1. What is a financial intermediary? What is their role in a financial system?

Explain with
example
A financial intermediary is an entity that acts as the middleman between two parties in a financial
transaction, such as a commercial bank, investment banks, mutual funds and pension funds.
Financial intermediaries offer a number of benefits to the average consumer, including
safety, liquidity, and economies of scale involved in commercial banking, investment
banking and asset management. Although in certain areas, such as investing, advances in technology
threaten to eliminate the financial intermediary, disintermediation is much less of a threat in other
areas of finance, including banking and insurance. The overall economic stability of a country may
be shown through the activities of financial intermediaries and growth of the financial services
industry.
Their role:-Financial intermediaries move funds from parties with excess capital to parties needing
funds. The process creates efficient markets and lowers the cost of conducting business. For
example, a financial advisor connects with clients through purchasing insurance, stocks, bonds, real
estate and other assets. Banks connect borrowers and lenders by providing capital from other
financial institutions and from the Federal Reserve. Insurance companies collect premiums for
policies and provide policy benefits. A pension fund collects funds on behalf of members and
distributes payments to pensioners.
Example:-If you need to borrow 1,000 you could try to find an individual who wants to lend
1,000. But, this would be very time consuming and you would find it difficult to know how reliable
the lender was. Therefore, rather than look for individuals to borrow a sum, it is more efficient to go
to a bank (a financial intermediary) to borrow money. The bank raises funds from people looking to
deposit money, and so can afford to lend out to those individuals who need it.

2. What is financial market? What is its significance in a financial system?

The financial market is a broad term describing any marketplace where trading of securities
including equities, bonds, currencies and derivatives occurs. Although some financial markets are
very small with little activity, some financial markets including the New York Stock
Exchange (NYSE) and the forex markets trade trillions of dollars of securities daily. Financial
market prices may not indicate the true intrinsic value of a stock due to macroeconomic forces like
taxes. In addition, the prices of securities are heavily reliant on informational transparency by the
issuing company to ensure efficient and appropriate prices are set by the market.

The stability of the financial markets plays a crucial role in the monetary protection of
consumers. Financial markets include the primary markets and secondary markets. Primary markets
provide avenues for buyers and sellers to buy and sell stocks and bonds. Secondary markets provide
a venue for investors and traders to purchase instruments that have been previously bought. Financial
markets attract funds from investors and channel them to corporationsthey thus allow corporations
to finance their operations and achieve growth. Money markets allow firms to borrow funds on a
short term basis, while capital markets allow corporations to gain long-term funding to support
expansion (known as maturity transformation).
Without financial markets, borrowers would have difficulty finding lenders themselves.
Intermediaries such as banks, Investment Banks, and Boutique Investment Banks can help in this
process. Banks take deposits from those who have money to save. They can then lend money from
this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form
of loans and mortgages.

Explain call money market and role of primary dealer in call money market.

The call money market (CMM) the market where overnight (one day) loans can be availed by banks
to meet liquidity. Banks who seeks to avail liquidity approaches the call market as borrowers and the
ones who have excess liquidity participate there as lenders. The CMM is functional from Monday to
Friday. Banks can access CMM to meet their reserve requirements (CRR and SLR) or to cover a
sudden shortfall in cash on any particular day. Effectively, the Call Money Market is the main
market oriented mechanism to meet the liquidity requirements of banks The call money is usually
availed for one day. If the bank needs funds for more days, it can avail money through notice market.
Here, the loan is provided from two days to fourteen days.

A Primary Dealer will have to commit to aggregative bid for Government of India dated securities
on an annual basis of not less than a specified amount and auction Treasury Bills for specified
percentage for each auction. The agreed minimum amount/ percentage of bids would be separately
indicated for dated securities and Treasury Bills

A Primary Dealer can offer to underwrite an amount not exceeding five times of its net owned funds.
The amount so arrived at should not exceed 30% of the notified amount of the issue. If two or more
issues are floated at the same time, the limit of 30% is applied by taking the notified amounts of both
the issues together.

3. Explain in brief T-bill market, CP and CD market.

Treasury bills are issued when the government need money for a shorter period while bonds are
issued when it need debt for more than say five years.Treasury bills; generally shortened as T-bills,
have a maximum maturity of a 364 days. Hence, they are categorized as money market instruments
(money market deals with funds with a maturity of less than one year).Treasury bills are presently
issued in three maturities, namely, 91 day, 182 day and 364 day. Treasury bills are zero coupon
securities and pay no interest. Rather, they are issued at a discount (at a reduced amount) and
redeemed (given back money) at the face value at maturity. For example, a 91 day Treasury bill of
Rs.100/- (face value) may be issued at say Rs. 98.20, that is, at a discount of say, Rs.1.80 and would
be redeemed at the face value of Rs.100/-. This means that you can get a hundred-rupee treasury bill
at a lower price and can get Rupees hundred at maturity

The return to the investors is the difference between the maturity value or the face value (that is
Rs.100) and the issue price. The Reserve Bank of India conducts auctions usually every Wednesday
to issue T-bills. The rational is that since their maturity is lower, it is more convenient to avoid intra
period interest payments.
Treasury bills are usually held by financial institutions including banks. They have a very important
role in the financial market beyond investment instruments. Banks give treasury bills to the RBI to
get money under repo. Similarly, they can keep it as part of SLR.

