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UNI
T-1I
NTRODUCTI
ONOFI
NDI
ANFI
NANCI
ALSYSTEM

Meani
ngofI
ndi
anf
inanci
alsy
stem

Thef i
nanci
alsyst
em enablesl endersandborr
ower stoexchangef unds.
Indi
ahasaf i
nancialsyst
em thatiscontr
oll
edbyindependentregul
atorsin
thesectorsofinsurance,banking,capi
talmar
ketsandv ar
iousservices
sector
s.

Thus,af inancialsystem canbesai dto playasigni

fi
cantr
olei
nt he
economicgr owthofacount rybymobil
izi
ngthesur
plusf
undsandut
il
izi
ng
them ef
fecti
v el
yforproduct
ivepur
poses.

FEATURESOFI
NDI
ANFI
NANCI
ALSYSTEM:

• I
tpl
aysav
ital
rol
eineconomi
cdev
elopmentofacount
ry.

• I
tencour
agesbot
hsav
ingsandi
nvest
ment
.

• I
tli
nkssav
ersandi
nvest
ors.

• I
thel
psi
ncapi
tal
for
mat
ion.

• I
thel
psi
nal
l
ocat
ionofr
isk.

• I
tfaci
l
itat
esexpansi
onoff
inanci
almar
ket
s.

COMPONENTS/CONSTI
TUENTSOFI
NDI
ANFI
NANCI
ALSYSTEM

Thefol
l
owingaret
hef
ourmaj
orcomponent
sthatcompr
iset
heI
ndi
an
Fi
nanci
alSyst
em:

1.Fi
nanci
alI
nst
it
uti
ons

2.Fi
nanci
alMar
ket
s

3.Fi
nanci
alI
nst
rument
s/Asset
s/Secur
it
ies

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4.Fi
nanci
alSer
vices.

COMPONENTI
SDI
SCUSSEDBELOW:

FI
NANCI
ALI
NSTI
TUTI
ONS

Financi
al i nsti
tut
ions ar e the i ntermediar
ies who f acili
tate smoot h
functi
oningoft hef inancialsy st
em bymaki nginvest
orsandbor rowers
meet .Theymobi li
zesav i
ngsoft hesur plusunitsandal locatet hem in
producti
veact ivi
ti
espr omisingabet t
errateofretur
n.Financialinsti
tut
ions
alsoprovideser vi
cest oent iti
es(i
ndi vi
dual,busi
ness,government )seeking
adviceonv ari
ousissuer angingfrom r est
ructur
ingtodiver
sificati
onplans.
Theypr ovidewhol er angeofser vicest otheent i
ti
eswhowantt oraise
fundsfrom t hemar ketsorel sewher e.

Financi
alinst
ituti
onsareal
sot er
medasf
inanci
alint
ermediar
iesbecause
theyactasmi ddlebet
ween saver
sbyaccumulati
ng Fundst hem and
borrowersbylendingt
hesefund.

Itisalsoactasi nt
ermediari
esbecauset heyacceptdeposit
sfrom asetof
customer s( sav er
sl end these f unds to another set of customers
(borrowers).Like-wiseinvest
inginstit
uti
onssuchICCIC,mutualfundsalso
accumul atesav i
ngsandl endt hesetobor r
owers,thusper
formt heroleof
financi
alintermediari
es.

TYPESOFFI
NANCI
ALI
NSTI
TUTI
ONS

Fi
nanci
ali
nst
it
uti
onscanbecl
assi
fi
edi
ntot
wocat
egor
ies:

A.Banki
ngI
nst
it
uti
ons

B.Non-Banki
ngFi
nanci
alI
nst
it
uti
ons

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A.BANKI
NGI
NSTI
TUTI
ONS(
Reser
veBankofI
ndi
a)

I
ndianbankingindustryissubjecttothecontroloftheCentralBank.The
RBIas the apexi nsti
tuti
on organi
ses,runs,supervi
ses,regulat
es and
devel
opsthemonet arysystem andthefi
nancialsy
stem oft
hecount ry
.The
mainlegisl
ati
on gov erni
ng commer ci
albanks inI ndi
ai st he Banki
ng
Regul
ati
onAct,1949.

TheIndi
anbanki
ngi
nst
it
uti
onscanbebr
oadl
ycl
assi
fi
edi
ntot
wo
cat
egori
es:

1.Or
gani
sedSect
or

2.Unor
gani
sedSect
or.

1.Or
gani
sedSect
or

Theorgani
sedbanki
ngsectorconsi
stsofcommer
cialbanks,cooper
ati
ve
banksandther
egi
onalr
ural
banks.

(a)Commer ci
alBanks:Thecommer ci
albanksmaybeschedul edbanksor
non–schedul edbanks.Atpr esentonlyonebanki sanon-schedul edhank.
Allotherbanksar eschedul ebanks.Thecommer cialbanksconsistof27
publi
csect orbanks,pr i
vat
esect orbanksandf or
eignbanks.Priorto1969,
al
lmaj orbankswi t
ht heex cepti
onofSt ateBankofI ndiaint hepri
vate
sector.Animpor tantstept owar dspubli
csect orbankingwast akeninJuly
1969,when14maj orprivat ebankswi thadeposi tbaseof50cr or
esor
mor ewer enationali
sed.Lat erin1980anot her6wer enational
i
sedbr i
nging
upthet otalnumberbanksnat i
onali
sedtotwent y.

(b)Co-oper
ati
vebanks:Ani mpor t
antsegmentoft heorganizedsectorof
I
ndianbankingi
st heco-operat
ivebanking.Thesegmentisrepresentedby
agroupofsocieti
esregister
edundert heActsofthestatesrelati
ngtoco-
operat
ivesoci
eti
es.Infact,co-
operati
vesocieti
esmaybecr editsociet
ies

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ornon-
credi
tsoci
eti
es.

Dif
ferenttypesofco-operat
ivecredi
tsoci et
iesareoper
ati
ng i
nI ndi
an
economy .Thesei
nst
ituti
onscanbecl assif
iedint
otwobroadcategori
es:
(a)Ruralcredi
tsoci
etieswhichareprimaryagr i
cul
tur
e,(
b)Urbancredit
soci
etieswhichar
epri
mar i
lynon-
agri
cult
ure.

Fort
hepurposeofagr
icul
tur
ecredi
tther
earedi
ff
erentco-
oper
ati
vecr
edi
t
i
nsti
tut
ionst
omeetdiffer
entki
ndsofneeds.

(c)Regi onalRur alBanks( RRBs):Regi

onalRur alBankswer esetbyt he
stategov er
nmentandsponsor ingcommer cialbankswi ththeobj ecti
veof
developing the r ur
aleconomy .Regi
onalr uralbanks pr ovide banking
servi
cesandcr edittosmallfar
mers,smallentrepreneursintheruralareas.
Ther egi
onalr uralbankswer esetupwit
hav iewt opr ov
idecreditfaci
li
ti
es
toweakersect i
ons.Theyconst i
tut
eanimpor tantpar toftheruralfi
nancial
archit
ectureinI ndia.Ther
ewer e196RRBsatt heendofJune2002,as
compar esto107i n1981and6i n1975.

(d)For eignBanks:Forei
gnbankshav ebeeninIndiafrom Brit
ishdays.
Foreignbanksasbankst hathav
ebranchesint
heothercountr
iesandmain
HeadQuar terintheHomeCount r
y.Withtheder
egulat
ion(Eli
minati
onof
Gov ernmentAut hor
it
y)in1993,anumberoff or
eignbanksar eenteri
ng
Indi
a. Forei
gnBanks
are:CitiBank.BankofCeyl
on.

2.Unor
gani
sedSect
or.

Intheunor
gani
sedbanki
ngsect
orar
etheI
ndi
genousBanker
s,Money
Lender
s.

1.I
ndi
genousBanker
s

IndigenousBanker
sar epri
vatefi
rmsorindi
vidualwhooperat
easbanks
andassuchbot hr
eceivedeposi
tsandgi
venloans.Li
kebanker
s,theyal
so
financiali
nter
medi
ari
es.Theyshouldbedi
sti
nguishedpr
ofessi
onalmoney
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l
ender
swhosepr i
marybusinessi
snotbanki
ngandmoneylendi
ng.The
i
ndi
genousbanksar
etr
adingwitht
heHundi
es,
Commer
cial
Paper.

1.
MoneyLender
s:

Moneylender
sdependent ir
elytoontheironefunds.MoneyLender
smay
beruralorur ban,pr
ofessi
onalornon- pr
ofessi
onal
.Theyincludelar
ge
numberoff armer,merchants,tr
aders.Theiroperat
ions ar
e entir
ely
unr
egulat
ed.Theychargeveryhighr
ateofint
erst.

B.NON-BANKI NGINSTI
TUTI ONS
Thenon-bankinginst
it
utionsmaybecat egori
zedbroadl
yint
otwogr
oups:
(a)Organi
sedNon-BankingFinanci
alI
nsti
tuti
ons.
(b)Unorgani
sedNon-BankingFinanci
alI
nsti
tuti
ons.

(a)Or gani sedNon-Banki ngFi nancialInstituti

ons
Theor ganisednon-banki ngf i
nancialinstituti
onsi nclude:
1.Dev el
opmentFi nanceI nst i
tuti
ons.
Thesei ncl ude:Thei nsti
tutionsl i
keI DBT,I CI
CI,IFCI ,IIBI
,IRDCatal lI
ndia
l
ev el.TheSt ateFi nanceCor por ati
ons( SFCs) ,StateI ndust r
ialDevelopment
Cor porations( SIDCs)att hest atelevel.
Agr i
cul t
ureDev elopmentFi nanceI nsti
tutionsasNABARD, LDBSet c.
Dev elopmentbanks pr ovide medi um and l ong t erm f inance tot he
corpor ateandi ndust ri
alsect orandal sot akeuppr omot ionalactiv
iti
esfor
economi cdev el opment
2.Inv estmentI nstit
utions.
Thesei ncludet hosef i
nanci alinsti
tutionswhi chmobi li
sesav i
ngsatt he
publ i
c atl arge t hrough v ar i
ous schemes and i nv estt hese funds in
corpor ateandgov ernmentsecur it
ies.Thesei ncludeLI C,GI C,LTT,and
mut ual funds.

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Thenon-bankingfi
nanci
ali
nst
it
uti
onsintheorgani
sedsector
)hav
ebeen
di
scussedatl
engthi
ndetai
li
nseparat
echapter
softhisbook.

(b)Unor ganisedNon-Banki ngFinancialInsti

tutions:
Theunor gani
sednon-banki ngfinanciali
nstit
utionsi ncl
udenumberofnon
-bankingf i
nanci
alcompani es(NBFCs)pr ov
idingwhol erangeoffi
nancial
servi
ces.Thesei ncludehire-purchase300consumerf i
nancecompanies,
l
easingcompani es, housi
ngf i
nancecompani es, factori
ngcompanies,
Credi
tr atingagenci es,merchantbanki ngcompani eset c.NBFCsmobil
ise
publi
cfundsandpr ovidel
oanablef unds.

FINANCI ALMARKET
Itisthroughf i
nancialmar ketsandi nst
ituti
onst hatthef i
nancialsystem of
an economi c wor ks. Financi al mar kets r ef
er to t he i nsti
tuti
onal
arrangement sfordeal ingi nf inancialasset sandcr editinstr
ument sof
differ
enttypessuchascur rency ,cheques, bankdeposits,bil
ls,bondsetc.
Funct i
onsoff i
nanci almarketsar e:
(i
)Tof acil
itat
ecr eati
onandal locat i
onofcr editandli
qui di
ty
(i
i)Toser veasint er
medi ari
esformobi l
isatonofsav i
ngs.
(i
ii
)Toassi stthepr ocessofbal ancedeconomi cgrowth.
(i
v)Topr ovidefinancialconvenience.
(v)Tocat ertothev ari
ouscr editneedsoft hebusinesshouses.

Theseor
gani
sedmar
ket
scanbef
urt
hercl
assi
fi
edi
ntot
wot
heyar
e

(
i)Capi
tal
Mar
ket

(
ii
)MoneyMar
ket

CAPI
TALMARKET

Thecapi
talmar
ketisamar ketf
orfi
nanci
alasset
swhi chhavealongor
i
ndef
ini
tematur
it
y.Gener
all
y,i
tdeal
swithl
ongterm secur
it
ieswhi
chhave
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amaturi
typer
iodofabov
eoney
ear
.Capi
talmar
ketmaybef
urt
herdi
vi
ded
i
ntot
hreenamely:

(
I)I
ndust
ri
alsecur
it
iesmar
ket

(
II
)Gov
ernmentsecur
it
iesmar
ketand

(
II
I)Longt
erml
oansmar
ket

1.I
NDUSTRI
ALSECURI
TIESMARKET:

Asthev erynameimpl i
es,
iti
samar ketf
ori
ndust
ri
alsecur
it
iesnamel
y:
(i
)Equi
tyshar esorordi
naryshar
es,
(i
i
)Preferencesharesand
(i
i
i)Debent ur
esorbonds.

Itisamarketwhereindustr
ialconcernsraisethei
rcapit
alordebtbyi
ssui
ng
appropri
atei
nstr
ument s.I
tcanbef urthersubdivi
dedint
otwo.Theyare:
(i)Pr
imarymarketorNewi ssuemar ket
(ii
)Secondar
ymar ketorStockexchange

Pr
imar
yMar
ket

Pri
mar ymarketi
samar ketfornewi ssuesornewf i
nancialclai
ms.Hence,
i
tisalsocalledNew Issuemar ket
.Thepr i
marymar ketdeal swi t
ht hose
securi
ti
eswhicharei
ssuedtothepubl i
cforthefi
rsttime.
Inthepri
marymarket
,borrowersexchangenewf inancialsecurit
iesforlong
ter
mf unds.Thus,pr
imarymar ketfacil
it
atescapitalfor
mat ion.Therear e
thr
eeway sbywhi chacompanymayr aisecapit
ali napr imar ymar ket
.
Theyare:

(
i)Publi
cissue
(
ii
)Rightsissue
(
ii
i)Pri
vateplacement

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Themostcommonmet hodofraisi
ngcapitalbynewcompani esisthr
ough
sal
eofsecur it
iestothepubl
ic.Iti
scal l
edpublicissue.Whenanexi st
ing
companywant storai
seadditi
onal capi
tal
,securi
tiesaref
irstof
feredtothe
exi
sti
ngshar eholder
sonapr e-empt i
vebasis.Iti
scalledr
ightsissue.
Pri
vateplacementi sawayofsel li
ngsecuriti
esprivat
elyt
oasmal lgr
oup
ofi
nvestors.

Secondar
yMar
ket

Secondar ymar ketisamar ketforsecondar ysaleofsecur i

ti
es.I nother
words, securi
ti
eswhichhav eal r
eadypassedt hroughthenewi ssuemar ket
aret r
adedi nthismarket.Gener all
y,suchsecur i
ti
esarequotedt heSt ock
Exchangeandi tprovi
desacont inuousandr egularmarkettobuy i
ngand
sell
ing of secur i
ti
es.Thi s mar ket consist
s of allst ock exchanges
recognisedbyt heGov ernmentofI ndia.Thestockexchangesi nI ndiaare
regulat
ed undert he Securit
ies Cont r
acts(Regulat
ion)Act1956.The
BombaySt ockExchangei st
hepr incipalst
ockexchangeinIndiawhi chsets
thetoneoft heotherstockmar kets.

I
I.GOVERNMENTSECURI
TIESMARKET

I
tisot her
wisecal ledGi l
t-Edgedsecur it
iesmar ket.Itisamar ketwher e
Governmentsecur ities aret raded.InI ndiat here are many ki nds of
GovernmentSecur ities-shortt erm andlongt erm.Longt erm securi
tiesare
tr
adedi nthi
smar ketwhi l
eshor tterm securitiesaret radedi nthemoney
market.Securit
iesi ssuedbyt heCent ralGov ernment ,StateGov ernment s,
SemiGov er
nmentaut hori
ti
es l i
ke City Cor porati
ons,Por tTr ust s et
c.
I
mpr ovementTr usts,St ate Electr
ici
tyBoar ds,Al lI ndi
a and St atel ev
el
fi
nanciali
nst
ituti
onsandpubl i
csect orenterpri
sesar edeal ti
nt hi
smar ket
.

I
II
.LONGTERM LOANSMARKET

Dev
elopmentbanksandcommer
cialbankspl
ayasi
gni
fi
cantr
olei
nthi
s

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mar
ketbysuppl
yi
ngl
ongt
erml
oanst
ocor
por
atecust
omer
s.

Longt
erml
oansmar
ketmayf
urt
herbecl
assi
fi
edi
nto:

(
1)Ter
mloansmar
ket

(
ii
)Mor
tgagesmar
ket

(
ii
i)Fi
nanci
alGuar
ant
eesmar
ket
.

Ter
m LoansMar
ket

InIndia,manyi ndustrialfi
nancingi nst
it
utionshav ebeencr eat
edbyt he
Governmentbot hatt henat i
onalandr egionallevel
st osupplylongterm
and medi um t erm loans t o corporat
e cust omers di
rectl
y as wellas
i
ndirectly
.Thesedev elopmentbanksdomi natetheindustr
ialfi
nancein
Indi
a.I nsti
tut
ionsl i
keI DBI,IFCI,ICICI
,andot herfi
nancialcorpor
ati
ons
comeundert hiscategor y.

Mor
tgagesMar
ket

Amor tgageloani saloanagai

nstthesecuri
tyofimmovablepr
opert
ylike
realestat
e.Thet ransf
erofinter
estinaspecifi
cimmov abl
epropert
yt o
secureal oan is cal
led mor
tgage.This mort
gage may be equi
table
mor t
gageorl egal
one.

MONEYMARKET

Moneymar keti
samar ketfordeal
i
ngwit
hfinanci
alasset
sandsecuri
ties
whichhaveamat ur
it
yper i
odofuptooney
ear.I
notherwords,
iti
samar ket
forpur
elyshor
ttermfunds.Themoneymarketmaybesubdivi
dedint
ofour.
Theyare:

(
i)Cal
lmoneymar
ket

(
ii
)Commer
cial
bil
l
smar
ket

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(
ii
i)Tr
easur
ybi
l
ismar
ket

(
iv)Shor
tter
mloanmar
ket
.

