoting of joint stock
companies?
7. Name the agencies from which the underwriting services are available.
8. Explain the nature of underwriting function. What are the responsibilities of underwriters?
State the instructions for underwriters’ operations.
9. What do you meant by syndicate underwriting? State its advantage.
10. What are the Advantages of Stock Exchanges?
11. What are the functions of new issue market?
12. Write an note on: (a) Right issue (b) Bonus issue
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LESSON - 11
OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

Learning Objectives
• explain the meaning and the functions of OTCEI (Over the Counter Exchange of India)
• understand the objectives advantages of OTCEl along with special features
• describe the trading in OTCEI and SEBI guidelines
Structure
11.1 Introduction
11.2 Stock Exchanges
11.3 Over The Counter Exchange of India
11.4 Need for Starting OTCEI
11.5 Definition of OTCEI
11.6 Promotion of OTCEI
11.7 Objective of OTCEI
11.8 Advantages of OTCEI
11.9 Special Features of OTCEI
11.10 Trading
11.11 Guideline for Issue of Shares
11.12 Constituents of OTCEI
11.13 SEBI guidelines for Secondary Market

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11.14 Summary
11.1 Introduction
Secondary market refers to the market for the securities which are already issued. Thus, the
subsequent buying and selling of securities is called secondary market. In primary market the
securities are offered by the companies to the investors directly where as in secondary market
one investor buys securities form existing investors. In short it refers to the availability of shares
from the stock market through the brokers. Shares are purchased or sold according to the
returns or expectations in the future market.
11.2 Stock Exchanges
Stock exchange is an organised market where financial instruments like shares, debentures
and other securities are transacted. It deals industrial securities, securities issued by government,
semi government and local authorities. They plays an important role in helping the public in
savings and directing their money flow to the profitable ventures. It facilitates raising of capital,
required for the economic development of the country. It is considered as in important institutions
that enables the smooth functioning of corporate organisations.
An individual desires to invest whatever he has saved. The best financial derivates, which give
a mammoth yield, are the stocks of corporate companies. In order to bring liquidity these
instruments are traded systematically in a stock exchange in a stock exchange a person who
wishes to sell his security is called a seller, and a person who is willing to buy the particular
stock is called buyer.
Any trading of a share subsequent to is primary offering, is a secondary transactions. The

initial buyer may reoffer the securities to an interested buyer at a price which is mutually
satisfactory. The rate of stock depends on the simple Law of demand and share prices over a
period are indicated as index of the financial status of an organisation.
Stock exchange is an organised secondary market where securities like shares. debentures of
public companies. Government securities and bonds issued by municipalities, public
corporations, utility undertakings, port trusts and such other local authorities are purchased
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and sold. The securities and Contract (Regulation) Act 1956 defined stock exchange as an
association or organisation or body of individuals, whether or not established for the purpose
of assisting, regulating, and controlling business in transacting securities.
11.3 Over The Counter Exchange of India
Over The Counter Exchange of India (OTCEI) is the first unlisted security market in ixia. It has
been incorporated as a company under the Companies Act, 1956. It has been promoted by
UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI Capital Market Ltd. And Can Bank Financial Service Ltd.
The OTCEL or OTC is a company incorporated under the Companies Act in 1990. It is a
different kind of stock exchange. Investor can buy and sell securities over the counters of their
local banks. It is a recognized stock exchange aims to make the stock market investor friendly.
It functions as a cash market where securities to the investors. It helps companies to raise
finance from the capital market in a cost effective manner and to provide a convenient and
efficient avenue of capital market investment for investor a large, OTCEI has opened 20
representative offices in all major cities of the country. .
11.4 Need for Starting OTCEI
Many small companies in India are finding it difficult to raise adequate capital through Stock
Exchange as the conditions stipulated by them could not be fulfilled. The Companies must
have run for minimum three year and they must have earned profit and the minimum capital
requirement for listing is also quit high, which is at present is Rs.5 corers. Hence by promoting
a new stock exchange with flexible conditions, the small and medium companies in India will
be able to raise sufficient capital, Once these companies enlarged their resources, they can list
themselves in the regular stock exchanges,
Listing on OTCEl may be sought by companies with equity capital of less than Rs. 10 corers,
closely held companies wanting to attain listed company status and companies assisted by
venture capitalist.
11.5 Definition of OTCEIT
OTCEI can be defined as a stock exchange without a proper trading floor. All stock exchanges
have a specific place for trading their securities through counters. But the OTCEI is connected
through computer network and the transactions are taking place through computer operations.
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Thus, the development of information technology has given scope for starting this type of stock
exchange. This stock exchange is recognized under the Securities Contract (Regulation) Act
and so all the listed in this exchange enjoy the same benefits as other listed securities.
11.6 Promotion of OTCEL
OTCEI has been incorporation under Section 25 of the Companies Act. As a result of which the
word ‘limited need not be used since it is promoted for a common cause of promoting the
interest of small and medium companies. This privilege has been given to the company by
Central Government. This company was promoted by, as already stated, UTI, ICICI, IDBI,
IFCI, LIC, GIC, SBI Capital Market Ltd. And Can Bank Financial Service Ltd.
11.7 Obiective of OTCEL
The obiective of the OTCEl are:
1. Create a stock exchange to help companies to raise finance from capital market in cost
effective manner.
2. To provide an efficient channel of capital market investment to strengthens the investor

community and
3. To provide an opportunity for small companies to acquire public funds at low cost.
11.8 Advantages of OTCEI
1. It facilitate companies by raising funds through capital market investment.
2. To negotiate the issue price of its shares of the company with the sponsors who will
market the issue.
3. It saves unnecessary expenses or raising funds from the capital market.
4. It provides accessibility to large pool of capital captive investor base to enhance fund
raising power substantially.
5. All companies listed on the OTC market will get the status of a public limited company
6. Tax advantage to private companies engaged in trading is quite attractive.

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7. OTCEl’s network will make the stock exchange easily accessible to the investor
8. Investors can watch the price displayed at each OTC counters.
9. It provides grater confidence and fidelity of trade.
10. Investors can settle the deals across the counter and the money or scrip proceed form
the deal will be settled in a mailer of days.
11. It provides liquidity to investors.
12. It helps in spreading the stock exchange operations and integrate the capital market.
13. It promotes venture capital activities to boost entrepreneurship
14. It attract foreign fund particularly NRI funds to new ventures.
11.9 Special Features of OTCEI

1. Use of modern technology
Unlike other sock exchanges, OTCEI does not have any special counters and it is an
electronically operated stock exchange. This prevent the syndication or other form of informal
operations.
2. Restriction for other stock
Stock and share listed in other stock exchange will not be listed in the OTCEI and similarly,
stock listed in OTCEI will not be listed in other stock exchanges. This prevent hedging.
3. Minimum issued capital requirements
Minimum issued equity capital should be Rs.30 lakhs out of which minimum public offer should
be Rs.20 lakhs.
4. Restriction for large companies
For companies with minimum equity capital of more than Rs.30 lakhs but less than Rs.300
lakhs, the minimum public offer should be 25% of the issued capital or Rs. 20 lakhs worth of
shares whichever is higher. Companies with an issued equity capital of more than Rs.300
lakhs seeking listing on the OTCEI will have to comply with the listing requirements and guidelines
applicable to such companies to enlist in other recognised stock exchanges.
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5. Base capital requirement for members
Member will be required to maintain a minimum base capital or Rs. 4 lakhs to trade on the
permitted or on listed segment. This facilitates large number of membership: increased
membership enhances the reliability in stock market operations.
6. All India network
The network of counters links OTCEl members located in different parts of the country. Thereby
it reduces joint price manipulation is stock exchanges and protect the interest of retail investors.
7. Satellite facility
The satellite required for OTCEI for its operation is jointly held with Press Trust of India (PTI)
and hence, PTI-OTCEI scan displays the prices of OTCEI’s scrip.
8. Computerisation of transactions
Computers at each counter enable the dealers to enter various or queries or quotes through a
central OTCEI computer, using telecommunication links. Due to the above features, OTCEI
has an edge over other Stock exchanges in the country.
11.10 Trading
Permitted securities category for trading was initiated in 1994-95. After obtaining SEBI’s approval
for listing finance, investment, leasing and hire purchase companies, OTCEI issued guidelines
for listing of such companies on April 7, 1995. OTCEI invited applications for dealership in 54
cities in 19 states. The number of companies went up to 89 by the end of March 1996 with
about 82 equities and 24 debentures listed under the permitted securities category
The Dave Committee on OTCEI had recommended relaxation of the specified size of the issue
to be listed on OTCE and in the listing criteria. The committee had also recommended a shift
from a rolling (T+3) settlement to a five day account period settlement normally practised in
other exchanges. SEBI has accepted the recommendations which will make OTCEl more
effective and viable.
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11.11 Guideline for Issue of Shares
i) Public issues without sponsors should conform to the normal guidelines of disclosure
and investor protection.
ii) In case the sponsor has taken up the shares they may be offered to public at a later
date at a price decided in accordance with the regulations. Even after such an offer, the
pronioters should retain at least 25 per cent of the total issued capital for five years and
acting as a market maker for three years and find an additional market maker.
iii) The sponsor has to view two way quote based on the minimum and the maximum
trading prices.
iv) Revised Guidelines for Bought-out Deals(BoDs)
A) The BoD should be offered only to the OTCE! members and dealers. If participations
is not forthcoming then they may be offered to others.
B) The members and Dealers should take up a minimum of 10 percent of BoDs.
C) The offer for sale should ensure a minimum 25% of the position paid-up capital bit
to the public.
11.12 Constituents of OTCEI
OTCEI commenced its operations in 1992. In OTCEI, we have the following parties taking part
in various transactions. They are:
i) Companies
ii) Dealers
iii) Members
iv) Investors
v) Custodian or settlers
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vi) Transfer agents
vii) OTCEI
viii) The Government and
ix) SEBI
1. All the companies entering the capital market should give a statement regarding und
utilisation of previous issue,
2. Brokers are to satisfy capital adequacy norms so that the member firms maintain
adequate capital in relation to outstanding positions.
3. The stock exchange authorities have to alter their by-laws with regard to capital adequacy
norms.
4. All the brokers should submit with SEBI their audited accounts.
5. The brokers must als The brokers must also disclose clearly the transaction price of
securities and the commission earned by them. This will bring transparency and
accountability for the brokers.
6. The brokers should issue within 24 hours of the transaction contract notes to the clients.
7. The broker must clearly mention their accounts details of funds belonging to clients and
that of their own.
8. Margin money on certain securities has to be paid by claims so that speculative

investments are prevented.
9. Market makers are introduced for certain scrips by which brokers become responsible
for the supply and demand of the securities and the price of the securities is maintained.
10. A broker can not underwrite more than 5% of the public issue.
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11. All transactions in the market must be reported within 24 hours to SEBI.
12. The brokers of Bombay and Calcutta must have a capital adequacy of Rs.5 lakhs and
for Delhi and Ahmedabad it is Rs. 2 lakhs.
13. Members who are brokers have to pay security deposit and this is fixed by SEBI.
Check Your Progress
1. What do you mean by Secondary market?
2. What is OTCEI?
3. Define Trading.
11.14 Summary
OTCEl can be defined as Stock exchanges without a proper trading floor, OCTEI is connected
through computer network and the transactions are taking place through computer operations.
Small & growth oriented companies would be able to grow faster as they would raise required
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capital through OCTEl market at a low cost. Transparency in the transactions, Absolute liquidity,
Nation-wide listing etc are the highlighting factors of OCTEI. The constituents of OCTEI are
Companies, Dealers, Members, Investors, Custodians, Transfer agents, OCTEI, The
Government and SEBI.
1. Explain the special features or OTCEL.
2. Explain the functioning of OTCEI.
3. Discuss SEBI guidelines for Secondary Market.

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LESSON - 12
NATIONAL STOCK EXCHANGE (NSE)

Learning Objectives
After studying this unit, you will be able to
• explain the features of NSE market
• outline the classification of shares
• explain the online trading.
Structure
12.1 Introduction
12.2 Salient Features of NSE
12.3 Listing Requirements in NSE
12.4 Different Classification of Shares Traded in Stock Exchanges
12.5 Stock Exchange Indices
12.6 Online Trading
12.7 Summary
12.1 Introduction
In order to counter the influence of Bombay Stock Exchange (BSE) and to reduce the influence
of certain powerful intermediaries in the stock market, a new stock market was promoted in
which both securities of companies and debt instrument are traded namely the National Stock
Exchange(NSC). NSC take into account the screen based trading and so it is the most advanced.
The success of this stock exchange is quite evident that within a few year of its promotion, the
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volume and the value of transaction have surpassed the Bombay Stock Exchange. Apart from
this, the prices of securities prevailing in this market have its influence on the Bombay Stock
Exchange.
The National Stock Exchange was promoted in November 1992, as a limited company by
insurance companies, commercial bank other financial institution. Besides, SB! Capital Market
Limited, Infrastructure Leasing and Financial Service Ltd and Stock Holding Corporation Ltd:,
were also part of the promoters of NSE. The NSE was incorporated with an equity capital of
Rs.25crores. The International Securities Consultancy (ISC) of HÓng Kong has helped in setting
up of the NSE.
12.2 Salient Features of NSE
Some of the salient features which give a clear edge of NSE, over other regional stock
exchanges.
1. Wide coverage
As the name suggests, it is a country wide stock exchange and has its access throughout the
country.
2. No fived location
As it is screen based, there is no need for any stock exchange floor and all the members of this
market are able to transact through their computer terminal s, sitting at their respective offices.
3. Confidential trading
The identity of the member is withheld and transactions are entered only through code numbers.
Thus, the anonymity of trading member is kept.
4. Transparency
There is total transparency in trading operation as the opening and closing prices are available
for the investors. They are also able to see their orders being executed.
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5. Effective matching
Matching of order is done immediately with the help of the system., i.e., buying and selling
adjustments. The system also ensures best prices for securities through India (both for buying
and selling ). The computer network helps the trader to find a suitable match for its order and
waits till the match is located.
6. Borrowings made easy
et instruments, the system helps by providing a suitable match with reasonable interest and
period of repayment. This exposure is available throughout India for the sale of debt instruments.
7. Settlement
Automated trade matching system ensures quick and efficient settlement of transactions,
12.3 Listing Requirements in NSE
A company has to apply for listing securities in the prescribed form.
• Already listed companies should also apply for further issue of securities.
• 1% of the amount of securities offered for subscription to the public should be kept as
deposit and 50% of it should be deposited in cash. And the balance can be in the form
of a bank guarantee.
• For IPO’s, minimum paid up capital should be Rs.20crores.
• The paid up equity capital for existing companies should be not less then Rs. 10 crores
and market capitalisation of the applicant’s equity should be either Rs. 25crores or
Rs.50crores.
• In order to accommodate hi-tech companies going public, the paid up equity capital
shall be not less than Rs.5crores.
• The capitalisation at the time of issue is not less than Rs.50 crores
• There should be a 3-year track record for listing in NSE, out of which at least dividends
should have been paid for one year.
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12.4 Different Classification of Shares Traded in Stock Exchanges
1. Alpha shares
Shares which are frequently traded in the market.
2. Technical shares
Shares belonging to technological companies.
3. Growth oriented shares
Shares which determine the economic growth of the country.
4. Cyclical shares
Shares whose prices fluctuate due to trade cycle fluctuations.
5. Blue chip shares
Companies with long standing and very good performance and whose shares are in demand.
6. Rolling settlement
2015 Trade outstanding with stock market at the end of the day has to be settled at the end of
the settlement periodo
7. Permitted Securities
These are securities or stocks listed in one stock exchange and permitted to be traded in other
stock exchanges also. For example, Reliance Industry shares listed in Bombay Securities
Exchange may be permitted to trade in Madras Stock Exchange. All the permitted securities
are allowed to be traded after 1.30 p.m. while the listed securities are traded from 12 noon to
2 p.m.
8. T + 5 rolling settlement
Transaction entered into on Monday has to be settled on the fifth working day, which will be the
subsequent Monday when pay in or pay out takes place. U.S.A &U.K follow T+3 systems, while
Germany follows T+2 settlement cycle.
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9. Liquidity shares
Shares which can be quickly traded.
In Bombay Stock Exchange the shares are classified A, B1 and B2
1. A
This group consists of 150 scrips in which carry - forward facility is permitted. That is, transactions
in these categories can be shifted from one settlement to another settlement day.
2. B1 Scrip
This group consists of cash group shares where carry - forward facility is not allowed.
B2 Scrip : Low market capital. Thinly traded stocks. Carry – forward facility is not allowed.
3. Circuit Filter
Maximum permissible fluctuation limit - 8% in A aroup and B1 stock. 25% in certain B2 stock.
If the fluctuations occur beyond this limit, circuit breaker will operate.
12.5 Stock Exchange Indices
Since the prices of most securities tend to travel up and down together, indexes are used to
reflect the overall movement of stock prices. The older, more traditional and better known
indexes tend to consist of are relatively small number of issues. A Stock index sample is normally
generated by a non-random selection technique designed to incorporate specific characteristics.
An index is a number used to represent the changes in a set of values between a base time
period and another time period. Stock Index represents change in the value of a set of stocks,
which constitute the index, over a base year. Any index is an average of its constituents. For
example, the BSE Sensex is a weighted average of prices of 30 select stocks and S&P CNX
Nifty of 50 select stocks, where the weight is the market capitalization of individual stocks.
A market index is very important because of the following reasons:
• It acts as a barometer for market behaviour.
• It is used to benchmark portfolio performance.