A certificate of deposit (CD) is a document issued by the bank to an investor who chooses to
deposit his funds in the bank for a specific amount of time. A certificate of deposit can also be
referred to as a promissory note issued by a bank. One feature of the CD is that once the money has
been deposited for a period of time the depositor cannot withdraw the funds without incurring a
penalty for early withdrawal. Since funds cannot be withdrawn as pleased, the interest paid to the
depositor of a CD is higher than for a savings account. Once the CD matures, at the end of the
specified term of holding the funds are repaid to the depositor alongside the interest calculated for
the period. CDs issued by banks can be negotiable or non-negotiable. A negotiable CD allows the
holder to sell it on the money market before maturity. A non-negotiable CD mandates the depositor
hold the funds till maturity or incur a penalty for early withdrawal
Commercial paper is a short term money market instrument that matures within a period of 270
days. Commercial papers are used as a means of raising funds, sometimes used instead of a bank
loan, and are usually preferred over a bank loan since large amounts of funds can be raised within a
short period of time. Commercial papers are not backed by collateral and, therefore, only
creditworthy institutions with high debt ratings can issue them to obtain funds at a lower cost of
interest. If the organization does not have a very attractive debt rating they may have to offer a high
interest rate that covers investment risk, to attract investors to invest. An advantage to the issuer of a
commercial paper is that since the instrument has a very short maturity it does not require a
registration with the Securities and Exchange Commission (SEC), which makes it much less
complicated and a cheaper form of obtaining finance.

4. How CP is different from CD?

Comparison between Certificate of Deposit (CD) and Commercial Paper
CDs and commercial papers are both forms of money market instruments and are issued in the
money markets by organizations that wish to raise funds, and are traded by investors who wish to
profit from the interest rate fluctuations. However, there are many differences between these two
forms of instruments, since CDs are issued as a proof of an investment of funds in the bank by a
depositor while commercial papers are issued to an investor as a proof of purchase of the issuers
debt (purchasing debt means providing funds like a bank gives out a loan). The main difference
between the two forms of instruments is the time period of maturity of the two. While a CD is
usually for a longer term, a promissory note is for a shorter period. The issuance of a CD, owing to
this difference in maturity, entails higher responsibility on the issuers part than for a promissory
note; the CD is insured by the Federal Deposit Insurance Corporation (FDIC) so that the depositor
will be reimbursed in the incident that the bank fails to repay the deposit.
5. How to evaluate the efficiency of a financial system? ( Indicators of financial system)

Quantitative measures of efficiency that could be evaluated include (a) total costs of financial
intermediation as percentage of total assets and (b) interest rate spreads (lending minus deposit
rates). Components of intermediation costs include operating costs (staff expenses and other
overhead), taxes, loanloss provisions, net profits, and so forth. Those costs can be derived from the
aggregated balance sheet and income statements for financial institutions.
6. What is de-regulation of interest rate and how it impacted the banking system?

7. How base rate based system of lending impacted the commercial paper market?
With the Implementation of base rate system, banks do not have flexibility to lend to corporates at
the rates that are lower than base rate. Corporates, therefore, cannot negotiate with banks for interest
rates lower than the base rate on rupee-denominated loans and advances to fund working capital
requirements. The corporates may now turn to alternate sources of funding, including issuing CPs, at
rates lower than the rates at which they can avail of working capital loans from banks. The eligibility
criteria, listed in the Reserve Bank of Indias guidelines for corporates issuing CPs, do not pose any
real restrictions for issuers, especially the top rated ones.
Below is the Eligibility Criteria for issuing CPs
The Companys Tangible net worth, as per the latest audited balance sheet, is not less
than Rs. 40 million.
The company has been sanctioned working capital limits by banks or all-India financial
institutions.
The borrowal account of the company is classified as a standard asset by the financing
banks/institutions.
8. Explain Money market mutual fund.
A mutual fund that invests only in money markets such as commercial papers, commercial bills, and
treasury bills certificate of deposit and other instruments specified by RBI. These funds have a
minimum lock-in period of 15 days. Till recently, the RBI regulated money market funds but they
now come under SEBI. A money market fund is a mutual fund that invests solely in cash/cash
equivalent securities, which are also often referred to as money market instruments. These
investments are short-term, very liquid investments with high credit quality. They generally include:
Certificates of deposit (CDs)

9. What is monetary policy? What are its objectives

Monetary policy also known as the credit policy, is the policy which is purely managed by
our Central bank of India (Reserve Bank of India) to control the money supply in the economy
& amount of credit in the economy.
1. Price Stability
It is one of the most important objectives of the monetary policy. RBI makes efforts to control price
stability through various monetary measures. Under price stability the fluctuations in prices are to
controlled to have positive impact on production, income and employment generation in the
economy. In absence of price stability, inflationary and deflationary conditions are generated in the
economy, which affects the various sectors of the economy.

2. Exchange stability
It is one of the traditional objective of the monetary policy. Exchange rate stability means to
minimise the rate of fluctuation in the value of a currency in respect to the value of another currency.
Stability in exchange rate will lead to outflow of money and encourage development of international
trade leading to favourable balance of payment situation.

3. Neutrality of Money
Neutrality of money means to keep the impact of change in the quantity of money on various
elements like price, income, employment as constant. Neutrality of money does not mean that the
supply of money is perfectly inelastic and fixed but it means to control the effectiveness of money.
4. Economic development
In a developing economy monetary policy encourage economic development by attaining
equilibrium between money supply and demand. Economic development and the capital formation
are closely related and the monetary policy through its quantitative and qualitative measures
accelerating saving , investment and capital formation for rapid economic growth.
10. Explain LAF as tools for monetary policy.
LAF is a facility extended by the Reserve Bank of India to the scheduled commercial banks
(excluding RRBs) and primary dealers to avail of liquidity in case of requirement or park excess
funds with the RBI in case of excess liquidity on an overnight basis against the collateral of
Government securities including State Government securities. Basically LAF enables liquidity
management on a day to day basis.
Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money
through repurchase agreements or repos. LAF is used to aid banks in adjusting the day to day
mismatches in liquidity (frictional liquidity deficit/surplus). Liquidity of a more durable nature are
managed with other instruments like, cash reserve ratio (CRR) or Market Stabilization Scheme
(MSS).
The operations of LAF are conducted by way of repurchase agreements (repos and reverse repos)
with RBI being the counter-party to all the transactions. Repo or repurchase option is a collaterised
lending i.e. banks borrow money from Reserve bank of India to meet short term needs by selling
securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate
charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity
into the system. Reverse repo operation is when RBI borrows money from banks by lending
securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo
operation therefore absorbs the liquidity in the system.
The collateral used for repo and reverse repo operations comprise of primarily Government of India
securities. In fact, Reverse Repos and Repos can be undertaken in all SLR-eligible transferable
Government of India dated Securities/Treasury Bills. Oil bonds have been also suggested to be
included as collateral for Liquidity adjustment facility.
Through LAF, banks are permitted to borrow only a certain percentage of its Net Demand and Time
Liabilities (NDTL).In case the Bank requires more funds, beyond what is permissible under LAF, it
can access another window called Marginal Standing Facility (MSF)
In the LAF for overnight drawings, both the reverse repo and repo operations are conducted at a
fixed rate. These rates are changed only through the announcements made during the Monetary
Policy Statements of the RBI.

