Unit I - Introduction To Financial Institutions and Markets

FINANCIAL INSTITUTIONS AND MARKETS
Unit I: Nature and Role of Financial system Introduction; structure of financial system; Equilibrium in financial markets; financial system and economic development; Theories of Impact of Financial developments
Unit I - Introduction to Financial Institutions and Markets

Financial System- implies a set of Complex and closely connected institutions, markets, transactions, agents, practices, claims and liabilities in a economy What is the financial system concerned with? Money Credit Services finance Functions of Financial system Financial Institutions- act as mobilisers and depositories of saving and as the custodian of finance. Provides various financial services to the society. Financial institution A financial institution is an institution whose primary source of profits is through financial asset transactions Classifications of Financial Institutions Banks Stock Brokerage Firms Non Banking Financial Institutions Building Societies Asset Management Firms Credit Unions Insurance Companies
Get MBA study materials, articles, order business templates and stock market updates from or www.easymbaguide.com or www.easymbaguide.jimdo.com or www.easymbaguide.blogspot.com. Give your valuable feedback easymbaguide@gmail.com. Join easymbaguide@yahoogroups.com to get updates
Functions of Financial Institutions The principal function of financial institutions is to collect funds from the investors and direct the funds to various financial services providers in search for those funds. Financial Markets A financial market is a market in which financial assets are traded. In addition to enabling exchange of previously issued financial assets Six basic functions of financial markets Borrowing and Lending Price Determination Information Aggregation and Coordination Risk Sharing Liquidity Efficiency Financial Instruments Financial instruments are cash, evidence of an ownership interest in an entity, or a contractual right to receive, or deliver, cash or another financial instrument. Categorization of Financial Instruments Cash instruments :are financial instruments whose value is determined directly by markets. They can be divided into securities, which are readily transferable, and other cash instruments such as loans and deposits, where both borrower and lender have to agree on a transfer Derivatives instruments: are financial contracts, or financial instruments, whose prices are derived from the price of something else Equilibrium in financial Markets When the expected demand for funds matches with the planned supply of funds generated out of saving and credit creation or when the total desired borrowing is equal to the total desired lending. Determinants of supply of funds Aggregate savings by the household sector Aggregate savings by the business sector Aggregate savings by the government Determinants of demand for funds Investment in fixed and circulating capital (working capital) Demand for consumer durables Investment for housing Theories on savings and investment Prior Savings Theory- Samuelson Credit Creation Theory- Kalecki and Schumpeter Theory of forced Savings- Keynes and Tobin Financial Regulation theory- Stiglitz Financial Liberalisation Theory- Mckinnon and Shaw
Prior Savings Theory- Samuelson Saving as a Prerequisite for Investment Appropriate monetary and fiscal policy Generate high rate of inflation Controlled by interest rate Role of financial system to promote financial development-transformation like Liability- Asset transformation Size- transformation Risk- transformation Maturity- transformation Credit Creation Theory Credit creation in anticipation to saving Investment through credit creation results in prompt income generation Theory of forced Savings Other wise known as inflationary financing through forced savings It is the saving that determines the investment- monetary expansion Four channels for monetary expansion- if the resources are unemployed, if resources are fully employed, inflation changes income distribution among the profit earners, inflation imposes taxes Financial Regulation theory Financial markets are prone to market failures Government interventions makes them function better Lowering interest rates and credit programmes Financial Liberalization Theory In the form of interventions, political pressures Financial liberalisation, privatisation.
Unit II: The Financial System in India - Capital markets and money markets; new issues market; secondary market Stock exchanges in India; Listing of Securities; Registration of Brokers; SEBI regulations; Guidelines for IPO; Recent Developments in Financial System in India.
