Final Course

(Revised Scheme of Education and Training)

Study Material

Elective Paper 6B
Financial Services and
Capital Markets
Part – A

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

© The Institute of Chartered Accountants of India

 ii .

This study material has been prepared by the faculty of the Board of Studies. The objective of the study
material is to provide teaching material to the students to enable them to obtain knowledge in the subject. In
case students need any clarifications or have any suggestions for further improveme nt of the material
contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the students.
However, the study material has not been specifically discussed by the C ouncil of the Institute or any of its
Committees and the views expressed herein may not be taken to necessarily represent the views of the
Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this ma terial.

© The Institute of Chartered Accountants of India

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or transmitted, in
any form, or by any means, electronic, mechanical, photocopying, recording, or o therwise, without prior
permission, in writing, from the publisher.

Revised Edition : November 2020

Website : www.icai.org

E-mail : [email protected]

Committee/ : Board of Studies

Department

ISBN No. :

Price : `

Published by : The Publication Department on behalf of The Institute of Chartered

Accountants of India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002, India.

Printed by :

© The Institute of Chartered Accountants of India

 . iii

SYLLABUS

PAPER 6 B : FINANCIAL SERVICES AND CAPITAL MARKETS

(One paper – Three hours – 100 marks)
Objective:
1. To gain knowledge of financial services rendered by intermediaries and banks and their role
and activities in the financial market in general and capital markets in particular;
2. To acquire the ability to apply such knowledge to address issues in practical scenarios.
Contents:
1. Global Financial Markets
• Introduction to Global Financial Market
• Role of Financial Market in Economic Development of a country
• Stakeholders in Financial Market (Domestic and Global)
• Indian Financial Market scenario
2. Impact of various Policies of Financial Markets
• Credit Policy of RBI
• Fed Policy
• Inflation Index, CPI, WPI, etc.
3. Capital Market - Primary
• New Issue Market – Domestic and Global
• Private Placement, QIP, Disinvestment
• Right Issue
4. Capital Market - Secondary
• Secondary Market
• Stock Market Operations
• Indian Debt Market

© The Institute of Chartered Accountants of India

 iv .

5. Money Market
• Basics of Money Market
• Money Market Participants
• Money Market Instruments
• Repo and Reverse Repo
• CRR, SLR
• MIBOR, LIBOR
• Government Securities Market
6. Institutions and Intermediaries
• Depository
• Stock and Commodity Exchanges – Indian and Global
• Intermediaries
• Institutional Investors
• FPIs
• Custodians
• Clearing Houses
7. Commodity Market
• What are Commodity Markets
• Role of Commodity Markets
• Commodity Market in India
• Application of Derivative in Commodities
• Global Commodities Exchanges
8. Banking as source of Capital including NBFCs
• Concept of Project Financing
• Working Capital Management
• Reverse Mortgage
9. Mutual Funds
• Meaning

© The Institute of Chartered Accountants of India

 . v

• Evolution
• Types
• Performance Measures, NAV
• Mutual Fund Organisation
• Advantages and Disadvantages of Mutual Fund
• Exchange Traded Funds (ETFs)
• Real Estate Investment Trusts (ReITs)
• Infrastructure Investment Trusts (Invits)
10. Private Equity
• Meaning and Classification
❖ Venture Capital
❖ Buyouts
❖ Special Cases
❖ Hurdle rate
❖ Paid in Capital
❖ Term Sheet
• Cost of Investing in Private Equity
• Exit Routes
• Valuation of Private Equity Transactions
• Private Equity Funds (Distribution of returns in General Partner and Limited
Partners)
11. Investment Banking
• Concept
• Functions
• Challenges
• Developments in Investment Banking
• Merchant Banking and issue management
12. Credit Rating
• Introduction
• Rating Services

© The Institute of Chartered Accountants of India

 vi .