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• It is used in derivative instruments like Index futures.
• It can be used for passive fund management as in case of index find
12.6 Online Trading
Some of the leading stock markets in India have introduced computer system for activities.
The brokers can get hooked-up and do their trading on Online basis. The computer terminals
will enable the public and the brokers to know the price prevailing in the market at any time.
This will prevent speculation activities.
Transparency Through Online Trading
The online trading through computer has brought in transparency to the transactions in the
market. People are able to know prices prevailing in the market at any time and as such the
brokers cannot deprive their clients of their profits. The manipulation in the opening and closing
prices of shares by the brokers in the market is no longer possible.
Check Your Progress
1. Define Permitted Securities.
2. Describe Online Trading.

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12.7 Summary
National Stock Exchange (NSE) was incorporated in November 1992 with an objective of
providing a nation-wide trading facility for equities, debt instruments etc. It enables equal access
to investors all over the country through an appropriate communication network with fair &
transparency in transaction, shorter settlement cycles.
Alpha shares, Technology shares, Growth oriented shares, Cyclical shares, Blue chip shares,
Roiling settlement, Permitted securities, T+5 rolling settlement, Liquidity shares are its
classification but Bombay Stock exchange classified its shares as A. B1 and 82 Introduction of
online trading prevents speculation activities. The manipulation in the opening & closing prices
of shares by the brokers in the market is no longer possible.
1. Explain the requirements that are to be followed for listing in NSE
2. Explain Listing Requirments in NSE.

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LESSON - 13
TRADING MECHANISM
Learning Objectives
• discuss the floor trading procedures
• describe the online trading mechanism
• outline the term associated with the stock exchange transactions.
Structure
13.1 Introduction
13.2 Trading Mechanism
13.3 Trading Mechanism - Online Trading
13.4 Summary
13.1 Introduction
Some of the leading stock markets in India have introduced computer system for their trading
activities. The brokers can get hooked-up and do their trading on Online basis. In this unit, we
can discuss trading mechanism.
13.2 Trading Mechanism
The following the procedure normally adopted in floor based trading system before the
introduction of the online trading mechanism. However, it is not necessary to involve all the
activities in tractions.
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1. Selection of a Broker
• Selection of a broker through the investor or seller’s bank for purchase or sale to be
made
• The banker approach their broker at exchange for dealings on behalf of their customers.
• The broker on the recommendation of the bank opens the client’s account
2. Placing an order
• The client places the order for purchase and sale of securities after the selection or the
broker.
• The broker guides the client regarding the purchase and sale of securities, the
• favourable time for purchase and sale etc.
• The client them informs the broker regarding the purchase of shares, number of shares
to be purchased, the price to be paid, etc.
• The broker then tries to purchase the securities as far as possible to the nearest price
offered by the client.
• The broker is given the choice for bargaing for the purchase and sale of securities.
3. Making the Contract
• There are different trading posts for different types of securities in the trading floor of
the stock exchange.
• The clerk of the broker goes to the concerned post and express his intention to buy or
• sell the security.
• A deal is struck when the other party also agrees for the same price.
• The parties note the bargain in their notebooks.

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• The slip giving details of the bargain is put in a box for making announcement in the
official price list for publicity.
4. Contract Note
• The broker prepares note after their mutual consent next day.
• The buyer is sent a buying note and the seller is sent a selling note
• The entire details of securities traded are given mentioning their price numriber etc.,
5. Settlement
• The selling broker after receiving the price hands over the transfer form and share
certificate to the buying broker. The procedure adopted depend upon whether the delivery
is a ready delivery or forward delivery.
13.3 Trading Mechanism - Online Trading
The National Stock Exchange’s online trading system is called as the National Stock Exchange
for Automated Trading System (NEAT). It is fully automated Trading System (NEAT). It is fully
automated trading system where screen based trading takes place. In this system a member
of the stock exchange andre order quantity and price at which his client willing buy or sell the
securities. The transaction will be executed as soon it finds a matching sale or buy order form
counterparty. It electronically matches orders on a strict price / time priority and hence, cut
down on time, cost and risk of error as well as on fraud resulting in improved operational
efficiency. It allows further incorporation of price sensitive information into prevailing prices
and thereby increasing the informational efficiency of market. It enables market participants to
see the full market on real-time, making the market transparent.
This system of trading allows large number of participants, irrespective of their geographical
location simultaneously and hence improves the depth and liquidity of the market. It provides
tremendous flexibility to the user in terms of kinds or orders can be placed on the system. They
are:
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1. Good-Till-Cancelled
This order remains in the system until it is cancelled by the trading member. It is able to span
trading day if there is not match.
2. Good-Till-Day
This order allows a trading member/ broker to specify the days unto which the order I stay in
the system. At the end of this period the order gets flushed out from the system.
3. An immediate-Or-Cancel
This order allows a trading member to buy or sell a security as the order is released into the
market, failing which the order is removed from the system
4. Limit Stop-Loss
This order allows the trading member to place an order that gets activated only the market
price of the relevant security cresses a threshold limit until nter the market. The order is get
triggered if the last traded price is crosses the stop-loss value.
The online system ensures full anonymity by accepting order from members without revealing
their identity and providing equal access to everybody. The trading hub of the stock exchange
not only accessible from the computer in premises of broker but also from any geographical
location through VSAT technology connected via satellite.
5. Online IPOs
The online trading system enables the companies to make IPOs through book-building process.
It is fully automated screen-based bidding system. All the bids received are electronically
numbered, stamped and stored. The price is determined after the bid closing date.
6. Transaction Charges
The maximum brokerage chargeable by a trading member with respect is 2.5 percent of the
contract price exclusive of service tax and stamp duty. However, the brokerage in practice is as
low as 0.15 %.
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7. Clearing and Settlement
The National Securities Clearing Corporation Ltd (NSCCL) determines the trading members
funds or securities obligations. The following are involved in the clearing process:
1. Trading Recording : These details are automatically recorded in the electronic trading
system.
2. Trade Confirmation : Since the trade executed automatically upon the order of other
members confirmation generated as soon as the order execution.
3. Determination of Obligation: The online system determines what the counter parties
owe and what is due to on the date of settlement securities-wise.
4. Pay-in of Funds and Securities & Pay-out of Funds and Securities : The net receipt
or payment along with the delivery of securities is determined and made available with
or obtained form the NSCCL.
The NSCCL with the help of the clearing members, custodians, clearing banks and depositories
settles the trades executed on the online trading system. A similar Online Trading system is
maintained by Bombay Stock Exchange is known as BOLT.
Check Your Progress
1. Define Trading Mechanism.
2. Describe contract note.

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13.4 Summary
Trading mechanism normally involves Selection of a broker, Placing an order, Making the
contract, Preparation of Contract Note & finally Settlement transaction. But NSE’s online trading
sytem called National Stock Exchange for Automated Trading system (NEAT) allows large
number of participants from different locations with transparency, liquidity & flexibility in operation.
Good-Till cancelled, Good-Till day, An Immediate-or-Cancel, Limit Stop-loss, Transaction
charges, Online IPO’s Clearing & Settlement are its processes.
1. Discuss the floor trading mechanism.
2. Explain the online trading mechanism.

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LESSON - 14
FINANCIAL SECURITIES
Learning Objectives
After studying this lesson you will be able to :
• explain the various financial securities
• highligt the differences between the debt and equity security
• describe various kinds of transactions in stock exchanges.
Structure
14.1 Introduction
14.2 Equity
14.3 Debt
14.4 Debt and Equity
14.5 Kinds of Transactions
14.6 Summary
14.1 Introduction
At present, there are 23 stock exchanges and more than 6,000 stock brokers. The - secondary
market has undergone lot of change due to increase in number of listed companies. There
were more institutions promoted by the government such as mutual funds, merchant banks,
investment trust, etc. for speeding up activities. The Government has also set up National
Stock Exchange and OTCEI (Over the Counter Exchange of India)
These two stock exchanges are promoting more medium and large companies. In fact, the
National Stock Exchange has even overtaken in volume and value of transactions compared to
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Bombay Stock Exchange. But with all these measures, we still find some defects exiting in the
stock markets. The stock scam of 1990s was a big eye opener to the vernment. The five major
stock exchange namely, Bombay, Calcutta, Madras, Delhi, Ahmedabad are responsible for
90% of the transactions from the stock market.
14.2 Equity
The equity shareholders are considered as the owners of the company and all investment,
financing and dividend decisions are taken in view of maximization of wealth of the owners.
Trading on equity is calculated by taking the difference of rate of return on equity capital by
having equity and debt components in capital structure, to rate of return on equity by having
only equity share capital in the capital structure.
14.3 Debt
The debt funds are less risk bearing as compared to equity funds. The providers of debt have
prior claims on income and assets of the firm over equity holders. Therefore, the return payable
on debt should be less than the return available to equity holders.
14.4 Debt and Equity
The firm has to consider the following differences between debt and equity before it take any
decision to raise its capital:
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14.5 Kinds of Transactions
The following are the important transactions carried out in the Stock Exchanges
• Budla Financing
• Forward Trading and
• Scripless Trading
Budla Financing
Budla is a transfer of a contract from one period to another, where, either the buyer or the seller
is unable to execute the contract of which purpose, the defaulting parties will pay Budla changes
(which are decided by the Stock Exchanges). At present, SEBI has banded Budla Financing.
Forward trading
Forward Trading has been introduced since 9th June 2000 in Bombay Stock Exchange on a
trail basis and if found successful, it will be extended. It will be helpful to the investors in
ascertaining the true colours of existing companies.
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Scripless Trading
Scripless Trading is a method of securities trading in which the settlement of transactions are
taking place through book entry instead of physical exchange and delivery of securities
certificates. The major objective of introducing Scripless trading is to ensure the safety of
securities certificates and to improve the liquidity position of the stock markets both in primary
and secondary markets.
The major advantages of the Scripless trading system are as follows:
• Reduction in paper work of stock brokers and stock exchanges.
• Ensure safety of certificates from theft, fake certificates, mutilation, department, etc.
• Reduction in cumbersome share transfer procedures.
• Greater speed in exchange and delivery of securities certificates.
• Improves liquidity of both the individual scrips and stock market position.
Check Your Progress
1. What is meant by Financial Securities?
2. Define debt.
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14.6 Summary
There are 23 stock exchanges and more than 6000 stock brokers. The five major stock
exchanges namely Bombay, Calcutta, Madras, Delhi, Ahmedabad are responsible for 90% of
the transactions from the stock market. The equity share holders are considered as the owners
of the company and all investment, financing and dividend decision are taken in view of
maximization of wealth of the owners. The debt fund are less risk bearing as compared to
equity funds. The providers of debt have prior claims on income & assets of the firm over
equity shareholders. Budla financing, Forward trading and scriples trading etc are the various
types of transaction carried out in the stock exchanges.
1. What is Budla Financing?
2. Briefly explain Scripless Trading.

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LESSON - 15
DERIVATIVES
Learning Objectives
• explain the features of derivatives
• describe various types of derivatives
• highlight various derivative instruments.
Structure
15.1 Introduction
15.2 Features of Derivatives
15.3 Type of Derivatives
15.4 Derivative instruments
15.5 Summary
15.1 Introduction
The complexity of financial structuring involves in multi currency transactions and multifaceted
risk such as exchange rate, interest rate, political, economical risks. In the current scenario
risk management is indeed in financial market. Derivatives occupy an important role as a risk
reducing instrument. They are recognised as a way of hedging risk in commercial and financial
transactions. They also known as deferred delivery or deferred payment instrument. As hedging
mechanism derivatives minimise the risk Stock index, futures are the most popular and preferred
type of equity derivatives.
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are involved. The assets consist of shares, foreign currencies, and interest bearing securities
or even commodities.
Banks have derivative deposits which emerge out of primary deposits. When a bank received
deposit in the form of cash from the customer, it is called primary deposit. This deposit money
is utilised by the bank by way of granting loan. The loan creates deposit either in the same
bank or in other banks which are known as derivative deposits. Derivative market provides an
opportunity buy or sell to exercise their options and hence it is called option trading
15.2 Features of Derivatives
The following are the important features of the derivatives
• Derivatives facilitate speculative buying and selling much higher than the values of the
underlying assets. Use of derivatives by mutual funds.
• Mutual funds have been allowed to trade in derivatives for the purpose of hedging their
portfolios.
• It enhances the speculative character of the Indian stock market.
• The SEBI permitted index futures trading in Bombay stock exchange and National
stock exchange.
• Derivatives enhance liquidity in market for underlying assets.
• Derivative help in smoothening the price fluctuations
• They enable investors high net worth individuals and institutions to find ways for proper
asset allocation.
• These are off balance sheet instrument
• Derivatives are traded between parties; the actual delivery of the underlying assets in
not involved.
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• Derivatives enable the clients to transfer their financial risk to the financial service
companies.
• It protects the client for unforeseen risk and help them to get their due operating profits
or to keep the project with in the budgeted cost.
• To hedge the various risks in the financial market.
15.3 Type of Derivatives
Derivatives are broadly classified as four types. Financial derivatives are the ways and means
of mitigating risk associated with volatile market fluctuations. Credit derivatives are the ways
and means of mitigating risk associated with the loans extended by the banks / financial
institutions / companies with regard to the quality of the borrowers. The financial derivatives
are classified as equity derivatives interest derivatives and currency derivatives. The most
common derivate instruments are forward contracts, futures, swaps, options, warrants and
convertibles etc.
15.4 Derivative Instruments
The derivative instruments are classified into four types as follows.
(1) Forwards
(2) Futures
(3) Options
(4) Swaps
1. Forwards
A forward contract is an agreement between two parties to exchange an agreed quantity of an

asset for cash in future at a predetermined price. It is the oldest of all derivatives. In a forward
contract, a user who promised to buy the specified assets at an agreed price at a future date is
said to be in the long position. The user who promises to sell at an agreed price at a future date
is said to be in short position. The important type of financial forward rate contract is the
forward rate currency contract. The advantage of the forward contract is the lack of cash
deposit - cash need not changed until the asset is delivered.
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2. Futures
A financial future contract is a legally biding agreement to make delivery of a given quantity
and quality of a financial instrument/asset at an agreed price on a specific date in the future.
Futures contracts standardise the agreement between a buyer and a seller specifying a trade
in an underling cash asset for the specified quality at a specific time contract is their safe guard
against default. The future trading is in practice on the stock exchange in group of securities.
3. Swaps
Swaps are agreements between two parties for the exchange of assets or exchange of futures
streams of payment. The common swap deals are currency swap, interest rate swaps, credit
swaps.
A currency swap is nothing but a contract exchange foreign currency in a spot market with a
simultaneous transaction in the forward market in the opposite direction. An interest swap is a
of interest payments for another. Interest are swaps are used by banks as a risk management
device to hedge against interest rate risks. A swap deal involves simultaneous spot deal and a
matching forward deal in the opposite direction.
4. Options
An option is a legal contract that gives the holder the right to buy or sell a specified amount of
the underlying item at a fixed or predetermined price upon exercise of the option. In contract
holder or buyer of the option has the right but not obligation to exercise the option whereas the
seller or writer of the option has the obligation to meet the commitments. The options are
traded on a variety of underlying items. They are currency options, stock index options, and
stock options etc.
The option may by a call option or put option. In the call option, the option of buying is exercised
and in put option the option of sell is exercised. The purpose of exercising the option is to
minimise the risk of loss. If A enters into contract to sell B, A is exercising put option, whiie B is
exercising call option.
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(i) Call Option
A call option gives the buyer the right but not the obligation to buy a given quantity of the
underlying assets., a given price known as an exercise price or strike price on or before a given
future dated called the maturity date or expiry date. A call option gives the buyer the right to buy
a fixed number of shares or commodity in a particular security at the exercise price up to the
date of expiration of the contract. The seller of an as writer. Unlike the buyer, the writer has no
choice regarding the fulfilment of the obligations under the contract.
(ii) Put option
The put option gives the buyer the right, but not the obligation, to sell a given quantity of the
underlying asset at a given price on or before a given date. The put option gives the buyer the
right to sell the underlying asset at the exercise price up to the date of the contract. The seller
of put option is kwon as writer. He has no choice regarding the fulfilment of the obligations
under the contract. If the buyer wants to exercise his put option the writer must purchase at
exercise price.
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Check Your Progress
1. What do you mean by derivatives?
2. Define Derivative instruments.
15.5 Summary
are involved. The assets consist of shares, foreign currencies and interest bearing securities
or even commodities. Banks have derivative deposits which emerge out of primary deposits.
When a bank received deposit in the form of cash from the customer. it is called primary
deposit. Derivative instruments are primary deposit. Derivative instruments are classified into
four they are Forwards, Furthers, Options and Swaps.
1. Explain the relationship between Debt and Equity,
2. Explain the various transactions performed at Stock Exchanan
3. Explain the importance of Call-Option and Put-Option

