CHAPTER I

INTRODUCTION

Statement of the Problem

The economic development of an economy depends upon the
financial system of a country because financial system of a country
provides a network of financial institutions, financial markets,
financial instruments and financial services which facilitate the
transfer of funds by mobilizing the savings and channelizing them
into productive activity and thus influences the pace of economic
development. Indeed, financial system deals with three interrelated
and interdependent variables; (i) money, (ii) credit and (iii) finance.
The participants in the financial system transfer funds from one party
to another party.

As regards financial markets, these refer to the network and

structural facilities for the transfer of funds between the buyers and
sellers of financial assets and services. Financial markets help the
participants to deal in financial instruments. As business firms need
large funds to undertake desired project, the accumulation of these
funds may be beyond their capacity in a reasonable time and
similarly government need funds to provide goods and services to
the people, financial markets facilitate business firms as well as
government to raise the required funds by issuing or selling different
instruments. In addition, financial markets also help investors to
invest surplus funds and earn a return. Financial markets comprise of

1
money market, government security market, capital market and
foreign exchange market.

As regards Securities Trading Corporation of India Limited, it

was established by Reserve Bank of India in May 1994, jointly with
public sector banks and all-India financial institutions with the main
objective of fostering the development of an active secondary market
for Government securities and bonds issued by Public sector
undertakings, Financial Institutions, Corporates etc. The company
was incorporated with an authorized and paid up capital of Rs. 500
crore of which Reserve Bank of India contributed 50.18 per cent.
Reserve Bank of India later on divested its shares in favour of other
shareholders. Presently Bank of India is the major shareholder with
29% followed by State Bank of India and Associates 10.5%, and
Industrial Development Finance Corporation 10%. The remaining
portion is held by Public Sector Banks and Financial Institutions.

Securities Trading Corporation of India Limited commenced

business operations in June 1994 and went on working as one of the
first Primary Dealers. The company is registered as a Non-Banking
Financial company with Reserve Bank of India and is classified as an
Investment company. The Government of India has notified
Securities Trading Corporation of India Limited as an Approved
Financial Institution.

The core activities of the company comprise of participation,

underwriting, market making and trading in Government Securities.
Besides it, the company is an active participant in the inter-bank call
money markets and Repo market. As underwriters of government

2
securities, the company has large commitments to bid for
Government securities in primary auctions.

After establishing its footing in the Government Securities

Market, the company has progressively moved into other segments
of the fixed income securities markets and in this way, the company
has become one of the dominant players in the Corporate Bond
Market. The company has also moved into the debt derivatives
market by becoming an active market maker in the Interest Rate
Swaps. The company has recently started providing portfolio
management services, trading in the equities market on proprietary
account and distributing Mutual Fund products.

The company moved on the path of growth involving both the

organic and inorganic routes as is reflected by the fact that the
company acquired UTI Securities Ltd (a 100% subsidiary of the
erstwhile Unit Trust of India) for Rs 265 Cr. This company is engaged
in areas of Merchant Banking, Lead Management and Book running
for IPOs, Debt and Equity broking, PMS, Debt Origination,
Syndication and Distribution and Online Equity trading. The company
is also in the process of exploring new avenues of activities like
Private Equity, Asset Management etc. in the holding Parent
company.

The company primarily deals in (i) Underwriting of GOI

Securities and Treasury Bills; (ii) Participation in the auctions of
GOI's Securities and Treasury Bills; (iii) Market-making and Trading
in GOI Securities and Treasury Bills; (iv) Trading in PSU Bonds and
other Corporate Debt Instruments; (v) Participation in Repo Market of

3
GOI Securities and Treasury Bills; (vi) Participation in the Inter-Bank
Call / Notice / Term money market, both as a borrower and as a
leader; (vii) Trading in Equities; and (viii) Portfolio Management
Services.

In spite of its significant role in money market as well as in

capital market, no research regarding its dimensions has been done
so far. Hence, the present study "Earnings & Growth Analysis of
Securities Trading Corporation of India Limited" has been selected
with a view to make a detailed analysis of its dimensions in Indian
financial markets.

Objectives of the Study

The present study aims at analyzing in detail the earnings &
growth of Securities Trading Corporation of India Limited since 1995.
Indeed, the present work seeks to study various aspects of earnings
and growth of Securities Trading Corporation of India Limited. The
study also seeks to suggest ways and means for improving the
performance of Securities Trading Corporation of India Limited.
Thus the main objectives of the present study are:
(i) To analyze Capital Structure of Securities Trading Corporation
of India Limited;
(ii) To study Risk Management in the Unit;
(iii) To make Portfolio Analysis of the Unit,
(iv) To analyze Earnings Management in the Unit,
(v) To make Growth Analysis in the Unit;
(vi) To suggest Financial Measures for strengthening the financial
soundness of Securities Trading Corporation of India Limited.

