Professional Documents
Culture Documents
Capital Market
Capital Market
Capital Market
Unit 1
Definition
In the financial sense, the capital market is the market for the instruments representing long-term funds requirement of
the corporation.
It consists of a sprawling complex of institutions and mechanism whereby intermediate-term funds and long-term funds
are pooled and made available to business, government, and individuals.
Meaning of Capital Market
• Capital Market is the part of financial system which is concerned with raising capital funds by dealing in Shares,
Bonds, and other long-term investments.
• The market where Investment instruments like bonds, equities and mortgages are traded is known as the capital market.
Capital market:-
1 Issue
2 Stock exchange
3 Merchant Banker
4 Market Regulator
5 Investors
6 stock broker
7 Depositories
8 Depository Participants
- First: the ultimate lenders (= surplus economic units) and borrowers (= deficit economic units), i.e. the non-financial
economic units that undertake the lending and borrowing process. The ultimate lenders lend to borrowers either directly
or indirectly via financial intermediaries, by buying the securities they issue.
- Second: the financial intermediaries which intermediate the lending and borrowing process. They interpose
themselves between the lenders and borrowers, and earn a margin for the benefits of intermediation (including lower
risk for the lender). They buy the securities of the borrowers and issue their own to fund these (and thereby become
intermediaries).
- Third: financial instruments (or assets), which are created/issued by the ultimate borrowers and financial
intermediaries to satisfy the financial requirements of the various participants. These instruments may be marketable
(e.g. treasury bills) or non-marketable (e.g. retirement annuities).
- Fourth: the creation of money (= bank deposits) by banks when they satisfy the demand for new bank credit. This is a
unique feature of banks. Central banks have the tools to curb money growth.
- Fifth: financial markets, i.e. the institutional arrangements and conventions that exist for the issue and trading
(dealing) of the financial instruments.
- Sixth: price discovery, i.e. the establishment in the financial markets of the price of money, i.e. the rates of interest on
debt (and deposit) instruments and the prices of share instruments.
1
Capital market are classified into two segment
1: Primary market
2: Secondary market
Primary Market
The Primary market is a type of capital wherein the financial securities are traded for the first time in a stock
exchange, and the fresh capital is raised from the market. Underwriters or investment banks facilitate the transactions
that require fresh capital and set the floor and cap price according to the valuations. Some primary market offering
includes:
The companies which are not traded publicly (held privately) intends to raise capital for their business objectives
via IPO. The companies planning to raise capital generally appoints an underwriter (s), select an exchange and apply
for a listing to the market regulator. After the approval is received, requirements must be completed to list the shares
in any exchange, and these requirements would vary from jurisdiction to jurisdiction.
2.Placement
As the name suggests ‘Placement’, the securities are placed to a few or several institutional/sophisticated investors on
an exclusive basis. The placement is less costly than the public offering, and sometimes listed companies also offer
placement of new shares to an exclusive investor.
Secondary Market
The Secondary market is a market for financial securities that are pre-owned by the investors or the holder of those
securities already owns the shares. It is a market for trading pre-owned securities; the stock exchanges facilitate these
markets wherein existing securities from the market change their ownership for consideration. ETFs and Bonds are
also traded in the secondary market once they are issued initially. Some of the secondary market examples apart from
the trading of securities can be an on market buy-back program of any company, delisting or merger of companies
through cash offer.
Primary market & Secondary market are the two types of capital markets; the main difference between these two
markets is that in Primary markets, only newly issued financial securities are issued while in Secondary markets, the
existing securities are traded in the market. In primary markets, the raised capital is supplied to the enterprises for their
business objectives; however, the capital is not supplied to these enterprises or companies in the secondary market.
The Primary market is a one-time market, while the ownership can change multiple times in the secondary market. It
can be said that the buying and selling of securities are between companies and investors in the primary market;
meanwhile, buying and selling of securities is between the investors only in the secondary market. Underwriter
facilitates the issue of new securities in the primary market, and the broker provides the trading services for these
securities in the secondary market.
2
and a government regulator oversees the activities of a stock exchange. ASIC supervises the activities of stock exchanges
in Australia.
Retail Investors – Retail investors are commonly referred to as individual investors or non-professional investors. These
investors are mostly involved in the buying & selling of securities, mutual funds or Exchange traded funds. These
investors trade on securities through brokers, and the capital invested by retail investors is relatively low against
institutional investors.
Institutional Investors – An institutional investor is an organization that invests the capital on behalf of other investors;
the scale of operations of these investors is mainly large. These investors possess specialized knowledge and resources
than an individual investor, and maybe special rights as well. It should be noted that these investors have a high-risk
appetite, and these investors also favour investments in derivatives, unlike retail investors.
Regulators – The regulators are the safe keeper of the ethics in any economy or business. In capital markets; these
regulators play an essential role in safeguarding the interests of the investors while closely supervising the market
activities and investigations. A market regulator closely watches the capital movements, while also investigates matters
for potential unfairness.
Brokers – A broker can be an individual person, or a company acting as an agent in executing trades on behalf of
clients; these clients may include retail & institutional investors as well. Generally, brokers charge a commission while
executing any trade, and sometimes also provide insights on market, investments and intelligence to the customers while
dealing in securities. There are different types of credentials required in different jurisdictions to become a broker.