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LESSON - 16
FINANCIAL SERVICES
Learning Objectives
• understand the financial services and its importance
• deine promoting savings
Structure
16.1 Introduction
16.3 Types of Financial Services
16.4 Players in Financial Services
16.5 Summary
16.1 Introduction
Financial service, as a part of financial system provides different types of finance through
various credit instrument, financial products and services. In financial products. we come across
different types of mutual funds; extending various types of investment opportunities. In addition,
there are also products such as credit cards, debit cards, etc.
A financial service enables a country to improve its economic conditions whereby there is more
production in all the sectors leading to economic growth. Financial services enable an individual
to acquire or obtain various consumer products through hire purchase. Financial institutions
promote investment, production, saving etc.
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1. Promoting investment
The presence of financial services creates more demand for products and the producer, in
order to meet the demand from the consumer goes for more investment. Factoring and leasing
companies, both domestic and foreign enable the producer not only to sell the products but
also to acquire modern machinery/technology for further production.
2. Promoting savings
Financial services such as mutual funds provide ample opportunity for different types of saving.
In fact, different types of investment options are made available for the convenience of
pensioners as well as aged people. For people interested in the growth of their savings, various
reinvestment opportunities are provided, interests of the public who save through these financial
institutions are highly protected.
3. Minimising the risks
The risks of both financial services as well as producers are minimised by the presence of
insurance companies. Various types of risks are covered which not only offer protection from
the fluctuating business conditions but also from risks caused by natural calamities. The
Government has not only privatised the life insurance but also set up a regulatory authority for
the insurance companies known as IRDA, 1999.
4. Maximising the Returns
The presence of financial services enables businessmen to maximise their returns, in certain
cases, they can even go for leasing of certain assets of very high value. Factoring companies
enable the seller as well as producer to increase their turnover which also increases the profit,
with a higher turnover of stocks, they are able to maximise their return.
5. Ensures greater yield
As seen already, there is a subtle difference between return and yield. The yield which attracts
more producers to enter the market and increase their production to meet the demands of the
consumer. Financial services enhance their goodwill and induce them to go in for diversification.
The stock market and the different types of derivative market provide ample opportunities to
get a higher yield for the investor.
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6. Economic growth
The development of all the sectors is essential for the development of the economy The financial
services ensure equal distribution of funds to all the three sectors namely, primary, secondary
and tertiary. In a well developed country, service sector plays a major role and it contributes
more to the economy them the other two sectors.
7. Economic development
Financial services enable the consumers to obtain different type of products and services by
which they can improve their standard of living. Purchase of car, house and essential as well
as luxurious items is made possible through hire purchase companies.
8. Benefit to government
The presence of financial services enable the government to raise both shot-term and long-
term funds to meet both revenue and capital expenditure. Through the money market,
government raise short-term by the issue of Treasure Bills. The most important benefit for any
government is the raising of finance without offering any security. In this way, the financial
services are a big boon to the government.
9. Expands activities of Financial Institutions
Mutual funds, factoring, credit card, hire purchase finance are some of the services which get
financed by financial institutions. The financial institutions are in a position to expend their
activities and thus diversify the use of their funds for various activities.
10. Capital market
One of the barometers of any economy is the presence of a vibrant capital market. The financial
services ensure that all the companies are able to acquire adequate funds toboost production
and to reap more profits eventually. When the capital market is more active, funds from foreign
countries also flow in.
11. Promotion of Domestic and Foreign Trade
Financial services ensure promotion of domestic as well as foreign tread. Banking and insurance
services further contribute to step up such promotional activities.
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12. Balance Regional development
The government monitors the growth of economy and regions that remain backward
economically are given fiscal and monetary benefits through tax and cheaper credit by which
more investment is promoted. This generates more production, employment, income, demand
and ultimately increases in prices.
16.3 Types of Financial Services
The various financial services can be brought under the following types
• Facilitating type
• Investment-oriented
• Promotion - oriented
• Return or Income oriented
• Linking type
• Trade oriented
• Credit oriented
• Performance appraisal
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1. Facilitating Type
Hire purchase finance companies facilitate consumers in the purchase of consumer goods
while lease companies facilitate traders in the purchase of capital goods. Hence, they come
under facilitating type.
2. Investment - Oriented
Merchant bankers promote investment by helping investors in fulfilling various formalities such
as issue of shares and debentures. They also advice the promoters on the quantum of capital
to be raised through issue of different types of securities.
3. Promotion-Oriented
Promoting new ventures is taken up by the venture capital companies. Underwriters also help
in the sale of securities which promote companies. The bankers also help entrepreneurs through
project finance. Hence, they all come under promotion type.
4. Return or Income Oriented
For those investors who do want to take risks yet but want to ensure a reasonable return for
their investment, mutual funds companies are the best source which come under this type of
financial services.
5. Linking Type
Promoters, investors, public, foreign investors and government are linked by certain companies
such as merchant bankers. They not only link these people but also ensure that each one is
satisfied with his / her return on investment. The merchant bankers act as the brain in coordinating
the various entities.
6. Trade Oriented
For the purpose of increasing the sales, both domestically and abroad, factors play a major
role in financing the traders by financing a major part of the value of the traded goods. Forfeiting
companies do the same while selling goods across the borders.
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7. Credit Oriented
Financial services which provide credit to consumers will come under this category: Credit
card companies and even hire purchase companies come under this category.
8. Performance Appraisal
In order to enable the public to know the financial strength of companies before investment, we
have credit rating companies which provide ratings on the basis of the performance of the
companies from various aspects. Thus, the strength of companies is known beforehand which
will not only help the companies to get more finance but also to improve their performance in
course of time.
16.4 Players in Financial Services
The players in financial services includes the following
• Financial service sector comes under the tertiary sector in which banks play a major
role. For the growth of financial services, banks are led by the central bans of the
country followed by commercial banks, co-operative banks, development banks, foreign
banks, etc.
• Hire purchase financier is also a play in the financial service sector as he enables the
consumer to buy the product on credit basis.
• Leasing companies through financial and operating lease ensure the acquiring of assets
by producers on a long term basis at a reasonable charge.
• Factoring enables the seller to obtain 80 % value of sales from the financial companies
undertaking factoring services.
• Mutual funds ensure investment by the public and also ensure tax relief to the investor.
• Finance companies in general and also a part of non-banking finance companies provide
additional funds to the above players so that there is more activity in the economy
In addition to the above players, the government acts as the umpire and the various enactments
as rules for playing a fair game in the field of financial services.
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16.4 Summary
Financial Service enables a country to improve its economic conditions whereby there is more
productino in all the sectors leading to economic growth. Financial services promotes Savings,
Investments, Minimising the risk with maximum return, Ensures greater yield, economic growth
& development, Expands the activities of Financial Institutions, Capital market growth, Promoting
Domestic & Foreign trade, Helpful to Government and overall leads to Balanced regional
development.
Finacial service organization render services to industrial enterprises and ultimate consumer
markets. These can be further sub-divided to include Government / public sector | private
sector, the commercial sector, Industry and International markets within the financial services
industry. The main sectors are banks, Financial Institutions and Non-banking Financial
Companies (NBFC’s). The various types of services are Faciliting type, Investment oriented,
Promotion oriented, Return or Income oriented, Linking type, Trade oriented, Credit oriented,
provides ratings to the company on the basis of performance appraisal.
1. Explain the various types of Financial Services.
2. Discuss Players in Financial Services.
3. Explain in detail the different types of Financial Services.
4. What is a Financial System? What are its components? How does it promote Economic
Growth?
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LESSON - 17
MERCHANT BANKING
Learning Objectives
• define merchant banking
• explain authorisation of merchant banker
• outline the responsibilities of merchant banker
• enumerate merchant banking position in India.
Structure
17.1 Introduction
17.2 Functions of Merchant Banker
17.3 Authorisation of Merchant Banker
17.4 Responsibilities of Merchant Banker
17.5 Merchant Banking in India
17.6 Summary
17.1 Introduction
A merchant bank is a bank whose function is provision of long-term equity and loan finance for
industrial and other companies, particularly new securities. Merchant banker acts as a financial
intermediary in providing long-term finance to the corporate. The merchant banks are called as
“Investment Banks’ in U.S. The activities performed by merchant bankers include the following:
1. Management of issue of corporate securities of existing companies and newly floated
companies, 2. Offering financial expertise in mergers, takeover, capital reorganisation to
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corporate sectors, 3. Management of investment trusts, 4. Handling insurance business, 5.

Loan syndication and Corporate advisory services, 6. Portfolio management, 7. Custodial and
Depository services, 8. Broking of corporate securities, 9. Attraction of foreign investment, 10.
Liquidity management, 11. Underwriting of securities, 12. Bill discounting, 13. Lease financing,
14. Arrangement of venture capital, 15. Acting as trustees for debentures, 16. Mobilisation of
public deposits and managing fixed deposits etc.
17.2 Function of a Merchant Banker
1. Issue Management: This consists inter alia, the preparation of prospectus and other
information relating to the issue of shares, bonds, debentures, etc. Tie-up of financiers
and determining the financial structure are also taken up by the MB.
2. Post-issue Services: This includes the issuing of refund orders for rejected applications
or over-subscribed issues and also partial payment towards the shares such as the call
money, etc.
3. Corporate Advisor Services: It advises corporations and firms relating to opening of

issues receiving loans.
4. Droiect Appraisal: This includes helping those people who have finance but who do
not have the competence or the technical know-how required for running a successful
business. The MB brings such people together and guides them to invest their money
in the right kind of business suitable to them as well as quite profitable.
5. Loan Syndication: Sometimes the MB might be approached for loans by its clients. In
such cases, the MB surveys the market and acquires loans from rich organisations and
also sometimes from foreign organisations to be invested in the country. Thus, it also
helps its clients and at the same time increases the foreign currency reserve of the
country.
6. Off-shore Banking: Merchant Bankers are now allowed to get loans from other countries
and invest it in safe and profitable ventures. Here, the MB receives loans from a foreign
country which can be invested in the home country but the same cannot be done vice-
versa.
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7. SWAP: Swap is yet another trading instrument. In fact, it is a combination of forwards

by two counterparties. It is arranged to reap the benefits arising from the fluctuations in
the market - either a currency market or interest rate market or any other market for
that matter.
17.3 Authorisation for a Merchant Banker
if any person or body is interested in the business of merchant banking either to start it as a
new business or to add it to its existing business, would need Authorisation from SEK!: The
Securities and Exchange Board of India. This would have to be done in the prescribed format.
SEBI’s authorisation criteria would take in to consideration mainly the following:
1. Professional Competence: Whether the person or the body requiring authorisation

has the necessary professional know-how and the competence to successfully run the
business smoothly.
2. Capital: Whether they have adequate capital and ready financial resources.
3. Track Record: The person or firm should possess a clear record and their performance
in the past is considered. The amount of experience ihey have, their general reputation
and fairness in all their transactions are also scrutinised.
4. Infrastructure: The quality of their personnel and the basic foun dation and infrastructure
are also considered by SEBI.
5. Net Worth: The most important factor is the net worth of a prospective merchant banker.
SEBI lays down that all MB must be worth atleast Rs. One Crore.
However, this rule has now been amended for the benefit of Merchant Bankers and now a
varying net worth level has been introduced based on the category that an applicant opts for
Code of Conduct
It is imperative that the merchant bankers carry out their business based on the guidelines laid
down by SHBI. The guidelines stipulate that Merchant Bankers conduct their business with a
sense of integrity and fairness to all concerned.
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System of Monitoring Merchant Bankers
SEBI has recently introduced a system of moniteering MB by way of penalty points. A MB

collecting eight such points would be punished by way of cancelling his authorisation to furnish
as a Merchant Banker.
17.4 Responsibilities of Merchant Bankers
1. Specific responsibilities must be taken up by each divisional or lead manager. A statement

of inter-se allocation of responsibilities in the prescribed format, jointly signed by all
leadmanagers has to be submitted to SEBI.
2. A certificate of due-deligence certifying the contents of the Prospectus/Lot ter of offer

and the reasonableness of the views expressed therein also has to be submitted to
SEBI.
3. The above-mentioned documents together with a copy of the draft prospectus has to
be submitted to SEBI atleast 15 days before filing it with the registrar of companies.
4. Each Lead Manager has to accept a minimum underwriting obligation of 5% of the total
underwriting or Rs. 25 lakhs whichever is lower.
5. The Lead Managers have to ensure that the issue-related publicity and all advertising
material is in conformity with the contents of the prospectus. The information given or
views expressed in conferences also cannot be materially different from the contents
of the prospectus.
17.5 Merchant Banking in India
Merchant Banking in India is of recent origin. It had its beginning in India in 1967, whenGrindlay
s Bank established a division folio wed by City Bank in 1970 (now it has ceased to provide
merchant banking services) and the State Bank of India in 1972. Later on 1CICI set-up their
merchant banking division followed by a few other banks like Syndicate Bank, Bank of India,
Bank of Baroda, Charted Bank, Mercantile Bank etc.
The merchant banks, as they have developed in our country could be broadly classified into
three categories. The first category consists of the division of commercial banks, the second
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category comprises of National and State level financial corporation like ICIC1 etc. The third
category includes leading broker firms who have extended their activities into merchant banking
like H.L. Financial Consultancy and Management Services etc.
Check Your Progress
1. Define Merchant Banking.
2. State the qualities required for merchant bankers.
3. What are the basic functions of Merchant Banks?
17.6 Summary
A merchant bank is a bank whose function is provision of long-term equity and loan finance for
industrial and other companies, particularly new securities. The merchant banks are called as
‘Investment Banks’ in U.S. The need for underwriting was felt due to the provisions of the
company Act, whereby when a company fails to raise the minimum capital through the issue,
then it has to refund the money to the subscribers and this had led to the failure of the whole
issue. Underwriters enter into an agreement with the company for the sale of certain minimum
quantity of share and debentures to the public.
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1. What is Merchant Banking? Explain the services rendered by Merchant Banks.
2. Bring out the role of Merchant Banker in promoting investments in the country?
3. Describe the guidelines for merchant bankers issued by SEBI.
4. Discuss the role of Merchant Bankers. Explain also the present status as well as the
future scope of Merchant Banking in India?
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LESSON - 18
LEASING AND HIRE PURCHASE