Unit II: The Financial System in India

FINANCIAL SYSTEMS
Constituents of a Financial System
Money Market Money Market- The money market is a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions In India money market is regulated by Reserve bank of India FINANCIAL INSTRUMENTS Money Market Instruments Some of the important money market instruments are briefly discussed below; 1. Call/Notice 2. Treasury 3. Term 4. Certificate 5. Commercial Papers Money Bills Money Deposit
of
Capital Market
Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year. Securities Exchange Board of India (SEBI) [www.sebi.gov.in ] regulates capital market Capital Market Instruments Capital market consists of primary market and secondary market 1.Equity segment -Equity shares, preference shares, convertible preference shares, nonconvertible preference shares etc 2. Debt segment -debentures, zero coupon bonds, deep discount bonds etc. 3. Hybrid Instruments- convertible debentures, warrants etc Indian Capital Markets Gilt- Edged Market- Government securities market Industrial Securities Market- Primary market and Secondary market. Gilt- Edged Market Is the market for government and semi government securities Features- stable in value and are much sought after by banks Guaranteed return on investments No speculations in securities Industrial Securities Market A market for industrial securities Comprises the following segments- primary market and secondary market Primary market Also known as new issues market It is a market for raising fresh capital Modes of raising capital in the primary market Public issue Rights issue
Private placement Secondary market A market which deals with the securities that have been already issued The activity of buying and selling of securities in a secondary market are carried through the mechanism of stock exchange SEBI The Securities and Exchange Board Established in the year 1988 1992 Securities market regulation is entrusted to a single highly visible and independent organisation Constitutions- six member Departments of SEBI The primary market policy, Intermediaries, self regulatory organisations (SRO) AND Investor Grievance and Guidance department The issue management and intermediaries department The secondary market policy, Operations and exchange administrations, new investment products and insider trading department The secondary market exchange administration, inspection and non member intermediaries department Institutional investment(MF and FIIS), Mergers and acquisitions, research and publications and international relations and IOSCO department. Legal department Investigation department. Objective of SEBI 1. It tries to develop the securities market. 2. Promotes Investors Interest. 3. Makes rules and regulations for the securities market. Functions Of SEBI: 1. Regulates Capital Market 2. Checks Trading of securities. 3. Checks the malpractices in securities market. 4. It enhances investor's knowledge on market by providing education. 5. It regulates the stockbrokers and sub-brokers. 6. To promote Research and Investigation
Definition of Capital Market It is a place where people buy and sell financial instruments, be it equity or debt. It is a mechanism to facilitate the exchange of financial assets. Examples of capital market In India - BSE and NSE are the two capital markets. International - NYSE, LSE and TSE are the largest capital markets. Classification Primary market Secondary market It can also be classified on the basis of life span of the asset into: Money market -Less than one year Capital market proper - More than one year. PURPOSE STOCK MARKET 1. It helps in the capital formation of the country. 2. It maintains active trading. 3. It increases liquidity of assets. 4. It also helps in price recovery process Shortcomings of Stock Markets Scarcity of floating stocks: Financial institutions, banks and insurance companies own 80% of the equity capital in the private sector. Speculation: 85% of the transactions on the NSE and BSE are speculative in nature. Price rigging: Evident in relatively unknown and low quality scrips. Causes short time fluctuations in the prices. Insider trading: Obtaining market sensitive information to make money in the markets. Financing from capital markets; there are two ways a company can raise money from the financial markets: debt and equity. Primary or New Issue Market Primary market is the segment in which new issues are made whereas secondary market is the segment in which outstanding issues are traded. It is for this reason that the Primary Market is also called the New Issues Market and the Secondary market is called the Stock Market. In the primary market, new issues may be made in three ways namely, public issue, rights issue and private issue. Secondary Market The new issues of securities are made available in the 'primary market'. The securities that are already outstanding and owned by the investors are usually bought and sold through the 'secondary market', which is popularly known as 'stock market'. There are two broad segments of the stock markets (i) The organised stock exchanges (ii) The Over-the-Counter (OTC) market.