Custodians – Custodians are one of the most important market participants in the capital market, as they hold the
customer’ securities to minimise the risk of theft of loss. Custodians hold financial securities mostly fixed income &
equities, facilitate the post-trade activities, which include delivery and receipt of financial security for consideration or
capital. Mainly, these organisations include big banks offering custodian services to investors.
Depositories – As the name suggests ‘deposit’, these organisations facilitate the deposit or storage. Depository
participant or Depository holds the security while assisting in the trading of securities, and these organisations also
provide services like transferring of shares from one investor’ account to another. Depositories also provide clearing
services like Depository Trust & Clearing Corporation (DTCC) in the USA. Clearing House Electronic Subregister
System (CHESS) by ASX provides clearing services in Australia while Central Securities Depository (CSD) provides
depository services in Australia.
Rating Agencies – A rating agency or a credit rating agency assesses the ability to repay the principal and interest of
any company or government on their debts. These agencies provide ratings on the basis of the financial strength of any
entity, and these ratings are widely used by the market to interpret the credibility of the issuer.
3
#Functions of Capital Market
▪ Mobilization of savings to finance long term investments.
▪ Facilitates trading of securities.
▪ Minimization of transaction and information cost.
▪ Encourage wide range of ownership of productive assets.
▪ Quick valuation of financial instruments like shares and debentures.
▪ Facilitates transaction settlement, as per the definite time schedules.
▪ Offering insurance against market or price risk, through derivative trading.
▪ Improvement in the effectiveness of capital allocation, with the help of competitive price mechanism.
Capital market is a measure of inherent strength of the economy. It is one of the best source of finance, for the companies,
and offers a spectrum of investment avenues to the investors, which in turn encourages capital creation in the economy.
REGULATORY FRAMEWORK
Legislations
The five main legislations governing the securities market are a) the Securities 0Contracts (Regulation) Act, 1956,
preventing undesirable transactions in securities by regulating the business of dealing in securities; (b) the Companies
Act, 1956, which is a uniform law relating to companies throughout India; (c) the SEBI Act, 1992 for the protection of
interests of investors and for promoting development of and regulating the securities market; (d) the Depositories Act,
1996 which provides for electronic maintenance and transfer of ownership of dematerialised securities and ® the
Prevention of Money Laundering Act, 2002 which prevents money laundering and provides for confiscation of
property derived from or involved in money laundering.
Rules and Regulations
The Government has framed rules under the SC®A, SEBI Act and the Depositories Act. SEBI has framed regulations
under the SEBI Act and the Depositories Act for registration and regulation of all market intermediaries, for
prevention of unfair trade practices, insider trading, etc. Under these Acts, Government and SEBI issue notifications,
guidelines, and circulars, which need to be complied with by market participants. The self-regulatory organizations
(SROs) like stock exchanges have also laid down their rules and regulations for market partic ipants.
Regulators
The regulators ensure that the market participants behave in a desired manner so that the securities market continue to
be a major source of finance for corporates and government and the interest of investors are protected. The
responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA), Department of
Company Affairs (DCA), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Securities
Appellate Tribunal (SAT).
4
liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the capital
formation in the country.
2Easy Liquidity:
In the secondary market investors can sell off their holdings and convert them into liquid cash. Commercial banks also
allow investors to withdraw their deposits, as and when they are in need of funds.
3Ready and Continuous Market:
The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities.
Easy marketability makes investment in securities more liquid as compared to other assets.
4Technical Assistance:
In developing countries an important shortage faced by entrepreneurs is technical assistance. By offering advisory
services relating to preparation of feasibility reports, identifying growth potential and training entrepreneurs in project
management, the financial intermediaries in capital market play an important role.
5Raising Long - Term Capital:
The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their
funds for a permanent period but companies require funds permanently. The stock exchange resolves this dash of
interests by offering an opportunity to investors to buy or sell their securities, while permanent capital with the company
remains unaffected.
6Reliable Guide to Performance:
The capital market serves as a reliable guide to the performance and financial position of firm, and thereby promotes
efficiency.
7Foreign Capital:
Foreign capital generates from Capital markets. Indian firms are able to generate capital funds from overseas markets
by way of bonds and other securities. Government has liberalized Foreign Direct Investment (FDI) in the country. This
not only brings in foreign capital but also foreign technology which is important for economic development of the
country.
8Promotion of Industrial Growth:
The stock exchange is a central market through which resources are transferred to the industrial sector of the economy.
The existence of such an institution encourages people to invest in productive channels. Thus it stimulates industrial
growth and economic development of the country by mobilizing funds for investment in the corporate securities.
9Revival of Sick Units:
The Commercial and Financial Institutions provide timely financial assistance to viable sick units to overcome their
industrial sickness. To help the weak units to overcome their financial industrial sickness banks and FIs may write off
a part of their loan.
10Proper Channelization of Funds:
The prevailing market price of a security and relative yield are the guiding factors for the people to channelize their
funds in a particular company. This ensures effective utilization of funds in the public interest.
11Provision of Variety of Services:
The financial institutions functioning in the capital market provide a variety of services such as grant of long term and
medium term loans to entrepreneurs, provision of underwriting facilities, assistance in promotion of companies,
participation in equity capital, giving expert advice etc.
Shares
Shares are a unit of ownership in an organisation or corporation. It is a part of the company’s capital. Those individuals
who are getting shares from any company, are called Shareholders. When a company wants to borrow and increase their
capital, they issue their shares in the stock market (exchange) for their investors.