Learning Objectives
• explain the Leasing
• explain the different types of Leasing
• define about Hire-Purchasing and Hire-Purchasing agreement
Structure
18.1 Introduction
18.2 Types of Leasing
18.3 Hire-Purchase
18.4 Hire-Purchase Contract
18.5 Summary
18.1 Introduction
Lease is a financing device which was developed during 1960s and 1970s in U.S.A. In India, it
started in the mid 1980s. Leasing is a contractual agreement under which the owner of an
asset called lessor agrees to allow the use of the asset by another party called lessee, for a
periodic payment as lease rent. The lessee may or may not make a down payment. Thus, an
entrepreneur who cannot afford to have a huge investment initially may lease equipment for
his organization. A contract of lease is entered which could be for a specific period. At the end
of the period, the asset or the equipment will revert back to the lessor who is the owner of the
asset. The lessor also gains by claiming depreciation and investment allowance on the leased
asset. In certain long term lease agreements, the lessee is given the option to buy the equipment
or renew the lease.
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The lease contract consists of two parts. In the primary contract, the lessor will wover the cost
of the asset and profit through lease rentals. In the secondary lease, the lease rental will be
very nominal.
18.2 Types of Leasing
Lease agreements are basically of two types. They are :
• Financial lease and
• Operating lease
1.Financial Lease
A lease is considered as a financial lease if the lessor intends to recover his capital outlay plus
the required rate of return on funds during the period of lease. It is a form of financing the
assets under the cover of lease transaction. A financial lease is a noncancelable contractual
commitment on the part of the lessee (the user) to make a series of payments to the lessor of
the use of an asset.
In this type of leases, lessee will use and have control over the asset without holding the title to
it. The lessee acquires most of the economic values associated with the outright ownership of
the asset. The lessee is expected to pay for upkeep and maintenance of the asset. This is also
known by the name called ‘capital lease’
This lease is preferred in the following situations:
• When the lessee wants to own the asset but does not have enough funds to invest.
• The time period to use the asset is substantially long at lower lease rentals.
2. Operating Lease
An operating lease stands in contract to the financial lease in almost all aspects. This lease
agreement gives to the lessee only a limited right to use the asset. The operatina lease is
generally for a short term, where the lessor is usually the manufacturer of the asset, who wants
to increase his sales by allowing the customers to pay in installments for a short term and
ultimately the title to the asset will be transferred to the lessee on making full payment.
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The main characteristics of operating lease are as follows:
• The lease can be cancelled by the lessee prior to its expiration at a short notice’
• The lessor is responsible for upkeep and maintenance of the asset.
• The lessee is not given any uplift to purchase the asset at the end of the lease period.
• The lease is for a smaller period.
• The sum of all the lease payments by the lessee does not necessarily fully provide for
the recovery of cost of the asset.
• The lessor has the option to lease out the asset again to another party
This lease is preferred in the following situations:
• When the long term stability of asset is uncertain.
• When the asset is subject to rapid obsclescence.
• When the asset is required for immediate use to tie over a temporary problem.
18.3 Hire Purchase
Hire purchase is buying on credit, without paying the full amount straight away. It is often used
to buy household appliances, furniture and cars. You take the goods home and pay for them
over time but the finance company has a security interest in them until you have made the final
payment. Shops advertising “easy terms”, “time payment”, “no deposit”, or “interest free” are
offering hire purchase.
Anyone can buy goods on hire purchase if they meet the finance company’s credit conditions.
These conditions should be based on your ability to repay. Often the finance company will do a
credit check to make sure you have not defaulted on any credit contracts in the past.
A finance company cannot refuse you credit because of your age (if you are over 16), gender,
marital status, ethnic origin, or employment status. If you believe you have been refused hire
purchase for any of these reasons, .contact the Human Rights Commission.
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Hire purchase will almost always cost more than the price on the price tag. You will also pay
interest and administrative costs. Even an interest free deal usually has extra charges like
booking fees or insurance.
18.4 Hire Purchase Contract
This contract sets out your rights and obligations. It tells you:
• What you are buying
• How much it will cost
• How much and how many payments
There are
• The timing of the payments
• How to make the payments.
• When you buy goods on hire purchase you will usually have to deal with the seller and
a finance company. This is because most hire purchase contracts are assigned or on
sold to a finance company.
• Your contract is with the finance company and not the seller. You make your payments
directly to the finance company. The name and address of the finance company must
be on the contract. You may be given a payment book.
• Sometimes a seller has to check with their finance company before they agree to finance
you. If they do this it is best not to take the goods home in the meantime. This is
especially important when buying a car. If you have to sign anything, take a copy of the
document and read it before you sign.
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Checking the Contract
Before you sign the contract, you should ask yourself these questions:
• how much are the goods? What is the Cash price?
• Are there charges in addition to the Cash price of the goods? Am I prepared to pay
them?
• Can I afford the payments?
Other questions you might consider:
• Do the figures add up?
• Do I need insurance?
• Are the goods described correctly?
• Are they asking for any extra security, and if so, is it reasonable?
• Should I get advice from a budget advisor, lawyer, or a Community Law Centre
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Hire Purchase Finance
The hire purchase finance companies provide financial to the buyer of assets for a period of 2
to 5 or even 10 years. When a buyer is unable to purchase an asset, for example a car, the hire
purchase financial company provided financial to the buyer, which is repayable on a monthly
installment over a period of 24 or 60 months. The amount of repayment will be an equal amount
from which a part of it will be taken toward the principle and the remaining towards interest.
The hire purchase financial companies will be charging interest at a flat of 10 or 15% for the
period of the loan. At the same time, the HP companies will be getting finance from the bank
which will be on declining interest rate. The for the hire purchase finance companies will be
difference in the interest rate, i.e., what they charge to the customer and what they pay to the
bank.
Check Your Progress
1. Define: Lease Finance.
2. How is leasing evaluated projects?
3. What are the basic advantages of leasing contract?
18.5 Summary
Leasing is an arrangement that provides a firm within the use and control over assets without
buying and owning the same. Lease is a contract between the owner fo the asset (lessor) and
the user the asset (lessee) for a consideration called lease rental. Leasing classified into two
types, they are Financial lease and Operating lease. Hire purchase means a transaction where
goods are purchased & sold onthe terms that (i) payment will be made in instalments, (ii) the
possession of the goods is given to the buyer immediately, (iii) the property (ownership) of the
goods remains with the vendor till the last instalment is paid, (iv) the seller can repossess the
goods in case of default in payment of any instalment, and (v) each instalment is treated as
hire charges till the last instalment is paid. The hire purchase financed companies provides
financial to the buyer of assets for a period of 2 to 5 or even 10 years and charging interest at
a flat rate of 10 or 15% for the period of the loan.
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1. Explain the concept of Leasing. State its advantages and disadvantages.
2. State the structure of leasing industry in India.
3. Bring out the different types of leasing.
4: Explain the types of lease agreements and their merits.
5. Examine the procedure involved in Hire Purchase Finance. Ek
6. Distinguish between Lease Financing and Hire Purchase Financing.

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LESSON - 19
FACTORING AND CONSUMER’S FINANCE

Learning Objectives
• discuss about the Factoring
• define the Factoring Functions
• consumer finance products
Structure
19.1 Introduction
19.2 Functions of Factoring
19.3 Consumer Finance
19.4 Major Consumer Finance Products
19.5 Summary
19.1 Introduction
Factoring may be defined as an arrangement which is selling goods on credit. And also
purchasing the bills receivables of the seller. Thus, there are three parties in a factor agreement.
The supplier or the seller, the buyer and the factor.
The seller is to concentrate on his sales and he gets the finance periodically from the factor. In
most of the cases, the factor is a banking company which has branches throughout the country.
This makes it possible for the banking company to collect money from the buyer easily.
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19.2 Functions of Factoring
• Maintenance ladministration of sales ledger,
• collection facility/of accounts receivable.
• Financial facility/ trade debts,
• Assumption of credit risk/ credit control and credit protection,
• Provision of advisory services
Administration of Sales Ledger
The factor maintains the clients’ sales ledgers. On transacting a sales deal an invoice is sent
by the client to the customer and copy and of the same is sent to the factor. The ledger is
generally maintained under the open-item method in which each receipt is matched against
the specific invoice. The customer’s account clearly reflects the various open invoices
outstanding on any given dale. The factor also given periodic fortnight/weekly depending on
the volume of transaction) reports to the current status of his receivables, receipts of payment
from maintains a customer and other useful information.
Provision Collection Facility
The factor undertakes to collect the receivable on behalf of the client relieving him of the
problems involved in collection, and enables him to concentrate on other important functional
areas of the business. This also enables the client to reduce the cost of collection by the way
of savings in manpower, time and efforts.
The use of trained manpower with sophistication infrastructural back-up enables a factor to
systematically follow up and make timely demands on the debtors to make payment. Also, the
debtors are more responsive to the demands from a factor being credit institution. Collection of
receivables can be considered as the most important function of a factor.
Financial Trade Debts
The unique feature of factoring is that a factor purchases the book debts of his client at a price
and the debts are assigned in favour of the factor who a usually willing to grant advance to the
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extant of 80 per cent of the assigned debts. Where the debts are factored with recourse, the
finance provided would become refundable by the client in case of nonpayment by the buyer.
However, where the debts are factored without obligation to the seller becomes absolute on
the due date of the invoice whether or not the buyer makes the payment.
Credit Control and Credit Protection
Assumption of credit risk is one of the important functions oi a iacior. This service is provided
where debis are fixed credit factored without recourse. The lactor in consultant with the client
fixed credit limits for approved customers. Within these limits, the factor undertakes to purchase
all trades debts of the customer without recourse. In other words the factor assures the risk of
default in payment by the customers. Arising irom this function of the factor, there are two
important incidental benefits accruing to the client firstly, factoring relieves the client of the
collection work secondly, with access to extensive information available on the financial standing
and credit rating of individual customer and their track record of payments, the factor is able
advise the client on the credit worthiness of potenta! customer leading to better credit control.
Advisory Services
These services are spin-offs of the close relationship between a factor and a client. By virtue of
their specialised knowledge and experience in financial and credit dealings access to extensive
credit information, factors can provide a variety of incidental advisory services to their clients.
Cost of Services
The factors provide various services at a charge. The charge collection and sales ledger
administration is in the form of a commission expressed as a value os debts purchased. It is
collected up-from in the advance. The commission for short-tram financing as advance part-
payment is in the form of interest charge for the period between the date of advance payment
and the date of collection/guaranteed payment date. It is also known as discount charge.
19.3 Consumer Finance
Consumers need finance to purchase different durable goods. Non-baking finance companies
largely provided such a kind of services apart from some private and foreign banks.
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Sources of Consumer Finance
The main sources of finance is non-banking finance companies and public sector commercial
banks. The credit facility may be either secured or unsecured. Some of the business organization
also extend finance to purchase in the form of loans or advances, for example Loan on PF,
advances against salary, etc.,
Consumer Credit Contract
It is a document in writing containing the terms and conditions of the agreemont between the
financier and consumor. It has vital information regarding tho borrower and the amount of
credit, repaymont term, intorost rato etc. Normally the rate of Interost will bo high in consumer
finance as the risk of default is greater. Crodit card is one of the Important consumer product
offered by banks, however, the contract bolwoon tho borrower and mo consumer is pre-
determined and general.
19.4 Major Consumer Finance Products
Vehicle Finance
The most popular type of consumer finance is vehicle financo. Under this schomo the financial
assistance is provided to buy automobile either for won use or commercial such as self-employed.
The purchased vehicle is form the collateral security to the loan. For that purpose an endorsement
is made in the registration document. The listing of such endorsement is made only after the
payment of last installment due. Amargin of the value of the assets is funded by the consumers
won source. The financial assistance is repaid normally in equal-monthly-installments called
EMI.
Housing Finance
Housing finance segment growing fast due to low risk and security, when compared with vehicle
finance. Unlike other consumer durables houses do not depreciate in contrast the value of the
housed increases. Housing is the basic need of the people, hence, the chances for default is
lower. The rate of interest charged by financial institutions is also lower than the vehicle finance.
There are some organizations exclusively for housing finance like National Housing Bank -
NHB, HUDCO, HDFC some has subsidiary organization Ex: LIC, GIC.
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Professional Loan
These kind of financial assistant is extended to professional people like doctors, engineers,
lawyers, CAs, CMAs, etc., between the age group of 23 - 60 years. The maximum finance
under the professional loan varies with the organizations some provide up to 10 lakhs. For this
loan no guarantor is needed further in loan amount is repayable in 1 to 4 years.
Loan procedures
Normally financial institutions get residential proof before availing the loan. For easy collection
of loan due the prefer cheque payment rather than direct cash payment. As it not only reduces
the collection cost but also acting as security in default payment. Necessary document in
support of identification of the borrower is also obtained. They charge normally flat rate of
interest which look like lesser interest to consumer, however, reducing interest rate also permitted
in housing finance and other schemes.
Check Your Progress
1. What is meany by factoring?
2. Distinguish between ‘factoring and discounting’.

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3. What is meant by Mutual Fund? Explain its types?
19.5 Summary
Factoring means an arrangement between a factor and his client which includes at ollowing
services to be provided by the factors Finance, Maintenance of accounts, Collection of debts
and Protection against credit risk. Administration of Sales Ledger, Provision of Collection Facility,
Financial Trade debts, Credit Control & Credit Protection, Provision of advisory services are
the key functions of factoring.
The term consumer finance refers to the raising of finance by individuals for meeting their
personal expenditure or for the acquisition of durable consumer goods and for the purchase /
creation of an asset. The main objective of providing finance on easy terms and the door step
of the consumer. Vehicle Finance, Housing Finance & Professional Loans are the major
consumer finance products with simple loan procedures.
1. What is factoring? How it works? What are the various types of factoring?
2. Discuss the types of factoring and their features.
3. Elucidate the various services rendered by Factoring Institutions.
4. “Venture Capital financing in India is to go a long way”. Comment.’

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LESSON - 20
VENTURE CAPITAL AND MUTUAL FUNDS

Learning Objectives
• discuss about Venture Capital
• discuss Stages in Venture Capital Financing
• discuss the Importance of Venture Capital Financing.
• discuss the Mutual Funds.
Structure
20.1 Introduction
20.2 Stages in Venture Capital Financing
20.3 Importance of Venture Capital Financing
20.4 Meaning of Mutul Funds
20.5 Schemes of Mutual Funds
20.6 Advantages of Mutual Funds
20.5 Summary
20.1 Introduction
The venture capital can be defined as the “long-term equity investments in business which
display potential for significant growth and financial return.” Venture capital is generally regarded
as risk capital.
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The term ‘venture capital’ comprises of two words viz., ‘venture’ and ‘capital’. The dictionary
meaning of ‘venture’ is a course of proceeding associated with risk, the outcome of which is
uncertain and ‘capital means resources to start the enterprise. In a narrower sense venture
capital is understood as the capital which is available for financing new venture.
There are three main features that distinguishes venture capital investment from other forms
of capital investment. They are
• Supporting entrepreneurial talent by providing finance
• Providing business management skills A return in the form of capital gains
20.2 Stages in Venture Capital Financing
The object of venture capital is to generate substantial capital appreciation through investment
in early stage companies capable of achieving rapid growth. Venture capital supports the early
stage of a company’s life cycle. However, the timing of investment may be at seed capital
stage, early development stage or turn-around stage. Thus, the investment may be during:
• Product concept to product development stage
• Commercial scale implementation
• Post commercial stage
These are the stages during which the enterprise’s risks are very high due to technology and
market uncertainties. During these periods venture capital support is sought for as it is long-
term, patient and risk reward sharing in nature. However, the stages of financing can broadly
be classified as early stage and expansion stage. Under each of the above, there are different
stages of entry for different venture capital companies.
Early Stage Financing : Seed Capital financing or start-up capital is relatively small amount of
capital provided to an investor or entrepreneur to prove concept and to qualify for start-up
capital. Start-up financing is provided to a company at the completion of product development
stage and before the commercial exploitation.
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Expansion Financing : Second stage financing is providing working capital support. At this
stage, the company has good growth potential but needs additional working capital besides
the bank’s fund, to achieve the growth.
Seed Money Stage - Small amount of financing needed to prove a

concept or develop a product. Marketing is not included in this stage.
Start-up – Financing for a firm that started up in the past one yedi.
Funds are likely to pay for marketing and product development.
Second-round Financing - Funds earmarked for working capital for a

firm that is selling its product, but is still losing money.
First-round Financing - Additional money to begin sales and

manufacturing after a firm has spent its start-up
Third-round Financing – Financing for a firm that is breaking even

and is contemplating an expansion project.
Fourth-round Financing – Money provided for firms that are likely to

go public soon. Also known as bridge financing.
Third Stage or Mezzanine Financing : It is providing for major expansion of a company
Turn-around Financing : It is provided to persons for acquiring a viable non-. performing

company and strengthening its operation.
20.3 Importance of Venture Capital Financing
The various importance of Venture Capital Financing is as follows.
1. Promoting Entrepreneurs : Just as a scientist brings out his laboratory findings to

reality and makes it commercially successful. Similarly, an entrepreneur converts his
technical know-how to a commercially viable project with the assistance of venture
capital institutions.
2. Promoting Products: New products with modern technology become commercially