Reasons for Transactions on Secondary Market There are two main reasons why individuals transact in the secondary market: Information Motivated Reasons Liquidity Motivated Reasons The Securities which are traded in the secondary market may be classified as follows: 1. On the basis of issuer, Securities may be classified as Industrial securities Government securities Financial intermediaries securities The stock exchange is really an essential pillar of the private sector corporate economy. It discharges essential functions in the process of capital formation and in raising resources for the corporate sector. First, the stock exchange provides a market place for purchase and sale of securities. Secondly, the stock exchange provides the linkage between the savings in the household sector and investment in corporate economy. Thirdly, by providing a market quotation of the prices of shares and bonds. Stock Market Regulation Powers and Functions of SEBI Chapter IV of SEBI Act, 1992, deals with the powers and functions of the Board. Section 11 of the Act lays down that it shall be the duty of the Board to protect the interests of the investors in securities and to promote the development of, and to regulate the securities markets by such measures as it thinks fit. These measures would include: a) Regulating the business in stock exchanges and any other securities markets; b) Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an 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 markets in any manner; c) Registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf; d) Registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds; e) Promoting and regulating self-regulatory organisations; f) Prohibiting fraudulent and unfair trade practices relating to securities markets; g) Promoting investors education and training of intermediaries of securities markets; h) Prohibiting insider trading in securities; i) Regulating substantial acquisition of shares and takeover of companies; j) Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds and other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market;
k) Calling for information and record from any bank or any other authority or board or corporation established or constituted by or under any central, state or provincial Act in respect of any transaction in securities which is under investigation or inquiry by the Board; l) l) Performing such functions and exercising such powers under the provisions of the Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government; m) m) n) n) Levying fees or other charges for carrying out the purposes of this section; Conducting research for the above purposes;
o) o) Calling from or furnishing to any such agencies, as may be specified by the Board, such information as may be considered necessary by it for the efficient discharge of its functions; p) p) Performing such other functions as may be prescribed.
Organisation (Management Of SEBI) The management of SEBI vests in the board, which consists of the following members, namely: a) A Chairman b) Two members from amongst the officials of the 'Ministers of the Central Government dealing with Finance of Law' c) One member from amongst the official of the Reserve Bank of India d) Two other members, to be appointed by the Central Government For day-to-day functions, the activities of SEBI have been divided into five operational departments viz. many markets - policy, intermediaries, investor grievances and guidance, etc., Such management and intermediaries, investor grievances and guidance, etc. Secondary market-exchange administration, inspection and non- member intermediaries etc., Secondary market-exchange administration, inspection and non- member intermediaries, etc., Institutional investment - Mutual funds and Fills, mergers and acquisitions, research and publications and internal regulation. An Executive Director heads each department. Besides these five departments, there are the legal and investigation departments too. Activities The first major activity undertaken by SEBI was preparation of an Approach paper on comprehensive legislation for the securities markets. Since inception, SEBI has issued a number of guidelines, rules, drafts regular consultative papers etc. in order to regulate and develop the securities market and protect investors in some important guidelines etc.