4
Review of Literature
Review of the existing literature reveals that a lot of work has
been done on the Analysis of Financial Statements, Working Capital
Management, Profitability Analysis, Cost and Benefit Analysis by a
number of Research Scholars. But no such study has come to the
notice of the researcher as deals with all the aspects of Earnings &
Growth and their implications at one place. However, the studies
conducted by Edward I. Altman, James O. Horrigan, L.C. Gupta &
S.C. Varshney reveal that Altman highlighted five ratios with the help
of multiple discriminant analysis to predict the bankruptcy of the firm
in his study; Horrigan employed a multiple regression model to
predict corporate bond ratings in his study; L.C. Gupta pointed out
two ratios to distinguish between sick and non-sick companies; S.C.
Varshney suggested the use of multiple regression to predict
profitability and liquidity behavior of a firm in his study. Hence the
present study has been selected by taking Securities Trading
Corporation of India Limited, being a largest Non Banking Financing
company to fill a gap in the field of knowledge. The present study is
an humble attempt in the direction of making an in-depth analysis of
Earnings and Growth in Securities Trading Corporation of India
Limited so as to present findings and suggestions at one place which
may augment further the growth of the company in particular and
also benefit the corporate sector in general.

Research Methodology
The necessary information on the subject has been collected
from various sources. Textual and Statistical Material has been
collected mainly from the Head office of Securities Trading

5
Corporation of India Limited. Recourse has been made to various
libraries. Conversation and discussion with the Authorities of
Securities Trading Corporation of India Limited has also been held
before arriving at the conclusion. Appropriate statistical techniques
together with prominent accounting ratios have been worked out for
measuring relationship between variables so as to enrich inferences.

Hypothesis
As regards the hypothesis in the present study, the researcher
seeks to adjudge whether:
(i) Earnings and Growth are independent
or
(ii) Earnings and Growth are positively associated and Earnings
significantly affects Growth in the unit.

Techniques of Analysis
As there are numerous tools and techniques, which can be
applied into any research keeping in view the objective in hand. One
can use appropriate statistical, mathematical and accounting
techniques according to the nature of the data and desired goal. The
present work is based on statistical techniques which comprise
mainly of : (i) Mean to show the average representative unit of the
series, (ii) Geometric Mean to highlight annual average compound
growth rate; (iii) Least square method to make the best fit line and to
compute the trend.

Mean1 has been worked out by adding all the numbers in a

given series divided by number of years. Symbolically,

1
Chandan, Jit. S., “Statistics for Business and Economics”, Vikas Publishing House Pvt. Ltd., New
Delhi 1998 P.70.
6
 x
X=
N
Annual average compound growth rate has been computed
where data tend to increase geometrically with the help of geometric
mean. 1Geometric mean has been calculated by taking the nth root of
the result arrived after dividing the compound value by original value
and there from subtracting one. Symbolically,
pn
r n 1
p0

The trend values have been calculated with the help of 2Least
Square Method so as to have the best fit line wherein the value of 'a'
and 'b' have been found out with the help of the following normal
equations:
 y  na  b  x
 xy  a  x  b  x 2
Thereafter computed values of 'y' have been worked out with
the help of the following equation :
y c  a  bx

Percentage change over the previous year has been

calculated with the help of mathematical technique in which previous
year's data has been subtracted out of the current year's data and
then the resultant has been divided by the number of years under
study. Symbolically,

Difference between Current year' s Data over Base year' s Data

Percentage change  x 100
Base year' s Data

1
Sancheti D.C. & Kapoor V.K., “Statistics (Theory, Methods & Application)”, Sultan Chand &
Sons, New Delhi, 1993 P. 3.79.
2
I.bid, P. 6.15.
7
 As one cannot compare absolute data in its actual form with
the data of other concerns, the trend is calculated with help of Index
Numbers. Actually, It measures the manner in which variables
behave in a long time. In order to calculate trend, one assumes the
data of any year as a base data and value it as 100. On the basis of
this base year’s data, one may find out the percentage changes by
using the following formulae:

Current Year' s Data

Fixed Base Index Number  x100
Base Year' s Data

This percentage change calculated for each subsequent year

is termed as trend. These trends are used for comparing two
variables of identical nature. It is calculated with the help of the
following formulae :

Current Year' s Data

Chain Base Index Number  x100
Preceding Year' s Data

In order to measure the volatility of a stock in relation to the

market, Beta () is calculated which works as an index of Systematic
Risk, indicating the sensitivity of return on a security or a Portfolio to
return from the market. It is the slope of the regression line, known
as the Characteristic line which shows the relationship of an Asset
with the market. For measuring market returns, a broad-based index
is used. Thus, if  exceeds 1, the security is more volatile than the
market, and is termed an ‘Aggressive Security’. An asset, whose
beta is less than 1, is termed a ‘defensive security’. Based on this, an
aggressive growth strategy would be to invest in high beta stocks
when the market is poised for an upswing; similarly, a switchover to

1
Pandey, I.M., “Financial Management”, Vikas Publishing House Pvt. Ltd., New Delhi, P. 107.
8
low beta stocks is remain beneficial when a downswing is prevailing
in the market.