feasible mainly due to the financial assistance of venture capital institutions.
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3. Encouraging Customers : The financial institutions provide venture customers not as

a mere financial assistance but more as a par includes assistance in management,
marketing, technical and cial institutions provide venture capital to their sistance but
more as a package deal which
4. Bringing out latent talent : While funding entrepreneurs, the venture capital Institutions
give more trust to potential talent of the borrower which helps in the growth of the
borrowing concern.
5. Promotion of exports : The venture capital institutions encourage export oriented

units because of which there is more foreign exchange earnings for the country.
6. More employment opportunities : By promoting entrepreneurship, venture capital

institutions are encouraging self-employment and this will motivate more educated
unemployed to take up new ventures which have not been attempted so far.
7. Financial viability : Through their assistance, the venture capital institutions not only
improve the borrowing concerns but create a situation whereby they can raise their
own capital through the capital market. In this process, they can strengthen the capital
market also.
8. Technological Growth : Modern technology will be put to use in the country when
financial institutions encourage business venture with new technology.
9. Sick Companies : Many sick companies are able to turn around after getting proper
nursing from the venture capital institutions.
10. Development of Backward Areas : By promoting industries in backward areas, venture

capital institutions are responsible for the development of backward regions and human
resources.
11. Growth of economy : By promoting new entrepreneurs and by reviving sick units, a
fillip is given to the economic growth. There will be increase in the production of consumer
goods which improves the standard of living of the people.
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20.4 Meaning of Mutual Funds
Mutual funds represent pooled savings of numerous investors invested by professional fund
managers as diversified portfolio to obtain optimum return on investments with least risk to the
investors. Mutual Funds mobilize savings of large number of investors to invest in both debt
and equity securities. A large pool of funds enables the Mutual Funds to diversify risks into
different companies and industries and thereby minimize risk and optimize return for investors.
Mutual fund earns income by way of interest or dividend or both from the sect lds. It deducts
fees, operating expenses and a management income and then remainder to wealth holders
through dividends on the mutual fund share. The dividend fluctuates with the income on mutual
funds investments. Mutual Funds can be open en ended and income funds, growth funds or
balanced funds.
20.5 Schemes of Mutual Funds
Open-Ended Schemes
Open-ended schemes are available for subscription all the year round excluding me period of
book-closing. They may or may not have a specified redemption period. For instance, UTI’s
Unit Scheme 64 has no prescribed time limit when it would be redeemed. The sale and
repurchase prices are fixed by the mutual fund concerned from time to time. Repurchases are
generally allowed at specified rates.
Close-Ended Schemes
These are open for subscription only during a specified period. Generally the redemption is
also specified, and this means that they terminate on certain specified dates when the investors
can redeem their units. The duration of the scheme varies; normally it is five to seven years.
Income Funds
Income fund is established to maximize the current income (i.e. interest and dividend) of
investors. There are two aspects of income funds viz. Low investment risk generating constant
income and high investment risk generating maximum income. Investment is made in various
combinations of high yielding common stocks and bonds with a view to extract income on
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regular basis with safety of the principal amount of investment. Conservative investment strategy
dominates the income funds with modest amount of risk.
Growth Funds
Growth funds carry principal objective of capital appreciation of the investment over a period of
time. The investment is made in equity stock which have above average growth potential. This
is high risk investment fund with high capital gain potential and low current income assurance.
Balanced Funds
Some mutual funds are called as ‘Balance Funds’ where assets are a judicious mixture of
industrial stocks and bonds. With a view to embrace modest risk of investment and secure
reasonable rate of return the funds are employed in high grade common stocks with 25% to
40% investment in conservative fixed income securities like debentures, bonds and preference
shares.
Money Market Funds
Money Market Funds are used in short-term liquid assets like Certificate of Deposit (CDs) or
commercial papers and for them capital is raised by selling shares to the investing public at a
price equal to the asset value of the then existing shares outstanding plus a loading fee or
service charge. This is known as high liquid assets funds with very low risk and virtually no
capital loss. Interest income fluctuates because of volatile interest rates but investors get better
yield than available from pass book saving accounts. In USA, Money Market Funds were step
up in November, 1972 and have been very successful vehicle of savings mobilization.
Eligibility to set-up MMMFs - At present, while scheduled commercial banks and public financial
institutions and private sector funds are allowed to set up both Mutual Funds. MMMFs invest in
money market instruments of high quality, short maturities and ensure high level of liquidity.
Money market instruments are generally of high denominations and small investors cannot
directly invest their savings in them. It is only through MMMFs, their savings are invested in
MMMFs instruments like Certificate of Deposits (CDs), Commercial Papers (CPs), 182 days
Treasury Bills, etc.
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An investor gets following advantages from investment in money market mutual funds. Individual
with short term investible funds park their funds temporarily in money market instruments until
some long term avenue opens up.
1. Individual investors share through MMMFs the economic advantages of bulk purchases,
expertise of professional fund managers and high yield on short term investments.
2. Individual investors are benefited of high safety and liquidity of their investments which
MMMFs provide because of their early redemption features and reduced risk resulting
from diversified investments.
3. Individual saving habits get stimulated with readily available investment avenue the
short term.
4. Individual savers along cannot invest huge sums required for money market instruments
as the minimum investment requirements for each of the money market instruments
are very high because MMMES are the vehicles of raising huge funds for short term
requirements.
20.6 Advantageous of Mutual Funds
Mutual Funds are advantageous to individual investors in relation to their direct involvement in
investment portfolio activity covering the following aspects.
1. Reduced Risk: Mutual funds provides small investors access to reduced investment
risk resulting from diversification, economics of scale in transaction cost and professional
finance management.
2. Diversified investment : Small investors participate in larger basket of securities and

share the benefits of efficiently managed portfolio by experts, and are freed of keeping
any records of share certificates, etc. of various companies, tax rules, etc.
3. Botheration free investment: Investors get freedom from emotional stress involved in
buying or selling securities. Mutual funds relieve them from such stress as it is managed
by professional experts who act scientifically with right innings in buying and selling for
their clients.
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4. Revolving type of investment : Automatic reinvestment of dividends and capital gains

provides relief to the members of mutual funds.
5. Selection and timings of investment : Expertise in stock selection and timing is made
available to investors so that invested funds generate higher returns to them.
6. Wide investment opportunities : Availment of wider investment opportunities that create

an increased level of liquidity for the funds holders become possible because of package
of more liquid securities in the portfolio of mutual funds. These securities could be
converted into cash without any loss of time.
7. Investment care : Care for securities is available through mutual fund to the investors
Telleving them of various rules and regulations.
8. Low investment and easy liquidity : Initial investment in units is as low as Rs.1000 in
100 units of Rs. 10 each prompting investors habits which they encash as per the term
of the issue either through direct repurchase by mutual fund or through secondary
market of listed securities.
9. Tax benefits : Investors are allowed tax exemptions on investments made in mutual
funds with a view to motivate them to invest in mutual funds and provide finance to
industry.
Check Your Progress
1. What do you mean by Venture Capital?
2. What are the types of mutual funds in India?

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3. What are the objectives of credit rating?
20.7 Summary
The term Venture Capital represents financial investment in a highly risky project with the
objective of earning a high rate of return. Supporting entrepreneurial talent by providing finance,
Providing business management skills and a Return in the form of capital gains are the three
main features of Venture Capital Investment. Early stage financing, Expansion stage financing,
Mezzanine financing & Turn around financing are the various stages of Venture Capital
Financing. The various importance of Venture Capital Financing are promoting entrepreneurs,
promoting products, encouraging customers, bringing out latent talent, promoting exports,
encouraging self-employment, financial viability, technological growth, assisting the sick
companies, Development of backward areas & growth of economy.
Mutual Funds represent pooled savings of numerous investors invested by professional fund
managers as diversified portfolio to obtain optimum return on investment with least risk to the
investors. The various schemes of Mutual Funds are Open-ended, Close-ended, Income Fund,
Growth Fund, Balanced fund, Mone market funds etc. Minimum risk, Diversified Investment,
Wide investment opportunities, Selection & timing of investment, easy liquidity & tax exemptions
to the investors are the highlighting merits of Mutual Funds.

1. How Mutual Funds are help to (a) Investor (b) Banker (c) Govt. (d) Economy?
2. Explain the different schemes of mutual funds operated in India.
3. State the regulations pertaining to the mutual fund companies in India.
4. What are Venture Capital Schemes? Explain the services of agencies involved in
providing venture capital.
5. State the types of credit ratings and the methodology adopted for ratings.
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LESSON - 21
CREDIT RATING AND INSURANCE

Learning Objectives
• explain the meaning of credit Rating
• define the credit rating types
• describe the benefits of credit rating
• discuss about the insurance
• list out the characteristics of insurance.
Structure
21.1 Introduction
21.2 Types of Credit Rating
21.3 Benefits of Credit Rating
21.4 Meaning of Insurance
21.5 Characteristics of Insurance
21.6 Summary
21.1 Introduction
Credit rating has assumed an important place in the modern and developed financial markets.
It is a boon to the companies as well as investors. It facilitates the company in raising funds in
the capital market and helps the investors to select their risk-return trade off. Fund procurement
is one of the key functions of a business undertaking. Among the various sources of fund, long-
term debt, debentures, bonds, fixed deposit and commercial
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paper, besides, share capital are worth mentioning. The issuer of these instruments approaches
capital market, financial institutions and various agencies to raise necessary finance at certain
terms and conditions. As investors are concerned with the timely payment of interest and
principal, credit rating indicates the creditworthiness of a borrower.
Credit rating, essentially indicates the risk involved in a debt instrument as well as its qualities.
Higher the credit rating greater is the probability that the borrower will make timely payment of
principal and interest and vice versa. Thus, a credit rating is not a general evaluation of the
issuing organization. It essentially reflects the probability of timely repayment of Principal and
interest by a borrower company.
The credit rating is not a one time evaluation of.credit risk of a security. The rating agency may
change the rating considering the changes periodically. The following are the agencies that are
involving in Credit Rating Functions such as
• Credit Rating and Information Services of India Ltd. (CRISIL)
• Investment Information and Credit Rating Agency of India Ltd. (ICRA)
• Credit Analysis and Research (CARE)
• Duff & Phelps Credit Rating India (DCR)
21.2 Types of Credit Rating
Credit rating are of different types, depending upon the requirements of the rater and the rated.
The following are the common types of credit rating:
1. Bond Rating : Rating the bonds or debt securities issued by a company, Governmental
or Quasi – Governmental body is called bond rating. This occupies the major business
of credit rating agencies.
2 Equity Rating : The rating of equity of capital market is called equity rating.
3. Commercial Paper Rating : It is mandatory on the part of a corporate body to obtain the
rating of approved credit rating agency to issue commercial paper. In U.S.A 100 per
cent of commercial paper volume is rated.
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4. Rating the Borrowers : This includes rating a borrower to whom a loan / credit facility
may be sanctioned.
5. Sovereign Rating : This includes rating a country as to its credit worthiness, probability
to risk etc.
21.3 Benefits of Credit Rating
The benefits to various parties concerned with credit rating are listed below:
• It enables the investors to get superior information at low cost.
• It enables the investors to take calculated risk in their investments.
• It encourages the common man to invest his savings in corporate securities and get
high returns.
• It facilitates companies with good rating enter the capital market confidently and raise
funds at comparatively cheaper rates.
• Credit rating system plays a vital role in investor protection without casting burden for
that responsibility on the Government.
21.4 Meaning of Insurance
Modern business face risks form various angles such as financial, production natural calamities,
business conditions (such as inflation and depression), war, competition from foreign countries,
etc. In order to mitigate these losses, insurance has been playing a major role. The insurance
company compensates the loss by spreading the same to other in such a manner that the
society is able to bear the loss of a few individuals. Thus, insurance is kind of spreading of risks
of a few people to more number of people so that the loss suffered will be very negligible.
According to Allen. Z. Mayorson, who has defined Insurance as “Insurance is a device for the
safety of an insurer of certain of risks of economic loss that would otherwise be borne by the
insured.”
Robert Mehr defined Insurance as “Insurance is a social device for reducing risk by combining
a sufficient number of exposure unit to make their individual losses collectively predictable.
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The predictable loss is then shared proportionately by all those in the combination.”
W. Beveeridge defines Insurance as “The collective bearing of risking is insurance.”
Insurance is a contract between two parities, namely, the insured and the insured. Insured is
the person who insured his life or property and insured is the company which undertakes to
compensate the loss incurred by the insured for a consideration called premium. The contract
of insurance is also called contract of indemnity except life Insurance, as the insured is only
compensated and not allowed except life insurance, as the insured is compensated allowed to
earn any profit from the contract. The very concept of insurance is to put back the insurance as
it the insured in the same position that he was prior to me happening of the event such as
accident, natural calamity, etc. Life insurance is different from other insurance as it a contract
of guarantee wherein the insurer (insurance company) quarantees a stipulated sum for a fixed
period and on maturity of the period, the insured prior to the maturity period, the nominee of
insured will received the stipulated sum called insured amount(policy amount) from the insurer.
21.5 Characteristics of Insurance
The following are the characteristic features of an insurance contract.
Insurable Interest
A person can enter into a contract of insurance only when he has some insurable interest on
the life or property which is insured. Insurable interest basically means that the non-existence
or any injury or damage caused to a property or life should bring loss or which can be estimated
in term of money. So, a person is said to have insurable interest, on the property or life of any
person, provided the loss or damage caused to the property or life directly affects him. Thus, a
person cannot take insurance for an unconnected property of for an individual with whom he
has no connection as there is no insurable interest.
For example a husband has insurable interest on his wife and vice versa. A creditor has an
insurable interest on the debtor. A shop keeper has insurable interest on the products he
manufactures. In the case of life insurance the insurable interest should be there at the time of
taking the policy.
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For example a father may take a policy on the life of his daughter and later on when she gets
married her husband may become the nominee by a change of nomination. In the case of fire
insurance the insurable interest should be there at the time of taking the policy as well as at the
time of accident and in the case of marine insurance insurable interest at the time of accident
and in the case of marine insurance insurable interest at the time of accident alone is taken
into consideration.
For example a ship sailing from Bombay may take a cargo worth Rs. 10 crores and it may
unload it at London and later from London it may take only Rs2crores worth of cargo. Now if it
meets with an accident after leaving London the loss of Rs.2crores alone will be taken into
consideration for settling claims as the insurable interest at the time of accident is only
Rs.2crores.
Contract of ‘Uberrimae Fidei’ Or Contract Of Utmost Good Faith
Both the parties to the contract that is the insured and the insurer have to disclose all the facts
connected with the insurance contract. Non-disclosure of facts or declaration of false information
will make the contract null and void. A person suffering from a major disease cannot insure
under the pretext of having good health by concealing his ailment. If he does so later when the
insurer comes to know about his disease the contract will become null and void and no
compensation can be claimed from the insurance company. Similarly a ship may be having
defects and by concealing this fact the ship owner might have taken a marine insurance policy.
Later if an accident takes place the insurance company will refuse to pay compensation on the
ground that the contract was not Uberrimae fidei. Thus all the facts connected with the contract
must be disclosed by both the insured and the insurer failing which the contract becomes void.
Indemnity
The contract of insurance is a contract of indemnity. This means that the insurer will compensate
the insured to the extent of loss suffered by him. Marine or fire insurance are contracts of
indemnity as the insurer compensated the insured (say a shipping company or a match factory)
to the extent of loss suffered by it. Life insurance is different from contract of indemnity. It is a
contingent contract where the event death is certain to take place but it is a question of time.
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Hence the insurance company cannot guarantee against death or prevent death but can agree
to pay a stipulated sum in the event of death happening at an earlier date than agreed upon.
When a person takes life insurance he nominates his dependents to receive the policy amount
in the event of his death prior to the stipulated or agreed period.
For example an insurance policy may be taken on life for 25 or 30 years for a sum of rupees
25000 for which premium is paid monthly or quarterly half-yearly or even annually. in the event
of death prior to 25 years the insurance company will pay rupees 25000 to the dependent of
the insured whose name appears as nominee. To claim insurance premium
must have been paid regularly as it forms the consideration. In the case the policy holder
survives for the entire period then the policy amount of Rs.25000 along with profits earned by
the company will be paid to the policy holder on the date of maturity of the policy.
Mitigation of Loss
Though insurance aims at minimising the loss it is expected that every party to the contract of
insurance should take adequate steps to minimise the loss. Thus when a fire accident takes
places in a match factory the insured should take adequate steps to minimize the loss by
taking adequate preventive measures. He cannot allow the goods to be destroyed by fire
simply because he has insured them. Thus mitigation of loss ensures that both the parties to
the insurance shall undertake measures by which the risk is minimised and the loss suffered is
also mitigated.
Causa Proxima
The cause for the accident should be a direct cause for which insurance is taken and it should
not be a remote cause. In other words the insurance company will pay compensation to the
insured only when the cause of accident is directly related to the loss.
If the loss is the result of two causes one must look into the nearest cause and ascertain
whether that cause is insured. Only then the insurance company will pay compensation for the
loss.
Example: A ship with oranges was insured against the risk of collision. And during the course of
its voyage it collided with another ship resulting in delay in its voyage. It collided with another
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ship resulting in delay in its voyage. Due to this the oranges became unsuitable for consumption.
When the cargo owner claimed for the loss the insurance company refused to pay on the
ground that the oranges were affected only due to the delay which was a remote cause and not
due to collision which is a proximate cause (Pink Vs. Flemming).
Subrogation: Subrogation means stepping into the shoes of another person when the
insurance company pays full compensation to the insured it takes over the ownership of the
goods nsured and will enjoy complete right of taking necessary legal steps to claim compensation
com such person who are responsible for the loss suffered.
For example, a cotton mill is destroyed by fire which is caused by sabotage Her the insurance
company after paying full compensation to the extent of the insured sum. step into the shoes
cotton company and initiate criminal action against those person responsible for sabotage so
that it can claim due compensation. Similarly, if a ship is totally destroyed, the insurance company
will pay necessary compensation to the shipping company and later the insurance company
will salvage the items left in the ship.
Contribution: When an insurance company pays compensation to the insured, it put back
the insured in the same position that the he was prior to the accident. If the insured has
undertaken insurance company with more than one insurance with company, then he cannot
claim compensation from every insurance company with which he insured.
Under the doctrine of contribution, when an insurance company compensates the insured, it
will be indemnified by the other insurance company to the extent of the of the policy taken by
insured. The basic concept of contribution is to ensure is to that no body enjoys profit but the
loss is shared by the various insurance companies according to the respective policy amount.
Re-Insurance: When an insurance company insured with another insurance company, it is