Companies can issue two types of shares, which they offer to investors/shareholders. The two types of shares are:
(a) Equity shares
5
(b) Preference shares
Bonds
Bonds are issued by the banks, organisations and financial institutions. They issue bonds for getting an amount of money
from public (as a loan) and commit them a refund with an actual interest and within a maturity period. They issue their
bonds for financing their capital expenses and their various projects or activities.
Debentures
Debenture is an instrument which is used by the Corporations and Government for getting a loan from public and it is
given under the company’s Stamp Act. Corporations and Government can secure their debenture on company assets
which it issues as long term loans. In Debentures, companies are required to announce a fixed return at the time of
issuing.
Fixed Deposit
Fixed Deposit is that kind of bank account, where the amount of deposit is fixed for a specified period of time. All
Commercial banks are given these opportunities to their customers for opening a fixed account in their bank. In a Fixed
account, the uNamount of deposit is fixed, which means we cannot withdraw an unlimited amount from this account,
therefore it is also called a Fixed Deposit.
Gold ETF
Gold ETF is one of the most popular funds as it does not get influenced due to stock fluctuations or inflation. Gold ETF
fund is a fiscal instrument which works as a mutual fund and whose prices are depending upon the market price of gold.
When the market price of gold increases, gold ETF prices also increase.
UNIT-2
Functions:-
the following three major functions they are meant to perform:
1. Creditors provide a line of credit to qualified clients and collect the premiums of debt instruments such as
loans for financing homes, education, auto, credit cards, small businesses, and personal needs.
Converting short-term liabilities to long term assets (banks deal with large number of lenders and borrowers,
and reconcile their conflicting needs)
2. Risk transformation[citation needed]
Converting risky investments into relatively risk-free ones. (lending to multiple borrowers to reduce the risk)
3. Convenience denomination
Matching small deposits with large loans and large deposits with small
6
There are two essential advantages from using financial intermediaries:
• Banks
• Mutual savings banks
• Savings banks
• Building societies
• Credit unions
• Financial advisers or brokers
• Insurance companies
• Collective investment schemes
• Pension funds
• cooperative societies
• Stock exchanges
PRIMARY MARKET
The new issue market / activity was regulated by the Controller of Capital Issues (CCI) under the provisions of the
Capital Issues (Control) Act, 1947 and the exemption orders and rules made under it. With the repeal of the Act and
the consequent abolition of the office of the CCI in 1992, the protection of the interest of the investors in securities
market and promotion of the development and regulation of the market/ activity became the responsibility of the
SEBI. To tone up the operations of the new issues in the country, it has put in place rigorous measures. These cover
both the major intermediaries as well as the activities. So, we will discuss here, various intermediaries, their regulation
and SEBI guidelines related to them.
#Merchant Bankers:
In modern times, importance of merchant banker is very much, because it the key intermediary between the company
and issue of capital. Main activities of the merchant bankers are – determining the composition of the capital structure,
drafting of prospectus and application forms, compliance with procedural formalities, appointment of registrars to deal
with the share application and transfer, listing of securities, arrangement of underwriting / subunderwriting, placing of
issues, selection of brokers, bankers to the issue, publicity and advertising agents, printers and so on. Due to
overwhelming importance of merchant banker, it is now mandatory that merchant banker functioning as lead manager
should manage all public issues.
1 Registration: Merchant bankers require compulsory registration with the SEBI to carry out their activities.
Previously there were four categories of merchant bankers, depending upon the activities. Now, since Dec. 1997, there
is only one category of registered merchant banker and they perform all activities.
2 Grant of Certificate: The SEBI grants a certificate of registration to applicant if it fulfills all the conditions like (i)
it is a body corporate and is not a NBFC (ii) it has got necessary infrastructure to support the business activity (iii) it
has appointed at least two qualified and exp.
7
3 Code of Conduct: Every merchant banker has to abide by the code of conduct, so as to maintain highest standards
of integrity and fairness, quality of services, due diligence and professional judgment in all his dealings with the
clients and other people.
A merchant banker has always to endeavor to (a) render the best possible advice to the clients regarding clients needs
and requirements, and his own professional skill and
(b) ensure that all professional dealings are effected in a prompt, efficient and cost effective manner.
4 Restriction on Business: No merchant banker, other than a bank/public financial institution is permitted to carry on
business other than that in the securities market w.e.f. Dec.1997.
#Underwriters: Another important intermediary in the new issue/ primary market is the underwriters to issue of
capital who agree to take up securities which are not fully subscribed. They make a commitment to get the issue
subscribed either by others or by themselves. Though underwriting is not mandatory after April 1995, its organization
is an important element of primary market. Underwriters are appointed by the issuing companies in consultation with
the lead managers / merchant bankers to the issues.
1 Registration: To act as underwriter, a certificate of registration must be obtained from SEBI. On application
registration is granted to eligible body corporate with adequate infrastructure to support the business and with net
worth not less than Rs. 20 lakhs.
2 Fee: Underwriters had to pay Rs. 5 lakh as registration fee and Rs. 2 lakh as renewal fee every three years from the
fourth year from the date of initial registration. Failure to pay renewal fee leads to cancellation of certificate of
registration.
3 Code of conduct: Every underwriter has at all times to abide by the code of conduct; he has to maintain a high
standard of integrity, dignity and fairness in all his dealings. He must not make any written or oral statement to
misrepresent (a) the services that he is capable of performing for the issuer or has rendered to other issues or (b) his
underwriting commitment.