Covariane of an asset with market portfolio

Beta of an asset 
Variance of the market portfolio

Organization of the Study

The whole of the study has been divided into seven chapters.
Chapter one is of introductory nature and outlines the study design
and conceptual frame work with the profile of Securities Trading
Corporation of India Limited. Chapter two analyses Capital Structure
of Securities Trading Corporation of India Limited with the help of
various ratios. Chapter three discusses Risk Management with the
help of Variance along with Capital Assets Pricing Model and
Arbitrage Pricing Theory. Chapter four analyses Portfolio of
Securities Trading Corporation of India Limited. Chapter five deals
with earnings management in the unit in detail. Chapter six presents
Growth Analysis in the unit in terms of Net Assets, Net Profit and
Revenue. Chapter seven is the last chapter which highlights the
findings and suggestions of the whole study. The study covers a
period beginning from 1994-95 to 2007-08.

CONCEPTUAL FRAMEWORK
Main variables or terms used in the study can be conceptually
frame worked as follows :

Financial Market

As regards the Concept of Financial Market, it plays a vital role

in the economic development of a country because it provides a vast
forum rather than a specific physical location for trading activity so as
to transfer financial Assets and Liabilities, mostly in the form of
9
tradeable securities. The constituents of financial markets are money
market and capital market. These two categories can further be
divided into primary and secondary market. The primary capital
market deals in Public and Right issues, Euro issues and overseas
offerings and Private Placements. Secondary capital market works
through Securities Trading Corporation of India Limited, Security
Exchanges and Over the Counter Transactions.

Money Market
Money Market helps in balancing short term liquidity. Indeed,
Money Market is that segment of the financial markets wherein
financial instruments having maturities of less than one year are
traded. These instruments include (i) Call Money and Notice Money
having maturity between a range of 1 to 14 days; (ii) Repos having
maturity of 14 days; (iii) Inter-Bank Term Money having maturity
between a range of 15 to 90 days; (iv) Bill of Exchange having
maturity of 90 days; (v) Treasury Bills having maturity between a
range of 91 to 364 days; (vi) Inter-Bank Participation Certificate
having maturity between a range of 91 to 180 days; (vii)Certificate of
Deposit having maturity between a range of 90 to 364 days; (viii)
Commercial paperhaving maturity between a range of 30 to 364 days
and (ix) Intercorporate Deposit having maturity of 90 days.

Money market is useful to all those entities, wherein a

temporary surplus or Deficit of funds exists. In this sense, Money
Market is a forum for adjusting their short-term Liquidity positions.
However, the open money market does not have any physical
trading locations. It is essentially a network of the major players and
intermediaries linked by telephones and other media. However, the
10
Reserve Bank of India plans to introduce screen-based trading
system for this segment. The Discount and Finance House of India
Limited (DFHI) plays an important role as a Market Maker in money
market securities.

Capital Market
Capital Market is the barometer of the economic development
of a country. It is that segment of the financial markets in which
securities having maturities exceeding one year like Debentures,
Preference Shares and Equity Shares are traded. Over-the-Counter
Exchange of India (OCTEI) offering may originate as a public issue
or a Bought-out Deal. Euro Issues and Overseas offerings include
GDRS, Foreign Currency Convertible Bonds, ADRS, Foreign
exchange. Over-the-counter transactions reflect to the trading in
securities including shares that take place else where other than
exchanges.

Government Securities
Government securities are sovereign securities which are
issued by the Reserve Bank of India on behalf of Government of
India as a part of the Central Government's market borrowing
programme. Government Securities consist for (i) Central
Government Securities.; (ii) State Government Securities; (iii)
Treasury bills. As a matter of fact, the Central Government borrows
funds to finance its 'fiscal deficit' through the issue of dated securities
and 364 days treasury bills either by auction or by floatation of loans.
Besides this, treasury bills of 91 days are issued for managing
the temporary cash mismatches of the Government. These do not
form part of the borrowing programmes of the Central Government.
11
Treasury Bills
Treasury Bills are secured financial instruments issued by the
Government of India at a discount price that is less than face value
and treasury bills serve as money market instruments. These bills do
not carry any fixed interest rate. These bills are issued at discount
value and redeemed at par value. Returns depend on maturity period
and discount rate. Short term government securities which pay no
interest are issued at a discount. It is a Government Security with a
tenor of less than one year. Treasury Bills are money market
instruments to finance the short term requirements of the
Government of India. These are discounted securities and these are
issued at a discount to face value. The return to the investor is the
difference between the maturity value and issue price. Treasury Bills
are one of the safest money market instruments Issued by
Government of India through Reserve Bank of India. It is issued at a
discount and it may be of 14, 91, 182 or 364 days. Practically 91
days T-Bills are issued.