Regulatory Framework of Security Market The four main legislations governing the securities market are: (a) the SEBI Act, 1992 which establishes SEBI to protect investors and develop and regulate securities market; (b) the Companies Act, 1956, which sets out the code of conduct for the corporate sector in relation to issue, allotment and transfer of securities, and disclosures to be made in public issues; (c) the Securities Contracts (Regulation) Act, 1956, which provides for regulation of transactions in securities through control over stock exchanges; and (d) the Depositories Act, 1996 which provides for electronic maintenance and transfer of ownership of demat securities. Regulators The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Ministry of Company Affairs, Reserve Bank of India (RBI) and SEBI. The activities of these agencies are coordinated by a High Level Committee on Capital Markets. The orders of SEBI under the securities laws are appellable before a Securities Appellate Tribunal. Regulation of OTCEI The functioning and operations of the OTCEI are subject to the provision of the Securities Contracts (Regular Act, 1956, the Companies Act, 1956 and other relevant laws, which are applicable to Indian Stock Exchanges of operations are supervised by SEBI and Government of India. Criteria for admission of members The members would be public financial institutions, scheduled banks, mutual funds, banking subsidiaries, SEBI-registered merchant banks, venture capital funds and venture capital companies, non-banking financial companies having a minimum financial net worth as specified by OTCEI. The applicant should satisfy the elegant requirements of the Securities Contracts (Regulation) Rules, 1957. The member should posses the necessary skills, resources and capabilities to appraise project/common establish its viability, analyze a company's financial worth, evaluate a company's management and determine value for a company's products. The member should have the necessary status and standing to be able to carry the confidence of the members and licensed dealers while recommending any scrip for investment. The member should have sufficient financial reserves to 'sponsor' and trade in the scrip. The member should be authorized by SEBI for carrying out merchant banking activities. The member should have adequate organizational infrastructure to establish and manage the OTC count. The net worth of the member should be a minimum of Rs. 2.50 crores. Criteria for admission of licensed dealers The licensed dealers would be a corporate body, partnership firms and individuals having minimum tangible net worth of an amount to be decided by the OTCEI governing board from time to time. The corporate bond should satisfy the eligibility requirements of the Securities Contracts (Regulation) Rules, 1957. The licensed dealers should have a minimum tangible liquid net worth which would be sufficient to carry investment, trading and market making in the scrips listed on the OTC Exchanges.
The licensed dealers should have adequate organizational infrastructure. Licensed dealers should at least be graduates. Additional weightage will be given for additional ratio professional qualification. Licensed dealers should have adequate knowledge of trading, stock valuation, share transfer rules and relation. Apart from the above, the licensed dealers will be required to comply with the following terms and conditions: a) If the applicant is a corporate body, the promoters should hold at least 40% of the equity capital. b) In case of change in dealership from individual/partnership firm to a corporate body original individual dealers/shares of the partnership firm should hold at least 40% of the capital of the new corporate body. c) Partnership firms and corporate applicants must nominate one of the authorized signatories whose signification will be considered for eligibility and the same person will be required to take a written test and appear in interview. d) Dealership is not transferable. e) If there is a change in shareholding of a body corporate who is a dealer, resulting in change in ownership management, the OTC Exchange of India reserves the right to review the status of dealership of that dealer. Criteria for admission (for listing) of companies The company should be sponsored by a member of the OTCEI. The sponsor has to certify that all the scrips proposed to be offered for trading on OTC Exchange have already been subscribed to by members and licensed dealers of OTCEI. The company has to agree to abide by all statutory and OTCEI's provisions for listing. The company to agree to entered into an agreement with the OTCEI in a prescribed format. The company will comply with the provisions laid down in the Notification to be issued by the Government of India; subscribed to by members and licensed dealers of OTCEI. The company to agree to abide by all statutory and OTCEI's provisions for listing. The company will comply with the provisions laid down in the Notification to be issued by the Government of India, for listing on the OTC Exchange of India. New Issue Market An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book-building method or a combination of both. The new issue market deals with the new securities, which were not previously available to the investing public. The new issue market encompasses all institution dealing in fresh claim. Distinctions between new issue market and stock exchange The distinction between new issue market and stock exchange can be made on three grounds. 1. Functional difference 2. Organisational difference 3. Nature of contribution to industrial finance