Cal
lMoneyMar
ket

Thecal l
moneymar keti
samar ketf
orextremel yshortperi
odloanssayone
dayt of our
teenday s.So,itishighlyli
qui d.Thel oansarer epayableon
demandatt heopt i
onofei therthelenderort hebor r
ower.InI ndi
a,call
moneymar ketsar eassociat
edwi ththepr esenceofst ockexchangesand
hence,theyar elocatedinmaj orindustr
ialt ownsl i
keBombay ,Calcutt
a,
Madras,Del hi,Ahmedabadet c.Thespecialf eatureofthi
smar keti
st hat
theinterestratev ari
esfrom dayt odayandev enf r
om hourt ohourand
centr
et ocent re.Itisverysensiti
vetochangesi ndemandandsuppl yof
cal
lloans.

Commer
cialBi
ll
sMar
ket

Itisamar ketforBi
ll
sofExchangearisi
ngoutofgenuinetradetransacti
ons.
Int hecaseofcr editsal
e,thesell
ermaydr aw abillofexchangeont he
buy er
.Thebuy eracceptssuchabi l
lpr
omi si
ngt opayatal aterdate
specifi
edint hebil
l.Thesell
erneednotwaituntilt
heduedat eoft hebil
l.
Instead,hecangetimmedi at
epaymentbydiscounti
ngt hebil
l
.

Tr
easur
yBi
ll
sMar
ket

I
tisamar ketf
ortreasurybi
l
lswhi
chhav e'short-ter
m 'mat uri
ty.A
t
reasur
ybi
l
l i
sapromissor
ynot
eorafi
nancebi
ll
issuedbytheGov
er nment
.

Iti
shi ghl
yliquidbecausei tsrepay
menti sguar anteedbyt heGov ernment.
Iti
sani mportantinst
rumentf orshortterm bor r
owingoft heGov ernment
Therear etwot ypesoft r
easur ybi
ll
snamel y(i)ordinaryorr egularand( i
i)
adhoct r
easurybill
spopul arl
yknownas' adhocs’ .Ordinarytreasur ybi
ll
s
areissuedtot hepublic,banksandot herfinancialinsti
tut
ionswi t
hav i
ew
toraisingresourcesf ortheCent ralGovernmentt omeeti tsshor tterm
fi
nancialneeds.Adhoct reasurybil
lsareissuedi nf av
ouroft heRBIonl y.
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Theyar
enotsol dthr
oughtenderorauct
ion.Theycanbepurchasedbythe
RBIonl
y. Adhocsarenotmar ket
abl
einIndiabuthol
der
soft hesebi
ll
s
cansel
lthem backtoRBI
.

Shor
t-Ter
m LoanMar
ket

Itisamar ketwhereshort-termloansar egiv

ent ocorpor atecustomersfor
meet i
ng theirworki
ng capi t
alrequirements.Commer cialbanks playa
significantrol
einthi
smar ket.Commer ci
albankspr ovi
deshor ttermloans
i
nt hef or
m ofcashcreditandover dr
aftOverdr af
tfacil
i
tyi smai nl
ygivento
busi nesspeoplewher eascashcreditisgivent oindustr
ialist
s.Ov er
draf
tis
pur elyat emporar
yaccommodat ionandi tisgi v
eni nthecur rentaccount
i
t self.Butcashcreditisforaper iodofoney earandi tissanct i
onedina
separ ateaccount.

FI
NANCI
ALI
NSREUMENTS

Fi
nancialinst
rumentsrefertothosedocument swhichr epr
esent
sfinancial
cl
aimsonasset s.Asdiscussedearli
er,
financi
alassetrefer
stoaclaimtoa
cl
aimt otherepaymentofacer tai
nsum ofmoneyatt heendofaspeci f
ied
peri
od togetherwithinterestordi vi
dend.Exampl es:Billofexchange,
PromissoryNote,Tr
easuryBill
.

Fi
nanci
alsecur
it
iescanbecl
assi
fi
edi
nto:

(
i)Pr
imar
yordi
rectsecur
it
ies.

(
ii
)Secondar
yori
ndi
rectsecur
it
ies.

Pr
imar
ySecur
it
ies

These ar
e securi
ti
es dir
ect
lyissued by t
he ult
imateinvest
orstothe
ul
ti
matesavers.Eg.shar
esanddebenturesi
ssueddir
ect
lytothepubl
i
c.

Secondar
ySecur
it
ies

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These are securi

ti
es i
ssued by some inter
mediar
ies cal
led fi
nanci
al
i
ntermediari
estotheulti
matesav er
s.Eg.UnitTr
ustofIndiaandmut ual
fundsissuesecuri
tiesi
nt heform ofuni
tstothepubli
candt hemoney
pooledisinv
estedi
ncompani es.

Agai
nthesesecur
it
iesmaybecl
assi
fi
edont
hebasi
sofdur
ati
onasf
oll
ows:

(
i)Shor
t-t
erm secur
it
ies

(
ii
)Medi
um t
erm secur
it
ies

(
ii
i)Long-t
erm secur
it
ies.

Shor t-term securi

ti
esaret hosewhichmat urewithi
naper i
odofoney ear
.
Eg,Bi l
lofExchange,Tr easurybill
,et
c.Medi um term securi
ti
esarethose
whichhav eamat uri
typer i
odr angi
ngbet weenoneandf i
vey ear
s.Eg.
Debent uresmat ur
ingwithi
naper i
odof5y ears,Long-t er
m securi
ti
esare
those whi ch have a mat uri
ty per
iod of mor et han fiveyears.Eg,
Gov ernmentBondsmat uri
ngaf t
er10year
s.

FI
NANCI
ALSERVI
CES

Eff
iciencyofemer gingf i
nancialsystem largel
ydependsupont hequality
andv arietyoffinancialservi
cespr ovidedbyf inanciali
ntermediari
es.The
ter
m f inanci
alser vices can be def ined as “activi
ti
es,benef i
ts,and
sati
sfactions,connect edwitht hesaleofmoney ,thatoffertouser sand
customer s,fi
nancialrelat
edv al
ue.wi t
hinthef i
nancialservi
cesindustr
ythe
mainsect orsarebanks,f i
nancialinsti
tuti
ons,andnon- banki
ngf i
nancial
compani es.

KI
NDSOFFI
NANCI
ALSERVI
CES

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Fi
nanci
alser
vicesprovidedbyvar
iousfinanci
alinsti
tut
ions,commercial
banksandmerchantbanker
scanbebroadlycl
assi
fiedi
ntotwocategor
ies.

1.Assetbased/
fundbasedser
vices.

2.Feebased/
adv
isor
yser
vices.

Assetbased/
fundbasedser
vices

Theasset
/fundbasedser
vicespr
ovi
dedbybanki
ngandnon-banki
ng
fi
nanci
ali
nst
it
uti
onsasdi
scussedbel
owbri
efl
y.

1.Equi
pmentLeasi
ng/LeaseFi
nanci
ng

Leasingisaar r
angementt hatprovi
desafir
m withtheuseandcontrolover
assetswi t
houtbuyingandowni ngthesame.I ti
saf or
m ofrenti
ngassets.
Howev er,inmakingani nvestment,thef
irm neednotownt heasset.Itis
basical
lyinter
estedi nacquir
ingtheuseoft heasset.Thus,t
hef i
rm may
considerleasi
ngoft heassetrat
herthanbuyi
ngit.

Incompari
ngleasi
ngwi t
hbuying,thecostofleasingtheassetshoul dbe
comparedwit
ht hecostoffi
nancingtheassetthroughnormalsour cesof
fi
nanci
ng,i
.e.debtandequit
y.Sincepaymentofleaser ent
alsissimil
arto
paymentofi
nter
estonborrowi
ngsandl easef
inancingi
sequi val
enttodebt
.

2.Hi
rePur
chaseandConsumerCr
edi
t

Hir
epur chasemeansat r
ansacti
onwher egoodsar epurchasedandsol d
on the terms that(i
)pay mentwi llbe made iti nst
allment s,(i
i)the
possessionofthegoodsisgiventothebuyeri
mmedi atel
y,( i
i
i)thepropert
y
ownership)int
hegoodsr emainswi t
hthevendorti
llthelastinstall
mentis
pai
d,(i
v)thesell
ercanrepossessthegoodsi ncaseofdef aultinpayment
ofanyinstal
ment ,
and(v)eachinstal
mentistr
eatedashi rechar gesti
llt
he

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l
asti
nst
almenti
spai
d.

Consumercr editincl
udes al
lassetbased fi
nancing pl
ans off
ered to
i
ndividualst ohelpthem acquir
edurabl
econsumergoods.Inaconsumer
credi
tt ransacti
ontheindivi
dual
/consumer/buyerpaysapartofthecash
purchasepr iceattheti
meoft hedel
iver
yoftheassetandpaysthebalance
withinterestoveraspecif
iedperi
odofti
me.

3.
VENTURECAPI
TAL

Inther ealsense,v enturecapi talfi

nancingi soneoft hemostr ecent
entr
antsi ntheI ndiancapi talmar ket.Ther eisasi gni
fi
cantscopef or
vent
urecapitalcompani esinourcount rybecauseofi ncreasi
ngemer gence
oftechnocratentrepreneurswhol ackcapitalt ober isked.Thesev enture
capit
alcompani espr ovi
det henecessar yriskcapi t
alt otheentrepr
eneur s
soast omeett hepr omot erscont r
ibut
ionasr equiredbyt hef i
nancial
i
nsti
tuti
ons.Inaddi tiontopr ov
idingcapital,theseVCFS( v
enturecapi t
al
fi
rms)takeanact iveint
erestingui di
ngtheassi stedfir
ms.

4.I
nsur
anceSer
vices

Insuranceisacont ractwher ebyt hei nsur ere.insurancecompanyagr ees/

under t
akes,inconsider ati
onofasum ofmoney( premium)t omakegood
thelosssuf f
eredbyt hei nsur
ed( poli
cyhol der)againstaspeci f
iedrisksuch
asf i
reorcompensat et hebenef i
ciaries( insured)ont hehappeni ngofa
specifi
edev entsuchasacci dentordeat h.Thedocumentcont ai
ningt he
termsofcont ract,i
nbl ackandwhi te,bet weent heinsurerandt hei nsured
i
scal l
edpol i
cy.Thepr oper
tywhi chi sinsur edist hesubj ectmat t
erof
i
nsur ance.Thei nterestwhi cht hei nsur edhasi nt hesubjectmat t
erof
i
nsur ancei sknown asi nsurableint erest.Dependi ng upon t hesubj ect
mat t
er,insur
anceser vicesaredi vi
dedi nto( i)l
ife(i
i
)gener al
.

5.Fact
ori
ng

Fact
ori
ng,asaf
undbasedf
inanci
alser
vicepr
ovi
desr
esour
cest
ofi
nance

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recei
vabl
esaswel lasi tfacil
it
atesthe col
lect
ion ofrecei
vables.I
tis
anothermethodofr
aisi
ngshor t-ter
mf i
nancethroughaccountrecei
vabl
e
credi
toff
eredbycommercialbanksandfactor
s.

Acommercialbankmaypr ovidefi
nancebydiscounti
ngthebi ll
sorinvoices
ofi
tscust
omer s.Thus,afir
m getsimmedi at
epaymentf orsal esmadeon
cr
edi
t.Afactorisaf inanci
alinst
it
uti
onwhi choffersservicesr el
ati
ngt o
managementandf i
nancingofdebtsari
singoutofcredi
tsales.

B.FEEBASEDADVI
SORYSERVI
CES

(
i)Mer
chantBanki
ng

Feebasedadv i
soryservicesi ncludesal lthesef i
nancialservi
cesr endered
byMer chantBanker s.Mer chantbanker spl ayani mportantr ol
ei nt he
fi
nancialservicesSector.TheI ndust r
ialCredi tandI nvest
mentCor por ati
on
ofIndia(ICICI)wasthef ir
stdev elopmentf inancei nstit
uti
ontoiniti
atesuch
servicein1974.Af t
ermi d-sev ent i
es,tremendousgr owthinthenumberof
mer chantbanki ng organisationsl est aken pl ace.These include banks
fi
nancialinstit
uti
ons,non-banki ngf i
nanci alcompani es(NBFCS) ,brokers
andsoon.f inanci
alSer vi
cespr ov i
dedbyt heseor ganisati
onsincludel oan
syndicati
on por t
foli
o management , cor porate counsel li
ng pr oj
ect
counselli
ngdebent uretrusteeshi p,mer gersacqui sit
ions.

(
ii
)Cr
edi
tRat
ing

Credi
trati
ngi
stheopini
onoft her
ati
ngagencyontherelat
iveabil
it
yand
wil
li
ngnessoftheissuerofdebtinstr
umentto meetthedebtser v
ice
obli
gat
ionsasandwhent heyari
se.Asaf eebasedfinancialadvi
sory
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servi
ce,credi
tratingusefultoi
nvestor
s,cor
porat
es( borr
owers),banksand
fi
nancialinst
it
utions.Fort heinvest
ors,i
tisani ndicat
orexpressingt he
underl
yingcreditquali
tyofa( debt)i
ssueprogr
amme.Thei nvestorisfull
y
formed aboutt he company as any ef f
ectofchanges i n business/
economi cconditi
onsont heagencycompanyi sevaluatedandpubl ished
regul
arlybytherat i
ngagency.

(
ii
i)St
ock-Br
oki
ng

Pri
ortotheset
tingupofSEBI ,st
ockexchangeswer ebeingsuper
visedby
the Mi
nist
ryofFi nance underthe Secur
it
iesContract
sRegulati
on Act
(SCRA)andwereoperati
ngmor eorlesssel
f-
regul
ator
yorgani
sati
ons.

Theneedt oreform stockexchangeswasf elt,whenmal practi

cescr ept
i
nt oTradingandi nordertoprotecti
nvestor'
sinterests,SEBIwassetupt o
ensuret hatstockexchangeper f
ormt hei
rself-r egul
at oryrolepr operly
.
Sincethen,stockbr okinghasemer gedasapr ofessionaladv isoryservice
Stockbrokerisamemberofar ecognisedstockexchangewhobuy s,sel l
s
ordealsi nshares/secur i
ti
es.I
tismandat oryforeachst ockbrokertoget
him/her sel
fregistered wit
h SEBIor derto actas a br oker.SEBIi s
empower ed toi mpose condi ti
ons while granting t he cer ti
fi
cate of
regist
rati
on.

FI
NANCI ALMARKET
Iti
sthroughfinancialmar ketsandi nsti
tuti
onst hatthefi
nancialsyst
em of
aneconomi cwor ks.Financial marketsrefertotheinsti
tuti
onal
arr
angement sfordealingi nfinancialassetsandcr edi
tinstr
umentsof
dif
fer
enttypessuchascur rency,cheques, bankdeposits,bi
ll
s,bondset
c.
Financial
mar ketclassifi
edi ntotwot heyar e:

(
i)MoneyMar
ket

(
ii
)Capi
tal
Mar
ket

(
I)MONEYMARKET

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Moneymarketi
samar ketfordeal
i
ngwit
hfi
nanci
alasset
sandsecur
it
ies
whi
chhaveamat ur
it
yper i
odofuptooney
ear
.Inot
herwords,
iti
samarket
f
orpurel
yshor
ttermfunds.

Thei
mpor
tance/
funct
ionsoft
hemoneymar
keti
shi
ghl
i
ght
edasunder
:

1.Economi cdev elopment :Themoneymar ketprov i

desshorttermf undst o
both publi
cand pr ivatei nst
itut
ions.Thesei nstit
uti
onsneed moneyt o
fi
nance their capital needs.
Inot herwor ds,themoneymar ketassur essuppl yoff unds;the
fi
nancingisdonet hroughdi scounti
ngoft het r
adebi ll
s,commer cialbanks,
acceptancehouses,di scounthousesandbr okers.Inthisway ,themoney
markethelpsi nt heeconomi cdev elopmentbypr ovidi
ngf i
nancialhelpt o
tr
ade,commer ce and i ndust r
y.The busi nessmen t ake advantage by
i
nvestingtheircashi nhighl yl
iquidassetstoear nincomeandal sotoenj oy
l
iquidi
tybecauset heseasset scanbeconv ertedi ntocashwi thoutmuch
dif
fi
culty.

2.Profit
abl
einv est
ment:Thecommer ci
albanksdealwi t
hthedeposit
sof
thei
rcustomers.Thebanksarer equiredtoputt heirassetsint
ocashform
tomeett hedirecti
onsofthecent ralbankont heonehand,whi leont he
other,t
heyhavet oputtheirexcessr eservesintopr oducti
vechannel
st o
earnincomeont hem.Theaim oft hecommer ci
albanksi st omaximize
profi
ts.Theexcessr eser
vesoft hebanksar ei nvestedinnearmoney
assets.

3.Bor
rowi
ngsbyt
hegov
ernment
:

Themoneymar kethel
psthegov er
nmenti nborrowingshorttermf undsat
verylowinter
estr at
es.Theborr
owingi sdoneont hebasisoftreasurybil
ls.
Buti ncaset hegov er
nmentresortst odefici
tfinanci
ngort opr i
ntmor e
currencyortoshor ttermfundsatt hemoneysuppl yoverandabov ethe
borrow fr
om t hecentr
albank,i
twi l
lmer el
yr ai
seThusi tisclearthatthe
needsoft heeconomyandhencet hepricelevelwillboostup.Money

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mar
keti
sver
yusef
ulf
ort
hegov
ernmentsi
ncei
tmeet
sit
sfi
nanci
alneeds.

4.I
mpor
tancef
orcent
ralbank:

Ift
hemoneymar ketiswell-developed,thecentr
albanki mplement sthe
monetar
ypoli
cysuccessful
ly
.Itisonlythroughthemoneymar ketthatthe
centr
albankcancontrolthebankingsy stem andthuscont r
ibutetot he
devel
opmentoft
radeandcommer ce.Themoneymar keti
sv er
ysensitiv
ea
changei
nonesub–mar ketaff
ectstheothersub-mar ket
si mmediately.I
t
meansthecentr
albankcanaf fectthewhol emoneymar ketbychangi ng
j
ustonesub-market.