11. What is Bank rate? What is its significance?

A bank rate is the interest rate at which a nation's central bank lends money to domestic banks, often
in the form of very short-term loans. Managing the bank rate is method by which central banks affect
economic activity. Lower bank rates can help to expand the economy by lowering the cost of funds
for borrowers, and higher bank rates help to reign in the economy when inflation is higher than
desired. Bank Rate refers to the official interest rate at which RBI will provide loans to the banking
system which includes commercial / cooperative banks, development banks etc. Such loans are given
out either by direct lending or by rediscounting (buying back) the bills of commercial banks and
treasury bills. Thus, bank rate is also known as discount rate. Bank rate is used as a signal by the RBI
to the commercial banks on RBIs thinking of what the interest rates should be.

12. What is OMO? Explain its significance as monetary policy tool.

Open market operations are conducted by the RBI by way of sale or purchase of government
securities (g-secs) to adjust money supply conditions. The central bank sells g-secs to suck out
liquidity from the system and buys back g-secs to infuse liquidity into the system. These operations
are often conducted on a day-to-day basis in a manner that balances inflation while helping banks
continue to lend. The RBI uses OMO along with other monetary policy tools such as repo rate, cash
reserve ratio and statutory liquidity ratio to adjust the quantum and price of money in the system.

Why is it important?
In India, liquidity conditions usually tighten during the second half of the financial year (mid-
October onwards). This happens because the pace of government expenditure usually slows down,
even as the onset of the festival season leads to a seasonal spike in currency demand. Moreover,
activities of foreign institutional investors, advance tax payments, etc. also cause an ebb and flow of
liquidity However, the RBI smoothens the availability of money through the year to make sure that
liquidity conditions dont impact the ideal level of interest rates it would like to maintain in the
economy. Liquidity management is also essential so that banks and their borrowers dont face a cash
crunch. The RBI buys g-secs if it thinks systemic liquidity needs a boost and offloads them if it
wants to mop up excess money. The cental banks signal that it will move to a neutral liquidity
stance from a deficit stance, hints at more liquidity in the system in future. This could arm banks
with more funds for lending, and lead to softer interest rates in the economy. This is good news for
both businesses as well as individuals. However, large open market purchases by the RBI can give
the government a helping hand in its borrowing programme and are frowned upon for this reason. In
April 2006, the RBI was barred from subscribing to primary bond issues of the government. This
was done to put an end to the monetisation of debt by the Reserve Bank. However, that didnt stop
the process. With rising fiscal deficit, the RBI has been criticised for accommodating larger
government debt by way of OMO.

13. What is CRR rate and how is it calculated?

Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with the RBI. If the
central bank decides to increase the CRR, the available amount with the banks comes down. The
RBI uses the CRR to drain out excessive money from the system. Commercial banks are required to
maintain with the RBI an average cash balance, the amount of which shall not be less than 3% of the
total of the Net Demand and Time Liabilities (NDTL), on a fortnightly basis and the RBI is
empowered to increase the rate of CRR to such higher rate not exceeding 20% of the NDTL.

14. What is SLR rate and how is it calculated?

Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that the
commercial banks in India require to maintain in the form of gold, government approved securities
before providing credit to the customers. Statutory Liquidity Ratio is determined by Reserve Bank of
India maintained by banks in order to control the expansion of bank credit.

The SLR is determined by a percentage of total demand and time liabilities.The SLR is commonly
used to control inflation and fuel growth, by increasing or decreasing it respectively. This counter
acts by decreasing or increasing the money supply in the system respectively. Indian banks holdings
of government securities are now close to the statutory minimum that banks are required to hold to
comply with existing regulation. When measured in rupees, such holdings decreased for the first
time in a little less than 40 years (since the nationalisation of banks in 1969) in 200506.currently it
is 20 percent.

15. What is Cash Management Bills? Explain its significance.

Cash Management Bills (CMBs) are short term bills issued by central government to meet its
immediate cash needs. The bills are issued by the RBI on behalf of the government. Hence the
CMBs are short-term money market instruments that help the government to meet its temporary cash
flow mismatches. Following are the features of CMBs.

1. CMBs have a maturity of less than 90 days.

2. The CMBs have the generic character of Treasury Bills as the CMBs are issued at a discount and
redeemed at face value at maturity. For example, if the face value of a CMB is Rs 100, we can get
the bill at Rs 97 and at the end of the maturity date, say 60 after days, we can get Rs 100. Here, there
is no interest payment as the maturity period is so small. But the return for buying CMB is obtained
in the form of a discount.

3. The tenure or maturity, notified amount (how much total CMBs to be issued) and date of issue of
the CMBs depends upon the temporary cash requirement of the Government.

4. CMBs are eligible as SLR securities. Investment in CMBs is also recognized as an eligible
investment in Government securities by banks for SLR purpose under Section 24 of the Banking
Regulation Act, 1949.