Functions of new issue market The main function of new issue market is to facilitate transfer resources from savers to the users. The savers are individuals, commercial banks, insurance company etc. the users are public limited companies and the government. The new issue market plays an important role in mobilizing the funds from the savers and transferring them to borrowers for production purposes, an important requisite of economic growth. It is not only a platform for raising finance to establish new enterprises, but also for expansion/diversification/modernizations of existing units. On this basis, the new market can be classified as: 1. A market where firms go to the public for the first time through initial public offering (IPO). 2. A market where firms which are already trade raise additional capital through seasoned equity offering (SEO). The main function of new issue market can be divided into three service functions: 1. Origination 2. Underwriting 3. Distribution Methods of floating new issues The various methods which are used in the floating of securities in the new issue market are: Public issues Offer for sale Placement Rights issues Kinds of Offer Documents An offer document covers all the relevant information to help an investor in making wise investment decisions. Draft Prospectus Draft Letter of Offer Prospectus Abridged Prospectus Shelf Prospectus Information Memorandum Red-Herring Prospectus
Disadvantages of Floatation The disadvantages of floatation include the following: There are considerable costs in floatation and listing. It takes lot of management's time, before and after floatation and listing. The company must comply with the stringent stock exchange regulations. It will be necessary to meet the regulatory requirements for disclosure of information, including details of managerial remuneration. A dilution of management control will result from the widely held shares of the company. The affairs of the company are subject to public scrutiny and fluctuations in share price may some time cause adverse image in the public. Since the costs of floatation are higher, other ways of rising finance would reduce the cost of funds. Listed company status will put additional burden on the managerial staff. The buying and selling of shares by the directors and other related persons might attract the provisions of 'insider trading'. There will always be pressure from shareholders to declare dividends, which may not be in the interests of the company. The adverse campaigns against the company may drive down the share price; it is technically called 'bear raids'. The investors always expect a raise in the share price. The company's growth and profitability may not afford the increase in share price always. Promoters A 'promoter' has been defined as a person or group of persons who are instrumental in formation of the company, who enable the company to start its commercial operations by bringing in the necessary funds required for the concern. The promoters are in the overall control of the company, whose names are mentioned in the offer document. 'Promoter group' includes promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse). In case, promoter is a company, a subsidiary or holding company of that company. Any company in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the promoter. Any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company. In case, the promoter is an individual, any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member.
Promoters Contribution Promoters' contribution in any public issue shall be in accordance with the following provisions under SEBI's DIP Guidelines: Unlisted companies Offers for sale Listed companies Composite issues of listed companies Free Pricing of Issues The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. Advantages of Free Pricing The free pricing of capital issues will bring in the following advantages: The fixation of price is based on the influence of market forces, and it tends to be a fair price of share. This would lead to healthy transactions in the market place. This would boost the government policies as regards globalisation and liberalization. It helps in development of efficient capital markets with efficient information. There would be more flow of funds into the capital market, thereby development of the economy and faster growth in industrialisation. Disadvantages of Free Pricing The free pricing system of public issues is subject to the following drawbacks: Even though it appears that the price is fixed freely, it may happen to be an unrealistic price fixed by the company in consultation with the lead manager to the issue. For a developing country like India, absolute freedom from regulations will lead to unethical practices in the capital market. In an unregulated market, the risk exposure to the investor is more, and hence the regulatory mechanism should continue. Lock-in Period 'Lock- in' indicates the freeze on transfer of shares. Lock-in of Minimum Specified Promoters Contribution in Public Issues In case of any issue of capital to the public the minimum promoter contribution shall be locked in for a period of three years. The lock-in shall start from the date of allotment in the proposed public issue and the last date of the lock-in shall be reckoned as three years from the date of commencement of commercial production or the date of allotment in the public issue, whichever is later. "The date of commencement of commercial production" means the last date of the month in which commercial production in a manufacturing company is expected to commence as stated in the offer document.
Qualified Institutional Buyers (QIBs) Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital market. As per the SEBI guidelines, QIBs shall mean the following: Public Financial Institution as defined in Section 4A of the Companies Act, 1956 Scheduled Commercial Banks Mutual Funds Foreign Institutional Investors registered with SEBI Multilateral and bilateral development financial institutions Venture capital funds registered with SEBI Foreign venture capital investors registered with SEBI State Industrial Development Corporations Insurance companies registered with the Insurance Regulatory and Development Authority (IRDA) Provident Funds with a minimum corpus of Rs. 25 crores Pension Funds with minimum corpus of Rs. 25 crores. Placement Under this method, the issue houses or brokers buy the securities outright with the intention of placing them with their clients afterwards. Here, the brokers act as almost wholesalers selling them in retail to the public. The brokers would make profit in the process of reselling to the public. The issue houses or brokers maintain their own list of client and through customer contact sell the securities. Book-Building About Book Building Book-building is basically a capital issuance process used in Initial Public Offer (IPO), aiding price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism wherein, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.