5.Mobi
li
sat
ionoff
unds:

Themoneymar kethel
psintransf
err
ingfundsfr
om onesectort
oanother
.
Thedev el
opmentofanyeconomydependsonav ai
labi
li
tyoffi
nance.No
countr
ycandev el
opitstr
ade,commer ceandindust
ryunti
landunl
essthe
fi
nanci
al r
esour
cesaremobili
zed.

6.Sav
ingsandi
nvest
ment

Themoneymar keti
sthatithelpsinpr omot i
ngliqui
dit
yandsaf et
yof
fi
nancialasset
s.Bydoing so itcan helpin encouragi
ng sav
ingsand
i
nvestment.Thesavi
ngandinvestmentequil
ibri
um ofdemandandsupply
ofloanabl
efundshel
pst
heallocati
onofresources.

CAPI
TALMARKET

Thecapit
almarketisamar ketforfi
nanci
alasset
swhi chhavealongor
i
ndef
ini
tematuri
ty.Gener
all
y,i
tdealswithl
ongterm secur
it
ieswhi
chhave
amaturi
typer
iodofaboveoney ear
.

FUNCTI
ONSOFCAPI
TALMARKET

'
Themaj
orf
unct
ionsper
for
medbyacapi
tal
/secur
it
ymar
ketar
e:

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1.Hel
psi
ncapi
talf
ormat
ion.

Thecapitalmarketpl
aysanimportantr
oleinmobi l
i
sati
onofsavi
ngsand
channelt hem int
o product
iveinvest
ment sf or t
he dev
elopment of
commer ce and i
ndust
ry.As such,the capi
talmarkethel
ps in capi
tal
for
mat i
onandeconomicgrowthofthecountry
.

2.Actasl
inkbet
weensav
ersandi
nvest
ors.

Thecapi talmarketact
sasani mport
antlinkbetweensaversandi nvestors.
Thesav er sarelender
soff undswhileinvestor
sar eborrowersoff unds.
Thesav erswhodonotspendal lt
hei
rincomear ecall
ed"Surplusunits"and
thebor rowersar eknown as"def ici
tuni t
s.Thecapi talmar keti sthe
transmissionmechanism betweensur pl
usuni t
sanddef i
ci
tuni t
s.Iti sa
conduitthroughwhichsur
plusunityl
endtheirsurpl
usfundst odefi
citunits.

3.Hel
psi
nincr
easi
ngnat
ionali
ncome.

Funds come i nt
ot he capitalmarketf rom indi
vidual
s and f i
nanci
al
i
ntermedi
ariesandar eusedbycommer ce,indust
ryandgov er
nment.It
thusfaci
li
tatesthet ransferoffundstobeusedmor epr oduct
ivel
yand
prof
it
abil
i
tyt oi
ncreasest henati
onali
ncome.

4.Faci
li
tat
esbuy
ingandsel
li
ng.

Surplusunitsbuysecur i
ti
eswi ththei
rsurpl
usf undsanddef ici
twitsel
ls
securi
ti
es tor ai
se the funds theyneed.Funds f low fr
om l ender
sto
borr
owerseitherdirect
lyorindir
ectl
ythroughfi
nanciali
nsti
tuti
onssuchas
banks,unitt r
usts,mut ualf unds,etc.The bor rowersi ssue pri
mary
securi
ti
es which are purchased bylenders ei
therdirect
lyori ndir
ect
ly
thr
oughf i
nanci
alinsti
tut
ions.

5.Channel
izesf
undsf
rom unpr
oduct
ivet
opr
oduct
iver
esour
ces.

Thecapit
almar
ketprov
idesamarketmechani
sm forthosewhohave
sav
ingsandt
othosewhoneedf
undsforpr
oduct
ivei
nvest
ments.I
tdi
ver
s

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r
esourcesfr
om wasteful
andunproduct
ivechannel
ssuchasgold,
jewel
l
ery
,
r
ealestat
e,conspi
cuousconsumpti
on,et
c,toproduct
ivei
nvest
ments

6.Mi
nimi
sesspecul
ati
veact
ivi
ti
es.

Itdoessobyprovi
dingcapi
talt
otheneedyal
reasonabl
eint
erestr
atesand
hel
psinmini
misingspecul
ati
veacti
vi
ti
es.

7.Br
ingsst
abi
li
tyi
nval
ueofst
ocks.

A wel
l-developedcapit
almarketcompri
si
ngexpertbanki
ngandnon-
banki
ngi
nter
medi ar
iesbr
ingsst
abi
li
tyi
ntheval
ueofst
ocksandsecur
it
ies.
.

8.Promot eseconomi cgr owth.Thecapitalmarketencourageseconomi c

growth.Thev ari
ousi nsti
tut
ionswhi choperat
eint hecapitalmarketgive
quanti
ti
esandqual i
tati
vedirect
iont othefl
ow offundsandbr i
ngrati
onal
al
locati
onofr esources.Theydosobyconv er
ti
ngf i
nancialassetsinto
producti
vephy si
calassets.Thisl eadstothedev el
opmentofcommer ce
and industr
yt hrough the privat
e and publi
c sector,thereby i
nducing
economicgrowt h.

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Pr
imar
yMar
ket/NewI
ssueMar
ket

Pri
marymarketi
samar ketf
ornewi ssuesornewf i
nanci
alcl
aims.Hence,
i
tisalsocall
edNew Issuemarket
.Thepr i
marymar ketdeal
swi t
hthose
secur
it
ieswhi
charei
ssuedtothepubli
cforthefi
rstt
ime.

I
nthepri
marymarket
,bor
rower
sexchangenewfi
nanci
alsecuri
ti
esforlong
t
ermfunds.Thus,pr
imar
ymar ketf
aci
li
tat
escapi
talf
ormation.Ther
ear e
t
hreewaysbywhichacompanymayrai
secapi
tali
naprimarymarket.

FEATURESOFPRI
MARYMARKETS

(i
)Thisi
st hemarketfornewlongterm equi
tycapi
tal
.Thepri
marymarket
i
st hemarketwherethesecur
it
iesaresoldfort
hefi
rstti
me.Ther
efor
eitis
al
socall
edt henewissuemarket(NI
M).

(
ii
)inaprimar
yissue,t
hesecur
it
iesar
eissuedbyt
hecompanydi
rect
lyt
o
i
nvest
ors.

(
ii
i)Thecompanyr
ecei
vest
hemoneyandi
ssuesnewsecur
it
ycer
ti
fi
cat
es
t
ot hei
nvest
ors

(i
v)Pr
imaryi
ssuesar eusedbycompaniesfort
hepurposeofsett
ingup
newbusi
nessorforexpandi
ngormoder
nizi
ngtheexi
sti
ngbusi
ness.

(
v)Thepri
marymarketper
for
mst
hecr
uci
alf
unct
ionoff
aci
l
itat
ingcapi
tal
f
ormat
ioni
ntheeconomy.

(
vi)Thenew i
ssuemar
ketdoesnoti
ncl
udecer
tai
not
hersour
cesofnew
l
ongter
m ext
ernal

fi
nance,suchasl oansfr
om fi
nanciali
nst
itut
ions.Bor
rowersi
nthenew
i
ssuemar ketmayber ai
singcapit
alforconv er
ti
ngprivat
ecapi
tali
nto
publ
iccapit
al,
thi
sisknownas"goingpubli
c."

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FUNCTI
ONSOFNEW I
SSUEMARKET

At
hreeser
vicef
unct
ions:

Themai
nfunct
ionsofanewi
ssuesuemar
ketcandi
vi
dedi
ntonewpr
oject
.

1.Or
igi
nat
ion.

Itreferstothewor kofinvestigati
onanal ysisandpr ocessi
ngofnewpr oject
proposal s.
.Itstar
tsbeforeani ssueisact uall
yf l
oatedint hemar ket.Thi s
functioni sdonebymer chantbanker swhomaybecommer cialbanks,al l
Indiafinanciali
nsti
tut
ionsorpr i
vatefir
ms.Atpr esent,fi
nancialinstit
ut i
ons
andpr i
vatefir
msal soperformt hisservicei shi
ghlyimpor t
antt hesuccess
oft heissuedepends, t
oal argeext entont heeffi
ciencyofthemar ket.

2.Under
wri
ti
ng.

Itisan agr eementwher ebyt heunder wr i

terpromi sesto subscri
bet o
specif
iednumberofshar esordebent uresoraspeci fi
edamountofst ockin
the eventofpubl i
cnotsubscr ibi
ng t othe issue.I fthe i
ssue isfull
y
subscribed,thenthereisnol iabi
lit
yfort heunderwr i
ter.I
fapar tofshare
i
ssues r emai ns unsold,the under wr i
ter wil
lbuy t he shares.Thus,
underwr i
ti
ngisaguar anteeformar ketabi
lit
yofshar es.Therearetwotypes
ofunder writ
er si
nI ndia-I nsti
tuti
onal( LIC,UTI,IDBI ,I
CICI
)andNon-
i
nstit
utionalarebrokers.

3.Di
str
ibut
ion.

I
ti sthefuncti
onofsaleofsecuri
ti
estoulti
mat einv
est
ors.Thi
sser
viceis
performedbyspecial
izedagenci
esli
kebrokersandagentswhomaintai
na
regulardi
rectcont
actwit
htheult
imatei
nvestors.

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Secondar
yMar
ket
/St
ockExchangeMar
ket

Secondar ymar ketisamar ketforsecondar ysaleofsecur i

ti
es.I nother
words, securi
ti
eswhichhav eal r
eadypassedt hroughthenewi ssuemar ket
aret r
adedi nthismarket.Gener all
y,suchsecur i
ti
esarequotedt heSt ock
Exchangeandi tprovi
desacont inuousandr egularmarkettobuy i
ngand
sell
ing of secur i
ti
es.Thi s mar ket consist
s of allst ock exchanges
recognisedbyt heGov ernmentofI ndia.Thestockexchangesi nI ndiaare
regulat
ed undert he Securit
ies Cont r
acts(Regulat
ion)Act1956.The
BombaySt ockExchangei st
hepr incipalst
ockexchangeinIndiawhi chsets
thetoneoft heotherstockmar kets.

FUNCTI
ONSOFSTOCKEXCHANGE

Thestockexchangespl
ayani
mpor
tantr
olei
ntheeconomi
cdev
elopment
ofacountr
y.

Theimportanceofstockexchangewi
llbecl
earf
rom t
hef
unct
ionst
hey
per
form anddiscussed:

asf
oll
ows:
prov
ideapl
acewher
eshar
esandst
ock

1.Ensur
eLi
qui
dit
yofCapi
tal
.

Thestockexchangeswherebuyersandsell
ersar econvertedintocash.
Theexchangesprovi
deareadymar ket
.Hadar ealwaysav ail
ableandthose
whoareinneedofhardcashcansel lt
hei
rholdingsthi
snotbeenpossi bl
e
thenmanypersonswouldhavefearedforbl
ockingtheirsavingsin
Secur
it
iesastheycannotagai
nconv ertt
hem intocash.

2.Conti
nuousMar ketforSecuri
ti
es.
Thestockexchangesprovideareadymarketinsecurit
ies.Thesecuri
ti
es
onceli
stedconti
nuet obetradedatt
heexchangesi r
respecti
vethefactthat
ownersgoonchangi ng.Theexchangesprov
idear egularmarketfor
tr
adi
ngi nsecur
it
ies.

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3.Mobi
li
singSur
plusSav
ings.

Thest ockexchangespr ov i
dear eadymar ketforv ari
oussecurit
ies.The
i
nvestorsdonothav eanydiffi
cult
yi ninvest
ingtheirsavingsbypurchasi
ng
shares,bondset c,from theexchanges.I fthi
sf acil
it
yi snottherethen
manyper sonswhowantt oi nvesttheirsavi
ngswi l
lnotf indav
enuest odo
so.Int hiswayst ockexchangespl ayani mportantr oleinmoppingup
surpl
usf undsofinvestor
s.

4.Hel
pfuli
nRai
singNewCapi
tal
.

Thenew andexi stingconcernsneedcapi talf

ort heiract
ivi
ties.Thenew
concer
nsraisecapi talforthefi
rsttimeandexi stingunit
si ncreaset
hei
r
capi
talforexpansi onand diversi
fi
cationpurposes.Theshar esofnew
concer
nsarer egisteredatstockexchangesandexi sti
ngcompani esal
so
sel
lthei
rsharest hroughbroker
set c,atexchanges.Theexchangesar e
hel
pfuli
nrai
singcapi talbot
hbynetsol dconcer
ns.

5.Saf
etyi
nDeal
ings.

Thedeal i
ngsatstockexchangesar egov ernedbywel l-defi
nedr ul
esand
regul
ati
onsofSecuriti
esCont ract(
Regulation)Act,1956.Thereisnoscope
manipulati
ng tr
ansacti
ons.Ev ery contact is done accor ding tothe
procedurelai
ddownandt hereisnofearint hemindsofcontractingpar
ti
es.
Thesaf etyindeali
ngsbr ingsconfidencei nthemi ndsofal lconcer
ned
parti
esandhelpsinincreasingvari
ousdeal i
ngs.

6.Li
sti
ngofSecur
it
ies.

Onlyli
stedsecuri
ti
escanbepur chasedatst ockexchanges.Everycompany
desir
ousoflist
ingitssecuri
ti
eswi llapplytot heexchangeauthori
ties.The
l
ist
ing isall
owed onl yaft
eracr i
ticalexami nat
ion ofcapit
alst ruct
ure,
managementandpr ospect
soft hecompany .Theli
sti
ngofsecurit
iesgives
pri
vil
egetothecompany .Theinv estorscanf ormtheirownviewsaboutt he
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securi
ti
es because l
i
sti
ng a secur
it
ydoes notguar
ant
ee t
he f
inanci
al
stabi
l
ityofthecompany.

7.Smoot
henst
hePr
iceMov
ement
s.

A stockexchange smoothens t
he pr
ice movement
s ofst
ocks i
nthe
marketbyensur
ingacont
inuousfl
owofsecuri
ti
es,

8.I
nvest
orPr
otect
ion.

The st ock exchange r

enders safeguardi
ng acti
vi
ti
es forinvest
orsin
securi
ti
es.Itpr ovi
des a gri
evance redr
essalmechanism forinvest
ors.
Stockexchangesal sooperat
eacompensat ionfundfort
hepr ot
ecti
onof
i
nv est
ors.

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UNI
T-2MONEYMARKET

MONEYMARKET

Moneymarketisamar ketfordeal
ingwi
thfi
nanci
alassetsandsecuri
ti
es
whichhaveamat uri
typeri
odofupt ooneyear.I
not herwords,i
tisa
marketf
orpurel
yshortter
mf unds.Themoneymarketmaybesubdi v
ided
i
ntofour
.Theyare:

Obj
ect
ivesofMoneyMar
ket

Thef
oll
owi
ngar
ethei
mpor
tantobj
ect
ivesofamoneymar
ket
:

(
i)Topr
ovi
deapar
kingpl
acet
oempl
oyshor
t-
ter
m sur
plusf
unds.

(
ii
)Topr
ovi
der
oom f
orov
ercomi
ngshor
t-
ter
m def
ici
ts.

(i
ii
)ToenabletheCentr
alBanktoi nfl
uenceandr
egul
atel
i
qui
dit
yint
he
economyt
hroughit
sint
ervent
ioni
nthismar ket
.

(
iv)Toprovi
deareasonabl
eaccesst ouser
sofShor t
-t
ermfundst
omeet
t
heirr
equi
rement
squickl
y,adequat
elyandatr
easonabl
ecost
s.

(
v)Togiveasensibl
eaccesst ocli
ent
sofher eandnow asset
stomeet
t
hei
rpr
erequi
sit
erapi
dly
,suf
fi
cient
lyatsensi
blecost
.

(
vi)
Togi
veast
oppi
ngspott
out
il
izeher
eandnowsur
plusasset
s.

COMPOSI
TION/
COMPONENTSOFMONEYMARKET

(
i)Cal
lmoneymar
ket

(
ii
)Commer
cial
bil
l
smar
ket

(
ii
i)Tr
easur
ybi
l
lsmar
ket

(
iv)Shor
tter
mloanmar
ket
.

(
v)Bi
l
lDi
scountMar
ket

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Cal
lMoneyMar
ket

Thecal l
moneymar keti
samar ketf
orextremel yshortperi
odloanssayone
dayt of our
teenday s.So,itishighlyli
qui d.Thel oansarer epayableon
demandatt heopt i
onofei therthelenderort hebor r
ower.InI ndi
a,call
moneymar ketsar eassociat
edwi ththepr esenceofst ockexchangesand
hence,theyar elocatedinmaj orindustr
ialt ownsl i
keBombay ,Calcutt
a,
Madras,Del hi,Ahmedabadet c.Thespecialf eatureofthi
smar keti
st hat
theinterestratev ari
esfrom dayt odayandev enf r
om hourt ohourand
centr
et ocent re.Itisverysensiti
vetochangesi ndemandandsuppl yof
cal
lloans.

Commer
cialBi
ll
sMar
ket

Itisamar ketforBi
ll
sofExchangearisi
ngoutofgenuinetradetransacti
ons.
Int hecaseofcr editsal
e,thesell
ermaydr aw abillofexchangeont he
buy er
.Thebuy eracceptssuchabi l
lpr
omi si
ngt opayatal aterdate
specifi
edint hebil
l.Thesell
erneednotwaituntilt
heduedat eoft hebil
l.
Instead,hecangetimmedi at
epaymentbydiscounti
ngt hebil
l
.

Tr
easur
yBi
ll
sMar
ket

I
tisamar ketf
ortreasurybi
l
lswhi
chhav e'short-ter
m 'mat uri
ty.A
t
reasur
ybi
l
l i
sapromissor
ynot
eorafi
nancebi
ll
issuedbytheGov
er nment
.