CMBs are issued first on May 12, 2010. The purpose of the mechanism is to enable the government
to get short term money. Another similar method for the government to get short term money is
Ways and Means Advances (WMA). Under WMA, the RBI gives temporary loan facilities to the
centre and state governments as a banker to government for upto 90 days.

What is the difference between CMBs and Treasury Bills?

Difference between CMBs and Treasury bills is that CMBs are issued for less than 90 days whereas
treasury bills are issue for more than 90 days (91 day and 364-day treasury bills)

16. What is Primary Dealers? Explain the services offered by them

Primary dealers are registered entities with the RBI who have the license to purchase and sell
government securities. They are entities who buys government securities directly from the
RBI (the RBI issues government securities on behalf of the government), aiming to resell
them to other buyers. In this way, the Primary Dealers create a market for government
securities.
The role of Primary Dealers is to:
(i) Commit participation as Principals in Government of India issues through bidding in
auctions
(ii) Provide underwriting services
(iii) Offer firm buy - sell / bid ask quotes for T-Bills & dated securities
(v) Development of Secondary Debt Market
What is role of primary dealer in Call money market?

Concomitant with the objectives of PD system, the PDs are expected to support the primary
issues of dated securities of Central Government and State Government and Treasury Bills of
Central Government, through underwriting/bidding commitments and success ratios.

The following activities are permitted under core activities:

i. Dealing and underwriting in Government securities

ii. Dealing in Interest Rate Derivatives
iii. Providing broking services in Government securities
iv. Dealing and underwriting in Corporate / PSU / FI bonds/ debentures
v. Lending in Call/ Notice/ Term/ Repo/ CBLO market
vi. Investment in Commercial Papers
vii. Investment in Certificates of Deposit
viii. Investment in Security Receipts issued by Securitization Companies/ Reconstruction
Companies, Asset Backed Securities (ABS), Mortgage Backed Securities (MBS)
ix. Investment in debt mutual funds where entire corpus is invested in debt securities

PDs are permitted to undertake the following activities under non-core activities:

Activities which are expected to consume capital such as:

i. Investment / trading in equity and equity derivatives market

ii. Investment in units of equity oriented mutual funds
iii. Underwriting public issues of equity

Services, which do not consume capital or require insignificant capital outlay such as:

i. Professional Clearing Services

ii. Portfolio Management Services
iii. Issue Management Services
iv. Merger & Acquisition Advisory Services
v. Private Equity Management Services
vi. Project Appraisal Services
vii. Loan Syndication Services
viii. Debt restructuring services
ix. Consultancy Services
x. Distribution of mutual fund units
xi. Distribution of insurance products

17. What is CBLO Market? Who are participant in CBLO market?

A collateralized borrowing and lending obligation (CBLO) is a money market instrument that
represents an obligation between a borrower and a lender as to the terms and conditions of the loan.
Collateralized borrowing and lending obligations (CBLOs) are used by those who have been phased
out of or heavily restricted in the interbank call money market. CBLOs were developed by the
Clearing Corporation of India (CCIL) and Reserve Bank of India (RBI). The details of the CBLO
include an obligation for the borrower to repay the debt at a specified future date and an expectation
of the lender to receive the money on that future date, and they have a charge on the security that is
held by the CCIL.
Who are the participants in the CBLO market?

Institutions participating in CBLO are entities who have either no access or restricted access to the
inter -bank call money market. Still, institutions active in the call money market can participate in
the CBLO market. Nationalized Banks, Private Banks, Foreign Banks, Co-operative Banks,
Insurance Companies, Mutual Funds, Primary Dealers, Bank cum Primary Dealers, NBFC,
Corporate, Provident/ Pension Funds etc., are eligible for CBLO membership. These institutions
have to avail a CBLO membership to do activities in the market.

Instrument under the CBLO market

Collateralized Borrowing and Lending Obligation (CBLO) is the instrument in the CBLO market. It
is a discounted instrument available in electronic book entry form for the maturity period ranging
from one day to one year.The CCIL provides the Dealing System through Indian Financial Network
(INFINET) and Negotiated Dealing System for participating in the market. In the CBLO market,
members can borrow or lend funds against the collateral of eligible securities. Eligible securities are
Central Government securities including Treasury Bills, and such other securities as specified by the
CCIL. Borrowers in CBLO have to deposit the required amount of eligible securities with the CCIL.
For trading, the CCIL matches the borrowing and lending orders (order matching) submitted by the
members. Borrowers have to pay interest to the lenders in accordance with the bid.

18. What is NDS market? Explain in Brief.

'Negotiated Dealing System - NDS' An electronic trading platform, operated by the Reserve
Bank of India, used to facilitate the exchange of government securities and other
money market instruments. The negotiated dealing system will also be responsible for
hosting new issues of government securities. Most trading platforms have now migrated to
electronic mode. This has occurred in the trading of Government securities (G-Secs) as well.
The G-Secs are issued in the primary market and traded in the secondary market
electronically. For this, the RBI has created the Negotiated Dealing System (NDS) as an
electronic platform in 2002 for dealing in government securities.
Securities of the Central Government -both bonds and treasury bills and the State
Development Loans are auctioned using the NDS platform.
Functions of Negotiated Dealing System
The NDS facilitates members to submit bids for government securities electronically. These
bids for the purchase of government securities can be made when the RBI conduct auctions
 for them. The auction process take place in the primary market using the NDS platform.
Participants are primary dealers, commercial banks etc.
In the secondary market (market for trading the already issued G-Secs), the NDS facilitates
the settlement of transactions in G-Secs. Here, it provides an interface to the Public Debt
Office, RBI, Mumbai for the settlement of transactions conducted in the secondary market.
Secondary market trading in Government securities mostly happen over-the-counter (OTC).
The Negotiated Dealing System (NDS) has thus two modules one for the primary market
and the other for the secondary market.
Membership in NDS
Membership to the NDS is restricted to members holding SGL and/or Current Account with
the RBI, Mumbai.
NDS -OM
Secondary market trading is vital to give liquidity to Government Securities. For enhancing
secondary market activity in G-Sec segment, the RBI launched Negotiated Dealing System-
Order Matching system (NDS-OM) in 2005. The NDS-OM is a screen based electronic
anonymous order matching system for secondary market trading in Government securities.
This is an order driven electronic system, where the participants can trade anonymously by
placing their orders on the system or accepting the orders already placed by other
participants. The Clearing Corporation of India on behalf of the RBI operates the NDS-OM.
The NDS-OM brings transparency in secondary market transactions in Government securities
as there is anonymity about the traders who offer trading. Members can place bids (buy
orders) and offers (sell orders) directly on the NDS-OM screen. Being order driven, the
system matches bids and offers on price/ time priority.