• Objectives and types

• Uses
• Credit Rating Process
• Credit Rating Methodology
• Rating Revisions
• Credit Rating Agencies in India and abroad
• Limitations with case studies
13. Treasury Operations
• Raising and Deployment of Funds
• Risk Management
14. Risk Management
• Preventive Controls
• Early Signals
• Credit Risk
15. Credit Derivatives
• Credit Default Swaps
• Collateralized Debt Obligations (CDO)
• Pricing of Credit Derivative Instruments
16. Leasing
• Meaning, types, advantages and disadvantages of Leasing
• Financial evaluation of lease proposal from perspective of Lessee and Lessor
• Break Even Lease Rental (BELR) from Lessee’s and Lessor’s point of view
• Cross Border Leasing
• Regulatory Aspects of Leasing
17. Factoring
• Concept, Definition and Mechanism of Factoring
• Types/Forms of Factoring
• Functions of a Factor

© The Institute of Chartered Accountants of India

 . vii

• Benefits of Factoring
• Factors inhibiting the growth of Factoring in India
• Forfaiting
• Forfaiting vs Export Factoring
• Regulatory Aspects of Factoring
18. SEBI Guidelines
Following topic are covered in the paper of Strategic Financial Management (Paper – 2) and
Corporate and Economic Laws (Paper – 4) also forms the part of the syllabus
• Securitization
• Fixed Income Securities (Valuation of Bonds/ Debentures)
• Derivatives
• Interest Rate Risk Management
• The Securities and Exchange Board of India Act, 1992
• Legislative framework on listing agreements
• The Securities Contract (Regulation) Act, 1956
• Chapter III-D of the RBI Act, 1934

© The Institute of Chartered Accountants of India

 viii .

BEFORE WE BEGIN …

Revised Scheme of Education and Training: Bridging the competence gap

The role of a chartered accountant is evolving continually to assume newer responsibilities in a
dynamic environment. There has been a notable shift towards strategic decision making and
entrepreneurial roles that add value beyond traditional accounting and auditing. The causative
factors for the change include globalisation leading to increase in cross border transactions and
consequent business complexities, significant developments in information and technology and
financial scams underlining the need for a stringent regulatory set up. These factors necessitate
an increase in the competence level of chartered accountants to bridge the gap in competence
acquired and competence expected from stakeholders. Towards this end, the scheme of education
and training is being continuously reviewed so that it is in sync with the requisites of the dynamic
global business environment; the competence requirements are being stepped up to enable
aspiring chartered accountants to acquire the requisite professional competence to take on new
roles.
Introducing “Electives”: Significant feature of the Revised Scheme of Education and
Training
In the Revised Scheme of Education and Training, the concept of electives is being introduced at
the Final level in line with the school of thought that specialisation is the key to developing
professionally competent chartered accountants. As per this school of thought, an emerging
chartered accountant has to be geared up to assume new roles as consultants and advisors,
necessitated on account of growing business complexity, dynamic changes in legislations and
regulatory requirements and client expectations.
The seven core papers, namely, Financial Reporting, Strategic Financial Management, Advanced
Auditing and Professional Ethics, Corporate and Economic Laws, Strategic Cost Management and
Performance Evaluation, Direct Tax Laws and Indirect Tax Laws, represent the competence areas
in respect of which an aspiring chartered accountant has to be technically well equipped,
regardless of his intended future specialization or role. These subjects, in fact, provide the base to
enable an aspiring chartered accountant to specialize in any professional accounting role. For
instance, the core paper on direct tax laws and international taxation lays the foundation for f urther
specialisation in the area of international taxation. Further, consequent to borderless economies, it
has become imperative that subjects which transcend the borders be added in the curriculum, for
instance, Global Financial Reporting Standards and International Taxation.
The six elective papers introduced in the Revised Scheme are Risk Management, Financial
Services and Capital Markets, International Taxation, Economic Laws, Global Financial Reporting
Standards and Multi-disciplinary case study. Students have to opt for one out of these six papers
keeping in mind their desired area of specialization.