Iti
shi ghl
yliquidbecausei tsrepay
menti sguar anteedbyt heGov ernment.
Iti
sani mportantinstrumentf orshortterm bor r
owingoft heGov ernment
Therear etwot ypesoft r
easur ybi
ll
snamel y(i)ordinaryorr egularand( i
i)
adhoct r
easurybill
spopul arl
yknownas' adhocs’ .Ordinarytreasur ybi
ll
s
areissuedtot hepubl ic,banksandot herf inancialinsti
tut
ionswi t
hav i
ew
toraisingresourcesf ort heCent ralGov ernmentt omeeti tsshor tterm
fi
nancialneeds.Adhoct reasurybil
lsarei ssuedi nf av
ouroft heRBIonl y.
Theyar enotsoldt hrought enderorauction.Theycanbepur chasedbyt he

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RBIonl
y. Adhocsar
enotmar
ket
abl
einI
ndi
abuthol
der
soft
hesebi
l
ls
cansel
lthem backt
oRBI
.

Shor
t-Ter
m LoanMar
ket

Itisamar ketwhereshort-termloansar egiv

ent ocorpor atecustomersfor
meet i
ng theirworki
ng capi t
alrequirements.Commer cialbanks playa
significantrol
einthi
smar ket.Commer ci
albankspr ovi
deshor ttermloans
i
nt hef or
m ofcashcreditandover dr
aftOverdr af
tfacil
i
tyi smai nl
ygivento
busi nesspeoplewher eascashcreditisgivent oindustr
ialist
s.Ov er
draf
tis
pur elyat emporar
yaccommodat ionandi tisgi v
eni nthecur rentaccount
i
t self.Butcashcreditisforaper iodofoney earandi tissanct i
onedina
separ ateaccount.

BI
LLOFEXCHANGE

A writ
ten,uncondi tionalor derbyonepar ty( t
hedr awer )t oanot her(the
drawee)t opayacer tainsum, eit
herimmedi ately(asi ghtbi l
l)oronaf i
xed
date(at er
m bi l
l),forpay mentofgoodsand/ orser vi
cesr eceived.The
draweeaccept sthebi l
lbysi gningi t
,thusconv erti
ngi ti
nt oapost -
dated
checkandabi ndingcont ract.
abillofexchangecont ains:(1)Thet erm bil
lofexchangei nser t
edi nthe
bodyoft hei nstrumentandexpr essedi nthelanguageempl oy edi ndrawing
upthei nstrument .
(2)Anuncondi t
ionalordert opayadet er mi natesum of
money .(3)Thenameoft heper sonwhoi st opay( dr
awee) .(4)Ast at
ement
ofthet i
meofpay ment .(5)Ast at
ementoft heplacewher epay menti sto
bemade.( 6)Thenameoft heper sont owhom ort owhoseor derpay ment
i
st obemade.( 7)Ast atementoft hedateandoft hepl acewher et hebilli
s
i
ssued.( 8)Thesi gnat ureoft heper sonwhoi ssuest hebi ll(drawer )
.Abi ll
ofexchange i st he mostof ten used f orm ofpay menti nl ocaland
i
nternati
onal trade, andhasal onghi story
-asl ongast hatofwr i
ting.

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Ty
pesOfMoneyMar
ketI
nst
rument
s

Tr
easur
yBi
ll
s(T-
Bil
ls)

Issuedbyt heCent ralGov er

nment ,TreasuryBil
lsareknownt obeoneof
thesaf estmoneymar ketinstrument savail
abl
e.Howev er,tr
easurybi
ll
s
carryzeror i
sk.I.
e.ar ezer oriskinstruments.Ther
efore,t heret
urnsone
getsont hem arenotat tr
activ
e.Tr easurybil
l
scomewi thdi ffer
entmatur
it
y
periodsli
ke3-mont h,6-monthand1y earandarecir
culatedbypr i
maryand
secondar ymarkets.Treasurybill
sar eissuedbytheCent ralgover
nmentat
alesserpr i
cethantheirfacevalue.

Theint
erestear
nedbythebuyerwil
lbethedif
ferenceofthemat uri
tyvalue
oftheinst
rumentandthebuyi
ngpri
ceofthebill
,whichisdecidedwi t
ht he
hel
pofbi ddi
ngdonev i
aaucti
ons.Curr
entl
y,t
her eare3t y
pesoft reasury
bi
ll
sissuedbytheGovernmentofI
ndiavi
aauctions,whi
char e91-day,182-
dayand364-daytr
easurybi
l
ls.

Cer
ti
fi
cat
eofDeposi
ts(
CDs)

ACer t
ifi
cateofDeposit(CD)isati
medepositwithbank.CDsar egenerall
y
i
ssuedbycommer ci
albanksbutthecanbeboughtt hroughbrokerages.•
Theybearaspeci fi
cmat uri
tydate(fr
om threemont hstof i
vey ears,a
specif
iedinter
estrat
eandcanbei ssuedinanydenominati
on.•CDsof fera
sli
ghtl
yhighery i
eldthanT-Bi
ll
sbecauseoft hesl
ight
lyhigherdefaultri
sk
forbank.

Commer
cialPaper
s(CPs)

Commerci
alPaper
sar ecan becompar
ed t
o an unsecur
ed shor
t-t
erm
pr
omissor
ynote whi
ch i
sissued byhi
ghl
yr at
ed companies wi
tht he
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pur
poseofr ai
singcapi taltomeetr equir
ement sdir
ectl
yfrom themar ket.
CPsusuall
yfeatureaf ixedmat ur
it
yper i
odwhi chcanrangeanywheref r
om
1dayupt o270day s.Hi ghlypopularincount r
iesli
keJapan,UK,USA,
Aust
ral
i
aandmanyot hers,Commer cialPaperspromisehigherret
urnsas
compar
ed t ot reasury bill
s and are aut omati
call
y notas secur ei n
compar
ison.Commer cialpapersareactiv
elytr
adedinsecondarymar ket.

Repur
chaseAgr
eement
s(Repo)

Repur chaseAgr eement s,al

soknownasRev erseRepoorsi mpl yasRepo,
l
oansofashor tdur at
ionwhichar eagr eeduponbybuy er
sandsel ler
sfor
thepur poseofsel l
i
ngandr epurchasing.Thesetransacti
onscanonl ybe
car r
ied out bet ween RBI appr oved parties Repo / Rev erse Repo
transactions can be done onl ybet ween the part
ies appr
ov ed byRBI.
Tr ansacti
onsar eonl ypermitt
edbet weensecur it
iesapprovedbyt heRBI
l
iket reasurybil
ls,centralorstat
egov er
nmentsecur i
ti
es,corporatebonds
andPSUbonds.

Banker
'sAccept
ance(
BA)

Banker'
s Acceptance orBA i s basi
call
ya documentpr omisi
ng futur
e
paymentwhi chisguaranteedbyacommer ci
albank.Simil
artoat reasur
y
bil
l,Banker’
s Acceptance is often used i n money mar ketfunds and
speci
fi
est hedetail
softher epaymentliketheamountt ober epai
d,dateof
repay
mentandt hedetai
lsoft heindiv
idualtowhicht herepaymentisdue.
Banker’
sAccept ancefeaturesmat uri
typeriodsrangingbet ween30day s
upto180day s.

BI
LLOFEXCHANGE

BILLSOFEXCHANGEBi l
lsofexchangear esimi l
artochecksand
promissor
ynotes.Theycanbedr awnbyi ndivi
dualsorbanksandar e
general
lyt
ransf
erabl
ebyendor sements.Thedi ff
erencebet weena
promissor
ynoteandabi l
lofexchangeist hatthi
spr oductistransf
erabl
e
andcanbindonepar t
ytopayat hir
dpartyt hatwasnoti nvolv
edi ni
ts
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cr
eat
ion.I
fthesebil
lsarei
ssuedbyabank,t
heycanberef
err
edtoasbank
dr
aft
s.Ift
heyareissuedbyindi
vi
dual
s,t
heycanberef
err
edtoastr
ade
dr
aft
s.

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UNI
T-3STOCKMARKETS

Pr
imar
yMar
ket/NewI
ssueMar
ket

Pri
marymarketi
samar ketf
ornewi ssuesornewf i
nanci
alcl
aims.Hence,
i
tisalsocall
edNew Issuemarket
.Thepr i
marymar ketdeal
swi t
hthose
secur
it
ieswhi
charei
ssuedtothepubli
cforthefi
rstt
ime.

I
nthepri
marymarket
,bor
rower
sexchangenewfi
nanci
alsecuri
ti
esforlong
t
ermfunds.Thus,pr
imar
ymar ketf
aci
li
tat
escapi
talf
ormation.Ther
ear e
t
hreewaysbywhichacompanymayrai
secapi
tali
naprimarymarket.

FEATURESOFPRI
MARYMARKETS

(i
)Thisi
st hemarketfornewlongterm equi
tycapi
tal
.Thepri
marymarket
i
st hemarketwherethesecur
it
iesaresoldfort
hefi
rstti
me.Ther
efor
eitis
al
socall
edt henewissuemarket(NI
M).

(
ii
)inaprimar
yissue,t
hesecur
it
iesar
eissuedbyt
hecompanydi
rect
lyt
o
i
nvest
ors.

(
ii
i)Thecompanyr
ecei
vest
hemoneyandi
ssuesnewsecur
it
ycer
ti
fi
cat
es
t
ot hei
nvest
ors

(i
v)Pr
imaryi
ssuesar eusedbycompaniesfort
hepurposeofsett
ingup
newbusi
nessorforexpandi
ngormoder
nizi
ngtheexi
sti
ngbusi
ness.

(
v)Thepri
marymarketper
for
mst
hecr
uci
alf
unct
ionoff
aci
l
itat
ingcapi
tal
f
ormat
ioni
ntheeconomy.

(
vi)Thenew i
ssuemar
ketdoesnoti
ncl
udecer
tai
not
hersour
cesofnew
l
ongter
m ext
ernal

fi
nance,suchasl oansfr
om fi
nanciali
nst
itut
ions.Bor
rowersi
nthenew
i
ssuemar ketmayber ai
singcapit
alforconv er
ti
ngprivat
ecapi
tali
nto
publ
iccapit
al,
thi
sisknownas"goingpubli
c."

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FUNCTI
ONSOFNEW I
SSUEMARKET

At
hreeser
vicef
unct
ions:

Themai
nfunct
ionsofanewi
ssuesuemar
ketcandi
vi
dedi
ntonewpr
oject
.

1.Or
igi
nat
ion.

Itreferstothewor kofinvestigati
onanal ysisandpr ocessi
ngofnewpr oject
proposal s.
.Itstar
tsbeforeani ssueisact uall
yf l
oatedint hemar ket.Thi s
functioni sdonebymer chantbanker swhomaybecommer cialbanks,al l
Indiafinanciali
nsti
tut
ionsorpr i
vatefir
ms.Atpr esent,fi
nancialinstit
ut i
ons
andpr i
vatefir
msal soperformt hisservicei shi
ghlyimpor t
antt hesuccess
oft heissuedepends, t
oal argeext entont heeffi
ciencyofthemar ket.

2.Under
wri
ti
ng.

Itisan agr eementwher ebyt heunder wr i

terpromi sesto subscri
bet o
specif
iednumberofshar esordebent uresoraspeci fi
edamountofst ockin
the eventofpubl i
cnotsubscr ibi
ng t othe issue.I fthe i
ssue isfull
y
subscribed,thenthereisnol iabi
lit
yfort heunderwr i
ter.I
fapar tofshare
i
ssues r emai ns unsold,the under wr i
ter wil
lbuy t he shares.Thus,
underwr i
ti
ngisaguar anteeformar ketabi
lit
yofshar es.Therearetwotypes
ofunder writ
er si
nI ndia-I nsti
tuti
onal( LIC,UTI,IDBI ,I
CICI
)andNon-
i
nstit
utionalarebrokers.

3.Di
str
ibut
ion.

I
ti sthefuncti
onofsaleofsecuri
ti
estoulti
mat einv
est
ors.Thi
sser
viceis
performedbyspecial
izedagenci
esli
kebrokersandagentswhomaintai
na
regulardi
rectcont
actwit
htheult
imatei
nvestors.

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PLAYERSI
NTHENEW I
SSUEMARKET

Ther
earemanypl
ayer
sint
henew i
ssuemar
ket
.Thei
mpor
tantt
hem ar
e
thef
oll
owi
ng:

1.Mer
chantBanker
s

2.Regi
str
ars

3.Col
l
ect
ingandco-or
dinat
ingbanker
s

4.Under
wri
ter
sandbr
oker
s

5.Pr
int
ers,
adv
ert
isi
ngagenci
esandmai
l
ingagenci
es.

1.Mer
chantBanker
s

Theyar etheissuemanagers,lead manager

s,co -manager
sand ar
e
responsi
blet
ot hecompanyandSEBI .Thei
rfunct
ionsandworki
ngar
e
descri
bedinasepar
atechapt
er.

2.Regi
str
arst
otheI
ssue

Regist
rarsareani mpor t
antcategoryofi ntermediar
ieswhoundertakeall
acti
vit
iesconnectedwithnew i ssuemanagement .Theyareappointedby
thecompanyi n consult
ati
on wi t
ht hemer chantbankerstot heissue.
Regist
rarshaveamaj orrole,nextt o mer chantbanker
s,inrespectof
servi
cingofinvestor
s.Ther oleofRegi strarinthepr e-i
ssue,duri
ngthe
curr
ency of issue,pr e all
otment,al l
otmentand postal lot
mentar e
descri
bedbelow:

Rol
eofRegi
str
ari
nPr
e-i
ssue

1.Suggestdr
aftappl
i
cat
ionf
ormt
othemer
chantbanker
s.

2.Hel
pi dent
if
yingthecol
lect
ioncentr
es.Thechoiceofcoll
ect
ioncent
re
andofcoll
ect
ingbankeri
scrit
ical
tothesuccessoft
heissue.

3.Assi
sti
n openi
ng col
l
ect
ion account
s wi
th banks and l
ay down
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pr
ocedureforoperat
ionoftheseaccount
s.Sendinst
ruct
ionst
ocollect
ing
br
anches,forcoll
ect
ionofapplicat
ional
ongwi t
hcheques,draf
ts,stock
i
nvestsepar
atel
yandr emi
tt
anceoffunds.

4.Wor koutmodali
ti
estor ecei
vethecollect
ionf
iguresonaregularbasi
s
unti
lthesubscri
pti
onl i
stisclosed.andexper t
ise,qual
i
tyofmanpower ,
thei
rtrackrecor
d,adequacyofi nf
rast
ructur
esuchascomputers,stor
age
spaceetc.andcapi
taladequacy.

3.Col
lect
ingandCo-or
dinat
ingBanker
s

Coll
ectingbankerscoll
ectthesubscr i
ptionsincash,cheques,stockinvest
etc.Co-or dinati
ngbanker scoll
ectinformationonsubscript
ionsandco-
ordinat
ethecol l
ecti
onwor k.Theymoni tortheworkandkeepi nformt hem
totheregist
rarsandmer chantbankers.Collecti
ngbankerandcoor di
nating
bankermaybet hesamebankordi f
ferentbanks.

4.Under
wri
ter
sandBr
oker
s

Thef uncti
onsandr ol
eofunder wri
ter
sareexplai
nedseparatel
y.Broker
s
alongwiththenetwor kofsub-br oker
smarketthenewissues.Theysend
theirowncircul
arsandapplicat
ionstothecl
ient
sanddof ol
lowupwor kto
mar kett
hesecurit
ies.

5. Pr
inter
s,advert
isi
ng agenci
es and maili
ng agencies ar
e ot
her
Or
ganisati
onsi
nvol
vedint
henewissuemarketoper
ati
ons.

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SECONDARY/
STOCKMARKET

SECONDARYMARKET

Secondar ymar ketisamar ketforsecondar ysaleofsecur i

ti
es.I nother
words, securi
ti
eswhichhav eal r
eadypassedt hroughthenewi ssuemar ket
aret r
adedi nthismarket.Gener all
y,suchsecur i
ti
esarequotedt heSt ock
Exchangeandi tprovi
desacont inuousandr egularmarkettobuy i
ngand
sell
ing of secur i
ti
es.Thi s mar ket consist
s of allst ock exchanges
recognisedbyt heGov ernmentofI ndia.Thestockexchangesi nI ndiaare
regulat
ed undert he Securit
ies Cont r
acts(Regulat
ion)Act1956.The
BombaySt ockExchangei st
hepr incipalst
ockexchangeinIndiawhi chsets
thetoneoft heotherstockmar kets.

FUNCTI
ONSOFSTOCKEXCHANGE

Thestockexchangespl
ayani
mpor
tantr
olei
ntheeconomi
cdev
elopment
ofacountr
y.

Theimportanceofstockexchangewi
llbecl
earf
rom t
hef
unct
ionst
hey
per
form anddiscussed:

asf
oll
ows:
prov
ideapl
acewher
eshar
esandst
ock

1.Ensur
eLi
qui
dit
yofCapi
tal
.

Thestockexchangeswherebuyersandsell
ersar econvertedintocash.
Theexchangesprovi
deareadymar ket
.Hadar ealwaysav ail
ableandthose
whoareinneedofhardcashcansel lt
hei
rholdingsthi
snotbeenpossi bl
e
thenmanypersonswouldhavefearedforbl
ockingtheirsavingsin
Secur
it
iesastheycannotagai
nconv ertt
hem intocash.

2.Conti
nuousMar ketforSecuri
ti
es.
Thestockexchangesprovideareadymarketinsecurit
ies.Thesecuri
ti
es
onceli
stedconti
nuet obetradedatt
heexchangesi r
respecti
vethefactthat
ownersgoonchangi ng.Theexchangesprov
idear egularmarketfor

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t
radi
ngi
nsecur
it
ies.

3.Mobi
li
singSur
plusSav
ings.

Thest ockexchangespr ov i
dear eadymar ketforv ari
oussecurit
ies.The
i
nvestorsdonothav eanydiffi
cult
yi ninvest
ingtheirsavingsbypurchasi
ng
shares,bondset c,from theexchanges.I fthi
sf acil
it
yi snottherethen
manyper sonswhowantt oi nvesttheirsavi
ngswi l
lnotf indav
enuest odo
so.Int hiswayst ockexchangespl ayani mportantr oleinmoppingup
surpl
usf undsofinvestor
s.