4 Agreement with clients: Every underwriter has to enter into an agreement with the issuing company. The
agreement, among others, provides for the period during which the agreement is in force, the amount of underwriting
obligations, the period within which the underwriter has to subscribe to the issue after being intimated by/on behalf of
the issuer, the amount of commission/brokerage, and details of arrangements, if any, made by the underwriter for
fulfilling the underwriting obligations.
#Bankers to an Issue:
The bankers to an issue are engaged in activities such as acceptance of applications along with application money
from the investor in respect of capital and refund of application money.
1 Registration: To carry on activity as a banker to issue, a person must obtain a certificate of registration from the
SEBI. The applicant should be a scheduled bank. Every banker to an issue had to pay to the SEBI an annual free for
Rs. 5 lakh and renewal fee or Rs. 2.5 lakh every three years from the fourth year from the date of initial registration.
Non-payment of the prescribed fee may lead to the suspension of the registration certificate.
2 General Obligations and Responsibilities to Furnish Information: When required, a banker to an issue has to
furnish to the SEBI the following information : (a) the number of issues for which he was engaged as banker to an
issue (b) the number of applications / details of the applications money received (c) the dates on which applications
from investors were forwarded to the issuing company / registrar to an issue (d) the dates / amount of refund to the
investors.
3 Books of account/record / documents: A banker to an issue is required maintain books of accounts/ records/
documents for a minimum period of three years in respect of, inter alia, the number of applications received, the
names of the investors, the time within which the applications received were forwarded to the issuing company /
registrar to the issue and dates and amounts of refund money to investors.
4 Agreement with issuing companies: Every banker to an issue enters into an agreement with the issuing company.
The agreement provides for the number of collection centers at which application/ application money received is
forwarded to the registrar for issuance and submission of daily statement by the designated controlling branch of the
baker stating the number of applications and the amount of money received from the investor.
5 Code of Conduct: Every banker to an issue has to abide by a code of conduct. He should observe high standards of
integrity and fairness in all his dealings with clients/ investors/ other members of the profession. He should exercise
due diligence. A banker to an issue should always endeavor to render the best possible advice to his clients and ensure
that all professional dealings are effected in a prompt, efficient and cost-effective manner.
8
Secondary Market Intermediaries
Secondary Market
Secondary market intermediaries play an important role in the secondary market. Particularly on the sell side, they
provide an important service to potential sellers in what remains an opaque market. Services provided span from
identifying which funds in an investor’s portfolio are most marketable, developing an effective sales strategy, setting
price expectation, identifying potential buyers and managing an auction process as well dealing with the
administrative processes involved in the transfer of fund interests.
Stock Broker
A stockbroker is a professional who executes buy and sell orders for stocks and other securities on behalf of clients. A
stockbroker may also be known as a registered representative, investment adviser or simply, broker. Stockbrokers are
usually associated with a brokerage firm and handle transactions for retail and institutional customers alike.
Stockbrokers often receive commissions for their services, but individual compensation can vary greatly depending on
where they are employed. Brokerage firms and broker-dealers are also sometimes referred to as stockbrokers
themselves.
Step1: A duly filled application in Form A provided in Schedule I am required to be submitted to the Stock Exchange
where it wishes to be admitted as a member.
Step2: Within 30 days of receiving the application the stock exchange is required to forward the same to
the Securities Exchange Board of India.
Step3: After due analysis of the application if the Board is of the opinion that all the conditions mentioned under
Regulation 5 are satisfied, the certificate of registration is issued and the stock exchange is intimated of the same
effect.
Step4: If the Board is not satisfied with the contents of the application when such refusal is to be communicated to
the applicant and to the stock exchange as well within 30 days from the date of refusal. However, the applicant must
be provided an opportunity of being heard.
Step5: Any applicant with the rejected application has an option to reapply within 30 days from the date of intimation
of such rejection, which will be considered by the Board and decision will be communicated.
Sub Broker
A ‘Sub-Broker’ is any person who is not a Trading Member of a Stock Exchange but who acts on behalf of a Trading
Member as an agent or otherwise for assisting investors in dealing in securities through such Trading Members.
All Sub-Brokers are required to obtain a Certificate of Registration from SEBI without which they are not permitted to
deal in securities. SEBI has directed that no Trading Member shall deal with a person who is acting as a Sub-Broker
unless he is registered with SEBI and it shall be the responsibility of the Trading Member to ensure that his clients are
not acting in the capacity of a Sub-Broker unless they are registered with SEBI as a Sub-Broker.
Step-2 Members would be informed through letter and bill vide FTP to make available in its Exchange Dues Account
the processing fee amounting to Rs. 2,000/- plus the applicable applicable Goods & Service Tax (GST) for every Sub-
Broker registration application. Alternatively, the status of the Sub-Broker registration application would be
‘Documents Received’ in ENIT.
Step-3 In case of applications which are complete in all respects, Members would be informed through letter in FTP
asking them to make available the requisite SEBI registration fees in their Exchange Dues Account.
Step-4 In case the Member applies for withdrawal of the Sub-Broker registration application after its recognition by
SRC or for cancellation of the application after it is registered with SEBI, then the Member would need to procure the
refund of the SEBI registration fees directly from SEBI.
Step-5 Partial or total amount collected towards SEBI registration fees would not be adjusted towards any other dues
payable to the Exchange.