© The Institute of Chartered Accountants of India

 . ix

Framework and brief introduction of Chapters

The Elective Paper 6B – Financial Services and Capital Markets is a blend of theory and practical.
The Study Material has been segregated into two parts i.e. Part A and Part B. Part A consists of
Chapter 1 to 17 as mentioned in the syllabus and Part B consists of SEBI Regulations as depicted
in detailed contents of Part B of the Study Material.
The study material is prepared by keeping in mind the current scenarios in the financial services
and capital markets operating, wherever, required. Similarly, students will also get familiarized with
the various concepts of capital market. In the chapter, Capital Market – Primary, some of the new
concepts currently in vogue has been introduced such as Green Shoe Option, Application
Supported by Blocked Amount (ASBA), Anchor Investors etc. Similarly, in the Chapter, Capital
Market - Secondary, certain interesting topics such as Straight Through Processing (STP),
Securities Lending and Borrowing, Circuit Breakers, Margin Trading have been lucidly explained.
Banking plays an important role in the financial market in India. Therefore, a Chapter - Banking as
source of Capital including NBFCs has been added. This chapter throws light on Project
Financing, Bank Loan in the form of Working Capital and term loan, financing through NBFCs,
Working Capital Management and Reverse Mortgage.
Further, some chapters such as Commodity Market, Risk Management, Treasury Operations, and
Credit Derivatives have been added to give a wide coverage to the subject Financial Services and
Capital Markets. In these chapters some contemporary topics have been added to give a new
flavor to this dynamic subject.
Moreover, some more chapters such as Private Equity, Investment Banking and Credit Rating
have been added to give a further boost to the ever evolving field of Financial Services and Capital
Markets.
And, last but not the least; two chapters, i.e. Leasing and Factoring are included on account of their
importance in Financial Services.
Features of this study material
There are several significant characteristics of this study material which are outlined as below:
(i) It comprehensively covers the course requirements of students preparing for Financial
Services and Capital Markets paper.
(ii) The chapters have been organized in such a manner that the concepts of the students are
cleared in a step by step process.
(ii) It is written in a very simple and lucid manner to make the subject understandable to the
students.
(iii) At the beginning of each chapter, learning outcomes have been given so that the students
have some sort of idea about what he will learn after going through the ch apter.
(iv) Efforts have also been made to apprise the students of the latest happenings, wherever
possible, in various chapters of Financial Services and Capital Market Paper such as

© The Institute of Chartered Accountants of India

 x .

Primary Market, Secondary Market, Money Market, Institutions and Intermediaries,

Commodity Market, Mutual Funds, Private Equity, and Credit Rating, .
(v) While preparing the study material, it has been kept in mind that students understand the
concepts covered in the study material. Accordingly, chapters have been kept concise,
giving appropriate headings, sub-headings and mentioning examples at suitable places.
Strategy to approach this study material
It is desired from the students that they cover the entire syllabus and also required to visit ICAI
Website for additional material in the form of Supplementary, Case lets etc. Students are also
advised to update themselves with the latest changes in the financial sector. The students are
therefore required to refer academic updates in ‘Students Journal’ published by the Board of
Studies, the monthly journal ‘The Chartered Accountant’, and financial newspapers such as
Economic Times, Mint, Business Line and Business Standard.
This Part of Study Material has to be referred in conjunction with Part B of the Study
Material. Please note that while Part A may be revised, if required, Part B will be revised on
yearly basis. Hence, it is essential that students should refer the applicable edition of Part B
of Study Material as per the announcement being hosted at ICAI Website on time to time
basis.
Although, sincere efforts have been made to keep the study material error free, it is possible that
some errors might have inadvertently crept in. In this respect, students are encouraged to highlight
any mistake they may notice while going through the study material by sending an e -mail at fscm-
[email protected] or write to the Director of Studies, The Institute of Chartered Accountants of India, A -
29, Sector-62, Noida-201309.

Happy Reading and Best Wishes!

© The Institute of Chartered Accountants of India

 . xi

CONTENTS
PART- A
Chapter 1 – Global Financial Markets
Chapter 2 – Impact of various Policies of Financial Markets
Chapter 3 – Capital Market - Primary
Chapter 4 – Capital Market - Secondary
Chapter 5 – Money Market
Chapter 6 – Institutions and Intermediaries
Chapter 7 - Commodity Market
Chapter 8 – Banking as source of Capital including NBFCs
Chapter 9 – Mutual Funds
Chapter 10 – Private Equity
Chapter 11 – Investment Banking
Chapter 12 – Credit Rating
Chapter 13 – Treasury Operations
Chapter 14 – Risk Management
Chapter 15 – Credit Derivatives
Chapter 16 – Leasing
Chapter 17 – Factoring
PART - B
Chapter 18 – Applicable SEBI Regulations

© The Institute of Chartered Accountants of India

 xii .