4.Hel
pfuli
nRai
singNewCapi
tal
.

Thenew andexi stingconcernsneedcapi talf

ort heiract
ivi
ties.Thenew
concer
nsraisecapi talforthefi
rsttimeandexi stingunit
si ncreaset
hei
r
capi
talforexpansi onand diversi
fi
cationpurposes.Theshar esofnew
concer
nsarer egisteredatstockexchangesandexi sti
ngcompani esal
so
sel
lthei
rsharest hroughbroker
set c,atexchanges.Theexchangesar e
hel
pfuli
nrai
singcapi talbot
hbynetsol dconcer
ns.

5.Saf
etyi
nDeal
ings.

Thedeal i
ngsatstockexchangesar egov ernedbywel l-defi
nedr ul
esand
regul
ati
onsofSecuriti
esCont ract(
Regulation)Act,1956.Thereisnoscope
manipulati
ng tr
ansacti
ons.Ev ery contact is done accor ding tothe
procedurelai
ddownandt hereisnofearint hemindsofcontractingpar
ti
es.
Thesaf etyindeali
ngsbr ingsconfidencei nthemi ndsofal lconcer
ned
parti
esandhelpsinincreasingvari
ousdeal i
ngs.

6.Li
sti
ngofSecur
it
ies.

Onlyli
stedsecuri
ti
escanbepur chasedatstockexchanges.Ev
erycompany
desir
ousoflist
ingitssecur
iti
eswillappl
ytot heexchangeauthor
it
ies.The
l
ist
ing isall
owed onlyaf t
eracr i
ti
calexami nat
ion ofcapi
talstruct
ure,

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managementandpr ospect
softhecompany.Thel
ist
ingofsecur
it
iesgives
priv
il
eget othecompany.Theinvest
orscanf
ormthei
rownv i
ewsaboutt he
securit
ies because l
i
sti
ng a secur
it
ydoes notguarant
ee the f
inancial
stabil
i
tyoft hecompany.

.
7.Smoot
henst
hePr
iceMov
ement
s.

A stockexchange smoothens t
he pr
ice movement
s ofst
ocks i
nthe
marketbyensur
ingacont
inuousfl
owofsecuri
ti
es,

8.I
nvest
orPr
otect
ion.

Thest ockexchangerender ssafeguar

dingact
ivi
ti
esfori
nvest
orsi n
securi
ti
es.Itpr
ovidesagriev anceredr
essalmechani
sm f
orinvestors.
Stockexchangesalsooper ateacompensationfundfort
heprotecti
onof
i
nv est
ors.

Li
sti
ngofSecur
it
ies
Obj
ect
ives|Requi
rement
s|Pr
ocedur
e
Li
sti
ngofSecur
it
ies

List
ingmeanst headmissionofsecuri
tiesofacompanyt otradi
ngona
stockexchange.List
ingi
snotcompul soryundertheCompani esAct.It
becomesnecessarywhenapubl i
cli
mitedcompanydesi r
estoissueshar
es
ordebentur
estothepubli
c.Whensecur i
tiesar
elist
edinastockexchange,
thecompanyhast ocomplywit
htherequirementsoftheexchange.

Obj
ect
ivesofLi
sti
ng

Themaj
orobj
ect
ivesofl
i
sti
ngar
e

1.Topr
ovi
der
eadymar
ket
abi
l
ityandl
i
qui
dit
yofacompany
’ssecur
it
ies.

2.Topr
ovi
def
reenegot
iabi
l
ityt
ost
ocks.

3.Topr
otectshar
ehol
der
sandi
nvest
orsi
nter
est
s.
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4.Topr
ovi
deamechani
sm f
oref
fect
ivecont
rol
andsuper
visi
onoft
radi
ng.

Li
sti
ngr
equi
rement
s

A companywhichdesir
est ol
isti
tsshar
esi
nast
ockexchangehast
o
complywit
hthefol
l
owingrequi
rement
s:

1.Per
mi ssi
onforl
ist
ingshouldhavebeenprov
idedf
ori
ntheMemor
andum
ofAssociat
ionandArti
clesofAssoci
ati
on.

2.Thecompanyshouldhavei
ssuedforpubl
i
csubscri
pti
onatl eastt
he
mini
mum pr
escr
ibedper
cent
ageofit
sshar
ecapit
al(
49percent
).

3.Thepr
ospectusshoul
dcontainnecessar
yinfor
mat i
onwit
hregar
dtot
he
openi
ngofsubscri
pti
onl
ist
,recei
ptofshareappli
cat
ionet
c.

4.All
otmentofsharesshouldbedoneinaf ai
randreasonabl
emanner.In
caseofoversubscr
ipti
on,t
hebasisofall
otmentshouldbedecidedbythe
companyinconsultat
ionwi t
htherecogni
zedstockexchangewher ethe
shar
esareproposedtobelist
ed.

5.The companymustent erint

oal isti
ng agr
eementwiththe st
ock
exchange.Thel i
sti
ngagreementcont ainsthetermsandcondit
ionsof
l
isti
ng.Italso contai
nsthe di
sclosur
est hathaveto be made bythe
companyonacont inuousbasi
s.

Mi
nimum Publ
icOf
fer

Acompanywhi chdesirestol i
stit
ssecur it
iesinast ockexchange,
should offeratl eastsi xt
y per centofi t
si ssued capitalforpubli
c
subscri
ption.Outofthissixt
yper cent,amaximum ofel evenpercentint
he
aggregatemayber eserv
edf ortheCent r
algov er
nment ,Stat
egov er
nment,
thei
rinvestmentagenciesandpubl icfi
nanci
alinsti
tuti
ons.

The publ
i
c of
fershoul
d be made t
hrough a pr
ospect
us and t
hrough

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newspaperadv er
ti
sements.Thepromotersmi
ghtchoosetot
akeupthe
remaining for
typercentforthemsel
ves,oral
lota par
tofittothei
r
associates.

Fai
ral
lot
ment

All
otmentofsharesshouldbemadei nafai
randtranspar
entmanner .I
n
case ofov ersubscr
ipt
ion,al
l
otmentshoul
d be made in an equi
tabl
e
manneri nconsult
ati
onwi t
hthestockexchangewheretheshar esare
proposedtobeli
sted.

Incase,thecompanypr oposestoli
stitsshar
esinmor ethanone
exchange,thebasisofall
otmentshoul
dbedecidedi
nconsul
tat
ionwit
hthe
stockexchangewhi chislocatedintheplaceinwhichthecompany ’
s
regi
steredoff
iceislocat
ed.

Li
sti
ngPr
ocedur
e

Thefoll
owingarethestepst
obef
oll
owedi
nli
sti
ngofacompany
’s
secur
it
iesi
nastockexchange:

1.Thepromot
ersshouldfir
stdeci
deont hest
ockexchangeorexchanges
wheret
heywantthesharestobeli
sted.

2.Theyshouldcont
acttheaut
hor
it
iest
other
espect
ivest
ockexchange/
exchangeswher
etheypr
oposetol
i
st.

3. They shoul
d discuss wi
th the st
ock exchange aut
hor
it
ies t
he
requi
rement
sandel
igibi
li
tyf
orl
ist
ing.

4.TheproposedMemorandum ofAssoci
ati
on,Art
icl
esofAssoci
ati
onand
Prospect
usshouldbesubmit
tedfornecessaryexaminat
iont
othestock
exchangeaut
hori
ti
es

5.Thecompanyt
henf
inal
i
zest
heMemor
andum,
Art
icl
esandPr
ospect
us

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6.Secur
it
iesar
eissuedandal
l
ott
ed.

7.Thecompanyenter
sint
oal i
sti
ngagreementbypayi
ngt hepr
escr
ibed
feesandsubmi
tt
ingt
henecessarydocumentsandpar
ti
cul
ars.

8.Shar
esar
ethenandar
eav
ail
abl
efort
radi
ng.

BombaySt
ockExchange

TheBombaySt ockExchangeorBSEi sanI ndi

anst ockexchangewhi chis
l
ocatedatDalalStr
eet,Mumbai.Itwasest abl
ishedi nt heyear1875and
foundedbyPremchandRoychand,oneoft hei
nfl
uent i
albusinessmeni
nt he
19thcentur
y.Hewasf amouslyknownast heBigBul l
,theBul l
ionKi
ngor
theCottonKing.Hewasal sothef ounderofSt ockBr okersAssoci
ati
on,
knownasBSEandt heNativeShar
e.

Whi l
stBombaySt ockExchangeLt disnow sy nonymouswi thDal alStr
eet,
howev er,itwasnotal way sso.Thev eryfirstvenueoft heear l
ieststock
brokermeet i
ngswashel dint he1850sunderbany ant rees,in-
fr
ontoft he
TownHal l
,whereHor nimanCi rcl
eispr esentlysituat ed.Ay earlater
,the
brokersmov edtoanot herv enue,atthejunct i
onofMeadowsSt reetwhich
i
snow cal l
edMahat maGandhiRoad.Wi thani ncreasei nthenumberof
brokers,t heyhadt oshi ftfrom onepl acet oanot her ,thi
swoul dendt o
overfl
owi ng the streets.Last ,inthe y ear1874,t he br okersf ound a
permanentpl acewhi cht heycancal ltheirown.I twasknownasDal al
StreetorBr oker’
sStreet.

TheBombaySt ockExchangeorBSEistheoldeststockexchangeinAsia.
On31stAugust1957,TheBombaySt ockExchangebecamet hefi
rstst
ock
exchange t
hatwasr ecogni
zed bythe GovernmentofI ndi
a underthe
Securi
ti
esContr
actsRegul
ati
onAct.

Capi
talMar
ketofI
ndi
a

Presentl
y,BSEisdecentrali
zed&t hemanagi
ngteamsoft
heexchange
consistofapanelofdi
rectors.Theboar
dmember
softhi
sst
ockcompany
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i
nclude v ar
ious represent
atives of tr
adi
ng or gani
zati
ons and ot her
professional
sheaded byt heManagi ng Dir
ector.Theytakepar tint he
format i
on ofpr ograms,pol ici
es,and gui
deli
nes to contr
olt he enti
re
processoft heexchange.Appar ent
ly,t
herear e417 cit
iesand sev eral
towns t hatlie wi
thint he f
old ofBSE.Dur i
ng the yearFY 04-05 BSE
experiencedaphenomenal growthwhichtur
nedoutt obefrui
tf
ul.

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Nat
ionalSt
ockExchangeofI
ndi
a(NSE)

Nat
ional
StockExchangeofI
ndi
a

 Cr
eat
ed 
December9,
2017 

 Aut
hor
 Har
shSi
ngh 

 Cat
egor
y Mar
ketEcoSy
stem 

 Comment
s 2

NSE,ort heNat i
onalStockExchangeofI ndiaLimited,i
sI ndi
a’sleadi
ng
stockexchange.Establ
i
shedi n1992andl ocatedinMumbai ,thi
sexchange
broughtapar adi
gm shifttot he I
ndianf i
nancialmarket 
ri
ghtaf t
erithad
suffer
edaset backduet oanunpr ecedentedscam t hathittheBombay
StockExchange.Thi sarti
cle,dividedi nt
o 4maj orsecti
onshi ghl
ight
ed
below,wil
li
ntroduceyoutothel egacyofNSE.

Hi
stor
yofNat
ionalSt
ockExchangeofI
ndi
a

Aftertheoutbreakof1992secur ityscam inwhichaBSEmember ,Harshad

Meht a,wasexposedmani pulat
ingt hemar ket,thegover
nmentofI ndia
decidedtopromot eestablishingNSEbasedonr ecommendati
onsmadeby
HighPower edSt udyGrouponEst abli
shmentofNewSt ockExchanges.The
i
mmedi at
eai m wast opr ov i
deequalaccesst oinvest
orsfr
om allacr oss
thenationandmakepar t
icipatinginst ockmarketeasi
er.

I
nNov ember1992, NSEwasest abl
ishedasat ax-
payingcompanywithkey
i
nvestor
si ncl
udingLi
feInsuranceCor por
ationofI
ndia,Stat
eBankofIndi a,
I
FCILimited,I
DFCLi mit
edandSt ockHoldingCorpor
at i
onofIndiaLi
mited.
I
twasr ecognizedasast ockexchangeundert heSecur i
ti
esContracts
(
Regulati
on)Act ,1956inApr il1993andcommencedoper ati
onsint he
WholesaleDebtMar ket(WDM)segmenti nJune1994.Oper ati
onsint he
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equi
tysegmentwerestar
tedi
nNov
ember1994f
oll
owedby
 Der
ivat
ives
segment
 i
nJune2000.

NSEwast hefir
ststockexchangei nIndi
awher eowner shi
p,management
andtradingwer ehandledbyt hr eeindependentsetofpeopl e.Whilethe
ownershipiswithvari
ousfinanciali
nstit
uti
onsandbanks, themanagement
i
shandledbyi ndependentprofessionalswhoar ef
orbiddenfrom di
rect
lyor
i
ndir
ectlytr
adingont heexchange.Thi sdemutuali
zat
ionhasel i
minatedthe
ki
ndofconf li
ctofi
nterestt
hatwasatt herootof1992secur i
tyscam.

Funct
ionsofNSE

The NSE was set

-up wi
th an expr
ess obj
ect
ivet
oful
fi
lthe f
oll
owi
ng
funct
ions:

 establ
ishi
nganati
on-
widet
radi
ngf
aci
l
ityf
orequi
ti
es,debtandot
her
hybri
dinstr
ument
s

 ensuri
ngequalaccesstoinvestor
sacr
osst
henat
iont
hroughan
appropr
iat
ecommunicat
ionnetwork

 pr
oviding a fai
r,eff
ici
entand t
ranspar
entsecur
it
ies mar
kett
o
i
nvestorsusi
ngelect
roni
ctr
adi
ngsystems

 enabl
ing 
shor
ter set
tl
ement cy
cles and book ent
ry set
tl
ement
s
syst
ems,and

 meet
ingt
hecur
renti
nter
nat
ional
standar
dsofsecur
it
iesmar
ket
s

NSE successfullyf ulf

il
led these f uncti
ons by est abli
shing t he fi
rst
el
ectroni
c stock mar ket of t he nat i
on. NSE was i nst r
ument al in
creat
ing 
Nati
onal Secur i
ti
es Deposi t
ory Li mited (NSDL) , 
the f i
rst
deposit
oryinI ndi
a, al
lowing investorst o hold and t rade secur i
ties
el
ectroni
cal
l
y .This notonl ymade i nvesting si
mple,butal so provi
ded
i
ncreasedtransparency.Thepr i
cei nformat i
onthatwasear lieravail
able
onlytoahandf uloft raderspresentatt heexchange,wasnow wi dely

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br
oadcast
edandav
ail
abl
etoev
ery
oneatt
hei
rownr
emot
elocat
ion.

Beforet hesystem introducedbyNSE,ani nvestorwhowant edt otr

adea
securit
ynotl i
stedont henearestexchangehadt orouteordersthr
ougha
seri
esofcor respondentbr oker
stotheappr opri
ateexchange.Thisresult
ed
i
ni ncreaseduncertaintyandhight r
ansacti
oncost s.NSEmadei tpossibl
e
forani nvest
ort oaccesst hesamemar ketandor derbook,ir
respect
iveof
l
ocat i
on and att he same costas ev er
y ot herinvest
or.NSE t radi
ng
ter
mi nalsarenowpr esentin363citi
esandt ownsacr ossIndiaandcanbe
accessedt hr
oughbr oker sfr
om anywhereont heglobe.

Feat
uresofNat
ionalSt
ockExchange

NSE,li
keeveryotherl
eadingstockexchanget oday,runsanorder
-dr
iven
marketasopposedt oquote-
drivenmar ket
.Thef ull
yautomatedscreen
based tr
adi
ng system that i
tr uns i
s call
ed Nati
onalExchange for
AutomatedTr
ading(NEAT).

The or dermanagement system underNEAT gi vesauni quenumbert o

eachor derr
eceiv
edandifamat chisnotfoundimmedi atel
y,itisaddedt o
anor derbookwher et
hesequenceofor der
stobemat chedaredet ermined
basedonpr i
ce-t
imepri
or i
ty.Thatis,iftwoor der
sar eent eredi nt
ot he
syst
em,t heorderhav
ingt hebestpricegetsthehigherpr i
ori
tyandwi thi
n
theor dersofthesamepricepriori
tyi
sgiventotheolderorder.

Ordermat ching i
sdonebycompar ingt hebestbuyor der,thebuyor der
withthehighestprice,wit
ht hebestsel lorder,thesellorderwiththel
owest
price.Thi
sisbecauseasel lerwoul dliket oselltot hebuy eroff
eri
ngt he
highestpri
ceandv iceversa.Whi l
eor derscanbepar ti
all
ymat chedti
llthe
compl et
eordercanbecompl et
ed,themat chesareal waysmadebasedon
thepassivepriceoft heorderandnott heact i
vepriceatwhi chthemat chis
made.

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DematAccount

DematAccountisanaccountt hati
susedt ohol
dsharesandsecur i
ti
esin
el
ectronicfor
mat.Theful
lfor
m ofDemataccounti sademat er
iali
sed
account.Thepur
poseof  
openingaDemataccount ist
ohol dsharesthat
havebeenboughtordemat eri
ali
sed(conver
tedfr
om physicalt
oel ectr
onic
shares),
thusmakingsharetr
adingeasyfortheusersdur
ingonlinet r
ading.

InIndi
a, 
FreeDemataccount serv
iceisprovidedbydeposi t
oriessuchas
NSDLandCDSLt hr
oughi nt
ermedi ar
ies/DepositoryPart
icipant/Stock
BrokersuchasAngel Br
oking.Thechar gesofDemataccountv aryasper
thevolumeheldintheaccount,typesubscribed,
andt hetermsand
condit
ionslai
dbythedepositoryandt hestockbroker.

Whati
sBookBui
ldi
ng?