Step-6 In case the Member applies afresh for SEBI registration for Sub-Broker applications returned to the Member
who have been derecognized since they were unable to provide necessary clarification as sought by SEBI, within the
time stipulated by SEBI, the Exchange would process such applications afresh.
Trading member
Trading Member (TM): ): A member with rights to trade on its own account as well as on account of its clients, but
has no right to clear and settle such trades itself. Membership of MSEI can be taken by an Individual, Registered
Partnership Firm, Corporate or Bank. In case the applicant for membership of the Exchange is a Corporate, minimum
paid up capital of the Corporate should be 30 lakhs.
• Eligibility Criteria for at least 2 Directors
o Age - Minimum 21 years of Age
o Education - Should be at least HSC
o Experience - Minimum 2 years relevant experience
• After provisional admission to membership of the Exchange, the membership has to be registered with SEBI
• The applicant has to ensure that at least two of their users should be successfully certified for the relevant module
pertaining to the respective segments wherein membership of the Exchange has been sought.
• For fees and deposit structure please refer to the below mentioned table
Clearing Member
A member with a right to trade on its own account as well as on account of its clients. He can clear and settle the
trades for self and for others through Metropolitan Clearing Corporation of India Ltd (MCCIL). Membership of MSEI
can be taken by an Individual, Registered Partnership Firm, Corporate or Bank. Membership of MSEI cannot be taken
by a member of any commodity exchange. In case the applicant for membership of the Exchange is a Corporate,
minimum paid up capital of the Corporate should be 30 lakhs.
• Eligibility Criteria for at least 2 Directors
o Age - Minimum 21 years of Age
o Education - Should be at least HSC
o Experience - Minimum 2 years relevant experience
• After provisional admission to membership of the Exchange, the membership has to be registered with SEBI
• The applicant has to ensure that at least two of their users should be successfully certified for the relevant module
pertaining to the respective segments wherein membership of the Exchange has been sought.
• For fees and deposit structure please refer to the below mentioned table
10
In order to apply for membership to the Exchange, applicants need to submit the duly filled Membership Application
Form along with the required documents and applicable fees /deposits.
Clearing Transaction
is the process of updating the accounts of the trading parties and arranging for the transfer of money and securities.
There are 2 types of clearing:
1.bilateral clearing
2.central clearing.
In bilateral clearing, the parties to the transaction undergo the steps legally necessary to settle the transaction.
Central clearing uses a third-party — usually a clearinghouse — to clear trades. Clearinghouses are generally used by
the members who own a stake in the clearinghouse. Members are generally broker-dealers. Only members may
directly use the services of the clearinghouse; retail customers and other brokerages gain access by having accounts
with member firms. The member firms have financial responsibility to the clearinghouse for the transactions that are
cleared. It is the responsibility of the member firms to ensure that the securities are available for transfer and that
sufficient margin is posted or payments are made by the customers of the firms; otherwise, the member firms will
have to make up for any shortfalls. If a member firm becomes financially insolvent, only then will the clearinghouse
make up for any shortcomings in the transaction.
Settlement is the actual exchange of money and securities between the parties of a trade on the settlement date after
agreeing earlier on the trade. Most settlement of securities trading nowadays is done electronically. Stock trades are
settled in 3 business days (T+3), while government bonds and options are settled the next business day (T+1). Forex
transactions where the currencies are from North American countries have T+1 settlement date, while trades involving
currencies outside of North America have a T+2 settlement date. In futures, settlement refers to the mark-to-market of
accounts using the final closing price for the day. A futures settlement may result in a margin call if there are
insufficient funds to cover the new closing price.
The transactions in secondary market pass through three distinct phases, viz., trading, clearing and settlement. While
the stock exchanges provide the platform for trading, the clearing corporation determines the funds and securities
obligations of the trading members and ensures that the trade is settled through exchange of obligations. The clearing
banks and the depositories provide the necessary interface between the custodians/clearing members for settlement of
funds and securities obligations of trading members. The clearing process involves determination of what counter-
parties owe, and which counter-parties are due to receive on the settlement date, thereafter the obligations are
discharged by settlement. The clearing and settlement process for transaction in securities on NSE is presented in
Chart 5-1. Several entities, like the clearing corporation, clearing members, custodians, clearing banks, depositories
are involved in the process of clearing. The role of each of these entities is explained below:
■ Clearing Corporation: The clearing corporation is responsible for post-trade activities such as the risk management
and the clearing and settlement of trades executed on a stock exchange.
■ Clearing Members: Clearing Members are responsible for settling their obligations as determined by the NSCCL.
They do so by making available funds and/or securities in the designated accounts with clearing bank/depositories on
the date of settlement.
■ Custodians: Custodians are clearing members but not trading members. They settle trades on behalf of trading
members, when a particular trade is assigned to them for settlement.
■ Clearing Banks: Clearing banks are a key link between the clearing members and Clearing Corporation to effect
settlement of funds. Every clearing member is required to open a dedicated clearing account with one of the
designated clearing banks. Based on the clearing member’s obligation as determined through clearing, the clearing
member makes funds available in the clearing account for the pay-in and receives funds in case of a pay-out.
11
■ Depositories: Depository holds securities in dematerialized form for the investors in their beneficiary accounts.
Each clearing member is required to maintain a clearing pool account with the depositories. He is required to make
available the required securities in the designated account on settlement day. The depository runs an electronic file to
transfer the securities from accounts of the custodians/clearing member to that of NSCCL and visa-versa as per the
schedule of allocation of securities.