called re-insurance. Here, the original insured become insured when he insured with another
insurance company. The idea behind undertaking re-insurance is that each insurance company
may specialise in collision risks while another company may specialize in sea perils. Another
company may specialise in charter party agreements. So, the original insurer may insure with
more than one marine insurance company for a lesser premium as they specialise in particular
risks.
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Double Insurance: When the insurance insure with more than one insurance company, it is
called double insurance. However, the insured cannot get more than the actual value of the
loss in case of damage to the property.
Nomination: In life insurance policy, there will be nomination by which the insurance company
is instructed by the policy holder to play the policy amount in the case of death to the person
whose name is nomination can be altered later. For example, when a person takes up a life
policy, he may nomination his parents before his marriage. But after the marriage, he may
change the nomination his wife.
Assignment: A policy can be assigned to a creditor as a security for the loan obtained. Once
a policy is assigned, the nomination gets cancelled. When a policy is assigned, the same is
informed company and in the case of accident or loss of life, the policy amount is payable only
to the creditor to whom the policy is assigned (assignee).
Check Your Progress
1. What is meant by Credit Rating?
2. Define Assignment.
3. What are the characteristics of insurance?

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21.6 Summary
Credit rating is the opinion of the rating agency on the relative ability & Willingness of the
issuer of a debt instrument to meet the debt service obligation as and when they arise. Rating
is usually expressed in alphabetical or alpha-numeric symbols. Bond rating, Equity rating,
Conimercial Paper rating, Rating the borrowers, Sovereign rating are the various common
types of credit rating.
Agencies that are involving in Credit Rating functions are:
a) Credit Rating and information Services of India Limited (CRISIL)
b) Investment information and Credit Rating Agency of India (ICRA)
c) Credit Analysis & Research (CARE)
d) Duff & phelps Credit Rating India (DCR)
Insurance is a contract by which one party, for a consideration called premium, assumes a
particular risk of the other party and promises to pay to him or his nominee a certain a
ascertainable sum of amount on a specified contingency. Insurable interest, Contract of utmost
good faith, Indemnity, Mitigation of loss, Causa Proxima, Subrogation, Contribution, Reinsurance,
Double Insurance, Nomination & Assignment are the various characteristics of insurance.
2. What is consumer finance?
3. What are the different forms of consumer finance?
4. State the types of credit ratings and the methodology adopted for ratings.
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LESSON - 22
INSURANCE POLICIES AND IRDA

Learning Objectives
• discuss Life Insurance Policies
• outline the terms used in insurance
• explain Marine and Fire Insurance Policies, and vehicle insurance
• discuss about the insurance
• discuss the IRDA.
Structure
22.1 Introduction
22.2 Life Policy
22.3 Types of Marine Insurance Policies
22.4 Types of Fire Insurance Policies
22.5 Vehicle Insurance
22.6 IRDA
22.7 Terms Used in Life, Marine and Fire Insurance Policies
22.8 Marine Insurance Policy
22.9 Insurance Act, 1938
22.10 Summary

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22.1 Introduction
Types of stated already, life insurance is different from other type of policy insurance is called
contract of guarantee as only the guaranteed amount is payable nithe on the death of the
policy holder before the maturity period, or survival of the policy holder on the date of maturity.
It is a contingent contract as the happening of death is certain bu only the time of death is
uncertain. There are two types of major policies. One is whole lit policy and the other is
endowment policy.
22.2 Life Policy Whole Life Policy
A Whole life policy one where the policy amount payable only after the death of the policy
holder to his nominees. The policy holder may continue to pay the premium up to a certain
period. in India, the whole life policy amount is payable till policy holder attains the age of 82
after which he can receive the policy amount himself.
Endowment
Endowment policy is different from whole life as the premium is payable for a certain period
after which the policy amount period after which the policy amount is payable to the policy
holder if he survives. In case of death of the policy holder, it is payable to his dependents,
whomsoever he has nominated in the policy. The production of death certificate and the policy
is essential for obtaining the policy amount.
Annuity
Premium is paid in regular installment over a certain period or the premium may be paid in bulk
that is in lump sum. When the insured reaches a certain age, the policy amount will be payable
either in monthly, quarterly or annual installment. It is source of regular income to the insured
or to his dependent. In India, Jeevan Dhara is introduced by LIC as an annuity policy.
Janata Policy
It is a policy taken out for 10, 15, or 25 years with a condition that it should mature before the
insured attains 60 years of age. The maximum age limited is 45 years for taking a policy. No
medical examination is required and the maximum amount of policy will be only Rs. 1,000.
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Money Back Policy
Under this policy, the insured can receive a part of his policy amount, say 20% at the end of
every 5 years till policy matures. The balance amount will be paid at the time of maturity along
with profit.
22.3 Types of Marine Insurance Policies
Open policy is one where the actual value of the policy may not be mentioned and hence it is
called unvalued policy. The value of the insured object will be ascertained subsequently at the
time of claim.
However, the policy will have some minimum value to start with. This kind of policy is taken by
shipping companies as they have minimum cargo when the ship started sailing. Subsequently,
they may load cargo from difference ports en route. Now, the value of the cargo to be insured
will increase. Hence, open policy is popular among shipping companies.
Voyage
This is a policy taken for a particular voyage in which the route to be followed has to be mentioned.
In case of any problem in the normal route, there will be a deviation and in case an accident
occurs during such deviation, the insurance company will not indemnify. Hence, a deviation
clause may be introduced so that in case of emergency, a deviation in the route may be permitted.
Time Policy
The policy taken from midnight of a particular date to some other date which may cover months
or year. These kinds of policies are popular among charter party agreements where the entire
ship is given on hire to some other party. Those who take a ship on hire under charter party
agreement will insure it upto the period for which the hire exists.
Mixed Policy
It is a combination of time and voyage policies. A particular voyage has to be completed within
a particular period and hence it is called mixed policy.
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Comprehensive Policy
In a comprehensive policy, all kinds of risks arising out of a sea voyage is covered.
22.4 Types of Fire Insurance Policies
Specific Policy
In a specific policy, the policy amount is clearly specified incase of total loss of the nsured
property. Even if there is an undervaluation of the policy, it will not affect the claim.
Valued Policy
The value of the goods is clearly mentioned and the nature of goods is also mentioned. It will
hold good irrespective of any change in the value of the goods insured.
Floating Policy
The policy is taken to cover a particular period and the value of goods will be mentioned with
changes in the stock position. A single policy is taken, covering goods lying in difference parts
of the city or country. Hence it is called floating policy.
Average Policy
In average policy, an average is worked out between the compulsorily insured and the insurer
under for bearing the loss. In case of total loss, the entire claim amount will be given. For
example, in the case of fire, the value of goods destroyed may be more, but the insured value
agree to share the loss on an average basis.
22.5 Vehicle Insurance
Cars, two-wheelers, trucks come under vehicle insurance. They have to be compulsorily insured
under the Motor Vehicle Insurance Act. While insuring the vehicle, the owner has to take either
a comprehensive policy or third-party insurance.
Comprehensive Policy
Here, the insured is not only insuring the vehicle, but also against injury or death or damage
caused to any third-party. The insurance company will pay compensation even to a third-party
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who was injured by the insured’s vehicle. The premium amount will be slightly higher as it is
covering the risk of the third-party also.
Third-Party Insurance
Under this policy, only damage to third-party is covered. In the case of accident, the ines
suffered by the third-party alone will pay the compensation and the insured cannot for any
claim for the damage of the vehicle or injury caused to him.
Health and Other Kinds of Insurance
Health insurance is taken by people to cover medial expenses caused by ailment. The insurance
company will cover hospital charges, medicine costs and other incidental expenses towards
the treatment of the insured. But, at the time of taking the policy, a through medial investigation
of the insured is done. Hence, the changes of non-disclosure of diseases will not arise.
Employee State Insurance is a kind of insurance company in which all the employees in the
organised sector are cover from the risks arising out of various kinds of occupational hazards.
For this purpose, the employer and the employee jointly contribution to the ESI (Employee
State Insurance). Then, at the time of retirement of the employee, the amount saved will be
refund along with interest. There is also a pension fund created out of this from which the
family of the deceased employee will be paid family pension till their lifetime.
22.6 IRDA
In order to popularise insurance in rural India, the regulatory authority for insurance (IRDA) has
made it compulsory for the insurance companies that a part of their business should cover
rural areas also. By this, people in rural areas will be covered with various risks of insurance. In
the absence of such a regulation, the insurance companies were not keen to extend their
business to rural covering rural areas. The government has also come ut with a simple insurance
policy covering rural population. This cover even people in the unorganized sector. The
government also has come out with a clear definition for rural insurance.
Rural sector is any village / town -
(i) With a population not exceeding 5,000,

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(ii) and A density of population is not more than 400 per sq.km, and
(iii) At least 75%of the male population is working in agriculture. The percentage in rpe of
life and general insurance in rural sector should be
Life insurance of the total policies -
• 5%in the first financial year
• 7% in the second financial year
• 10% in the third financial year
• 12% in the fourth financial year
• 15% in the fifth financial year
These are applicable to new insurance companies set up after the passing of IRDA, 1999. The
percentage share of general insurance in the first two financial year should be - 2and 3%
respective and thereafter 5% of total gross premium income.
Social Sector
This includes unorganised sector, informal sector, economic vulnerable or backward classes
and person living below poverty line and they have to be compulsorily covered both in the rural
and urban areas percentage of 5, 7, 10, 12and15 thousand lives in the first five financial year
respectively.
Pension Plan
In order to provide pension facilities to persons working in unorganised sector and person
working in organisation not covered by insurance, or pension, a new pension plan is introduced
by ESI under which a fixed sum will be deposited by the insured. During the course of his
lifetime, the interest coming from such a deposit will be given as pension to insured after
attaining retirement age and after his death to his spouse and children.
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22.7 Terms Used in Life, Marine and Fire Insurance Policies
Surrender Value
When the insured is unable to play the premium and thereby wants to discontinue the insurance
contract, he may surrender the policy insurer (insurance company). For every policy, there will
be minimum period for which the policy, the insured will get back Seom the insurance company,
whatever premium he has paid towards his policy. There Sou be few deductions towards service
charges. Thus, surrender value of a policy is a value paid to the policy holder when he surrenders
the policy.
Paid Up Value
Even while discontinuing a policy, the policy holder instead of getting back the money may
allow the policy to continue till its maturity date, without paying further premium. By paid up
value, the proportion of premium paid toward the policy amount will be taken and on the date of
maturity, the same proportion will be paid the same policyholder along with interest. For example,
if a policy for Rs.50,000 is taken for 20 years and the policy holder has paid premium for the
first 5 years amount to 25 per cent of the policy and then he decides to make it as paid up. Now
after 20 years, the policy holder, if survives still will be paid one-fourth or 25% of the policy
amount i.e., Rs. 12,500 and in addition bonus accrued to the policy.
Double Accident Benefit Policy
Here, the policy holder may take up an insurance policy wherein if the insure dies prior to the
maturity of the policy due to an accident, then policy amount payable to his dependents,
whomsoever he has nominated will get double the amount of the policy.
With Profit and Without Profit Policy
If an insurance policy is taken, which is with profit policy, the policy holder or his dependent in
case of his death, will be given in addition to the policy amount, profit earned by the company
from investment made in difference companies. The premium payable for this policy will be
higher. In the case of without profit policy, on profit will be accruing and the policy holder, in
case of his survival or his dependents in the case his death will receive only the policy amount.
However, this kind of policy will have lesser premium, compared with-profit policy.
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22.8 Marine Insurance Policy
The marine insurance policy contains different clauses. At the same time, there is certain
understanding between insured and the insurer wherein not all the details connected Wes
Juddment of prudence. with the voyage be furnished. It involves Judgment of prudence.
For example, information which is likely to reduce the risk is the one that is waived by the
insurer. In fact, the insurer also may not be interested in such information. However, all material
facts connected to the marine insurance contract have to be disclosed.
22.9 Insurance Act, 1938
In India, the Insurance Act was passed in 1938 and it was implemented from 1st July 1939, by
which the private insurance companies, which were in existence then were controlled.
Insurance could be undertaken as a business only by a public company or by a cooperative

society or by any other limited company registered outside india. In 1956, Life Insurance
Corporation of India was created to take up life insurance business under public sector. For
this purpose, all the private sector insurance companies engaged in life insurance business
were taken over by LIC. However, after 1990, with the adoption of new economic policy, the
government has permitted insurance business in private sector also. This has enabled both
domestic and foreign companies to enter insurance business including life insurance.
22.10 Insurance Regulatory and Development Authority (IRDA)
In order to control the private sector insurance companies, the Government of India passed
the IRDA Act in the year 1999 which enabled it to regulate the private sector companies in
insurance business. What was the sole monopoly of the LIC is now thrown open to the private
sector for covering the life and property of individuals. Now, the IRDA controls the entire insurance
business in India.
The following are the powers of IRDA
(i) All insurance companies have to register with IRDA compulsorily.
(ii) with IRDA compulsorily. Companies can undertake only insurance business.
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(iii) The capital structure of the companies will be determined by IRDA.
(iv) Accounts and balance sheets of companies have to be submitted to IRDA.
(v) Insurance companies have to appoint actuaries and they will value the liabilities of the
insurance companies and report the same to IRDA.
(vi) Investment of assets will be prescribed by IRDA in the form of approved securities.
(vii) The nature of general insurance business will be prescribed by IRDA.
(viii) Statements of investment assets to be submitted to IRDA every financial year.
(ix) All insurance companies have to devote certain percentage of their business including
insurance for crops. This should cover unorganized sector including the economically
weaker sections.
(x) The appointment of chief executive officer requires the prior permission of the IRDA.
(xi) All insurance agents must obtain license from IRDA.
(xii) IRDA has powers to levy penalty on companies which fails to comply with the rules and
regulations.
Duties of IRDA
1. Regulates insurance companies : The working of insurance companies will be regulated

in the following aspects – (i) the persons to be employed, (ii) the nature of business, (iii)
covering of risks, (iv) terms and agreements for covering risks, etc., will be prescribed
by IRDA.
2. Promotes insurance companies : Corporate set-up is a must for establishing an insurance

company and they have to submit periodical reports to IRDA. Different kinds of policies
and different types of insurance are also suggested by IRDA to these insurance
companies.
3. Ensures growth of insurance and reinsurance companies : Here, the promotion of new
companies is encouraged. Even banks are also permitted to promote insurance
companies as a subsidiary.
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Check Your Progress
1. Define Insurance from the view point of experts.
2. What are the basic concepts of life insurance policy?
3. What is IRDA?
22.11 Summary
Life insurance is called contract of guarantee as only the guaranteed amount is payable on the
dealth of the policyholder or maturity of the policy whichever is earlier There are two types of
major policies one is whole life policy and the other is endowmen policy which include annuity
policy, janata policy, money-back policy.
Marine insurance is concerned with overseas trade. International trade involve transportation
of goods from one country to another by ships. So marine insurance insure the coverage of all
types of risk which occur during the transit. Voyage policy, Time polic Mixed policy and
Comprehensive policy are the various types of marine insurance policies.
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Fire insurance is a contract to indemnity the loss suffered by the insured. This contract does
not help in controlling or preventing fire but it is promise to compensate the loss. Specific
policy, Valued policy, Floating policy & Average policy are the various types of life policies.
Cars, two-wheelers, trucks comes under Motor Vehicle Insurance ACE. Comprehensive &
third-party insurance are its types. Health & Other kinds of insurance also helps public and
employees (Employees State Insurance).
In India, The Insurance Act was passed in 1938 & it was implemented from July 1939, by which
private insurance companies, which were in existence then were controlled.
In order to control the private sector insurance companies, The Government of India passed
the Insurance Regulatory & Development Authority (IRDA) Act in 1999 with a principal duties to
Regulate insurance companies, Promotes insurance companies and ensures growth of
insurance & reinsurance companies.
1. Explain the different types of Marine Insurance policies?
2 What are the basic concepts of life insurance policy? Explain the different types of life
policies offered to public?
3. Distinguish between life insurance and marine insurance. States the different types
of fire Insurance policy.
4. Write a note on (1) Rural Insurance, (2) Employee State Insurance.
5. Explain the Powers and functions of IRDA.