Commercial paper
Commercial papers came into origin in India in 1990. It is an
unsecured money market instrument issued in the form of a
promissory note with a view to enable highly rated corporate
borrowers to diversify their sources of short-term borrowings and to
provide an additional instrument to investors. Subsequently, primary
dealers and satellite dealers were also permitted to issue commercial
paper to enable them to meet their short-term funding requirements
for their operations. Corporates, primary dealers (PDs) and the All-
India Financial Institutions (FIs) are eligible to issue commercial

12
paper. A corporate would be eligible to issue commercial paper
provided (a) the tangible net worth of the company, as per the latest
audited balance sheet, is not less than Rs. 4 crore; (b) company has
been sanctioned working capital limit by banks or all-India financial
institutions; and (c) the borrowing account of the company is
classified as a Standard Asset by the financing banks or institutions.
All eligible participants are required to obtain the credit rating for
issuance of Commercial paper either from Credit Rating Information
Services of India Ltd. (CRISIL) or the Investment Information and
Credit Rating Agency of India Ltd. (ICRA) or the Credit Analysis and
Research Ltd. (CARE) or the FITCH Ratings India Pvt. Ltd. or such
other credit rating agency (CRA) as may be specified by the Reserve
Bank of India from time to time for the purpose of the issue of
Commercial Paper.

Call Money
Call Money refers to the funds borrowed and lent mainly by
banks for over night use. This is a market where banks access in
order to meet their reserve requirements or to cover a sudden
shortfall in funds and the interest rate is determined by supply and
demand conditions. The situation arises when banks face an
unforeseen shortfall in funds. High call money rates indicate a
mismatch or a deliberate policy to substantially borrow short-term
and lend long-term. The more stringent requirements relating to the
Cash Reserve Ratio from January 1995, particularly the severe
penalty for default, also forced banks to borrow short-term; this
brought about the sudden but short-lived jumps in the call money
rate.

13
Inter-Bank Term Money
Inter-Bank Term Money refers to money Market transactions
exclusively involving banks in which funds are borrowed and lent for
periods ranging from 15 days to less than one year at market interest
rates. Generally, the transactions are for periods ranging between 15
to 90 days and no collateral security is involved. From 1993, select
all-India Financial Institutions have been allowed to participate as
borrowers in the term money market for periods ranging from three to
six months.

Despite this fact, the term money market has not witnessed the
desired growth mainly due to the strong preference among banks for
Call Money transactions over term money lending and borrowing.
However, measures such as the exemption of inter-bank term
liabilities of original maturity between 15 days and 1 year from Cash
Reserve Ratio requirements and the gradual departure of non-bank
participants from the call money market are expected to improve the
volumes in the term money market.

Inter-Bank Participation Certificate

It is an instrument representing an interest in a part of a loan
made by the bank selling the instrument,. The participation certificate
is strictly an inter-bank instrument. Inter-Bank Participation
Certificates can be of two types, ‘With risk sharing’ and ‘Without risk-
sharing’, and can have a maximum Maturity of 180 days. The bank
that issues an Inter-Bank Participation Certificate, benefits from the
infusion of funds. For the investing bank, it can be an attractive
parking place for surplus money, especially when the Call Money
interest rate is low.
14
Certificate of Deposit
Certificate of deposit refers to negotiable interest-bearing debt
instrument of specific Maturity issued by banks. A Certificate of
Deposit represents the title on a time deposit with a bank, but is a
liquid instrument since it can be traded in the secondary market. It is
a money market instrument having a maturity of less than one year
and is issued at a discount from the face value. The interest is the
difference between the issue price and the face value which the
holder receivers at maturity. The Reserve Bank of India laid down
rules for issuing Certificate of Deposit. However, a relaxation
announced in October 1993 relates the removal of limits on
borrowings by banks through Certificate of Deposits. By June 2002,
the minimum size (Face Value) of Certificate of Deposit to a single
investor was reduced to Rs 1 lakh, in order to widen the investor
base. Incidentally, certain Financial Institutions such as Industrial
Development Bank of India, Industrial Finance Corporation of India,
Industrial Credit & Investment Corporation of India and Small
Industries Development Bank of India have been permitted to issue
Certificate of Deposits, having a maturity from 367 days to 3 years.

Bond
A long-term debt instrument on which the issuer pays interest
periodically is known as a Coupon. Bonds are secured by Collateral
in the form of immovable property. While generally, bonds have a
definite Maturity,

Foreign Bonds
These are Bonds denominated in the currency of the foreign
country where funds are sought to be raised. The issuer may be a
15
foreign government, company or bank as a borrower that desires to
raise funds outside the domestic capital market. Accordingly,
‘Yankee Bonds’ are dollar-denominated debt instruments sold in the
U.S. by any overseas entity. Similarly, ‘Bulldog Bonds’ are foreign
bonds issued in the U.K. and ‘Samurai Bonds’ are those issued in
Japan.