19. Who are merchant bankers? What is their role in Public offer
Merchant bankers are entities registered with SEBI and act as issue managers, investment bankers or
lead managers. They help an issuer access the security market with an issuance of securities. They
are single point contact for issuers during a new issue of securities. They evaluate the capital needs
of issuers, structure an appropriate instrument, get involved in pricing the instrument and manage the
entire issue process until the securities are issued and listed on a stock exchange. They engage and
co-ordinate with other intermediaries such as registrars, brokers, bankers, underwriters and credit
rating agencies in managing the issue process.
20. Who are registrar to a public issue?
Registrar of a public issue is a prime body in processing IPO's. They are independent financial
institution registered with SEBI and stock exchanges. They are appointed by the company going
public.

Responsibility of a registrar for an IPO is mainly involves processing of IPO applications, allocate
shares to applicants based on SEBI guidelines, process refunds through ECS or cheque and transfer
allocated shares to investors Demat accounts.
21. What is book building offer? How is it different from fixed price issue?
 Book building is the process by which an underwriter attempts to determine at what price to
offer an initial public offering (IPO) based on demand from institutional investors. An underwriter
builds a book by accepting orders from fund managers, indicating the number of shares they desire
and the price they are willing to pay
The final share price is determined using investor bids. When participating in an IPO, there are
several details an investor should know, such as the issue name, issue type, category and price band,
to name a few. The issue name is the firm going public. The issue type is the type of IPO: fixed price
or book building

22. Who are anchor investor?

Anchor investors are institutional investors who are offered shares in an IPO a day
before the offer opens. As the name suggests, they are supposed to anchor the issue by agreeing to
subscribe to shares at a fixed price so that other investors may know that there is demand for the
shares offered. Each anchor investor has to put a minimum of 10 crore in the issue.

SEBI introduced the concept of anchor investors in IPOs in 2009. Book built IPOs are
supposed to have a 50 per cent reservation for qualified institutional buyers (QIBs). Up to 30 per
cent of the total issue size can be allotted to anchor investors. No merchant banker, promoter or their
relatives can apply for shares under the anchor investor category. In offers of size less than 250
crore, there can be a maximum of 15 anchor investors, but in those over 250 crore, SEBI recently
removed the cap on number of anchor investors. Now, there could be 10 additional investors for
every extra 250 crore allocation, subject to minimum allotment of 5 crore per anchor investor.

The anchor investor cant sell his shares for at least 30 days after the allotment. This rule
ensures that investors who want to flip shares on listing, do not use the anchor route. Anchor
investors can bid for shares at anywhere within the price band declared by the company. If the price
discovered through the book building process is higher than the price at which shares were allotted to
anchor investors, then these investors have to bring in additional funds to make good the shortfall.
But if the book built price is lower, the excess amount is not refunded to them.

23. What is reverse book building?

The Reverse Book Building is a mechanism provided for capturing the sell orders on online basis
from the share holders through respective Book Running Lead Managers (BRLMs) which can be
used by companies intending to delist its shares through buy back process. In the Reverse Book
Building scenario, the Acquirer/Company offers to buy back shares from the share holders. The
Reverse Book Building is basically a process used for efficient price discovery. It is a mechanism
where, during the period for which the Reverse Book Building is open, offers are collected from the
share holders at various prices, which are above or equal to the floor price. The buy back price is
determined after the offer closing date

24. What is green Shoe option

In security issues, a greenshoe option is an over-allotment option. In the context of an initial public
offering (IPO), it is a provision contained in an underwriting agreement that gives
the underwriter the right to sell investors more shares than originally planned by the issuer if the
demand for a security issue proves higher than expected.
Over-allotment option
The green shoe option allows companies to intervene in the market to stabilise
share prices during the 30-day stabilisation period immediately after listing. This involves
purchase of equity shares from the market by the company-appointed agent in case the shares fall
below issue price.
The green shoe option is exercised by a company making a public issue. The issuer
company uses green shoe option during IPO to ensure that the shares price on the stock exchanges
does not fall below the issue price after issue of shares.
Green shoe is a kind of option which is primarily used at the time of IPO or listing
of any stock to ensure a successful opening price. Any company when decides to go public
generally prefers the IPO route, which it does with the help of big investment bankers also called
underwriters. These underwriters are responsible for making the public issue successful and find
the buyers for companys shares. They are paid a certain amount of commission to do this work.
Green shoe option is a clause contained in the underwriting agreement of an IPO.
The green shoe option is also often referred to as an over-allotment provision. It allows the
underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public
demand for the shares exceeds expectations and the stock trades above its offering price.
From an investor's perspective, an issue with green shoe option provides more
probability of getting shares and also that post listing price may show relatively more stability as
compared to market.
25. What is IDR?
A foreign company can access Indian securities market for raising funds through issue of Indian
Depository Receipts (IDRs). An IDR is an instrument denominated in Indian Rupees in the form of a
depository receipt created by a Domestic Depository (custodian of securities registered with the
Securities and Exchange Board of India) against the underlying equity of issuing company to enable
foreign companies to raise funds from the Indian securities Markets.