DETAILED CONTENTS : PART A

CHAPTER 1 – GLOBAL FINANCIAL MARKETS

1. Introduction to Global Financial Markets ........................................................................... 1.1
2. Role of Financial Market in Economic Development of a Country ...................................... 1.4
3. Stakeholders in Financial Market (Domestic and Global) ................................................... 1.7
4. Indian Financial Market Scenario .................................................................................... 1.14

CHAPTER 2 – IMPACT OF VARIOUS POLICIES OF FINANCIAL MARKETS

1. Credit Policy of the RBI ..................................................................................................... 2.1
2. Fed Policy ......................................................................................................................... 2.6
3. Cost Inflation Index ........................................................................................................... 2.8
4. Consumer Price Index ....................................................................................................... 2.9
5. Wholesale Price Index .................................................................................................... 2.10

CHAPTER 3 – CAPITAL MARKET - PRIMARY

1. Basics of Capital Markets .................................................................................................. 3.2
2. Segments of Capital Market ............................................................................................. 3.4
3. Capital Market Instruments ............................................................................................... 3.7
4. Aspects of Primary Market .............................................................................................. 3.12

CHAPTER 4 – CAPITAL MARKET - SECONDARY

1. Introduction to Secondary Market ...................................................................................... 4.2
2. Development of the Stock Market in India ......................................................................... 4.3
3. Stock Market Organization in India .................................................................................... 4.4
4. Demutualization of Stock Exchanges ................................................................................ 4.9
5. Share Trading in Secondary Market ................................................................................ 4.10
6. Stock Market and its Operations ..................................................................................... 4.16
7. Risk Management in Secondary Market .......................................................................... 4.19

© The Institute of Chartered Accountants of India

 . xiii

8. Indian Debt Market .......................................................................................................... 4.29

CHAPTER 5 – MONEY MARKET

1. Basics of Money Market .................................................................................................... 5.2
2. Money Market Participants (Institutions) .......................................................................... 5.10
3. Money Market Instruments .............................................................................................. 5.11
4. Cash Reserve Ratio and Statutory Liquidity Ratio ........................................................... 5.25
5. Determination of Interest Rates ....................................................................................... 5.26
6. Money Market Instruments- G Sec .................................................................................. 5.28
7. Recent developments in Money Market ........................................................................... 5.29
8. Repo, Reverse Repo and Ready Forward Contract ......................................................... 5.30
9. Day Count Convention .................................................................................................... 5.35

CHAPTER 6 – INSTITUTIONS AND INTERMEDIARIES

1. Depository ........................................................................................................................ 6.1
2. Stock and Commodity Exchanges – Indian and Global ..................................................... 6.4
3. Intermediaries in the Capital Market ................................................................................ 6.11
4. Institutional Investors ...................................................................................................... 6.15
5. Foreign Portfolio Investors (FPIs) .................................................................................... 6.17
6. Custodians ...................................................................................................................... 6.20
7. Clearing Houses ............................................................................................................. 6.21

CHAPTER 7 – COMMODITY MARKET

1. Introduction ....................................................................................................................... 7.1
2. Role of Commodity Markets .............................................................................................. 7.2
3. Commodity Market in India ................................................................................................ 7.3
4. Application of Derivative in Commodities .......................................................................... 7.5
5. Global Commodities Exchanges ........................................................................................ 7.8

CHAPTER 8 – BANKING AS SOURCE OF CAPITAL INCLUDING NBFCS

1. Bank Loans in the form of Working Capital Loan ............................................................... 8.1

© The Institute of Chartered Accountants of India

 xiv .

2. Bank Loan in the form of term loan ................................................................................... 8.8

3. Financing through NBFCs ................................................................................................. 8.8
4. Project Financing ............................................................................................................ 8.10
5. Working Capital Management ......................................................................................... 8.18
6. Reverse Mortgage........................................................................................................... 8.24

CHAPTER 9 – MUTUAL FUNDS

1. Meaning ............................................................................................................................ 9.2
2. Evolution ........................................................................................................................... 9.3
3. Types of Mutual Funds ...................................................................................................... 9.6
4. Net Asset Value (NAV) .................................................................................................... 9.14
5. Performance Measurement ............................................................................................. 9.15
6. Advantages and Disadvantages of Mutual Fund .............................................................. 9.21
7. Factors influencing the selection of Mutual Funds ........................................................... 9.23
8. Signals highlighting the exist of investors from the Mutual Fund Scheme ........................ 9.23
9. Money Market Mutual Funds ........................................................................................... 9.24
10. Separation of Distribution and Advisory Functions in the Mutual Fund Industry ............... 9.25
11. Exchange Traded Funds ................................................................................................ 9.25
12. Real Estate Investment Trusts ....................................................................................... 9.27
13. Infrastructure Investment Trust ...................................................................................... 9.31
14. Case Study: IL & FS Default and handling by Mutual Funds ............................................ 9.33
15. Case Study: Loan against securities exposure to Essel
Group entities of Mutual Funds ..................................................................................... 9.38