■ Professional Clearing Member : NSCCL admits special category of members known as professional clearing
members (PCMs). PCMs may clear and settle trades executed for their clients (individuals, institutions etc.). In such
cases, the functions and responsibilities of the PCM are similar to that of the custodians. PCMs also undertake clearing
and settlement responsibilities of the trading members. The PCM in this case has no trading rights, but has clearing
rights i.e. he clears the trades of his associate trading members and institutional clients.
Funds settlement refers to the transfer of funds from buyer to seller and the transfer of an asset's title from seller to
buyer.
When an investor sends an order to his or her broker, that trade information is sent to a clearinghouse (for example,
the National Securities Clearing Corporation). The clearinghouse processes and records the trade, and then issues a
report to the broker/dealers involved that includes their net securities positions and the money to be settled among the
parties.
The NSCC forwards settlement instructions to the Depository Trust & Clearing Corporation (DTCC), asking it to
electronically transfers the ownership of the securities from the selling broker's account to the buying broker's account.
The DTCC also transfers funds from the buying broker's bank account to the selling broker's bank account.
The brokerages then adjust their clients' accounts accordingly. The process is similar for institutional investors. For
most stock trades, this takes three business days to occur. For option trades, fund settlement usually takes one business
day.
Funds settlement also occurs for dividend payments. Foreign markets may have different settlement procedures or
times to completion.
Funds settlement is an important "back-office" function, and the faster it occurs, the more it reduces market risk by
ensuring that trades are executed properly. Fast funds settlement also increases investor confidence in the markets by
ensuring that their trades are completed on time and that they won't lose their funds to bankrupt brokerage firms or
intermediaries. It also requires participants to have the money in their accounts as their trades are made (or arrange for
credit before the trade is placed).
Unit 3
Mutual fund
A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in
securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by
professional money managers, who allocate the fund's assets and attempt to produce capital gains or income for the
fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its
prospectus.
12
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and
other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual
funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of
the fund—derived by the aggregating performance of the underlying investments.
1 Equity Funds
The largest category is that of equity or stock funds. As the name implies, this sort of fund invests principally in
stocks. Within this group are various subcategories. Some equity funds are named for the size of the companies they
invest in: small-, mid-, or large-cap. Others are named by their investment approach: aggressive growth, income-
oriented, value, and others. Equity funds are also categorized by whether they invest in domestic (U.S.) stocks or
foreign equities.
2 Fixed-Income Funds
Another big group is the fixed income category. A fixed-income mutual fund focuses on investments that pay a set
rate of return, such as government bonds, corporate bonds, or other debt instruments. The idea is that the fund
portfolio generates interest income, which it then passes on to the shareholders.
3 Index Funds
Another group, which has become extremely popular in the last few years, falls under the moniker "index funds."
Their investment strategy is based on the belief that it is very hard, and often expensive, to try to beat the market
consistently. So, the index fund manager buys stocks that correspond with a major market index such as the S&P 500
or the Dow Jones Industrial Average (DJIA).
4 Balanced Funds
Balanced funds invest in both stocks and bonds to reduce the risk of exposure to one asset class or another. Another
name for this type of mutual fund is "asset allocation fund." An investor may expect to find the allocation of these
funds among asset classes relatively unchanging, though it will differ among funds. This fund's goal is asset
appreciation with lower risk.
The money market consists of safe (risk-free), short-term debt instruments, mostly government Treasury bills. This is
a safe place to park your money. You won't get substantial returns, but you won't have to worry about losing your
principal. A typical return is a little more than the amount you would earn in a regular checking or savings account
and a little less than the average certificate of deposit (CD).
6 Income Funds
Income funds are named for their purpose: to provide current income on a steady basis. These funds invest primarily
in government and high-quality corporate debt, holding these bonds until maturity in order to provide interest streams.
While fund holdings may appreciate in value, the primary objective of these funds is to provide steady cash flow to
investors.
7 Specialty Funds
This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to
be popular but don't necessarily belong to the more rigid categories we've described so far. These types of mutual
funds forgo broad diversification to concentrate on a certain segment of the economy or a targeted strategy.
13
8 International/Global Funds
An international fund (or foreign fund) invests only in assets located outside your home country. Global funds,
meanwhile, can invest anywhere around the world, including within your home country. It's tough to classify these
funds as either riskier or safer than domestic investments, but they have tended to be more volatile and have unique
country and political risks.
Transparency
Mutual funds are subject to industry regulation that ensures accountability and fairness to investors.
Pros
• Liquidity
• Diversification
• Minimal investment requirements
• Professional management
• Variety of offerings
Cons
Pension Fund
A pension fund, also known as a superannuation fund in some countries, is any plan, fund, or scheme which provides
retirement income. Pension funds are pooled monetary contributions from pension plans set up by employers, unions,
or other organizations to provide for their employees' or members' retirement benefits. Pension funds are the largest
investment blocks in most countries and dominate the stock markets where they invest. When managed by
professional fund managers, they constitute the institutional investor sector along with insurance companies and
investment trusts. Typically, pension funds are exempt from capital gains tax and the earnings on their investment
portfolios are either tax deferred or tax exempt.
The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for
retirement plans in private industry. ERISA does not require any employer to establish a retirement plan. It only
requires that those who establish plans must meet certain minimum standards. The law generally does not specify how
much money a participant must be paid as a benefit.