26. What is Right issue? How is it different from public issue?

A rights offering (issue) is an issue of rights to a company's existing shareholders that entitles them
to buy additional shares directly from the company in proportion to their existing holdings, within a
fixed time period. In a rights offering, the subscription price at which each share may be purchased is
generally at a discount to the current market price. Rights are often transferable, allowing the holder
to sell them on the open market.

Initial public offering (IPO) is one type of public offering. Not all public offerings are IPOs. An IPO
occurs only when a company offers its shares (not other securities) for the first time for public
ownership and trading, an act making it a public company

27. What is Private placement?

A private placement is the sale of securities to a relatively small number of select investors as a way
of raising capital. Investors involved in private placements are usually large banks, mutual funds,
insurance companies and pension funds. A private placement is different from a public issue, in
which securities are made available for sale on the open market to any type of investor.
Since a private placement is offered to a few select individuals, the placement does not have to be
registered with the Securities and Exchange Commission (SEC). In many cases, detailed financial
information is not disclosed and the investment is not sold by prospectus.

When an issuer makes an issue of securities to a select group of persons

and which is neither a rights issue nor a public issue, it is called private placement. This is primarily
a wholesale issue of securities to institutional investors. It could be in the form of a Qualified
Institutional Placement (QIP) or a preferential allotment.
According to Companies Act 2013, an offer to subscribe to securities, made to less than 50 persons,
is called private placement of securities. The requirements of SEBIs regulations with respect to a
public issue will not apply to a private placement. A privately placed security can seek listing on a
stock exchange provided it meets the listing requirements of SEBI and the stock exchange. Private
placement of securities can be done by a company irrespective of whether it has made a public offer
of shares or not.

28. What is QIB?

A qualified institutional buyer (QIB) is a corporation that is deemed to be an accredited
investor as defined in the Securities and Exchange Commissions (SEC) Rule 501
of Regulation D.
 A QIB owns and invests a minimum of $100 million in securities on a discretionary basis; the
broker-dealer threshold is $10 million. The range of entities deemed QIBs includes savings
and loans associations (which must have a [net worth of $25 million) and banks, investment
and insurance companies, employee benefit plans, and entities completely owned by
accredited investors.

A QIB must be an institution, either domestic or foreign; individuals, regardless of their

wealth level of financial sophistication, are not permitted to be QIBs.

Under Rule 144A, QIBs are allowed to trade securities on the market. This rule provides
a safe harbor exemption against the SEC's registration requirements for securities. Typically,
transactions conducted under Rule 144A include offerings by foreign investors looking to
avoid U.S. reporting requirements, private placements of debt, and preferred securities of
public issuers and common stock offerings from issuers that do not report.

QIBs are considered to be financially sophisticated, recognized in this manner legally by

U.S. law and securities market regulators. Because of this classification, QIBs are considered
to require less protection from public issuers than most public investors. The qualifications
for this classification are based on the QIBs' total assets under management (AUM). Rule
144A, under the SEC, is the primary regulatory program for QIBs in the United States. For
qualified investors in other countries, additional specified legal conditions apply relating to
the country where each investor trades.

Who are underwriter?

Underwriters - Underwriters are intermediaries in the primary market who undertake to

subscribe any portion of a public offer of securities which may not be bought by investors. They
serve an important function in the primary market, providing the issuer the comfort that if the
securities being offered to public do not elicit the desired demand from investors, they (underwriters)
will step in and buy the securities. When the underwriters make their commitments at the initial
stages of the IPO, it is called hard underwriting. Soft underwriting is the commitment given once the
pricing is determined. The shares that devolve are usually placed with other financial institutions,
thereby limiting the risk to the underwriter. Soft underwriting also comes with a clause that provides
the option to exit from the commitment in the event of certain events occurring. The risk in hard
underwriting is much higher than in soft underwriting.

29. What is record date and Ex-date?

The record date of a stock and the ex-dividend date are both important terms that relate to which
investors receive dividends and when.

The record date is set by the board of directors of a corporation and refers to the date by which
investors must be on the company's books in order to receive dividends for a particular stock. Record
dates basically serve as notice to the board of directors of the people to whom they should send stock
reports and other financial information relating to the investment.
An ex-dividend date is dictated by stock exchange rules and is usually set to be two business
days before the record date. In order for an investor to receive a dividend payment on the
listed payment date, he would have to have his stock purchase completed by the ex-dividend date. If
the stock sale has not been completed by the ex-dividend date, then the seller on record is the one
who receives the dividend for that stock. So, for example, if a record date is set for May 30th, the ex-
dividend date would typically be set for the 28th of May. However, if May 30th is a Monday, the ex-
dividend date would then be Thursday, May 26th. If the buyer has not completed his purchase of the
stock by May 28th, he will not receive a dividend.

30. What is bonus share? When a company declares bonus shares?

A bonus issue, also known as a scrip issue or a capitalization issue, is an offer of free additional
shares to existing shareholders. A company may decide to distribute further shares as an alternative
to increasing the dividend payout. For example, a company may give one bonus share for every five
shares held. Companies give away bonus shares to shareholders when companies are short of cash
and shareholders expect a regular income. Shareholders may sell the bonus shares and meet their
liquidity needs. Bonus shares may also be issued to restructure company reserves. Issuing bonus
shares does not involve cash flow. It increases the companys share capital but not its net assets.
Bonus shares are issued according to each shareholders stake in the company. For example, a three-
for-two bonus issue entitles each shareholder three shares for every two they hold before the issue. A
shareholder with 1,000 shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500).