Gilt-Edged Securities
Gilt-Edged Securities are long-term debt securities of varying
maturities extending up to 30 years issued by the central and state
governments as well as municipal corporations, electricity boards,
certain Financial Institutions like Industrial Development Bank of
India, National Bank for Agricultural & Rural Development and other
bodies. Because these securities are issued by governments or bear
their guarantee which signifies zero Default Risk, the adjective ‘Gilt-
Edged’ or simply’ Gilts’ is often used while referring to these
instruments. The securities may be issued in the form of a
Promissory Note, stock certificate or bearer bond. In June 1992, the
Reserve Bank of India commenced the issue of Government
Securities through auction. In January 1994, the Reserve Bank of
India for the first time auctioned government issued zero-coupon
Bonds of five years Maturity. Further, in March 1995, the Reserve
Bank of India decided to conduct auctions in Government Securities
in Secondary Market sales as well. In September 1995, the Union
Government issued Floating Rate Bonds, at a face value of Rs
10,000 each, bearing a Maturity of four years and an interest rate for
any half-year period at 1.25 per cent over the average rate of the
governments’ 364-day Treasury Bills, auctioned during the previous

16
six calendar months. Also, the securities carried a floor rate of 13 per
cent. During July 2002, a long-term bond with call and put options
was floated. Shorter maturities of gilts give rise to redemption
pressure due to bunched repayments. Consequently, the Reserve
Bank of India reverted to longer maturities of upto 30 years.

Liquidity Adjustment Facility

Liquidity Adjustment Facility was introduced by Reserve
Bank of India during June, 2000 in phases, to ensure smooth
transition and keeping pace with technological up gradation. On
recommendations of an Reserve Bank of India’s Internal Group,
Reserve Bank of India revised the Liquidity Adjustment Facility
scheme on March 25, 2004. Further revision was carried with
effect from Oct 29, 2004. The revised Liquidity Adjustment Facility
scheme provides (i) The funds under Liquidity Adjustment Facility
are used by the banks for their day-to-day mismatches in liquidity;
(ii) Under the scheme, Reverse Repo auctions (for absorption of
liquidity) and Repo auctions (for injection of liquidity) are
conducted on a daily basis (except Saturdays) ; (iii) All
commercial banks (except RRBs) and PDs having current
account and SGL account with Reserve Bank of India can avail of
the Liquidity Adjustment Facility in Minimum bid Size of Rs. 5
crore and in multiple of Rs.5 crore; (iv) Repos and Reverse Repos
in transferable Central Govt. dated securities and treasury bills
were as eligible securities; (v) The reverse repo rate is fixed by
Reserve Bank of India from time.

Under the revised Scheme, Reserve Bank of India reserves

the overnight reverse repo or longer term reverse repo auctions at
17
fixed rate or at variable rates depending on market conditions and
other relevant factors. Reserve Bank of India also has the
discretion to change the spread between the repo rate and the
reverse repo rate as and when appropriate. In the Indian context,
“repo” denotes liquidity absorption by the Reserve Bank and
“reverse repo” denotes liquidity injection.

Blue Chip
A share of a company that is financially very sound, with an
increasing track record of earnings and Dividends, and which is
highly regarded for its competent management, quality products
and/or services.

Capital Asset Pricing Model

A theoretical construct, developed by William Sharpe and John
Lintner, according to which, a security’s return is directly related to its
Systematic Risk, that is, the component of risk which cannot be
neutralized through Diversification. This can be expressed as :

Expected rate of return = Risk-free rate of return + Risk Premium

Further, the model suggests that the prices of Assets are

determined in such a way that the Risk Premiums or excess returns
are proportional to symmetric risk, which is indicated by the Beta
coefficient. Accordingly, the relationship

Risk premium = [Rate on market portfolio – Risk-free return)

Beta of security determines the risk premium. Thus, according

to the model, the expected rate of return is related to the beta
18
coefficient. This relation is portrayed by the Security Market Line.
The model is often used to compute the cost of equity for a firm.

Portfolio
Portfolio refers to the different securities like shares,
Debentures Convertibles and other securities belonging to an
individual of a group of person or a mutual fund.

Repos
Repos imply a sale and repurchase agreement, which is also
termed ‘Buy back’ (RP) or ‘Ready Forward’ (RF). It is a sale of
securities with an agreement to repurchase the same on a future
date and at a specific price. This makes funds temporarily available.
The difference between the sale and purchase prices, the latter
being higher, is the interest earned by the investor or lender. It is, in
effect, a short-term loan secured by the Assets sold to the lender.
So, the interest rate decided remains lower because of the
involvement of Collateral. Institutional investors having surplus funds
use repos as a convenient device; they are able to invest such funds
up to a specific date for which a security with matching Maturity is not
available.

Reserve Repurchase Agreement

Reserve Repurchase Agreement refers to a repos deal viewed
from the perspective of the supplier of funds. It is also a technique of
borrowing securities. The assets are bought with an agreement to
resell them at a fixed price on a future date.