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LESSON - 23
PENSION FUND
After studying this unit you should be able to :
 Describe about pension plans and its types
 Explain about the advantages and disadvantages of pension plans
 Describe about Chilean model of Pension
 Enumerate about National Pension System
Structure
23.1 Introduction
23.2 Classification of Pension Fund
23.3 Benefits of Pension Fund
23.4 Various types of Pension Fund
23.5 Chilean Model - Chile Pension System
23.6 National Pension System
23.7 Summary
23.1 Introduction
A pension fund, also known as a superannuation fund in some countries, is any plan,
fund, or scheme which provides retirement income. Pension funds typically have large amounts
of money to invest and are the major investors in listed and private companies. They are
especially important to the stock market where large institutional investors dominate. The largest
300 pension funds collectively hold about $6 trillion in assets. In January 2008, The
Economist reported that Morgan Stanley estimates that pension funds worldwide hold over
US$20 trillion in assets, the largest for any category of investor ahead of mutual funds, insurance
companies, currency reserves, sovereign wealth funds, hedge funds, or private equity.
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Pension plans are also known as retirement plans. In this, The investor may invest some
portion of your income into the designated plan. The main objective behind a pension plan is to
have a regular income post-retirement. Considering the ever-growing inflation, investing in
these plans has become necessary.
In order to meet the situation of contingency the pension plans are important.
In India, pension plans have two stages – the accumulation stage and the vesting stage.
In the former, the investors pay annual premiums until they attain the age of retirement. On
reaching the retirement age; the second stage, the vesting stage begins. During this stage of
the pension plan, the retiree will start receiving annuities until their death or the death of their
nominee.
The contributions that are made to a pension plan, under Section 80CCC, are tax-exempt
up to a maximum ceiling of Rs 1.5 lakh. The contributions include the amount spent on buying
a new pension plan or renewing an existing plan of similar nature. Both residents and non-
residents may claim tax deductions which are offered by this section. However, Hindu Undivided
Family is not eligible to make such claims under the given section.
The withdrawals, however, are not tax-free. Only one-third of the corpus that is distributed
to the retiree (soon after reaching the retirement age) by the pension plan is tax-free. The rest
of the money is distributed as an annuity and is subject to taxation depending on the retiree’s
tax rate at the time of retirement.
There are different kinds of pension plans which you can check below:
 Plans that are sponsored by an insurer where the investment is solely in debt and are
best suited for conservative investors.
 Plans that are unit-linked and invest in both equity and debt.
 The National Pension Scheme, which invests either 100% in government securities, 100%
in debt securities (other than government securities), or a maximum of 75% in equity.
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23.2 Classification of Pension Fund
The following are the classification of Pension fund.
a. National Pension Scheme
The Government of India introduced a new Pension Scheme for people who wanted to
build up their pension amount. With the scheme, your savings will be invested in debt and
equity market, based on your preference. It allows you to withdraw 60% of the funds at the time
of retirement and the remaining 40% is used for the purchase of the annuity. The maturity
amount is tax-free.
b. Deferred Annuity
With the deferred annuity plan, you can accumulate a corpus through a single premium
or regular premiums over the term of the policy. The pension begins once the policy term gets
over. This deferred annuity plan has tax benefits wherein no tax is charged on the money
invested until you plan to withdraw it. This scheme can be bought by either making regular
contributions, or by a one-time payment. This way, it works for you whether you want to invest
the entire amount at one time or want to invest systematically.
c. Pension Funds
The government body, Pension Fund Regulatory and Development Authority (PFRDA),
has authorised six companies to operate as fund managers. These plans offer comparatively
better returns at the time of maturity and remain in force for a substantial amount of time.
d. Immediate Annuity
In this type of scheme, the pension begins right away. As soon as we deposit a lump sum
amount, the pension starts. This is based on the amount the policyholder invests. We can
choose from a range of annuity options. Under the Income Tax Act of 1961, the premiums of
the immediate annuity plans are tax exempt. Post the death of the policyholder, and it is the
nominee who is entitled to the money.
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e. Guaranteed Period Annuity
Regardless of whether the holder survives the duration, this annuity option is given for
periods such as five years, ten, fifteen, and twenty years.
f. Pension Plans with and without cover
Pension plans with cover include life cover, which means that at the death of the
policyholder, the family members are paid a lump sum amount. This amount may not be
considerable. The without-cover plan as the name suggests does not have life cover. If the
policyholder passes away, then the nominee gets the corpus. At present, the immediate annuity
plans are without protection, while the deferred plans are with cover.
g. Annuity certain
In this scheme, the annuitant is paid the annuity for a certain number of years. The
annuitant can pick this period, and in case of their death, the beneficiary receives the annuity.
h. Life Annuity
The life annuity scheme pays the annuity amount to the annuitant until the time of death.
If the annuitant dies and they had chosen the option ‘with spouse’, then the spouse receives
the pension amount.
23.3 Benefits of Pension Fund

Some of the advantages of investing in Pension Plans are listed below:
a. Option in Investment
b. Long-term savings
These plans serve as a long-term savings scheme regardless of whether you opt for a
lump sum payments or multiple payments of small amounts, the savings is assured. Pension
plans create an annuity which can be invested further and give rise to a steady flow of cash
post your retirement.
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c. Choose how you want to get paid
Depending on your age or what your plans are, you can either invest a lump sum amount
and get annuity payments right away, or choose a deferred annuity plan which will let your
corpus earn more interest until the payouts begin.
d. Works as a life insurance cover
There are pension plans that offer the investor a lump sum amount when they retire or in
case of the death of the individual, whichever scenario occurs earlier. This means that your
pension policy also serves as a life insurance cover.
e. Negates the effect of Inflation
It is an excellent way of negating the effect of inflation by investing in pension plans.

These plans pay a lump sum during your retirement, which amounts to a maximum of one-third
of the accumulated corpus and the remaining two-thirds of the corpus is used in generating a
steady cash flow.
f. Access a lump sum amount during an emergency
We are allowed to make adjustments to your pension policy to access a lump sum payout
in case of an emergency. This can be done to cover one’s long-term health care.
Disadvantages of pension fund
The following are the disadvantages of Pension Fund discussed below :
a. Limited amount of deduction allowed
Though pension plans qualify you to a tax deduction, the maximum allowed deduction on
life insurance premiums is Rs 1.5 lakh under the Income Tax Act, 1961.
b. Taxation on the annuity
When you receive the annuity after your retirement, it is taxable as on that date.
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c. High returns require high-risk taking
To make sure that the payout at the time of your retirement is adequate, you may have to
seek high-risk options to obtain higher returns. The traditional non-risky investment options
may not be enough to override the effects of inflation.
d. Best suited for early investors
This suits for the early investors
Pension funds give investors the option to invest in either the safe government securities
or take some risk and invest in debt and equity investments depending on their risk profile. The
risk is balanced by the prospect of higher returns that are generated by the investment.
23.4 Various Types of Pension Plans
The following are considered as the most predomiant pension plans.
1. LIC Jeevan Akshay 6 Plan: The LIC Jeevan Akshay 6 policy plan is an immediate annuity

plan, which can be bought by paying a lump sum amount as a single premium. The
pension starts immediately after buying the plan.
Features and benefits:

 Premium paid in lump sum
 Pension/annuity payment can be received either monthly, quarterly, half yearly or yearly
 No medical examination required to avail of this plan
 Minimum purchase price of Rs 1 lakh for offline distribution channels and Rs 1.50 lakh for
online distribution channels
 No maximum limits for purchase price, annuity etc
 Minimum entry age is 30 years and maximum entry age is 85 years
 Age proof is mandatory
 Premium paid is exempt from tax

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2. LIC Jeevan Nidhi Plan: The LIC Jeevan Nidhi plan is a with profits pension plan. The
accumulated amount of LIC Jeevan Nidhi plan is used to generate pension for the
policyholder based on his or her survival past the policy term.

 Premiums paid are exempt under Section 80CCC of the Income Tax Act
 For the first five years, the policyholder will receive guaranteed additions @ Rs.50/- per
thousand Sum Assured for each completed year
 The policy will participate in profits of the corporation from the sixth year onwards based
on terms determined by the Corporation
 Minimum basic Sum Assured is Rs 1 lakh under regular premium and Rs 1.50 lakhs
under single premium policies
 No maximum limit for basic Sum Assured
 Policy term ranges from 5 - 35 years
 Minimum vesting age of 55 years and maximum of 65 years
3. SBI Life Saral Pension plan: The SBI Life Saral Pension plan is an individual, participating,

non linked, traditional pension plan, which offers the policyholder protection from market
fluctuation and volatility.

 Guaranteed bonuses for the first 5 years, @ 2.50% of the sum assured for the initial three
years and 2.75% of the sum assured for the following two years
 The policyholder is assured of vesting bonuses on maturity of the plan
 The minimum policy term is 10 years and the maximum term is 40 years
 Minimum premium payment of Rs 7,500 per annum with no maximum limit
 Minimum entry age is 18 years and maximum is 65 years
 Minimum maturity age of 40 years and maximum of 70 years
 Minimum Sum Assured of Rs 1 lakh with no maximum limit

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4. HDFC Life - Click2Retire: The HDFC Life - Click 2 Retire plan is an online Unit Linked

Plan that offers the policyholder market linked returns with minimal charges, which helps
in meeting post-retirement requirements.

 Guaranteed vesting benefits as well as additional gains from the market
 Minimum entry age of 18 years and maximum of 65 years
 Low maturity age of 45 years and maximum of 75 years
 Death benefits to the nominee will be higher of the fund value of the policy or 105% of
premiums paid till then
 Tax benefits under Section 80C and Section 10(10A) of Income Tax Act 1961
5. HDFC Life - Assured Pension Plan: The HDFC Life - Assured Pension Plan is a Unit
Linked Pension Plan that offers market linked returns with loyalty additions to the
policyholder to meet retirement goals.

 Guaranteed vesting benefits as well as additional gains from the market
 Loyalty additions every alternate year from the 11th year onwards
 Minimum entry age of 18 years and low vesting/maturity age of 45 years
 Limited and single pay options
 Death benefits to the nominee will be higher of the fund value of the policy or 105% of
premiums paid till then
 Tax benefits under Section 80C and Section 10(10D) of Income Tax Act 1961
6. ICICI Pru - Easy Retirement: This plan helps the policyholder receive regular income
once his or her salary stops post retirement through equity investment. ICICI Pru Easy
Retirement generates good long term returns and offers protection against market volatility.
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· Minimum premium of Rs 48,000 per annum with no maximum limit
 Monthly, half yearly and yearly payment frequency modes
 Minimum entry age of 35 years and maximum of 70 years
 The policy is offered for 10, 15, 20, 25, and 30 years
 Tax benefits on premiums and benefit
7. Reliance - Smart Pension: The Reliance Smart Pension Plan is a non participating Unit

Linked Pension Plan that helps the policyholder save in a systematic manner in order to
build up a lump sum to generate regular income after retirement.

 The policy term ranges from 10 - 30 years
 Double benefit of equity participation plus capital guarantee
 Receive guaranteed loyalty additions
 Income tax benefits under Section 80C and section 10(10A) of Income Tax Act 1961
8. Bajaj Allianz - Pension Guarantee: The Bajaj Allianz Pension Guarantee plan assures

the policyholder of a guaranteed, regular income post retirement for the duration of his or
her lifetime, with a range of immediate annuities to choose from.
Features and benefits::

 Six annuity options to choose from
 Minimum entry age of 37 years and maximum age of 80 years
 Minimum purchase price of Rs 25,000 with no maximum limit
 Minimum annuity installment of Rs 1,000(monthly) and the maximum annuity installment

is Rs.12,000 (yearly)
 Option to extend annuity to the spouse

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9. Max Life Guaranteed Lifetime Income Plan: The Max Life Guaranteed Lifetime Income

Plan is a non-linked traditional annuity plan that guarantees the policyholder a regular
stream of income after his or her retirement.

 Option to receive life-long payments for as long as you and your spouse are alive
 Purchase price of the policy is returned to the nominee after death of the policyholder
 Pension can be received on a monthly, quarterly, half-yearly or yearly basis
 Four annuity options to choose from
 Option to choose a onetime lump sum amount to pay to purchase the policy
10. Birla Sun Life Empower Pension: The Birla Sun Life Empower Pension plan is a unit

linked, non-participating pension plan designed to enhance the policyholder’s savings
post retirement.