31. What are DVRs?

A DVR is just like a normal share of a company, except that it carries less than 1 voting right per
share unlike a common share. Such an instrument is useful for issuers who wish to raise capital
without diluting voting rights. Investors who wish to invest only for dividends and capital
appreciation and are not really bothered about voting rights find these shares attractive. The number
of voting rights for a DVR differ from company to company. DVRs typically trade as a separate
category of instrument and are available at a discount to the common shares of a company. The
Companies Act, 2013 defines the eligibility of a company to issue such shares. This includes a
dividend of at least 10% over the preceding 3 years and such shares shall not exceed 25% of the total
post-issue paid up capital of the company. Several companies in India including Tata Motors and
Pantaloons have issued DVRs.

32. What is Rolling settlement?

Rolling settlement is the process of settling security trades on successive dates so that trades
executed today will have a settlement date one business day later than trades executed yesterday.
This contrasts with account settlement, in which all trades are settled once in a set period of days,
regardless of when the trade took place.

Securities that are sold in the secondary market typically settle three business days after the initial
trade date. Within a portfolio, if some stocks are sold on Wednesday, they will settle the following
Monday. Stocks in that same portfolio that are sold on Thursday will settle on the following
Tuesday. Finally, if some of the stocks are sold on Friday, they will settle the following Wednesday.
When securities are sold and settled on successive business days, they are said to be experiencing a
rolling settlement

33. What is market order, limit order?

Market order: A market order is an order to buy or sell a contract at the best bid/offer
price currently available in the market. Price is not specified at the time of placing this
order. The price will be the currently available price in the market i.e., a buy market
order will get executed at the best price at which the seller is ready to sell and a sell
market order will get executed at the best price at which the buyer is ready to buy.

Limit order: It is an order to buy or sell a contract at a specified price. The user has to
specify this limit price while placing the order and the order gets executed only at this
specified limit price or at a better price than that (lower in case of buy order and higher
in case of a sell order).

34. What is SBTS?

Before the NSE was set up, trading on the stock exchanges in India used to take place through open
outcry without use of information technology for immediate matching or recording of trades. This
was time consuming and inefficient. The practice of physical trading imposed limits on trading
volumes as well as, the speed with which new information was incorporated into prices.

To obviate this, the NSE introduced screen-based trading system (SBTS) where a member can punch
into the computer the quantities of shares and the prices at which he wants to transact. The
transaction is executed as soon as the quote punched by a trading member finds a matching sale or
buys quote from counterparty. SBTS electronically matches the buyer and seller in an order-driven
system or finds the customer the best price available in a quote-driven system, and hence cuts down
on time, cost and risk of error as well as on the chances of fraud.

Benefits of SBTS:

SBTS enables distant participants to trade with each other, improving the liquidity of the markets.
The high speed with which trades are executed and the large number of participants who can trade
simultaneously allows faster incorporation of price-sensitive information into prevailing prices.
This increases the informational efficiency of markets. With SBTS, it becomes possible for market
participants to see the full market, which helps to make the market more transparent, leading to
increased investor confidence
The NSE started nation-wide SBTS, which have provided a completely transparent trading
mechanism. Regional exchanges lost a lot of business to NSE, forcing them to introduce SBTS

35. What are the cost incurred in buying a share?

Actual market price of share, brokerage, transaction tax.

36. What is impact cost?

Impact cost is the cost that a buyer or seller of stocks incurs while executing a transaction due to the
prevailing liquidity condition on the counter. In other words, it represents the cost of executing a
transaction of a given security, with a specific predefined order size, at any given point in time. It is a
realistic measure of liquidity of the stock or security and is deemed to be closer to the true cost of
execution faced by a trader in comparison to the bid-ask spread (difference between the best buy and
the best sell orders). It is the percentage markup observed while buying or selling a desired quantity
of shares with reference to its ideal price

37. What is a stock index? What are its significance?

A stock index or stock market index is a measurement of the value of a section of

the stockmarket. It is computed from the prices of selected stocks (typically a weighted
average). It is a tool used by investors and financial managers to describe the market, and to
compare the return on specific investments. Although the stock market is much more
dynamic than the indexes suggest, along with the fact that there are different ways to
calculate the indexes, causing calculation bias, the stock market indexes are useful in a
number of ways to stock investors. First, the market indexes provide an historical perspective
of stock market performance, giving investors more insight into their investment decisions.
Investors who do not know which individual stocks to invest in can use indexing as a method
of choosing their stock investments. By wanting to match the performance of the market,
investors can invest in index mutual funds or index exchange-traded funds (ETFs) that track
the performance of the indexes with which they are aligned. This form of investing gives
investors the opportunity to do as well as the markets and not significantly underperform the
markets.

The second benefit of stock market indexes is that they provide a yardstick with which
investors can compare the performance of their individual stock portfolios. Individual
investors with professionally managed portfolios can use the indexes to determine how well
their managers are doing in managing their money.

The third major use of stock market indexes is as a forecasting tool. Studying the historical
performance of the stock market indexes, you can forecast trends in the market. The Internet
bubble is a prime example, which in hindsight provides 20/20 vision. The price-to-earnings
(P/E) ratio of the stock markets was in the high 20s to low 30s in 19992000, indicating that
the markets could not sustain the rapid increase in stock prices. The P/E ratio for the market
historically has ranged between the high single digits and the low 30s, with an average
around 15. The P/E ratio for the S&P 500 was 17 on August 4, 2006, an indication that the
stock market was not particularly overvalued. Consequently, the market indexes provide
investors with a useful tool for forecasting trends in the market.