19
 As regards auction, the Reserve Bank of India also conducts
repos auctions of Government Securities from time to time with a
view to mop up the temporary excess Liquidity in the financial system
and to moderate fluctuations in the Call Money interest rate.

Primary Dealer
A primary dealer is a bank or securities broker-dealer that may
trade directly with the Federal Reserve System of the United States.
Such firms are required to make bids or offers when the Fed
conducts open market operations, provide information to the Fed’s
open market trading desk and to participate actively in U.S. Treasury
securities auctions. They consult with both the U.S. Treasury and the
Fed about funding the budget deficit and implementing monetary
policy. Many former employees of primary dealers work at the
Treasury because of their expertise in the government debt markets,
though the Fed avoids a similar revolving door policy. Between them,
these dealers purchase the vast majority of the U.S. Treasury
securities sold at auction and resell them to the public.

In this way, Primary Dealer refers to a pre-approved bank,

broker, dealer or other financial institution that is able to make
business deals with the Government such as underwriting new
government debt. These dealers must meet certain liquidity and
quality requirements as well as provide a valuable flow of information
to the Government about the state of the worldwide markets.

In India, The Reserve Bank of India has allowed primary

dealers to bifurcate their operations into core and non-core activities.
Under core activities, primary dealers are permitted to undertake
20
dealing and underwriting in government securities, corporate, PSU,
FI bonds, debentures, lending in call, notice, term, repo markets,
dealing in interest rate derivatives, providing broking services in
government securities and investing in debt mutual funds. Under
non-core activities, they are permitted to make investment, trading in
equity and equity derivatives markets, investment in units of equity
oriented mutual funds and underwriting of public issues of equity.
They are also permitted to render professional clearing services,
portfolio management services, issue management services, merger
and acquisition advisory services, private equity management
services and project appraisal services.

Interest Rate Swap

Interest Rate Swap refers to an agreement between two
parties in which one stream of future interest payments is exchanged
for another based on a specified principal amount. Interest rate
swaps often exchange a fixed payment for a floating payment that is
linked to an interest rate. A company generally use interest rate
swaps to limit or to manage its exposure to fluctuations in interest
rates or to obtain a marginally lower interest rate than it would have
been able to get without the swap.

Limitations of the Study

Access to the original books of account of Securities Trading
Corporation of India Limited could not be possible so it could not be
possible to get the required information. The amount of profit was
accepted to the same form as shown by the published Accounts of
Securities Trading Corporation of India Limited. On account of non-

21
availability of necessary separated data, calculation of the profit
based on conventional accounting method could not be possible.
Similarly the division of expenditures was taken on the basis of the
division as shown in the annual reports. The methods of presentation
of published accounts of Securities Trading Corporation of India
Limited were not uniform because of hiving off its business especially
in 2007. However, due care has been taken while drawing the
conclusions. Despite this fact, the researcher can claim with
confidence that the work contains very fruitful information and
important conclusions in the interest of all those concerned.

Profile of Securities Trading Corporation of India Limited

As regards the genesis and development of Securities Trading
Corporation of India Limited, the historical study reveals that
Securities Trading Corporation of India Limited was set up as a
subsidiary of Reserve Bank of India in May 19941 with a view to
foster an active secondary market in Government of India Securities
and Public Sector bonds. The company had a subscribed and paid
up capital of Rs 500 crore with Reserve Bank of India owning the
majority stake to the tune of 50.18%. In 1996, Securities Trading
Corporation of India Limited was authorized by Reserve Bank of
India as one of the first Primary Dealers in India.

As a Primary Dealer, the company began with trading in

Government of India securities, Public Sector bonds, Non-SLR
instruments and money market instruments. The company also
carried out proprietary equity trading. Other activities of the company

1
Securities Trading Corporation of India Limited, “Annual Report, 1995-96, P. 4.
22
included trading in Interest Rate Swaps- both for hedging and market
making. In 19971, Reserve Bank of India divested part of its holding
and the share holding came down from 50.18% to 14.41% of the
total paid up capital. Bank of India became the largest shareholder of
the company. In 2002, Reserve Bank of India again sold its
remaining shareholding in the company to the existing shareholders.
Bank of India continued to be the largest shareholder.

In April 20062, Securities Trading Corporation of India Limited

took over UTI Securities Limited from Specified Undertaking of Unit
Trust of India. As Primary Dealers were not allowed to have step
down subsidiaries, Securities Trading Corporation of India Limited
hived off Primary Dealership as a separate 100% subsidiary by the
name STCI Primary Dealer Limited on June 25, 20073. The company
divested all the positions held in government securities in preparation
of transfer of Primary Dealership business to its new subsidiary and
the cash generated was parked temporarily in Commercial Deposits
and Fixed Deposits of Commercial Banks. The entire Interest Rate
Swap Book was transferred to the Primary Dealer subsidiary after
marking it to market. All the other business namely Mutual Fund
Distribution, Portfolio Management Services and Interest Rate
Swaps were also transferred.