BSE's Book-Building System Features Fixed Price process Book Building process
Pricing
The price at which the securities are offered/allotted is known in advance to the investor. Demand for the securities offered is known only after the closure of the issue. Payment if made at the time of subscription whereas refund is given after allocation.
The price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known. Demand for the securities offered can be known everyday as the book is built.
Demand
Payment
Payment only after allocation.
Safety Net Safety net is a scheme under which a person or a company (generally a finance company) undertakes to buy shares issued and allotted in a new issue from the allottees at a stipulated price This is an agreement in relation to an issue of equity shares. The main feature of the safety net is to provide the equity investors safety of their investments from fall of the share price below the issue price. Stockinvest The stockinvest is a non-negotiable bank instrument issued by the bank in different denominations. The investor who has a savings or current account with the bank will obtain the stockinvest in required denominations and will have to enclose it with the share/debenture application.
Rights Issues If an existing company intends to raise additional funds, it can do so by borrowing or by issuing new shares. One of the most common methods for a public company to use is to offer existing shareholders the opportunity to subscribe further shares. This mode of raising finance is called 'Rights Issues'. Reasons for a Rights Issue In times of inflation, the replacement costs of assets will be high; unless the company can retain cash from substantial profits, the only alternative is to raise cash from a fresh issue of shares. For funding expansion projects, a company may make a rights issue. If a company has a proportion of interest-bearing loan capital, it can suffer from a squeeze on profits. The company can improve its capital structure position by obtaining extra share capital. At a time when the share prices were relatively high, companies found it easy to persuade their shareholders to subscribe cash for new issues with a view to expansion by takeover. Long-dated Rights The long-dated rights are a dilutive anti-takeover device in which rights are automatically distributed to existing stockholders during hostile takeover. These 'poison pills' are automatically exercised when during a hostile takeover, a company or an investor acquires a certain percentage of shares, thereby diluting the takeover. Non-voting Shares Non-voting shares (NVS) are an innovative instrument for raising funds, although prevalent in many developed countries for years. The non-voting shares are closely akin to preference shares that do not carry any voting rights nor is the dividend payable pre-determined. However, unlike preference capital, non-voting shares do not carry a pre-determined dividend. The payoff to the investor for the assumption of higher risk levels and the compensation for loss of control is the high rate of dividends payable to them. Companies that are shy of exposure over leveraged companies, new companies and closely held companies can find NVS useful. It may find favour with small investors, non-resident Indians, overseas corporate bodies, mutual funds etc. The investor gains in terms of higher dividends, purchase at advantageous low price, liquidity and capital appreciation. Bought Out Deal Bought Out Deal (BOD) is a process of investment by a sponsor or a syndicate of investors/ sponsors directly in a company. Such direct investment is being made with an understanding between the company and the sponsor to go for public offering in a mutually agreed time. Bought out deal, as the very name suggests, is a type of wholesale of equities by a company. A company allots shares in full or in lots to sponsors at a price negotiated between the company and the sponsor(s). After a particular period of agreed upon between the sponsor and the company the shares are issued to the public by the sponsor with a premium. The holding cost of such shares by the sponsor may either be reimbursed by the company, or the sponsor may absorb the profit in part or full as per the agreement, arising out of the public offering at a premium. After the public offering, the shares are listed in one or more stock exchanges.