38. What is difference between Open ended fund and close ended fund?
Open-ended funds: These funds buy and sell units on a continuous basis and, hence, allow investors
to enter and exit as per their convenience. The units can be purchased and sold even after the initial
offering (NFO) period (in case of new funds). The units are bought and sold at the net asset value
(NAV) declared by the fund.
The number of outstanding units goes up or down every time the fund house sells or repurchases the
existing units. This is the reason that the unit capital of an open-ended mutual fund keeps varying.
The fund expands in size when the fund house sells more units than it repurchases as more money is
flowing in. On the other hand, the fund's size reduces when the fund house repurchases more units
than it sells. An open-ended fund is not obliged to keep selling new units all the time. For instance, if
the management thinks that it cannot manage a large-sized fund optimally, it can stop accepting new
subscription requests from investors. However, it has to repurchase the units at all times.

Closed-ended funds: The unit capital of closed-ended funds is fixed and they sell a specific number
of units. Unlike in open-ended funds, investors cannot buy the units of a closed-ended fund after its
NFO period is over. This means that new investors cannot enter, nor can existing investors exit till
the term of the scheme ends. However, to provide a platform for investors to exit before the term, the
fund houses list their closed-ended schemes on a stock exchange.

Trading on a stock exchange enables investors to buy and sell units through a broker in the same
manner as transacting the shares of a company. The units may trade at a premium or discount to the
NAV depending on the investors' expectations of the fund's future performance and prospects. The
demand and supply of fund units and other market factors also affect their price.

39. What is an AMC?

An asset management company (AMC) is a company that invests its clients' pooled funds into
securities that match declared financial objectives. Asset management companies provide investors
with more diversification and investing options than they would have by themselves. AMCs manage
mutual funds, hedge funds and pension plans, and these companies earn income by charging service
fees or commissions to their clients. AMCs offer their clients diversification because they have a
larger pool of resources than the individual investor could access on his own. Pooling assets together
and paying out proportional returns allow investors to avoid minimum investment requirements often
required when purchasing securities on their own, as well as the ability to invest in a larger set of
securities with a smaller investment

40. What is FOF (Fund of Fund)?

A fund of funds (FOF) - also referred to as a multi-manager investment - is an investment strategy in
which a fund invests in other types of funds. This strategy invests in a portfolio that contains
different underlying assets instead of investing directly in bonds, stocks and other types of securities.
A mutual fund that invests exclusively in other mutual funds. Theoretically, funds of funds allow the
investor to diversify risk even more than in a regular mutual fund without reducing return
significantly. One disadvantage is the fact that most funds of funds have higher fees because
shareholders have to pay fees for the funds of funds themselves and must also pay fees for the
underlying funds. Funds of funds were especially popular in the 1960s

41. What are Debt based fund? When these funds give better return?
 A debt fund is an investment pool, such as a mutual fund or exchange-traded fund, in which core
holdings are fixed income investments. A debt fund may invest in short-term or long-term bonds,
securitized products, money market instruments or floating rate debt. The fee ratios on debt funds are
lower, on average, than equity funds because the overall management costs are lower.
These funds gives better returns when interest rate falls, inflation is under control, and there is a
slowdown in equity market.

42. What is an Index Fund?

An index fund is a type of mutual fund with a portfolio constructed to match or track the components
of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said
to provide broad market exposure, low operating expenses and low portfolio turnover. These funds
adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that
stay in place no matter the state of the markets. "Indexing" is a passive form of fund management
that has been successful in outperforming most actively managed mutual funds.

43. What is NAV of a mutual fund?

Net Asset Value (NAV) is a fund's market value per unit. It is calculated by dividing the total value
of all the assets in a portfolio, minus all its liabilities. NAV is calculated at the end of every market
day, after taking into account the closing market prices of the securities in its portfolio. When
selecting a mutual fund for investments, remember that daily changes in NAV don't matter. It is best
to look at the annualised return of a fund over different time frames to estimate the performance of
the fund.

44. What are the advantages of Mutual fund?

Instant diversification: A mutual fund will provide you with a "basket of stocks" that will
provide diversification in your portfolio.
Effective for smaller accounts: Since a mutual fund provides exposure to hundreds or
thousands of stocks, you don't need to go out and buy hundreds or thousands of stocks on your own,
which could be very prohibitive for you if you have a smaller-sized investment account and limited
capital to invest with.
Professional money management: Mutual funds are run by investment managers who would
likely be considered "experts" in their field. Mutual fund companies have resources that are above
and beyond what one may have as an individual, retail investor.

45. What is sectoral fund?

A stock mutual, exchange-traded or closed-end fund that invests solely in businesses that operate in a
particular industry or sector of the economy. Because the holdings of this type of fund are in the
same industry, there is an inherent lack of diversification associated with these funds. These funds
tend to increase substantially in price when there is an increased demand for the product or service
offering provided by the businesses in which the funds invest. On the other hand, if there is a
downturn in the specific sector in which a sector fund invests, the fund will often face heavy losses
as a result of the lack of diversification in its holdings

46. What is a balanced fund?

A balanced fund combines a stock component, a bond component and sometimes a money market
component in a single portfolio. Generally, these hybrid funds stick to a relatively fixed mix of
stocks and bonds that reflects either a moderate, or higher equity, component, or conservative, or
higher fixed-income, component orientation. Balanced funds are geared toward investors who are
looking for a mixture of safety, income and modest capital appreciation. The amounts this type of
mutual fund invests into each asset class usually must remain within a set minimum and maximum.
Although they are in the "asset allocation" family, balanced fund portfolios do not materially change
their asset mix. This is unlike life-cycle, target-date and actively managed asset-allocation funds,
which make changes in response to an investor's changing risk-return appetite and age or overall
investment market conditions

47. What is Gilt fund?

A mutual fund that invests in several different types of medium and long-term government securities
in addition to top quality corporate debt. Gilts originated in Britain. Gilt funds differ from bond
funds because bond funds invest in corporate bonds, government securities, and money market
instruments. Gilt funds stick to high quality-low risk debt, mainly government securities. Gilt Funds
are mutual funds that invest only in government securities. They are preferred by risk averse and
conservative investors who wish to invest in the shadow of secure government bonds.