ERISA also clarifies what is known now as the “prudent person rule.” It stipulates that investments have to be made
for the exclusive benefit of plan beneficiaries. It makes clear that the only criteria that can be considered by fiduciaries
are financial — not other objectives that might be in the broader interest of beneficiaries, such as the investment’s
impact on the economy or the environment.
14
ERISA requires the following:
Plans must provide participants with information about the plan including important information about plan features
and funding. The plan must furnish some information regularly and automatically;
Sets minimum standards for participation, vesting, benefit accrual and funding;
Accountability of plan fiduciaries. ERISA generally defines a fiduciary as anyone who exercises discretionary
authority or control over a plan's management or assets, including anyone who provides investment advice to the plan.
Fiduciaries who do not follow the principles of conduct may be held responsible for restoring losses to the plan;
Gives participants the right to sue for benefits and breaches of fiduciary duty;
Insurance
Insurance is a tool by which fatalities of a small number are compensated out of funds collected from the insured.
Insurance companies pay back for financial losses arising out of occurrence of insured events, e.g. in personal accident
policy the insured event is death due to accident, in fire policy the insured events are fire and other natural calamities.
Hence, insurance is a safeguard against uncertainties. It provides financial recompense for losses suffered due to
incident of unanticipated events, insured within the policy of insurance.
The fixed amount of money paid by the insured to the insurance company regularly is called premium. Insurance
company collects premium to provide security for the purpose. Insurance is an agreement or a contract between the
insured and the Insurance Company (Insurer).
Types of Insurance
Insurance occupies an important place in the modern world because the risk, which can be insured, have increased in
number and extent owing to the growing complexity of the present day economic system. It plays a vital role in the
life of every citizen and has developed on an enormous scale leading to the evolution of many different types of
insurance. In fact, now a day almost any risk can be made the subject matter of contract of insurance. The different
types of insurance have come about by practice within insurance companies, and by the influence of legislation
controlling the transacting of insurance business. Broadly, insurance may be classified into the following categories:
(1) Classification on the basis of nature of insurance
(a) Life Insurance
(b) Fire Insurance
(c) Marine Insurance
(d) Social Insurance
(e) Miscellaneous Insurance
Venture Capital
Meaning of Venture Capital Venture Capital is long-term risk capital to finance high technology projects which
involve risk; these projects also possess strong potential for growth. Venture Capitalist pools their resources including
managerial abilities to assist new entrepreneurs in the early years of the project. Once the project reaches the stage of
profitability, they sell their equity holdings at high premium.
1Nature: Venture Capital is a long term investment. Since the project is risky, it may take time to earn profits.
Therefore, it takes time to get the refund of capital as well as return on it. The investors can exist on success of the
project by off-loading their investment. But it takes long time to get the success.
2 Form: Venture Capital is mainly in the form of equity capital. Investors can subscribe the equity capital and provide
the necessary funds to complete the project. The amount of equity invested by the Venture Capitalist is normally up to
49%of the total equity capital required for the project.
3 Borrowers: The borrowers are the new entrepreneurs who raise Venture Capital because they cannot get such an
amount from the general investors.
Type of project: Venture Capital projects are high risk, high technology and long term projects.
Management: Venture Capital projects are managed jointly by the entrepreneurs and Venture Capitalists. However,
Venture Capitalist should not interfere in day to day activities of the management. The Venture Capitalist can take
active part in the management and decision-making.
New venture: Venture Capital investment is generally made in new enterprises which use new technology to produce
new products, with an expectation of high gains or sometimes, spectacular returns.
Continuous involvement: Venture Capitalists continuously involve themselves with the client’s investments, either
by providing loans or managerial skills or any other support. Mode of investment: Venture Capital is basically an
equity financing method, the investment being in relatively new companies when it is too early to go to the capital
market to raise funds. In addition, financing also takes the form of loan finance/convertible debt to ensure a running
yield on the portfolio of the Venture Capitalists.
Objective: The basic objective of a Venture Capitalist is to make a capital gain in equity investment at the time of
exit, and regular on debt financing. It is a long-term investment in growth-oriented small/medium firms. It is a long-
term capital which is injected to enable the business to grow at a rapid pace, mostly from the start-up stage.
Hands-on approach: Venture Capital institutions take active part in providing valueadded services such as providing
business skills to investee firms. They do not interfere in management of the firms nor do they acquire a
majority/controlling interest in the investee firms. The rationale for the extension of hands-on management is that
Venture Capital investments tend to be highly non-liquid.
16
High risk-return ventures: Venture Capitalists finance high risk-return ventures. Some of the ventures yield very
high return in order to compensate for the high risks related to the ventures. Venture Capitalists usually make huge
capital gains at the time of exit
Process involving Venture Capital investment: The following are the steps involved in Venture Capital Investment
Process
1. Deal origination
2. Screening
3. Evaluation or due diligence
4. Deal structuring
5. Post- investment activity
6. Exit
Unit-4
Establishment:
The Exchange shall establish and maintain an Investors' Protection Fund to protect the interests of the clients of the
trading members of the Exchange, who may have been declared defaulters or who may have been expelled, under the
provisions of the Rules, Bye-laws and Regulations of the Exchange.