Intermediaries Brokers The gazette of India extraordinary Part II - Section 3 - Sub-section (II) was published by the authority in Bombay on the 20th day of August 1992 notification securities and exchange board of India (stock brokers and sub-brokers) rules, 1992. In exercise of the powers conferred by Section 29 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Central Government hereby makes the following rules, namely Definitions In these rules, unless the context otherwise requires: a) "Act" means the Securities and Exchange Board of India Act, 1992 (15 of 1992); b) "certificate" means a certificate of registration issued by the Board; c) "Rules" mean the Securities and Exchange Board of India (Stock Brokers and SubBrokers) Rules, 1992; d) "stock exchange" means a stock exchange which is for the time being recognised by the Central Government under Section 4 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); e) "stock broker" means a member of a stock exchange; f) "sub-broker" means any person not being a member of a stock exchange who acts on behalf of a stock-broker as an agent or otherwise for assisting the investors in buying, selling or dealing in securities through such stock-brokers; g) "Regulations" mean the Securities and Exchange Board of India (Stock Brokers and Sub- Brokers) Regulations, 1992. Conditions for grant of certificate to stockbroker. The Board may grant a certificate to a stock-broker subject to the following conditions, namely: a) he holds the membership of any stock exchange; b) he shall abide by the rules, regulations and bye-laws of the stock exchange or stock exchanges of which he is a member; c) in case of any change in the status and constitution, the stock broker shall obtain prior permission of the Board to continue to buy, sell or deal in securities in any stock exchange; d) he shall pay the amount of fees for registration in the manner provided in the regulations; and e) he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received from such investors.
Conditions of grant of certificate to sub-broker. The Board may grant a certificate to a sub-broker subject to the following conditions, namely: a) he shall pay the fees in the manner provided in the regulations; b) he shall take adequate steps for redressal of grievances of the investors within one month of the date of the receipt of the complaint and keep the Board informed about the number, nature and other particulars of the complaints received; c) in case of any change in the status and constitution, the sub-broker shall obtain prior permission of the Board to continue to buy, sell or deal in securities in any stock exchange; and d) he is authorised in writing by a stock-broker being a member of a stock exchange for affiliating himself in buying, selling or dealing in securities: Provided such stockbroker is entitled to buy, sell or deal in securities. Trading System Trading on stock exchanges is carried out through brokers and dealers. All members can act as brokers and for this purpose they have to maintain security deposits. Brokers act as agents buying and selling or others for which they receive brokerage commission at stipulated rates. Dealers act as principals and sell securities on their own accounts. However, members cannot enter into contract with any person other that member without prior permission from the Governing Body. The stock exchange rules, bye-laws and regulations have identified eight major functional specializations for the members. 1. Commission Broker 2. Floor Broker 3. Tataniwala 4. Dealer in Non-cleared securities 5. Odd-lot Dealer 6. Budiwalas 7. Security Dealer Primary Dealers The primary dealers have two major roles to play that of an underwriter in the primary market and that of a market maker in the secondary market for the government instruments.
Banking Services Universal Banking Universal banks are the one-stop shops, who deal with a wide portfolio of financial products integrating commercial banking, term lending, retail operations investment banking, mutual funds, pension funds, insurance, underwriting of issues securities issuance etc. Universal banks derive benefit from economies of scale, direct mobilisation of funds from the general public through bank deposits, using such deposit funds for the term lending and retail business. As the universal banks would serve more customers with the same existing network, and the customers would be ultimately benefited with the low cost of services. Correspondent Banking Services provided by correspondent bank include cheque collection, data processing, federal funds trading, securities safekeeping or sale of securities, loans to directors and officers, international transactions investment banking advice on mergers and acquisitions, loan participation and many others. Retail Banking It is a subset of commercial banking. A retail banker provides banking service for individuals. Private Banking In private banking, the banking services, including lending and investment management, are offered only for wealthy individuals. CHIPS The Clearing House Interbank Payment System (CHIPS) is a computerised fund transfer system for international dollar payments linking major US and foreign banks with offices in New York. SWIFT Society for Worldwide Interbank Financial Telecommunications, a cooperative company that transmits financial messages, payment orders, foreign exchange confirmations and delivery of securities to nearly 7,000 financial institutions on the network, located in 190 countries. INVESTMENT MANAGEMENT COMPANY The investment management company has to undertake only the management of the scheme; act as a trustee of any scheme; launch any scheme for the purpose of investing in securities but not invest in any schemes floated by it. An investment management company appoints a trustee who holds the assets of the scheme for the benefit of unit-holders. The investment management company may launch only those schemes that are approved by the trustee. The scheme has to obtain a rating from a credit rating agency. The company has to get the scheme appraised by an appraising agency. The investment management company has to issue unit certificates to accepted scheme applicants, at the most six weeks from the date of closure of the subscription list. A unit certificate issued under the scheme is freely transferable. The investment management company, on production of the instrument of transfer, together with relevant unit certificates, registers the transfer and returns the unit certificate to the transferee within 30 days of the date of such production.