Bookbuil
dingistheprocessbywhichanunder writerattemptst o
det
erminethepr i
ceatwhichan i
nit
ialpubl
i
cof f
ering (
IPO)wi llbeoff
ered.
Anunderwrit
er,normall
yaninvest
mentbank, bui
ldsabookbyi nvi
ti
ng
i
nsti
tut
ionali
nvestors(f
undmanager setal.
)tosubmi tbi dsforthenumber
ofshar
esandt hepr i
ce(
s)theywouldbewi l
li
ngtopayf orthem.

Under
standi
ngBookBui
l
ding

Bookbuildinghassur passedt he'

fixedpri
cing'method,wherethepr i
ceis
setpri
ort oinvestorpar t
icipation,t
obecomet hedef actomechanism by
whichcompani espricet heirIPOs.Thepr ocessofpricediscov
eryinvolv
es
generat
ingandr ecordinginv estordemandf orsharesbef or
earri
vi
ngatan
i
ssuepr i
cet hatwi l
lsatisfybot hthecompanyof f
eri
ngt heIPOandt he
market.Itishighlyrecommendedbyal lt
hemaj orstockexchangesast he
mostef f
icientwayt opr icesecur i
ti
es.

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UNI
T-4MUTUALFUNDS

MUTUALFUND

Mut ualfundshavebecomeahotf avouri

teofmi l
l
ionsofpeoplealloverthe
world.Thedr ivi
ngf orceofmut ualfundsist he‘safet
yoft hepr i
ncipal’
guaranteed,pl
ust headdedadvantageofcapi t
alappreci
ati
ontogetherwith
theincomeear nedint hefor
m ofinter
estordivi
dend.Peoplepref
ermut ual
fundst obankdeposi t
s,li
fei
nsuranceandev enbondsbecausewi thal i
ttl
e
money ,theycangetintotheinv
estmentgame.

Whati
sMut
ualFund

Tostateinsi
mpl ewords,amut ualfundcoll
ectsthesavi
ngsf r
om smal
l
i
nvest
ors,i
nvestthem i
nGov er
nmentandot hercorpor
atesecuri
ti
esand
ear
nincomethroughint
erestanddivi
dends,
besidescapi
talgai
n.

I
MPORTENCEOFMUTUALFUNDS

(
i)DI
VERSI
FICATI
ON:

Alargenumberofinvestor
shav esmallsav i
ngswi
ththem.Theycanatt he
mostbuysharesofoneort wocompani es.Whensmallsav
ingsarepooled
andent r
ust
edt omutualfundst henthesecanbeusedt obuysharesof
manydi f
fer
entcompanies.Thus,inv
estorscanpar
ti
ci
pat ei
nalargebasket
ofsharesofdi
ffer
entcompanies.

(
ii
)Li
qui
dit
y

A pecul i
aradv antageofamut ualfundi st hatinv estmentmadei nits
schemes Can be conv ert
ed back i nt
o cash pr ompt l
y withoutheavy
expenditur
eonbr okerage,delays,et
c.Accor dingtot heregulat
ionsofSEBI
,
amut ualfundi nI ndiai srequiredto ensur eliquidity
.Foropenended
schemes, thei
nv estorcanal way sapproacht heMut ualFundt orepur
chase
unit
satdecl aredhetasset sv al
ue'( NAV) .Incaseofcl osecaneasilybe
soldinthestockmar ket.endedschemes, unit
s

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(
ii
i)ReducedRi
sk.

Asmut ualf undsinv

estinlar
genumberofcompani esandaremanaged
pr
ofessionally
,theri
skfact
oroftheinvest
ori
sreduced.Asmalli
nvest
or,
ontheot herhand,maynotbeinaposit
iont
omini
misesuchri
sks.

(i
v)Taxadv antage.Therearecert
ainschemesofmut ualf
undswhi ch
providelaxadvantageundert
heI
ncomeTaxAct .Thus,
thetaxl
iabi
l
ityofan
i
nv estorisal
sor educedwhenheinvest
sintheseschemesoft hemut ual
funds.

(
v)LowOper
ati
ngcost
s.

Mut ualf
undshav elargeinv
estibl
efundsattheirdisposalandthuscan
avai
leconomicsoflargescale.Thi
sreducesthei
roper at
ingcostsbyway
ofbroker
age,fees,commissionetc.Thus,asmallinvestoralsoget
sthe
benefi
tofl
argescaleeconomiesandlowoperati
ngcost s.

(
vi)Fl
exi
bil
it
y.

Mut ualfundspr ovi

deflexi
blei
nv estmentpl
anstoitssubscr
iber
ssuchas,
regul
ar i nvest
ment pl ans, regular wit
hdrawal pl
ans and di vi
dend
rei
nvestmentpl ans,etc.Thus,ani nvest
orcani nv
estorwi t
hdraw f
unds
accordi
ngt ohisownr equir
ement s,

(
vii
)Hi
gherRet
urns.

Mutualfundsareex pectedtoprovi
dehi
gherreturntot hei
nvest
orsas
compared to di
rectinvest
mentbecause ofprofessi
onalmanagement
,
economiesofscale,
reducedri
sk,
etc.

(
vii
i
)Inv
est
orPr
otect
ion.

Mutualf undsarer egulatedandmonitoredbytheSecurit

iesandExchange
BoardofI ndi
a( SEBI).TheSEBIMut ualFunds)Regul
ations,1996whi ch
haver eplacedther egul at
ionsof1993,pr ovi
debett
erpr otect
iontot he
i
nvestors,impartagr eaterdegreeoff
lexi
bil
i
tyandfaci
li
tatecompetit
ion
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TYPESOFMUTUALFUNDS
(
A)Cl
ose-endedFunds

Underthi
sscheme,t hecorpusoft hef undandi tsdur at
ionareprefi
xed.In
otherwords,thecor pusofthefundandt henumberofuni t
saredetermined
i
nadv ance.Oncet hesubscr i
pti
onr eachest hepr e-determinedlevel
,the
entryofi
nv estorsisclosed.Aftert heexpi r
yoft hefixedper i
od,t
heent i
re
corpusisdisinvestedandt hepr oceedsar edist
ributedtot hevar
iousunit
holder
sinpr oporti
ont otheirholding.Thus,t hef undceasest obeaf und,
aftert
hefinaldist
ri
but i
on.

Feat
ures:Themai
nfeat
uresoft
hecl
ose-endedf
undsar
e:

(i
)Theper i
odand/ort
het
argetamountoft
hef
undi
sdef
ini
teandf
ixed
befor
ehand.

(
ii
)Oncetheperi
odisoverand/orthetar
geti
sreached,t
hedoori
scl
osed
f
orthei
nvest
ors.Theycannotpur
chaseanymoreunit
s.

(
ii
i)Theseunit
sar epubl
icl
ytr
adedthr
oughst
ockexchangeandgener
all
y,
t
hereisnorepurchasef
acil
i
tybythef
und.

(
iv)Themai
nobj
ect
iveoft
hisf
undi
scapi
tal
appr
eci
ati
on.

(
B)Open-endedFunds

I
ti sjusttheopposi
teofcl
ose-endedfunds.Underthisscheme,thesi
zeof
thef und and/ort heperi
od ofthef und i
snotpr e-determined.The
i
nv estorsarefr
eetobuyandsellanynumberofunit satanypointofti
me.
Any bodycanbuyt hisuni
tatanyt i
meandsel litalsoatanyt i
meathi s
discreti
on.

TheMai
nFeat
uresoft
heOpen-EndedFundsar
e:

(i
)Therei s completefl
exibi
l
ity wit
hr egar
dt o one’sinvest
mentor
di
sinv
estment
.Inotherwords,t
hereisfreeent
ryandexi tofi
nvest
orsi
nan
open-endedfund.Ther
eisnotimelimit
.Theinvestorcanjoi
ninandcome
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outf
rom t
heFundasandwhenhedesi
res.

(
ii
)Theseunitsarenotpubli
clyt
radedbut
,theFundi
sreadyt
orepur
chase
t
hem andresell
them atanyti
me.

(i
i
i)Theinv
estori
soffer
edi
nst
antli
qui
dit
yint
hesenset
hatt
heuni
tscan
besoldonanyworki
ngdayt
otheFund.

(i
v)Themai nobj
ect
iveofthi
sfundi
sincomegenerat
ion.Thei
nvest
orsget
di
vidend,
right
sorbonusesasrewar
dsfort
hei
rinvest
ment .

(v)Si
ncet
heunit
sarenotl
ist
edonthest
ockmarket
,thei
rpri
cesar
eli
nked
totheNetAssetVal
ue(NAV)oftheuni
ts.TheNAVisdeter
minedbythe
Fundandi
tvari
esfr
om t
imetoti
me.

Ont
heBasi
sofI
ncome

A)IncomeFunds:Ast heverynamesuggests,
thi
sFundai msatGener ati
ng
anddistri
buti
ngregul
arincomet othemembersonar eturnishigherthan
per
iodicalbasi
s.Itconcentr
atesmor eonthedi
stri
but
iont hatofincome
anditalsoseesthatt
heav er
agetheincomefr
om bankdeposits.

Themai
nfeat
uresoft
heI
ncomeFundsar
e

(
i)Theinv
estorisassur
edofr
egul
ari
ncomeatper
iodi
cint
erv
als.sayhal
f-
y
earlyoryear
lyandsoon.

(i
i)Themainobject
iveofthist
ypeofFundi
stodecl
arer
egul
ardi
vi
dends
andnotcapi
tal
appreciat
ion.

(
ii
i)Thepatter
nofinv
estmentisori
ent
edtowar
dshi
ghandf
ixedi
ncome
y
ieldi
ngsecuri
ti
esl
i
kedebent
ures,
bondset
c.

(
iv)Thisisbestsui
tedt
otheol
dandr
eti
redpeopl
ewhomaynothav
eany
r
egularincome.

(
v)I
lconcer
nsi
tsel
fwi
thshor
trungai
nsonl
y.

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(
B)Pur
eGr
owt
hFunds(
Growt
hOr
ient
edFunds)
.Unl
i
ket
heI
ncome

Funds,GrowthFundsconcentr
atemainl
yonl ongrungainsi.
e.capi
tal
appreci
ati
on.Theydonotofferregul
arincomeandtheyaim atcapi
tal
appreci
ati
oninthelongr
un.Hence,theyhavebeendescr
ibedas"Nest
Eggs"invest
ments.

TheMai
nfeat
uresoft
heGr
owt
hFundsar
e.

(i
)Thegrowthorient
edFundai
msatmeet
ingt
hei
nvest
ors'needf
or
capi
tal
appr
eci
ati
on.

(
ii
)Thei nvest
mentstr
ategyther
efor
e,confor
mst otheFundobj
ect
iveby
i
nvest
ingthefundspr
edominantl
yonequit
ieswit
hhighgr
owthpot
ent
ial.

(
ii
i)TheFundtri
estogetcapitalappr
eci
ationbytaki
ngmuchr i
sksand
i
nvest
ingonr
iskbear
ingequi
ti
esandhighgrowthequi
tyshar
es.

(i
v)Thefundmaydecl
aredi
vi
dend,
buti
tspr
inci
palobj
ect
ivei
sonl
ycapi
tal
appreci
ati
on.

(v)Thisisbestsui
tedtosal
ari
edandbusinesspeopl
ewhohavehighri
sk
bearingcapaci
tyandabil
i
tyt
odeferl
iqui
dity
.Theycanaccumul
ateweal
th
forfutur
eneeds.

(C)Bal ancedFunds:Thi sisotherwi

secal
led"income-cum -gr owth"
fund/.Itisnothi
ngbutacombi nati
onofbothi
ncomeandgr owt
hf unds.I
t
aimsatdi str
ibut
ingregulari
ncomeaswellascapitalappr
eciat
ionThisis
achievedbybal anci
ngt heinvest
mentsbetweenthehi ghgrowthequi t
y
sharesandal sothef
ixedincomeearni
ngsecur
it
ies.

(
D)Special
isedFunds:Thesef
undsinvesti
naparti
cul
art
ypeofsecur
it
ies,
t
hese f
unds may speciali
se i
n securi
ti
es ofcompani
es deal
i
ng ina

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parti
cul
arproduct,fi
rms i
n a part
icul
arindustryorofcertai
ni ncome
produci
ngsecuri
ti
es.Anti
nvest
orwant i
ngtoinvesti
n apar
ti
cularsecur
it
y
will
pref
erafunddeali
nginsuchsecuri
ti
es.

(E)Money-Mar ketMut ualFunds( MMMFs) :Thesefundsar ebasi cally

openendedmut ualFundsandassucht heyhaveallthef eat
ur esoft he
OpenendedFund.But ,t
heyinvestinhi ghlyli
quidandsaf esecur i
ti
esl i
ke
commer ci
alpaper,banker's accept ances,certi
fi
cates ofdeposi ts,
Treasurybil
lset
c.Thesei nst
rumentsar ecalledmoneymar ketinstrument s.
Theyt aketheplaceofshar es,debenturesandbondsi nacapi talmar ket.
Theypaymoneymar ketr
atesofinter
est.

(F)Taxati
onFunds:At axati
onf undisbasi call
yagr owthor
ient
edfund.But,
i
tof ferstaxr ebatest ot hei nvestorsei t
heri nthedomest i
corf oreign
capitalmarket.Iti ssui t
ablet osal ariedpeopl ewhowantt oenjoyt ax
rebatesparti
cularl
ydur i
ngt hemont hofFebr uaryandMar chInIndia,at
presentthel aw relat
ingt ot axr ebatesi scov er
edunderSec.88oft he
IncomeTaxAct ,1961.Ani nvestorisent i
tl
edt oget20%r ebatei
nI ncome
Tax f orinvestment s made undert hisf und subjectto a maximum
i
nv estmentofRs.10, 000/-perannum.

OTHERCLASSI
FICATI
ON

(G)Lev eragedFunds:Thesef undsar ealsocall

edbor r
owedfundssince
theyar eusedpr i
maril
yt oincr
easet hesi zeofthev alueofportf
oli
oofa
mut ualfund.Whent hev al
uei ncreases,theearningcapacit
yoft hefund
also incr
eases.The gai ns ar
e di st
ri
buted tot he unithol
ders,Thisis
resortedtoonlywhent hegainsfrom theborrowedf undsaremorethanthe
costofbor rowedfunds.

(H)DualFunds:Thi sisaspecialki
ndofclosedendf und.I
tprov i
desa
singl
einvestmentopport
unit
yfortwodi
ff
erenttypesofi nv
est
ors.Forthi
s
purpose,i
tsellstwotypesofinvest
mentstocksv i
z.,incomeshar esand
capit
alshares.Thoseinvest
orswhoseekcurrentinvestmentincomecan

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pur chaseincomeshar es.Theyreceivealltheinter

estanddividendsear ned
from t he entir
ei nv
estmentpor tfoli
o.Howev er,theyare guar ant
eed a
mi nimum annualdi vi
dendpay ment .Thehol dersofcapit
alshar esreceive
allt hecapitalgainsear nedont hoseshar esandt heyarenotent i
tl
edt o
recei v
eanydi videndofanyt y
pe.Int hisrespect,thedualfundi sdiff
erent
from abalancedf und.

(I
)IndexFunds:I ndexfundsrefertothosefundswher et heport
foliosare
designedinsuchawayt hattheyref
lectthecomposi ti
onofsomebr oad
based mar ketindex.Thisi s done byholding securi
ti
es i nt
he same
proporti
onast heindexitsel
f.Thev alueofthesei ndexlinkedfundswi l
l
automatical
lygoupwhenev erthemarketindexgoesupandv i
cev
er sa.

(J)BondFunds:Thesef undshaveport
foliosconsi
stingmai nlyoff i
xed
i
ncomesecur i
ti
esl i
kebonds.Themainthrustofthesef undsismost l
yon
i
ncomer at
herthancapit
algains.Theydifferfr
om incomef undsint he
senseincomef undsoff
eranav er
agereturnshigherthant hatfrom bank
deposi
tsandalsocapit
algainsl
essert
haninequityshares.

VENTURECAPI
TAL

CONCEPTOFVENTURECAPI
TAL

Thet
erm' Ventur
eCapit
al'
isunder
stoodinmanyways.I
nanarrowsense,
i
fref
erstoinvest
mentinnewandt r
iedenter
pri
sest
hatthatar
elacki
nga
st
abl
erecordofgrowt
h.

Inabr oadersense,v enturecapi t

alrefer
stot hecommi tmentofcapitalas
shareholding,f
ort heformul ati
onandset ti
ngupofsmal lfi
rm speci
alising
i
nnewi deasornewt echnol ogi
es.Itisnotmer el
yani nj
ect
ionoffundsi nto
anew f irm,itisasi mul t
aneousi nputofski l
lneededt osetupt hef irm,
design its mar ket
ing strategy and organise and manage it.Iti s an
associati
onwi t
hsuccessi v estagesoff i
rm' sdevelopmentwithdist
inctive
typesoff i
nancingappropriat et
oeachst ageofdev elopment.

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Meani
ngofVent
ureCapi
tal

Venturecapit
alislongtermr i
skcapit
altofinancehightechnol
ogypr oject s
whichi nv
olveriskbutatt hesamet i
mehasst rongpotenti
alforgrowt h.
Venturecapital
istpooltheirresourcesincludingmanager i
alabili
ti
est o
assistnewent r
epreneur
sint heEarl
yy ear
soft heproj
ect.Oncet heproject
reachest hestageofpr ofit
abil
i
ty,t
heysel ltheirequi
tyholdingsathi gh
premium.

Def
ini
ti
onofaVent
ureCapi
talCompany

Av enturecapit
alcompanyisdef
inedas"af
inancingi
nst
it
utionwhi
chjoi
ns
anent repr
eneurasaco-pr omoteri
naprojectandsharestheri
sksand
rewardsoft heenter
pri
se."

Feat
uresofVent
ureCapi
tal

Someoft
hef
eat
uresofv
ent
urecapi
tal
financi
ngar
easunder
:

1.Vent
urecapi
tali
susuall
yinthefor
m ofanequit
ypart
ici
pat
ion.I
tmay
al
sotakethef
orm ofconv
ert
ibl
edebtorl
ongt
ermloan.