CHAPTER 10 – PRIVATE EQUITY

1. Meaning of Private Equity ............................................................................................... 10.1
2. Classification of Private Equity ........................................................................................ 10.3
3. Cost of Investing in Private Equity ................................................................................. 10.10
4. Exit Routes for a PE ...................................................................................................... 10.10
5. Valuation of Private Equity Transactions ....................................................................... 10.11

© The Institute of Chartered Accountants of India

 . xv

6. Private Equity Funds ..................................................................................................... 10.12

7. PE Deals Score over REITs as Realtors Eye Fast Money ............................................. 10.13

CHAPTER 11 – INVESTMENT BANKING

1. Concept of Investment Banking ....................................................................................... 11.1
2. Functions of an Investment Bank .................................................................................... 11.6
3. Challenges in Investment Banking ................................................................................ 11.10
4. Developments in Investment Banking ........................................................................... 11.11
5. Merchant Banking and Issue Management .................................................................... 11.12

CHAPTER 12 – CREDIT RATING

1. What is Credit Rating ...................................................................................................... 12.1
2. Rating Services ............................................................................................................... 12.2
3. Objectives of Credit Rating ............................................................................................. 12.3
4. Types of Credit Rating .................................................................................................... 12.3
5. Uses of Credit Rating ...................................................................................................... 12.4
6. Credit Rating Process ..................................................................................................... 12.4
7. Credit Rating Methodologies ........................................................................................... 12.7
8. CAMEL Model in Credit Rating ...................................................................................... 12.10
9. Rating Revisions ........................................................................................................... 12.11
10. Credit Rating agencies in India ..................................................................................... 12.11
11. Credit Rating agencies abroad ...................................................................................... 12.12
12. Credit Rating agencies and the US Sub-prime crisis ..................................................... 12.13
13. Limitations of Credit Rating ........................................................................................... 12.13
14. Contemporary Aspects in Credit Rating ......................................................................... 12.14

CHAPTER 13 – TREASURY OPERATIONS

1. Introduction ..................................................................................................................... 13.1
2. Raising and Deployment of Funds ................................................................................... 13.6
3. Risk Management in Treasury Operations ..................................................................... 13.11

© The Institute of Chartered Accountants of India

 xvi .

CHAPTER 14 – RISK MANAGEMENT

1. Introduction ..................................................................................................................... 14.1
2. Types of Market Risks ..................................................................................................... 14.2
3. Early Signals ................................................................................................................... 14.3
4. Credit Risk ...................................................................................................................... 14.4

CHAPTER 15 – CREDIT DERIVATIVES

1. Collateralized Debt Obligations (CDOs) .......................................................................... 15.2
2. Credit Default Swap (CDS) ............................................................................................. 15.3
3. Pricing of Credit Derivative Instruments .......................................................................... 15.6

CHAPTER 16 – LEASING
1. Leasing ........................................................................................................................... 16.1
2. Types of Leasing ............................................................................................................. 16.2
3. Advantages……………………………………………………………………………………........ 16.3
3. Disadvantages ................................................................................................................ 16.4
5. Evaluation of Lease ....................................................................................................... 16.5
6. Break Even lease Rental (BELR) .................................................................................. 16.11
7. Cross-Border Leasing ................................................................................................... 16.13
8. Regulatory Aspects of Leasing ...................................................................................... 16.16

CHAPTER 17 – FACTORING
1. Introduction to Factoring ................................................................................................. 17.1
2. Definition and Mechanism ............................................................................................... 17.2
3. Types/Forms of Factoring ............................................................................................... 17.4
4. Functions of a Factor ...................................................................................................... 17.5
5. Benefits of Factoring ....................................................................................................... 17.6
6. Factors inhibiting the growth of Factoring in India ........................................................... 17.6
7. Forfaiting......................................................................................................................... 17.7
8. Some Illustrations in Factoring ........................................................................................ 17.8
9. Regulatory Aspects of Factoring ..................................................................................... 17.9

© The Institute of Chartered Accountants of India