Compensation:
The Investors’ Protection Fund may provide compensation against a genuine and bonafide claim made by any client,
who has either not received the securities bought from a trading member for which the payment has been made by
such client to the trading member thereagainst or has not received the payment for the securities sold and delivered to
the trading member or has not received any amount or securities which is/are legitimately due to such client from the
trading member, who is either declared a defaulter or expelled by the Exchange or where the trading member, through
whom such client has dealt, is unable to get the securities rectified or replaced for the reason that the introducing
trading member at the Exchange is either declared a defaulter or expelled by the Exchange, under the relevant Rules,
Bye-laws and Regulations of the Exchange.
17
Regulation to Govern Investor’s Interest
There are mainly five regulations or legislation framed in India to regulate the interest of investors in Corporate
Sector. They are –
Appointment
• Presiding Officer
The Presiding officer of SAT shall be appointed by the Central Government in consultation with the Chief Justice of
India or his nominee.
• Members
The two members of SAT shall be appointed by the Central Government.
Qualifications
• Presiding Officer
o A sitting or retired judge of the supreme court or
o A sitting or retired Chief Justice of the High Court or
o A sitting or retired Judge of a High court, who has completed atleast 7 years of service as a Judge in a High Court.
Members
o He is a person of ability, integrity and standing and
o He has shown capacity in dealing with problems relating to securities market and has qualification and experience of
corporate law, Securities laws, Finance, economics or accountancy.
Tenure
• Presiding Officer
Earlier of the two
– 5 years at a time or re appointment or
– 68 years
18
Powers of SAT
The SAT shall have, for the purpose of discharging their functions under this Act, the same powers as are vested in a
civil court under the code of civil procedure 1908 while trying a suit, in respect of the following matters namely
• Summoning and enforcing the attendance of any person and examine him on oath
• Requiring the discovery and production of documents
• Receiving evidence on affidavits
• Issuing commissions for the examination of witnesses or documents
• Reviewing its decisions
• Dismissing an application for default or deciding it ex-parte
• Setting aside any order or dismissal of any applicable for default or any order passed by it ex-parte.
Procedure of appeal
(1) A memorandum of appeal should be presented in the form by an aggrieved person in the registry of
appellate tribunal within whore jurisdiction his case for or shall be sent by register post addressed to
the registrar.
(2) A memorandum of appeal sent by post shall be deemed to have presented in the registry on the day it
was received in the registry.
Under Section 12 of the Prevention of Money Laundering Act, 2002 (PMLA) for anti-money laundering actions
(AML), all REPORTING ENTITIES* are required to-
a) maintain a record of all transactions, including information relating to transactions covered under clause (b), in
such manner as to enable it to reconstruct individual transactions;
b) furnish to the Director within such time as may be prescribed, information relating to such transactions, whether
attempted or executed, the nature and value of which may be prescribed;
c) verify the identity of its CLIENTS in such manner and subject to such conditions, as may be prescribed;
· Under Section 2(ha) of the PMLA, "CLIENT" has been defined to mean a person who is engaged in a financial
transaction or activity with a reporting entity and includes a person on whose behalf the person who engaged in the
transaction or activity, is acting.
d) identify the BENEFICIAL OWNER, if any, of such of its clients, as may be prescribed;
· Under Section 2(fa) of the PMLA, "BENEFICIAL OWNER" has been defined to mean an individual who
ultimately owns or controls a client of a reporting entity or the person on whose behalf a transaction is being
conducted and includes a person who exercises ultimate effective control over a juridical person.
e) maintain record of documents evidencing identity of its clients and beneficial owners as well as account files and
business correspondence relating to its clients,
for a minimum period of 5 (five) years.
Money Laundering
Money laundering is the process of making large amounts of money generated by a criminal activity, such as drug
trafficking or terrorist funding, appear to have come from a legitimate source. The money from the criminal activity is
considered dirty, and the process "launders" it to make it look clean. Money laundering is itself a crime.
The process of laundering money typically involves three steps: placement, layering, and integration.
19
• Placement puts the "dirty money" into the legitimate financial system.
• Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
• In the final step, integration, the now-laundered money is withdrawn from the legitimate account to be used
for whatever purposes the criminals have in mind for it.
In 1989, the Group of Seven (G-7) formed an international committee called the Financial Action Task Force
(FATF) in an attempt to fight money laundering on an international scale. In the early 2000s, its purview was
expanded to combating the financing of terrorism.
The United States passed the Banking Secrecy Act in 1970, requiring financial institutions to report certain
transactions to the Department of the Treasury, such as cash transactions above $10,000 or any others they deem
suspicious, on a suspicious activity report (SAR). The information the banks provide to the Treasury Department is
used by the Financial Crimes Enforcement Network (FinCEN), which can share it with domestic criminal
investigators, international bodies or foreign financial intelligence units.
While these laws were helpful in tracking criminal activity, money laundering itself wasn't made illegal in the United
States until 1986, with the passage of the Money Laundering Control Act. Shortly after the 9/11 terrorist attacks,
the USA Patriot Act expanded money-laundering efforts by allowing investigative tools designed for organized crime
and drug trafficking prevention to be used in terrorist investigations.
The Association of Certified Anti-Money Laundering Specialists (ACAMS) offers a professional designation known
as a Certified Anti-Money Laundering Specialist (CAMS). Individuals who earn CAMS certification may work as
brokerage compliance managers, Bank Secrecy Act officers, financial intelligence unit managers, surveillance analysts
and financial crimes investigative analysts.
Jai Mata Di
20