2.Investmenti
smadenotonl
yinhi
ghr
iskbutal
soi
nhi
ghgr
owt
hpot
ent
ial
project
s.

3.Venturecapitali
sav ail
ableonlyforcommer ci
ali
sat
ionofnew ideasor
new technologi
esandnotf orenter
pri
seswhichar eengagedint r
ading,
booki
ng,f inancial serv
ices,agency ,li
aison work or resear
ch and
devel
opment .

4.Ventur
ecapital
istj
oinstheent
repreneurasaco-pr
omot
eri
npr
oject
s
andsharether
isksandr ewar
dsoftheenterpr
ise.

5.Ther
eiscont
inuousi
nvol
vementi
nbusi
nessaf
termaki
ngani
nvest
ment
bythei
nvest
or.

6.Oncet
hev
ent
urehasr
eachedt
hef
ullpot
ent
ialt
hev
ent
urecapi
tal
i
st

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di
sinv
estshi
shol di
ngseit
hert
ot hepromotersori
nthemarket
.Thebasi
c
obj
ecti
veofinvestmenti
snotprofi
tbutcapit
alappr
eci
ati
onatthet
imeof
di
sinv
estment.

SCOPEOFVENTURECAPI
TAL/STAGES/
TYPESOFVENTURECAPI
TAL

Vent
urecapit
almayt akevari
ousformsatdif
ferentst
agesofthepr
oject
.
Ther
earefoursuccessi
vestagesofdev
elopmentofaproj
ectv
iz.

Dev elopmentofapr ojectidea,I mplementationoftheidea,commer cial

product i
onandmar keti
ngandf i
nallylar
gescal ei
nvest
mentt oexpl
oitthe
economi csofscaleandachi evest abil
it
y.Financi
ali
nsti
tutionsandbanks
usual l
yst ar
tfinanci
ngt heprojectonl yatthesecondandt hi
rdst
agebut
rarelyfrom thefir
ststage.Butv enturecapi
tali
stprov
idefinanceevenfrom
thef i
rststageofideaformulati
on.

Thev
ari
ousst
agesi
nthef
inanci
ngofVent
ureCapi
tal
aredescr
ibedbel
ow:

1.Dev
elopmentOfAnI
dea-SeedFi
nance

I
ntheini
ti
alstagev ent
urecapital
istprov
ideseedcapit
alfort
ransl
ati
ngan
i
deaint
obusinesspr oposit
ion.Att hi
sst
ageinvest
igat
ionismadeindept
h
whi
chnormall
yt akesay earormor e.

2.I
mpl
ement
ati
onSt
age-St
artupFi
nance:

Whenthefir
missetupt omanufact
ureaproductorprovi
deaservice,star
t
upfi
nanceispr
ovidedbythev
enturecapi
tal
ist
s.Thefir
standsecondst age
capi
tal
isusedforful
lscal
emanufact
uri
ngandf ur
therbusi
nessgrowth.

3.Fl
edgi
ngSt
age-Addi
ti
onalFi
nance:

I
nt het hi
rdst
agefir
m hasmadesomeheadwayandent er
edthest
ageof
manuf act
uri
ngproductbutfacesteet
hingprobl
ems.I
tmaynotbeableto
generateadequat
ef undsandsoaddi t
ionalr
oundoff
inanci
ngispr
ovi
ded
todevelopthemarketi
nginf
rastr
uctur
e.

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4.Est
abl
ishmentSt
age.Est
abl
ishmentFi
nance:

Atthi
sst agethefi
rmi sest
abli
shedi nthemarketandexpect edtoexpand
atarapidpace.Itneedsfur
therfi
nancingforexpansionanddi ver
sif
icati
on
sothatiscanreapeconomicsofscal eandatt
ainstabil
it
y.Attheendoft he
est
abli
shmentst age,thefi
rmi sli
stedont hestockexchangeandatt hi
s
poi
ntthev ent
urecapit
ali
stdisi
nveststhei
rsharehol
dingsthroughavailabl
e
exi
stroutes.

LEASI
NG

I
NTRODUCTI
ON

Themai nobjecti
veofabusi nessi stomaxi mi set heowner'seconomi c
welfare.Thef i
rm makesi nvestment st omaxi mi sest ockhol der’
sweal t
h.
Afteridenti
fyi
ngat t
ract i
vepr oj
ects,thef ir
m consi der svariousmet hodsof
fi
nancing them.I n addi ti
on to debtand equi tyf i
nancing,l easing has
emer ged asat hi
rdi mpor t
antsour ceofi nt ermedi at
eand l ong -t erm
fi
nancingofcor porat eenterpri
sesdur ingt her ecentf ew decades.I tis
widelyusedi nwest erncount ri
est of inancei nvest ments.Pr i
orto1950,
l
easingwaspr imaril
yconcer nedwi thr ealest ate,i.c.l andandbui l
dings.
Buttoday ,
almostallt ypesoff i
xedasset scanbel eased.InI ndia,l
easingi s
ar ecentdev elopmentand equi pmentl easing wasi ntroduced byFi rst
LeasingCompanyofI ndiaLimitedi n1973onl y.Si ncet hen,anumberof
medi um tolarge-si zedcompani es,financiali nstituti
onsl ikeICICI,IRCI,
SICOM andCI Chav eal soent er
edt hefieldofl easi ng.

MEANI
NG

Leasi
ngisanar r
angementthatpr
ovidesafir
m wit
htheuseandcont rol
overasset
swithoutbuyi
ngandowni ngthesame.I
tisaform ofrent
ing
asset
s.Leasei
sacontractbet
weentheowneroft
heasset(
lessor
)andthe
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useroft heassetcal ledthelesser

, wherebythelessorgi v
est her i
ghttouse
theassett ot hel esseeov eranagr eedper i
odoft i
mef oraconsi derati
on
call
edt hel easer ental.Theleasecont ractisregulatedbyt hetermsand
conditi
onsoft heagr eement.Thelesseepay sthel easeTentper iodicall
yto
thelessorasr egul arfi
xedpay mentsov eraperiodoft ime.Ther entalsmay
bepay ableatt hebegi nningorendofamont hl
y,quarter,half-yearory ear.
Thel easerent al
scanal sobeagr eedbot hintermsofamountandt iming
aspert hepr ofit
sandcashf lowposi t
ionoft helessee.Att heexpiryoft he
l
easeper i
od, t
heassetr ever
tsbackt othelessorwhoi sthel egalownerof
theasset .

ESSENTI
ALELEMENTSOFLEASI
NG

1.No.ofPar ti
est otheCont
ract
.Ther
ear
eal
way
stwo par
ti
est
oa
cont
ractofl
easefi
nanci
ng

(
a)Theuserort
hel
essee (
b)Theownerort
hel
essor

2.Asset.Thesubj
ectmatt
erofaleasef
inanci
ngcontr
actmaybeanasset
,
proper
tyequipmente.
g.pl
antandmachi
nery,l
andandbuil
dinget
c.

3.Consi derat
ion.The r i
ghtt o use an asseti
s given t
olessee fora
considerat
ioncall
edl easer ent
al.Leaserentisdeter
minedbyt helessor
taki
ngi ntoconsiderati
ont hecapitalinv
estedintheasset,depreci
ati
on,
i
nterestoncapital
,repair
set c.

4.LeasePeriod.Acontr
actofleasingisusual
lyundert
akenforaf ixed
peri
od(no.ofyear
s).I
tmaysomet i
messpreadov ert
heent i
reeconomic/
usefull
i
feoftheasset
.Attheexpir
yoftheleaseperi
od,theassetrev
erts
backtothel
esserwhoist
helegalowneroft
heasset.

5.UseVI
S.Owner
shi
p.Dur
ingt
het
erm ofl
ease,owner
shi
poft
heasset

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r
emainswit
hthel
essorwhereasthepossessi
onofassetl
ieswit
hthe
l
essee.Hei
sal
l
owedtouset
heassetdur
ingt
hetenur
eofl
easeagr
eement
.

Ty
pesofLeasi
ng

1.Oper
ati
ngLeasi
ng

2.Fi
nanci
alLeasi
ng

OPERATI
NGORSERVI
CELEASE

Anoper
ati
ngl
easei
susual
l
ychar
act
eri
sedbyt
hef
oll
owi
ngf
eat
ures:

(i
)Iti
sashort-t
erml easeonaperiodtoper
iodbasi
s.Thel
easeper
iodi
n
suchacont
racti
slessthantheusef
ulli
feoft
heasset
.

(
ii
)Thel
easei
susual
l
ycancel
l
abl
eatshor
t-not
icebyt
hel
essee.

(i
ii
)Ast heper
iodofanoper ati
ngl
easei slesst hantheusefull
i
feofthe
asset
,itdoesnotnecessari
lyamort
izetheor i
ginalcostoftheasset
.The
l
essorhast omakef urt
herl
easesorselltheassett orecoverhi
scostof
i
nvestmentandexpectedrat
eofret
urn.

(i
v)Thelesseeusual
l
yhast
heopt
ionofr
enewi
ngt
hel
easeaf
tert
heexpi
ry
ofleaseperi
od.

(
v)Thelessorisgener
all
yr esponsibl
ef ormaintenance,i
nsur
anceand
t
axesoft
heasset.Hemayalsoprovideotherser
vicestothel
essee.

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Asiti
sashor t-term cancel
lablel
ease, i
timpli
eshigherriskt othelessor
buthi
gherleaserentalstothelesseeOper at
ingorserviceleasingis
commont otheequi pmentwhi chrequir
eexperttechnicalstatfor
maint
enanceandar eexposedt otechnol
ogicaldevel
opment s,e.g.
computer
s, v
ehicles

I
I.FI
NANCI
ALLEASE

Aleasei sclassifi
edasf inanci
alleasei fitensurestheterm ofthelessor
foramor t
isati
onoft heent ir
ecostofi nv est
mentpl ustheexpectedret ur
n
oncapitaloutlayduri
ngt het er
m ofthel ease.Suchal easeisusuall
yf ora
l
ongerper iodandnon-cancel labl
e.Asasour ceoff unds,thefi
nanci al
l
easesisanal ternati
vesimi l
artodebtfinancing.Mostoft hel
easesinIndia
arefi
nanci alleasest hatarecommonl yusedf orl easi
ngland,building,
machineryandf ixedequipment .

Af
inanci
all
easei
susual
lychar
act
eri
sedbyt
hef
oll
owi
ngf
eat
ures:

(1)Thepr esentvalueofthetotall
easerent
alspayabl
eduringtheper i
odof
theleaseexceedsori sequaltosubstanti
all
ythewholeoft hefai
rv al
ueof
theleasedasset.Itimpli
esthatwithi
ntheleaseperi
od,thelessorrecover
y
hisi
nv est
menti ntheassetalongwithanacceptabl
erateofretur
n.

(2)Ascompar
edt
ooper
ati
ngl
ease,af
inanci
all
easei
sforal
ongerper
iod
ofti
me.

(
3)I
tisusual
l
ynon-cancel
l
abl
ebyt
hel
esseepr
iort
oit
sexpi
rat
iondat
e.

(4)Thelesseeisgeneral
lyresponsi
blefort hemai nt
enance,i
nsuranceand
servi
ceoft heasset .Howev er
,thet ermsofl easeagreement,insome
cases.mayr equir
et hel
essortomai ntainandser vicet
heasset.Suchan
arr
angementi scall
ed'Maintenanceorgr osslease’.

(
5)Afinanci
all
easeusual
lypr
ovidesthelesseeanopt
ionofr
enewi
ngt
he
l
easef
orfurt
herper
iodatanominalrent
.

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For
msofFi
nanci
alLeasear
rangement
s:

Thef
oll
owi
ngar
ethei
mpor
tantf
ormsoff
inanci
all
easear
rangement
s:

(i
)SaleandLeaseback.Asaleandleasebackarr
angementi
nvolv
esthe
sal
eofanassetal
readyownedbyafirm(vendor
)andleasi
ngofthesame
assetbackt
othevendorf
rom t
hebuy
er.

Thisform ofleasear rangementenabl esaf i

rmt or eceivecashfrom the
sal
e of assetand al so retai
nt he economi c use of t he asseti n
consider
ation of per iodi
c lease pay ments. A sal e and leaseback
arr
angementi sgener allyprefer
redbyf ir
msf acingshor t
ageofwor ki
ng
capit
alf unds.The l essors engaged in sale and l ease back incl
ude
i
nsurance compani es,pensi on funds,priv
atef inance compani es and
fi
nanciali
nsti
tut
ions.

(i
i)Dir
ectLeasi ng. In cont
rastwit
h sal
eand l easeback,underdir
ect
l
easingaf i
rm acqui
restheuseofanassetthatitdoesnotal r
eadyman.A
dir
ectleasemaybear r
angedei t
herthemanufacturersuppl
ierdi
rect
lyor
thr
ought hel
easingcompany .

Int hefi
rstcase,themanufactur
er/suppli
erhimselfactsast helessor
whil
einthesecondcasethelesseefir
m arr
angesthepurchaseoftheasset
fortheleasi
ngcompany( l
essor)from the manufacturerorthesuppli
er
andalsoentersint
oanagreementwi t
hthelessorfortheleaseofont he
asset.

(i
ii
)LeveragedLease.Al ev
eragedl easeisanarrangementunderwhi chthe
l
essorbor rowsf undsf orpurchasingt heasset,fr
om at hi
rdpar t
ycal l
ed
l
enderwhi ch isusual lya bank,f inancecompany .Thel oan isusual l
y
secur
edbyt hemor tgageoft heassetandt heleaserental
stober ecei
ved
fr
om thel essee.Thel oanispai dbackoutoft heleaserental
s,maybe
dir
ect
lybyt helesseebypay ingonl ytheexcessamount stothelessor.The
l
essoractsast heowneraswel lastheborrowerandthelenderisusuallya
bank insurance company f inanci
ali nst
it
uti
on ora pr i
vat
ef i
nancing
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company
.

(i
v)Str
aightLeaseandModifiedLease.Strai
ghtleaserequi
resthelessee
fi
rmt opayl easerent
alsov
ert heexpectedservi
celif
eoft heassetand
doesnotpr ovi
deforanymodi f
icat
ionst
ot heter
msandcondi ti
onsoft he
basicl
ease.

Modif
iedlease,ont
heot herhand,provi
dessever
aloptionstothelessee
dur
ingtheleaseperi
od.Forexampl e,t
heoptionofterminat
ingthelease
maybeprov i
dedbyei
therpurchasi
ngtheassetorr
eturni
ngthesame.

(v)PrimaryandSecondar yLease( Front-endedandBack-endedLease) .

Underpr i
maryandsecondar ylease,theleaser ent
alsarechargedinsucha
mannert hatthelesserrecoversthecostoft heassetandaccept abl
eprofi
t
duringtheini
tialperi
odoft heleaseandt henasecondar yl
easei spr
ovided
atnomi nalrentals.Insimpl ewor ds,ther entalschargedint heprimary
periodaremuchmor ethant hatofthesecondar yper
iod.Thi
sf or
m oflease
arrangementisal soknownasf r
ont-endedandback-endedl ease.

OTHERTYPESOFLEASES

(1)Floati
ngRent alRateLeaseCont r
acts.Frequentchangesint hei
nter
est
ratesinthelastfewy earshav el
edt othi
stypeofleasecont r
act.Undert
his
typeofl ease,leaser entalsarer educedori ncreasedaccordingt othe
borrowingratesbyt hel essor.Thist y
peofl easecont ractpermitsthe
l
essee t o undertake the risk and enjoy t
he benef i
ts ofinter
estrate
variat
ions

(2)DomesticLeaseandInt er
nat
ionalLease.Whent helessor,lesseeand
theequipmentsuppli
eri
nv olv
edint heleasecontractareresidentinthe
samecount r
y,t
heleaset
ransacti
onissaidt obedomest i
clease.Whent he
part
iestotheleasecont
ractareresi
dingindiff
erentcountri
esi tisknown
asinter
nati
onall
ease.

I
tisoft
wot
ypes:

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(a)Impor tLease.I
nthistypeoflease,botht helessorandlesseeare
resi
ding inthe same countr
y butthe equipmentsupplierbelongs t
o
diff
erentcountr
y.Thel
essorfir
stimport
st heequipmentandleasesitto
thelessee.

(
b)CrossBorderLease.Whenal essor-l
easesanequipmenttoalessee
whoisnotf
all
inginthejuri
sdi
cti
onofthelessor'scount
rythent
helease
i
sknownascrossBorderleasi
ng,t
hedomicil
eofthesuppl
ieri
simmateri
al.

(3)Sale-AidLeasing.Undert hist
ypeofleasi ng,amanuf acturerdirectl
y
extendsfacil
it
yofleasi ngeit
herbyoneofhi sownsubsi di
ariesoft hrougha
thi
rdparty.Theleasingenabl esamanuf acturertohavedi rectliai
sonwi th
thecustomer ,
ensur eregularupdati
ngorr eplacementofequi pmentand
i
mpr ovesalesposition.Thel esseeisal
soatgr eatadvantagebecausehe
gelsassetonmont hlypaymentbasi sspreadoutonav erylongper iod.He
getstheassetinstalledandoper ati
onalwithoutincurr
ingcapi tal
expendit
ure.

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UNI
T-5MERCHANTBANKI
NG

Introduct ion
Thet erm mer chantbanki ngi suseddi f
fer entlyindi fferentcount r
ies
andsot herei snopr ecisedef i
niti
onf orit, I
nLondon, mer chantbanker
referst ot hosewhoar emember sofBr itishMer chantBanki ngand
Secur i
ti
esHouseAssoci ationwhocar r
yonconsul tation, l
easi ng,
portf ol
ioser v i
ces, asset smanagement ,eur ocr edit,l
oansy ndicat i
on
etc.I nAmer ica,mer chantbanki ngi sconcer nedwi thmobi l
isingsav i
ngs
ofpeopl eanddi rect i
ngt hef undst obusi nessent erprise.
Def init
ion
Ther ei snouni versal def i
niti
onf ormer chantbanki ng.I tassumes
diver sefunct ionsindi f
ferentcount ries.Somer chantbanki ngmaybe
definedas, 'aninst i
tutionwhi chcov er sawi der angeofact i
v i
tiessuch
asmanagementofcust omerser vices, por t
foliomanagement , credit
syndi cation, accept ancecr edi t,
counsel li
ng, insur anceet c.
TheNot i
ficationoft heMi nist r
yofFi nancedef i
nesamer chant
bankeras, "anyper sonwhoi sengagedi nt hebusi nessofi ssue
managementei t
herbymaki ngar rangement sr egar dingsel ling, buying
orsubscr ibingt othesecur itiesasmanager ,consul tant ,
adv i
seror
render ingcor porateadv i
sor yser v
icei nr elationt osuchi ssue
management" .