In this way, the company remained as a primary dealer upto 24

June 2007. Thereafter, Restructuring of the business was made.
After hiving off the Primary Dealer business to a separate subsidiary,
the company has retained its NBFC character and it has been
1
Securities Trading Corporation of India Limited, “Annual Report, 1997-98, P. 4.
2
I.bid, 2006-07, P.5.
3
I.bid, 2007-08, P.4.
23
classified as an Investment company. Besides, the company has
initiated activities in Capital Market Financing e.g. Loan against
Shares, Initial Public Offer financing etc.

With the formation of STCI Primary Dealer Ltd, the company

has three subsidiaries: (i) STCI Primary Dealer Ltd; (ii) STCI
Commodities Ltd and (iii) Standard Chartered- STCI Capital Markets
Ltd. As regards STCI Primary Dealer Ltd, the new subsidiary
company was created to take over the company's Primary
Dealership business commenced operation during year on June 25,
2007.

As regards STCI Commodities Ltd. the company acquired UTI

Securities Ltd. through an open bidding process from the
Administrator of the Specified Undertakings of Unit Trust of India.
Subsequently, the company also entered into a Share Purchase
Agreement with Standard Chartered Bank in order to divest 49% of
the company's holding in UTI Securities. The company took over
100% of UTI Securities holding in STCI Commodities Ltd at book
value as on 31/3/2007 for Rs.3.87 crore to facilitate completion of its
stake sale to Standard Chartered Bank. In this way, STCI
Commodities Ltd. which was earlier a subsidiary of the company's
subsidiary, UTI Securities, has now become a direct 100% subsidiary
of the company.

As regards Standard Chartered-STCI Capital Markets Ltd, the

company entered into an agreement to divest 49% of UTI Securities
in favour of Standard Chartered Bank for a consideration of Rs.147
crore, subject to necessary regulatory approvals. Standard Chartered

24
Bank received all regulatory approvals for taking 49% stake in UTI
Securities during the year. However, before the completion of the
transaction, certain irregularities arising from improper employee
action at one of the branches of UTI Securities surfaced. A special
audit of that branch by an external firm of auditors led to an
estimation of the potential loss at a figure in excess of Rs. 10 crore.
Standard Chartered Bank asked for full indemnity from the company
with respect to this potential loss as a condition before completing
the transaction. Following discussion and negotiation between the
company and Standard Chartered Bank, the Board decided that
having regard to the content and spirit of the agreement that had
been entered into with Standard Chartered Bank and in the interest
of speedily closing the stake sale to Standard Chartered Bank, an
indemnity payment up to Rs. 10 crore be made to cover the probable
losses arising from the said irregular employee action. This was
accepted by Standard Chartered Bank and the sale of 49% stake
was closed on 11th January, 2008 and the consideration amount of
Rs. 147 crore duly received on that date. Further as per the Share
Purchase Agreement between Standard Chartered Bank and the
company, the former had a call option to take up a further 25.9%
stake in UTI Securities in 2008. The call option has since been
exercised by Standard Chartered Bank on 1st September, 2008 after
finalization of the accounts of the subsidiary for the year 2007-08.

In January 2008, the company felt a need of a strategic

partner, so the company sold 49% of its stake in UTI Securities
Limited to Standard Chartered Bank (Mauritius) Limited in January
2008. As Banks are not allowed to trade in Commodities, Securities

25
Trading Corporation of India Limited took 100% stake in STCI
Commodities from UTI Securities Limited thereby making it a fully
owned subsidiary. Consequent upon the partial sale of stake to
Standard Chartered Bank (Mauritius) Limited, UTI Securities was
renamed as Standard Chartered- Securities Trading Corporation of
India Limited Capital Markets Limited.

After hiving off its Primary Dealer operations, Securities

Trading Corporation of India Limited continues to be a registered
Systemically Important-Non Deposit taking Non Banking Financial
company with the focus on investment and loan activities. Apart from
this, the company deals in Equity, Fixed Income Securities and
Commodities Futures.
Presently, the company has a vision to evolve into a Leading
Financial Services House and the company’s mission is to strive to
meet financial requirements of varied business segments together
with building, nurturing and retaining relationship.

Shareholding Pattern of the company

As regards Shareholding Pattern of Securities Trading
Corporation of India Limited, Public Sector Banks hold 78.17%,
Public Sector Insurance Companies hold 6.21% and Others hold
15.62% stake as on March 31, 2008. The Detailed Breakup of Public
Sector Banks (78.17%) reveals that Bank of India holds 29.96% ,
SBI & Associates holds 10.42%, Industrial Development Bank of
India holds 6.86%, Punjab National Bank holds 4.94%, Canara Bank
holds 3.75%, Bank of Baroda holds 3.30%, Indian Bank holds 2.94%,
Central Bank of India holds 2.81%, Dena Bank holds 1.58%,