 Policy term ranges from 5 – 30 years subject to a maximum age of vesting of 80 years
 Minimum entry age of 25 years and maximum age of 70 years
 Option to choose your policy premium amount
 Option to choose vesting date to have accumulation period of 5 – 30 years
 Choose risk profile based on risk appetite
23.5 Chilean Model - Chile Pension System
The Chile pension system refers to old-age, disability and survivor pensions for workers
in Chile. The first pension system of Chile was designed during the first presidency of Arturo
Alessandri.
A social security system was introduced in Chile in the 1920s, which included a PAYGO
pension system. By 1973 the funding of the pension fund was low, though 73% of all Chilean
workers paid into the system. The reason for this was that almost all workers contributed only
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the statutory minimum contribution, and many successfully evaded pension contributions. The
poor payment record is attributed primarily to the fact that individual contributions had little
correlation with anticipated pension benefits. On November 4, 1980, under the leadership
of José Piñera, Secretary of Labor and Pensions under Augusto Pinochet with the collaboration
of his team of Chicago Boys, the PAYGO pension system was changed to a capital funded
system run by investment funds. José Piñera had the idea of privatizing the pension system for
the first time when reading the book Capitalism and Freedom from Milton Friedman. There
have been implemented several (private) pension funds the so-called Administradoras de
Fondos de Pensiones (AFPs). For all citizens who are legally defined as workers, employers
must pay a proportion of the earnings to a pension fund. Workers who had already paid in the
old system, got an option to continue to pay into the old system. But the statutory minimum
contribution to the new private pension funds was set 11% lower than the contributions to the
old pension system, therefore most workers changed to the new pension system. Chilean
military that implemented the new AFP system excluded themselves from it keeping obtaining
their pensions from the Caja de Previsión de la Defensa Nacional. The pensions of the military
are substantially higher than those of the rest of Chileans, being most often similar to the
income they have during active service. However, differently from what a regular, society-wide,
PAYGO system would operate, military pensions go to a small section of the population and
are financed by all of the taxpayers in the country.
Pension Reforms in 2008
Under the Bachelet government, the pension system was reformed again in the year
2008. Andrés Velasco, the leading economic adviser to the government, addressed the two
main problems as the coverage of the population and the amount of the administrative costs.
Too many people are outside the pension system, and capital accumulation by using the pension
funds is quite expensive[21] The reform follows a recommendation by the World Bank, who has
found in the 1980 pension system a strong redistributive component at the expense of low paid
or occasionally unemployed workers. A big part of the Chilean population is not able to finance
meaningful pensions, because many workers are not able to regularly contribute a higher
amount of money. Additionally many workers have difficulties to achieve the 20 years of
contributions to at least qualify for minimum pension. Since the pension funds charge high
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fixed administrative costs per insured person and only a small portion of the administrative
costs depend on the amount of the capital account, capital accumulation by pension funds is
very unprofitable for workers with lower incomes. The World Bank therefore recommended
that the minimum pension and the Pensiones Asistenciales should be abolished and instead
introduced a public risk pooling device financed by VAT tax revenue
The reform includes mainly the following points:

 The minimum pension and the Pensiones Asistenciales were replaced by a tax-funded
solidary pension system (SPS). All citizens older than 65 years, that lived in Chile for at
least 20 years and do not have a private pension on a defined minimum level qualify for
an SPS pension.
 The legally defined framework within which pension fund investments are allowed has
been extended.
 Within a transitional period lasting until 2015, self-employed individuals are also to be
integrated into the pension system.
23.6 National Pension System
The National Pension System (NPS) is a voluntary defined contribution pension system
in India. National Pension System, like PPF and EPF is an EEE (Exempt-Exempt-Exempt)
instrument in India where entire corpus escapes tax at maturity and entire pension withdrawal
amount is tax-free.
NPS started with the decision of the Government of India to stop defined benefit pensions
for all its employees who joined after 1 January 2004. While the scheme was initially designed
for government employees only, it was opened up for all citizens of India between the age of 18
and 60 in 2009.] In its overall structure NPS is closer to 401(k) plans of the United States.
Administered and regulated by the Pension Fund Regulatory and Development Authority
(PFRDA)(Based on the recommandations of Chakka Muni Balaji Ganesh Committee),in
accordance with (Juturu Sahithi committee).
On 10 December 2018, Government of India made NPS an entirely tax-free instrument

in India where entire corpus escapes tax at maturity, the 40% annuity also became tax-free.[7] The
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contribution under Tier-II of NPS is covered under Section 80C for deduction up to Rs. 1.50
lakh for income tax benefits, provided there is a lock-in period of three years. The changes in
NPS will be notified through changes in The Income-tax Act, 1961, which is expected to happen
through the Finance Bill in 2019 Union budget of India.[12] NPS is limited EEE, to the extent of
60%. 40% has to be compulsorily used to purchase an annuity, which is taxable at the applicable
tax slab.
Contributions to NPS receive tax exemptions under Section 80C, Section 80CCC and
Section 80CCD(1) of Income Tax Act. Starting from 2016, an additional tax benefit of Rs 50,000
under Section 80CCD(1b) is provided under NPS, which is over the Rs 1.5 lakh exemption of
Section 80C. Private Fund managers are important parts of NPS. NPS is considered one of
the best tax saving instruments, after 40% of the corpus was made tax-free at the time of
maturity and it is ranked just below Equity-linked savings scheme(ELSS).
he National Pension System (NPS) is a voluntary defined contribution pension system

administered and regulated by the Pension Fund Regulatory and Development
Authority (PFRDA), created by an Act of the Parliament of India. The NPS started with the
decision of the Government of India to stop defined benefit pensions for all its employees who
joined after 1 January 2004. While the scheme was initially designed for government employees
only, it was opened up for all citizens of India in 2009. NPS is an attempt by the government to
create a pensioned society in India. In its overall structure NPS is closer to 401(k) plans of the
United States. Today, the NPS] is readily available and tax efficient under Section 80CCC and
Section 80CCD. Under the NPS, an individual can contribute to his retirement account. Also,
his employer can contribute to the welfare and social security of the individual.
NPS is a quasi-EET instrument in India where 40% of the corpus escapes tax at maturity,
while 60% of the corpus is taxable. Of the 60% taxable corpus, 40% is tax-exempt as it has to
be compulsorily used to purchase an annuity. The annuity income will be taxed, though. In 2017
Union budget of India, 25% exemption of the contribution made by an employee has been
announced as a form of premature partial withdrawal in NPS. This amendment will take effect
on 1 April, 2018 and will, accordingly, apply in relation to the assessment year 2018-19. NPS is
a market-linked annuity product.
191
In 1999 the Government of India commissioned a national project, OASIS (an acronym
for “old age social and income security”), to examine policies related to old age income security
in India. Based on the recommendations of the OASIS report, the Government of India introduced
a new Defined Contribution Pension System for the new entrants to Central/State Government
service, except to the Defence forces ie. Army, Navy and Air Force, replacing the existing
system of the Defined Benefit Pension System.
On 23 August 2003, the Interim Pension Fund Regulatory & Development Authority
(PFRDA) was established through a resolution by the Government of India to “promote old age
income security by establishing, developing and regulating pension funds, to protect the interests
of subscribers to schemes of pension funds and for matters connected therewith or incidental
thereto.” The Pension Fund Regulatory & Development Authority Act was passed on 19
September 2013 and notified on 1 February 2014, thus setting up PFRDA as the regulator for
pension sector in India. However, there remains a considerable amount of confusion with other
entities like the Employee Provident Fund, pension funds run by life insurers, and mutual fund
companies being outside the purview of PFRDA.
The contributory pension system was notified by the Government of India on 22 December
2003, now named the National Pension System (NPS) with effect from 1 January 2004. The
NPS was subsequently extended to all citizens of the country with effect from 1 May 2009,
including self-employed professionals and others in the unorganized sector on a voluntary
basis.
Unlike traditional financial products where all the functions (sales, operations, service,
fund management, depository) are done by one company, NPS follows an unbundled
architecture where each step of the value chain has been made disjointed from the other. This
unbundling not only allows the customer to mix and match his providers of service through the
value chain, picking the best-suited option, but it also curbs the incidence of misselling.
NPS architecture consists of the NPS Trust, which is entrusted with safeguarding
subscribers’ interests, Central Recordkeeping Agencies (CRAs) which maintains the data and
records, Point of Presence (POP) as collection, distribution and servicing arms, pension fund
managers (PFM) for managing the investments of subscribers, a custodian to take care of the
192
assets purchased by the fund managers, and a trustee bank to manage the banking operations.
At age 60 the customer can choose to purchase pension Annuity Service Providers (ASP).
NPS investors can’t opt for two pension fund managers, neither can switch to another pension
fund before a year. In 2017, PFRDA increased the entry age in NPS to 65 years.
The number of pension fund managers (PFM) has increased to 9 in NPS:
 SBI Pension Funds
 LIC Pension Fund
 UTI Retirement Solutions
 HDFC Pension Fund
 ICICI Prudential Pension Fund
 Kotak Pension Fund
 Reliance capital Pension Fund
 Birla Sun Life Pension Management Ltd.
SBI Pension Funds is the largest pension fund manager (PFM) in India and its assets
under management(AUM) level is Rs 61,000 crore. At Present, Central government employees
have no say in the matter of choice of fund manager or investment allocation in NPS, as both
are decided by the government. All the NPS contributions of Central government employees
are being distributed evenly across three public sector fund managers :LIC Pension Fund, SBI
Pension Fund and UTI Retirement Solutions.
The current CRAs are the NSDL e-Governance Infrastructure Limited (NCRA) and Karvy
Computer Shares Pvt Ltd (KCRA). All the major commercial banks, brokers and Stock Holding
Corporation Ltd perform the role of PoP. The subscriber can choose any one of them. There
are seven fund managers and eight annuity service providers for subscribers to choose from.
The subscriber can choose to invest either, wholly or in combination, in four types of investment
schemes offered by the pension fund managers. These are:
 Scheme E (equity) which allows up to 75% equity participation, this is invested in stocks.
 Scheme C (corporate debt) which invests only in high-quality corporate bonds upto 100%.
193
 Scheme G (government/Gilt bonds) which invests only in government bonds upto 100%.
 Scheme A (Alternative Investment)which allows up to 5% (Newly added asset class only

for private sector subscriber with active choice)
Alternatively, the subscriber can opt for the default scheme, whereas per the time left to
retirement his portfolio is rebalanced each year for the proportion of equity, corporate bonds,
and government bonds.
NPS offers two types of accounts to its subscribers:

 Tier I :The primary account, which is a pension account which has restrictions on
withdrawals and utilization of accumulated corpus. All the tax breaks that NPS offers are
applicable only to Tier I accounts.
 Tier II: In order to introduce some liquidity to the scheme, the PFRDA allows for a Tier II
account where subscribers with pre-existing Tier I accounts can deposit and withdrawn
monies as and when they want. NPS Tier II is an investment account, similar to a mutual
fund in characteristics.
The contribution to voluntary savings account (also called Tier-II account) can only be
made by the subscriber and not by any third party.
PFRDA has introduced new features to NPS in 2016, including more choices to lifecycle
funds:
 Aggressive Life Cycle Fund (LC-75) which allows subscribers equity exposure of up to
75% till 35 years of age. This is more suitable to a 20s investor.
 Conservative lifecycle fund with a 25% starting equity exposure, may be suited to older
investors.
 Automatically Lifecycle Fund.
The regulator add a new asset class Alternative Investment Funds (AIF) to the existing
menu of equities, government securities and corporate bonds, available on NPS.
194
As of March 2019, the number of subscribers had grown substantially to 1.24 crore
subscribers. NPS AUM (assets under management) grew to Rs 3,11,353.44 crore as of March
2019. 88% of total NPS AUM is accounted for Government sector, both Central and State
employees, who also account for 35 per cent of the number of subscribers. As of March 2016,
The total AUM of the NPS Tier II segment is Rs 197 crore. NPS Tier II has 34,620 subscribers
with an average balance of Rs 54,000
e-NPS started in 2015. an NPS account can be opened online using either of the two
options available to complete the KYC process
 One, Aadhaar-based KYC, wherein you will be authenticated through an OTP that will be
sent to the mobile phone number that is registered with Aadhaar. Once one authenticates
oneself, the KYC information will be taken from the Aadhaar database. If you had selected
Aadhaar-based registration, you have to upload a scanned signature. You can make your
investment through Net banking from any bank’s account.if you choose Aadhaar-based
KYC, you don’t have to sign and send the physical form. You can simply e-sign. There is
no need to print the NPS form that you had filled online and submit the printout within 90
days to the central record keeping agency.
 Second way to proceed is to give the permanent account number (PAN) and bank account
details to complete the KYC authentication step.
Premature withdrawal in NPS before age of 60 years required parking 80% of the sum in
an annuity. One can withdraw 20 percent of the corpus before 60 years but he/she must buy
annuity with 80 percent of the corpus. In 2016, the NPS allowed withdrawal of up to 25% of
contributions for specified reasons, if the scheme is at least 3 years old with certain conditions.
One can withdraw the complete amount if the pension collected is less than INR 2,00,000.
Investment in NPS is eligible for tax benefits as follows:
 Up to Rs. 150,000 under Section 80CCD(1). The benefit is additionally capped at 10% of
basic salary. The benefit under Section 80C, Section 80CCC and Section 80CCD(1) is
capped at Rs 150,000.
 Contribution Up to Rs 50,000 under Section 80CCD(1B). This is over and above tax benefit
under Section 80CCD(1b).
195
 Employer co-contribution up to 10% of basic and DA without any upper cap in terms of
amount is tax free income in hands of employees under Section 80CCD(2).
Check your Progress

1. List out any three pension plans.
2. What is Deferred Annuity?
23.7 Summary
A pension fund, also known as a superannuation fund in some countries, is any plan,
fund, or scheme which provides retirement income. Pension funds typically have large amounts
of money to invest and are the major investors in listed and private companies. They are
especially important to the stock market where large institutional investors dominate. The largest
300 pension funds collectively hold about $6 trillion in assets. The Government of India
introduced a new Pension Scheme for people who wanted to build up their pension amount.
With the scheme, your savings will be invested in debt and equity market, based on your
preference. It allows you to withdraw 60% of the funds at the time of retirement and the remaining
40% is used for the purchase of the annuity. The maturity amount is tax-free. Pension funds
give investors the option to invest in either the safe government securities or take some risk
and invest in debt and equity investments depending on their risk profile. The risk is balanced
by the prospect of higher returns that are generated by the investment.
196
23.8 Key words

 Pension plan
 Chilean Model
 National Pension system
 Retirement Planning

1. What is pension fund?
2. What are the classification of pension fund?
3. What are the benefits of pension fund?
4. What are the disadvantages of Pension fund?
5. Explain in detail about Chilean Model
6. Explain in detail about National Pension System
7. What are the various pension plans?

197
Model Question Paper

B.Com - General Commerce
Second Year – Fourth Semester
Paper - X
FINANCIAL SERVICES
Time : 3 Hours Maximum : 75 Marks
Part A – (10x2 = 20 marks)

Answer any ten questions each in 50 words.
1. What is meant by financial services?
2. Define Merchant Banking.
3. What is meant by Capital Market?
5. Who is bankers to an issue?
6. Define Lease finance.
7. What is meant by Venture Capital?
9. What are the types of consumer finance?
10. What are the basic concept of insurance policy?
11. What do you mean by mutual fund?
12. Write a short note an Pension financing.

198
Part B – (5x5 = 25 marks)

Answer any five questions each in 250words
13. Bring out the importance of financial services.
14. What are the different types of underwriting?
15. What are the basic constitutents of capital market?
16. Disucss the nature and scope of merchant banking business.
17. What are the salient features of hire purchase agreement?
18. Explain the importance of venture capital financing.
19. Explain the funtions of IRDA
Part C – (3x10 = 30 marks)

Answer any three questions each in 500 words
20. Examine the role of financial services institutions in the economic development of a ratio.
21. Bring out the role of Merchant Banker in promoting investments in the country?
22. Explain the functions of stock exchanges.
23. Discuss about the basic features of consumer finance.
24. Describe the various features of Insurance contract.

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INSTITUTE OF DISTANCE EDUCATION

It is with a great pleasure to welcome you as a student of Institute of Distance Education,

With best wishes from mind and heart,

Dr. D. Udaya Suriyan

Dr. R. Panchalan Dr. P. Hemavathy

© UNIVERSITY OF MADRAS, CHENNAI 600 005.

Financial Services - Concept - Objectives - Functions - Characteristics - Financial Services

UNIT II: Merchant Banking and Public Issue Management

Definition - Functions - Merchant Bankers Code of Conduct - Public Issue Management -

UNIT III: Money Market and Stock Exchange

Characteristics - Functions - Indian Capital Market - Constituents of Indian Capital Market

UNIT IV: Leasing

Characteristics - Types - Participants - Myths about Leasing - Hire Purchase - Lease

3. Meir Kohn, Financial Institutions and Markets, Oxford University Press

7. Santhanam B, Financial Services, Margam Publications

After studying this unit, you will be able to:

• explain the meaning and importance of financial services

• describe the functions of financial institutions

• enumerate the constituent of the financial services.

1.2 Meaning and Scope of Financial Service

1.3 Importance of Financial Services

1.4 Classification of Financial Service Industry

1.5 Functions of Financial Service Institutions

1.6 Constituent of Financial Service

1.8 Review Questions

1.2 Meaning and Scope of Financial Service

Financial services otherwise called as ‘Financial Intermediation’. It is a process of mobilising

1.3 Importance of Financial Services

1.4 Classification of Financial Service Industry

(i) Capital Market Intermediaries

(ii) Money Market Intermediaries

2. Classification based on Charges/Fund

(i) Fund Based Financial Services

(ii) Fee Based Financial Services

It consists of the financial services: Issue management, portfolio management. corporate

1.5 Functions of Financial Service Institutions

(1) Promoting the overall savings of the economy

(3) To facilitate trade transaction and credit facilities.

(4) Providing assistance in deciding the financial mix of a firm

1.6 Constituent of Financial Service

(1) Financial Instruments

(2) Market Players

(3) Specialized Institutions

(4) Regulatory Bodies.

Maior Players in Financial Services

ii) Non-Banking Financial Institutions

iii) Commercial Banks

iv) Mutual Funds

vi) Merchant Bankers

vii) Portfolio Managers in JSEM

viii) Stock Brokers

ix) Financial Consultants

ii) Non-Banking Financial Institutions

iii) Commercial Banks

iv) Mutual Funds

Mutual funds are associations of interested members in investment on financial instruments of

vi) Merchant Bankers

vii) Portfolio Managers