MERCHANTBANKI
NGI
NINDI
A

InIndi
apri
ortotheenactmentofI
ndianCompani esAct,1956managing
agent
sactedasi ssuehousesforsecur
it
ies,evaluat
edpr oj
ectrepor
ts,
pl
annedcapit
alst
ructur
eandtosomeextentprovidedv ent
urecapit
alf
or
newfir
ms.Fewsharebroki
ngfi
rmsal
sofuncti
onedmer chantbanker
s.

Theneedf orspecial
isedmer chantbanki
ngservi
cewasfel
tinIndia
wit
ht herapi
dgr owthint henumberandsi zeofthei
ssuesmadei nt he
pri
mar ymarket.Themer chantbankingserv
iceswer
estart
edbyf oreign
banks,namelytheNat ionalGr i
ndlay
sBankin1967andtheCityBank
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i
n1970.TheBanki ngCommi ssi onini tsr eporti n1972r ecommended
theset t
ingupofmer chantbanki ngi nstitut i
onsbycommer cial banks
andf inanci alinst i
tut ions.Thi smar kedt hebegi nningofspeci ali
sed
mer chantbanki ngi nI ndi a.Tobegi nwi th,mer chantbanki ngser vi
ceswer e
offeredal ongwi t
hot hert raditionalbanki ngser v i
ces.I nt hemi d-ei ghti
es,
theBanki ngRegul at i
onsActwasamendedper mi tti
ngcommer cialbanksto
offera
wider angeoff i
nanci al servicest hrought hesubsi di aryrule.TheSt ate
BankofI ndiawast hef irstIndi anBankt osetupMer chantBanki ng
Divisioni n1972.Lat erI CICIsetupi t sMer chantBanki ngDi vision
fol
lowedbyBankofI ndi a,BankofBar oda, Canar aBank, Punj ab
Nat i
onal BankandUCOBank.Themer chantbanki nggai ned
promi nencedur ing1983-84duet onewi ssueboom.
MERCHANTBANKSANDCOMMERCI ALBANKSTV
Ther ear edi f
f erencesi nappr oach, at t
itudeandar easofoper at i
ons
betweencommer ci al banksandmer chantbanks.Thedi ff
er ences
betweenmer chantbanksandcommer ci al banksar esummar isedbel ow:
1.Commer cial banksbasi callydeal indebtanddebtr el
at edf i
nance
andt hei ractiv i
tiesar eappr opr iatelyar ray edar oundcr edi tpr oposal s,credi
t
appr aisal andl oansanct ions.Ont heot herhand, thear eaofact ivit
yof
mer chantbanker si s' equi tyandequi tyr elatedf inance' .Theydeal with
mai nlyf undsr aisedt hroughmoneymar ketandcapi talmar ket .
2.Commer cial banksar eassetor i
ent edandt hei rlendi ngdeci sions
arebasedondet ailedcr editanal y sisofl oanpr oposal sandt hev alueof
secur ityof f
eragai nstl oans.Theygener allyav oidr isks.

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SCOPEFORMERCHANTBANKI
NGI
NINDI
A

Inthepr esentdaycapit
almarketscenari
o,themer chantbankspl ayt he
rol
e of an encour agi
ng and support
ing force t
ot he entr
epreneur s,
corporat
esect orsandt hei
nvestor
s.Therei svastscopef ormer chant
bankerst o enl
argethei
roperat
ionsbot hindomest icandi nter
nat i
onal
mar ket
.

1.Gr
owt
hofNewI
ssuesMar
ket-

Thegrowthofnew issuemar ketisunprecedent edsince1990amountof

annualaver
ageofcapi tali
ssuesbynon-gov ernmentpubl i
ccompanies
wasonlyabout90croresinthe70s,thesamer oset ooverRs.1,
000ersin
the80s'andfur
thertoRs.12, 700cror
esint hef ir
stfouryear
sof1990' s.
Thisfi
gur
ecouldbewel lbeyondRs.40,000cr oresbyt heendof1994-95.
Thenumberofcapitalissueshasalsoincreasedf rom 363in1990-91t o
900in1993-94.Thetrendisexpectedtocont i
nuei nfutur
e.

2.Ent
ryofFor
eignI
nvest
ors

Anoutstandi
ngdevelopmenti nthehistor
yofI ndi
ancapi talmarketwasi ts
openi
ngupi n1992byal l
owi ngforei
gninstituti
onali nvestorstoinvestin
pri
maryandsecondar ymar ketandalsoper mitt
ingI ndiancompani est o
di
rectl
ytapforei
gncapitalthrougheuroissues.Wi t hi
ntwoy ear
st oMar ch
1994,thetot
alinfl
ow off oreigncapi
talthrought heser outesreachedt o
about$5bi ll
i
on.Itisest i
mat edthatthi
sf iguremaygoupt o$35-40
bi
ll
ionbytheturnofthi
scent ury.

3.Changi
ngPol
icyofFi
nanci
alI
nst
it
uti
ons

Wit
hthechangi
ngemphasisi
nt helendi
ngpolici
esoffi
nanciali
nsti
tut
ions
f
rom secur
it
yor
ient
ati
ont
oprojectori
entat
ion,
corpor
ateenterpr
iseswould

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requiretheexpertserv
icesofmer chantbankersfr
om projectapprai
sal
,
fi
nancial management et c. The pol i
cy of decentrali
zati
on and
encouragementofsmal landmedium i ndust
ri
eswillf
urt
herincreasethe
demandf ortechni
calandfinanci
alser vi
ceswhichcanbepr ovi
dedby
mer chantbanker
s.

4.Dev
elopmentofDebtMar
ket

The conceptofdebtmar kethas sett o workt hrough Nati

onalStock
ExchangeandtheOv ertheCount erExchangeofI ndi
a.Expertsfeelt
hatof
theesti
matedcapitalissuesofRs.40,000cr oresin1994-95,agood
port
ionmayber ai
sedt hroughdebti nst
ruments.Thedev el
opmentofdebt
marketwil
loff
ertr
emendousoppor tunit
ytoMer chantBankers.

5.I
nnov
ati
onsi
nFi
nanci
alI
nst
rument
s

TheI ndiancapitalmarkethaswi tnessedi nnovati

onsint heintr
oduct i
onof
fi
nancialinstrumentssuchasnon-conv erti
bledebentureswi t
hdet achabl
e
warrants,cumul ati
veconv ert
ibl
epr eferenceshar es,zerocouponbonds,
deepdi scountbonds,t r
ipl
eopt i
onbonds,secur edpremium not es,fl
oati
ng
rat
ebonds, aucti
onrateddebentureset c.Thishasf ur
therextendedt herol
e
ofMer chantBanker sasmar ketmaker sfort hesei
nstruments.

6.Cor
por
ateRest
ruct
uri
ng

As a r esul
tofl i
beral
isat
ion and gl obalisat
ion t
he compet it
ion i
nt he
cor
por ate sectoris becomi ng intense.To sur vi
vei nt he competi
ti
on,
compani esarer evi
ewingt heirstrategies,st r
uct
ureandf unct
ioni
ng.This
hadledt ocorporaterestr
uct ur
ingi ncludingmer gers,acquisi
ti
ons,spl
its,
di
sinvestment sandfinanci
alr estr
uct uri
ng.Thi soff
ersgoodoppor tuni
tyto
MerchantBanker stoextendt heareaoft heiroperat
ions.

7.Di
sinv
est
ment

Thegover
nmentrai
sedRs.2000cr or
esthr
oughdisi
nvestmentofequi
ty
shar
esofsel
ect
edpubl
icsect
orundert
aki
ngsin1993-94.Thegover
nment
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proposest oshi
f tthepresentmet hodofper iodicsaleofpubl icsector
shares toround the yearof floading ofshares dir
ectl
yon t he st
ock
exchangefrom they ear1995-96.Thegov er
nmentwi llsellt
hesharesof
i
dent i
fi
edpubli
csect oratanyt imedur i
ngthey earwhent heygetagood
pri
ce above minimum st ipulat
ed level
.Thisi slikel
yt o prov
ide good
businesstoMerchantBanker sinfut
ure.

Theabov
edi
scussi
onhi
ghl
i
ght
s,t
hatt
hescopeofmer
chantbanki
ng

i
svastandt
her
eli
esi
mmenseoppor
tuni
ti
esaheadofMer
chantBanker
s

SERVI
CESOFMERCHANTBANKS

Thefinanciali
nsti
tuti
onsi nIndiacoul dnotmeett hedemandf or
l
ongt ermf undsrequir
edbyt heev erexpandingi ndustryandt r
ade.
cor
por at
esect orenter
prises,therefore,meetthei rr
equi r
ement s
achissueofshar esanddebent uresint hecapi
tal mar ket.Toraise
moneyf rom capit
almar ket,promot ersbankuponmer chantbanker s
managet hewhol eshowbyr ender i
ngmul ti
far
iousser v
ices.The
merchantbanker salsoadv i
set hei nvestor
soft heincent i
vesavail
able
i
nthef orm oftaxreli
efsandot herstatutor
yobligations,

Theserv
icesofmer
chantbanker
sar
edescr
ibedi
ndet
ail
int
he
fol
l
owingsecti
on:

(
i)
Cor
por
ateCounsel
li
ng

Corporatecounsell
ingcoverst heenti
refiel
dofmer chantbanking
acti
vi
tiesviz.proj
ectcounsel
ling,capi
talrest
r uct
uri
ng,pr
oject
management ,publ
ici
ssuemanagement ,l
oansy ndi
cati
on,working
capit
al,f
ixeddeposit,l
easefinancing,acceptancecredi
tetc.Thescope
ofcorporatecounsell
ingisli
mi tedtogivi
ngsuggest i
onsandopi ni
ons

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tothecli
entandhelptaki
ngacti
onst
osolv
ethei
rpr
oblems.Itis
provi
dedtoacorporateunitwi
thavi
ewtoensur
ebet
terperf
ormance,
maintai
nsteadygrowthandcreat
ebett
eri
mageamonginvestors
(i
i)Proj
ectCounsell
ing

Projectcounsel li
ngincl udespr eparationofpr ojectr eports,deci ding
upont hef i
nancingpat ternt ofinancet hecostoft hepr ojectand
appraisi
ngpr oj
ectrepor twi ththef i
nanci ali
nstituti
onsorbanks.
Proj
ectr eportsarepr epar edt oobt aingov er
nmentappr oval,get
fi
nancial assist
ancef rom i nsti
tutionsandpl anf ort hepubl i
ci ssue.
Thef i
nanci ngmi xistobedeci dedkeepi nginv i
ewt herules,r egul at
ions
andnor mspr escri
bedbyt hegov ernmentorf oll
owedbyf i
nanci al
i
nsti
tut i
ons.Thepr oj
ectsar eappr aised,astot hel ocat i
on, t
echni cal
,
commer cialandfinancial viabil
ityoft heproject.Pr ojectcounsel li
ng

i
i)LoanSy
ndi
cat
ion

Loansy ndi
cationr eferstoassistancer enderedbymer chantbankstoget
mainlytermloansf orproj
ects.Suchl oansmaybeobt ai
nedfrom asingle
devel
opmentf inancei nst
itut
ionorasy ndicateorconsor ti
um.Mer chant
Bankershelpcor porateclient
st or ai
sesy ndicatedloansfrom commer ci
al
banks.MerchantBankshel pcl i
entsappr oachfinanciali
nsti
tut
ionsf
orterm
l
oans.Thedeci si
onast owhichf inanci
alinstit
utionshouldbeapproached
dependsoni ndustry,locat
ionoft heunitandsi zeofpr oj
ectcost.

TheMer chantBankers, fir

st,makeanappr aisaloft hepr oj
ectt osat isfythat
i
ti sviable.Thenextst epi sdesigningcapi talst r
ucture.det ermi ningt he
promot er'scont r
ibuti
onandar ri
vingataf igureofappr oximat eamountof
termloant ober aised.TheMer chantBankerhast oensur ethatt hepr oject
adheres t o t he gui delines for f inanci
ng i ndustri
al pr ojects. Af t
er
veri
fi
cat i
onst hatthepr ojectwoul dbeel i
gibl
ef ort erml oan,apr eliminary
meetingi sfixedwi t
hf inanciali
nstit
ution.Ifthef inancialinsti
tutionagr ees
toconsi dert heproposal ,theappl i
cat i
onisf il
ledi nandsubmi ttedal ong
withot herdocument s.TheMer chantBanker si nv ol
vementenabl est he
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companyt ostat
et hatithasexerci
sedduedi
l
igencei
ntheexer
ciseof
obl
igat
ionsundervari
ousregul
ati
ons.

(
iv)I
ssueManagement

Managementofi ssueinv ol
vesmar keti
ngofcorpor
atesecuri
tiesv i
z.,equit
y
shares,pr
ef erenceshar esanddebent ur
esorbondsbyof feringt hem to
publi
c.Mer chantbanksactasi nt
ermediarywhosemainj obi stot ransf
er
capit
alfr
om t hosewhoowni ttothosewhoneedi t
.Theissuef unctionmay
be broadly di vi
dend into pre– i ssue managementand posti ssue
management .Inboththest ages,legalrequi
rementshavetobecompl i
ed
with and sev er
alacti
v i
t i
es connected wit
ht he i
ssue havet o be co -
ordi
nated.

Thepr
e-i
ssuemanagementi
sdi
vi
dedi
nto:

(
i)I
ssuet
hroughpr
ospect
us,
off
erf
orsal
eandpr
ivat
epl
acement
.

(
ii
)Mar
ket
ingandunder
wri
ti
ng. (
ii
i)Pr
ici
ngofI
ssues,

(
v)Under
wri
ti
ngofPubl
icI
ssue

Underwri
tingisaguar anteegiv
enbyt heunder writ
erthatintheeventof
undersubscript
iontheamountunder wri
tt
en,woul dbesubscribedbyhim.It
i
sani nsurancet othecompanywhi chpr oposest o makepubli
cof fer
agai
nstr isk ofundersubscr i
pti
on.The i ssues packed bywel l
-known
underwri
ters general
lyrecei
ve a high premium f r
om the publi
c.Thi s
enabl
est heissuingcompanytosellsecuri
ti
esqui ckl
y.

(
vi)Manager
s,Consul
tant
sorAdv
iser
stot
heI
ssue

Themanagerstotheissueassi
stinthedraft
ingofpr
ospectus,
appl
i
cati
on
for
ms and compl eti
on of f or
mal i
ti
es under the Companies Act,
appoi
ntmentofRegist
rarfordeal
ingwithshareappli
cati
onsandtr
ansf
er
andli
sti
ngofshar
esoft hecompanyont hest
ockexchange.

Compani
esar
efr
eet
oappoi
ntoneormor
eagenci
esasmanager
stot
he
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i
ssue.SEBIguidel
inesinsistthatalli
ssuesshouldbemanagedbyat l
east
oneauthori
zedmer chantbanker .Ordi
nari
l
y,notmor ethantwomer chant
banker
sshouldbeassoci atedasl eadmanagers,advi
sersandconsul
tants
toapubli
cissue.I
ni ssuesofov erRs.100cror
es, upt
oamaxi mum offour
merchantbanker
scoul dbeassoci at
edasmanager s.

(
vii
)Por
tfol
ioManagement

Portfol
ior efer
st oinvest
menti n di
ff
erentki ndsofsecur iti
essuch as
shares,debenturesorbondsissuedbydi fferentcompaniesandsecur it
ies
i
ssuedbyt hegov er
nment.Iti
snotmer elyacol l
ect
ionofunr el
atedasset s
butacar efull
yblendedassetcombi nationwi t
hinauni fi
edf ramewor k.
Portfol
io management r efer
st o mai ntaining proper combi nat
ion of
securit
iesinamannert hatt
heygivemaxi mum r etur
nwi t
hmi nimum risk.

PROBLEMSOFMERCHATNBANKI
NG

1.SEBIguidel
ineshav
eauthor
izedmer chantbankerstounder
takeissue
rel
atedact
ivi
ti
esonlywit
hanexceptionofpor tf
oli
omanagement .These
gui
deli
neshavemadethemerchantbankerseit
hertorest
ri
ctt
hei
r

act
ivi
ti
esort
hinkofsepar
ati
ngt
heseact
ivi
ti
esf
rom t
hepr
esentoneand

f
loatnewsubsi
diar
yandenl
arget
hescopeofi
tsact
ivi
ti
es.

2.SEBIgui
del
i
nesst
ipul
ateami
nimum networ
thofRs.1cr
oref
or

aut
hor
isat
ionofmer
chantbanker
s.Smal
lbutpr
ofessi
onal
andspeci
ali
sed

mer
chantbanker
swhodonothav
eanetwor
thofRs.1cr
oremayhav
eto

cl
osedownt
hei
rbusi
ness.Theent
ryi
sdeni
edt
oyoung,
speci
ali
sed

pr
ofessi
onal
sint
omer
chantbanki
ngbusi
ness.

3.Nonco-oper
ati
onoft
hei
ssui
ngcompani
esi
nti
mel
yal
l
otmentof

secur
it
iesandr
efundofappl
i
cat
ionmoneyi
sanot
herpr
obl
em ofmer
chant

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banker
s.Thegui
del
i
neshav
eputt
her
esponsi
bil
i
tyont
hemer
chant

banker
s.Theyhav
etoseekt
heco-oper
ati
onoft
hei
ssui
ngcompanyt
o

shoul
dert
her
esponsi
bil
i
ty.

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