26
Syndicate Bank holds 1.53%, Union Bank of India holds 1.53%,
Allahabad Bank holds 1.52%, Oriental Bank of Commerce of 1.25%,
UCO Bank holds 1.22%, United Bank of India holds 1.02%, Andhra
Bank holds 0.82%, Bank of Maharashtra holds 0.80%, Indian
Overseas Bank holds 0.76%, Corporation Bank holds 0.63% and
Punjab & Sind Bank holds 0.55%. The detail breakup of Public
Sector Insurance Companies (6.21%) reveals that Life Insurance
company Ltd holds 3.67%, General Insurance company Ltd holds
1.06%, New India assurance company Limited holds 0.90%, Oriental
Insurance company Limited holds 0.36% and National Insurance
company Limited holds 0.22%. As regards the detailed breakup of
others, it is observed that IDFC Limited holds 9.38%, ICICI Bank
Limited holds 3.69%, SUUTI – DRF holds 1.48%, IFCI Limited holds
0.82% and Industrial Investment Bank of India holds 0.25%.

Management Pattern of the company

Presently, a Board of Directors comprising professionals from
Banking and Financial sectors and Academics look after the
business operations of the company. As on March 31, 2008, the
Board comprised of One Chairman, One Managing Director and Five
Directors.1 Committees of the Board consists of : (i) Audit Committee
(a) to determine the scope and functions of the Internal and the
Concurrent Auditors; (b) to review the Statutory, Internal and
Concurrent Auditors' reports; (c) to hold discussions as necessary
with the Internal, Concurrent and Statutory Auditors; (d) to review the
Audit reports of the Comptroller & Auditor General of India, RBI, etc.
and (e) to discuss the annual financial statements with the

1
Appendix 1.
27
Management and the Statutory Auditors; (ii) Human Resource
Committee (a) to review the Human Resources policy and procedure
to be followed by the company besides the remuneration to be paid
to the Managing Director and whole-time Directors if any; (iii)
Management/ Executive Committees which manages its businesses
and the related risks with the help of (a) Management Committee
that deliberates on matters which have a bearing on the company's
operations and functions as a forum to elicit inputs from departmental
heads and also keeps departmental heads aware of these issues; (b)
ALCO and Risk Management Committee that ensures adherence to
the prudential limits and guidelines set by the Board and the Audit
Committee of Board, formulates Risk Management Policies and
attends all issues related to Asset-Liability Management; (c) Credit
Committee that decides upon fixing of exposure limits for each Initial
Public Offer financing and for loan against shares. The exposure limit
for each borrower is also decided by the Credit Committee; (d)
Grievances Redressal Committee that redresses complaints and
grievances of Staff and that of Customers or clients.

Services of Securities Trading Corporation of India Limited

Securities Trading Corporation of India Limited primarily deals
in (i) Underwriting of GOI Securities and Treasury Bills; (ii)
Participation in the auctions of GOI's Securities and Treasury Bills;
(iii) Market-making and Trading in GOI Securities and Treasury Bills;
(iv) Trading in PSU Bonds and other Corporate Debt Instruments; (v)
Participation in Repo Market of GOI Securities and Treasury Bills;
(vi) Participation in the Inter-Bank Call / Notice / Term money market,

28
both as a borrower and as a lender; (vii) Trading in Equities; and (viii)
Portfolio Management Services.

Salient Economic Indicators of the Unit

As Securities Trading Corporation of India Limited is one of the
primary dealers engaged in balancing short term liquidity by way of
investing into treasury bills, Government of India Securities and other
PSUs bonds. Salient economic indicators of Securities Trading
Corporation of India Limited are being shown in Table 1.1.

Table No. 1.1

Showing Economic indicators of
Securities Trading Corporation of India Limited
(Rs. in lac)
Particulars 1994-95 2007-08

Revenue 3451.25 652961.58

Profit after Tax 414.67 2505.45
Equity Capital 50,000.00 41000.00
Net Worth 50414.67 78744.58
Total Loans 19375.00 0.00
Net Fixed Assets 24.95 976.76
Working Capital 69580.22 39962.13
Ratio (in %age)
Profit after tax to 0.82 3.18
Net Worth

(Source : Computed with help of statistics published by Securities Trading Corporation of

India Limited in its Annual Reports).

Table 1.1 exhibits that Securities Trading Corporation of India

Limited registered remarkable progress in terms of its revenue, which
29
increased from Rs. 3451.25 lac in 1994-95 to Rs. 652961.58 lac in
2007-08 showing an increase of 188.19 times. Profit after Tax of the
company registered an increase of Rs. 5.05 times; net worth of the
company also increased from Rs. 50414.67 lac to Rs. 78744.58 lac;
net fixed assets of the company increased from Rs. 24.95 lac to Rs.
976.76 lac over a period of thirteen years under study. In this way,
the company made a remarkable progress not only in terms of
revenue, profit after tax and net fixed assets but also in terms of
profit after tax to net worth ratio which increased from 0.82 percent in
1994-95 to 3.18 percent in 2007-08.

30