Merchant Bankers/Investment Banks Definition Merchant banking may be defined as, 'an institution which covers a wide range of activities such as management of customer services, portfolio management, credit syndication, acceptance credit, counselling, insurance etc. Origin Merchant banking originated through the entering of London merchants in financing foreign trade through acceptance of bill. Services of Merchant Banks The services of merchant bankers are described in detail in the following section. i) Corporate Counselling ii) Project Counselling iii) Loan Syndication iv) Issue Management The pre-issue management is divided into as following: a) Issue through prospectus, offer for sale and private placement b) Marketing and underwriting c) Pricing of Issues d) Post-issue Management e) Underwriting of Public Issue f) Managers, Consultants or Advisers to the Issue g) Portfolio Management h) Off-shore Finance Fund Manager Fund managers sell the units of funds to investors at the net asset value (NAV) and are also ready to purchase units from the investors at the net asset value. In case of a "no-load" fund, the fund manager sells the units by mail to the investors. Since there are no other intermediaries, this type of fund does not have a sales commission. In terms of a loaded fund, the units are sold through a salesperson. When investors purchase units, a part of the investor's equity is removed as the load at the beginning of the contract. This is called the front-end loading. By adding the commission at the time of sale of units by the investors, exit fees or back-end loading can also be charged. The commission to be paid to the salesperson is added to the net asset value. Apart from this, the fund managers also charge a management fee for the cost of operating the portfolios. These costs include expenses that will be borne by the fund manager such as brokerage fees, transfer costs, book-keeping expenses, and fund managers' salaries. Mutual Funds "A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. Anybody with an investible surplus of as little as a few thousand rupees can invest in mutual funds. These investors buy units of a particular mutual fund scheme that has a defined investment objective and strategy."
ENTITIES IN A MUTUAL FUND OPERATION A mutual fund represents a vehicle for collective investment. In India, the following entities are involved in a mutual fund operation. 1. Sponsor 2. Mutual Fund 3. Trustees 4. Asset Management Company (AMC) 5. Custodian 6. Registrars and Transfer Agents Mutual Funds and SEBI The Unit Trust of India was the first mutual fund set up in India in the year 1964. In the year 1992, the Securities and Exchange Board of India (SEBI) Act was passed. The objectives of SEBI are to protect the interest of investors in securities and to promote the development of and to regulate the securities market. All mutual funds whether promoted by public sector or private sector entities, including those promoted by foreign entities are governed by the same set of regulations. There is no distinction in regulatory requirements for these mutual funds and all are subject to monitoring and inspections by SEBI.

Unit I - Introduction To Financial Institutions and Markets

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Unit I - Introduction To Financial Institutions and Markets

Enviado por

Direitos autorais:

Formatos disponíveis

FINANCIAL INSTITUTIONS AND MARKETS

Unit I - Introduction to Financial Institutions and Markets

Unit II: The Financial System in India

Constituents of a Financial System

Payment only after allocation.

Você também pode gostar