UNIT-1

Q 1. What are the Money market Instrument?

Ans. Money Market:
 Market for short term funds which deals in monetary assets whose
period of maturity is up to 1 year.
 Market, where low risk, unsecured and short-term debt instruments that
are highly liquid are issued and actively traded every day.
Money Market Instruments:
1) Treasury Bills(T-Bills):
 An instrument of short-term borrowing by the Government of India
maturing in less than 1 year.
 Also Known as Zero coupon bonds issued by the Reserve Bank of India
(RBI) on behalf of Central Government to meet its short-term
requirement of funds.
 Issued in form of promissory note.
 T-Bills are available for a minimum amount of Rs. 25,000 and in multiples
thereof.
2) Commercial Paper:
 Unsecured promissory note having a maturity of 15 days to 1 year
 Negotiable instrument transferable by endorsement and delivery.
 Sold at discount and redeemed at par.
 Alternative to bank borrowing.
 Bridge financing- Suppose a company needs long-term finance to buy
some machinery. In order to raise the long-term funds in the capital
market the company will have to incur floatation costs (costs associated
with floating of an issue are brokerage, commission, printing of
applications and advertising etc.). funds raised through commercial
paper are used to meet the floatation costs.
3) Call Money:
 Short term finance repayable on demand
 Maturity period of 1 day to 15 days
 Commercial banks maintain CRR as per directives of RBI
 Call money is a method by which banks borrow from each other to be
able to maintain the CRR.
 Interest rate paid on call money which is known as Call rate.
4) Certificate of deposit:
 Unsecured, negotiable, short-term instruments in bearer form, issued by
commercial banks and development financial institutions.
 Issued in periods of tight liquidity, when the deposits by individuals and
households is less but demand for credit is high.
 This has to help to mobilize the large amounts of money in a short time
period.
5) Commercial bill:
 Short-term, self-liquidating, negotiable instrument which used for
financing credit sales of a firm.
 When goods are sold on credit, the buyer becomes liable to make
payment on a specific date in future. The seller could wait till the
specified date or make use of a bill of exchange.
 If the seller draws a BOE on buyer who accepts it then it becomes
marketable instrument known as trade bills.
 When the seller presents this to Bank & accepts it and give funds against
it to seller, it becomes commercial bill.
Q 2. What are the Capital market Instrument?
Ans. Capital Market:
 Capital market is a market where buyers and sellers engage in trade of
financial securities like bonds, stocks, etc.
 The buying/selling is undertaken by participants such as individuals and
institutions.
 Capital market consists of Primary Market and Secondary market.
Primary market deal with trade of new issues of stocks and other
securities, whereas Secondary market deal with the exchange of existing
or previously-issued securities.
Capital Market Instruments:
1) Preference Shares:
 Shares that carry preferential rights in comparison with ordinary shares
are called “Preference Shares”.
 These shareholders get the preference over equity shareholders
regarding dividends and payment.
2) Equity Shares:
 Equity shares also known as ordinary shares are the shares held by the
owners of a corporate entity.
 Since equity shareholders face greater risks and have no specified
preferential rights, they are given larger share in profits through higher
dividends than those given to preference shareholders.
3) Debentures And Bonds:
 A debenture, issued under the common seal of the company, usually
takes the form of a certificate that acknowledges indebtedness of the
company.
 A document that shows on the face of it that a company has borrowed a
sum of money from the holder thereof upon certain terms and
conditions is called debenture.
 Debentures may be secured by way of fixed or floating charges on the
assets of the company. These are the instruments that are generally
used for raising long-term debt capital.
4) Hybrid Instruments:
 An investment product that combines the attributes of an equity
security with a debt security.
 Generally, hybrid instruments are designed as debt type instruments
with exposure to the equity market.
 Example of hybrid instruments are
convertible bonds, preferred stocks, equity default swaps and structured
notes linked to an equity index. Also called Hybrid Instruments.
Q 3. What are the various transactions and contracts in the secondary market?
Ans: Secondary Market:
 The secondary market refers to all transactions of security that happen
after the initial offering.
 The secondary market is referred to as the “Stock market” .
 All major exchanges around the world which deal with secondary
markets are:
 NYSE
 NASDAQ
 FTSE
 HANG SENG
 BSE & NSE
 In a secondary market, investors trade among themselves. No
involvement of issuing company
e.g. If you go to buy Infosys stock, you are dealing only with another
investor who owns shares in Infosys. Infosys company is not directly
involved with the transaction.

Q 4. Who regulates the Indian debt market and explain its rule?
Ans: As the debt market trade both government and corporate debt
instruments, we have the following two regulators:
RBI: It regulates and also facilitates the government bonds and other
securities on behalf of governments.
SEBI: It regulates corporate bonds, both PSU (Public sector
undertaking) and private sector.
Q 5. Explain the components of the Indian financial system.
Ans: Financial System:
 A financial system is a matrix of financial Institutions, Financial Markets,
Financial Instruments & Financial Services to facilitate the transfer of
funds.
Components of Financial system:
The main components of financial systems are

4. Financial Services 1. Financial Institutions

Financial System

3. Financial Instruments 2. Financial Market

1) Financial Institutions:
 A financial institution is a body that is a financial transaction between
two parties.
 The most common types of financial institutions include commercial
banks, brokerage houses, insurance companies, etc.
2) Financial Market:
 Financial Market is a market where trading of securities like equity,
bonds, and derivatives takes place.
 It can further be divided into Money Market & Capital Market
3) Financial Instruments:
 Financial instruments are those tradable instruments which have a
monetary value.
 Financial instruments are:
 Equity – Ownership-based securities
 Debt – Acknowledgement of debt
4) Financial Services:
 Financial services facilitate the person to acquire any asset on credit,
according to his suitability and at a reasonable interest rate.
 In services we have leasing, factoring, hire purchase finance etc.,
Q 6. What are the various capital market reforms please explain.
Ans: Reforms in Indian Capital Market:
 Eslistabhment of SEBI: The SEBI was set up with the fundamental
objective, "to protect the interest of investors in the securities market
and for matters connected therewith or incidental thereto."
 Increasing of Merchant Banking Activities: It has proved as a helping
hand to factors related to the capital market
 Growing Mutual Fund Industry: The growth of mutual funds in India has
certainly helped the capital market to grow. Public sector banks, foreign
banks, financial institutions, and joint mutual funds between Indian and
foreign firms have launched many new funds
 Investor's Protection: It works in educating and guiding investors. It tries
to protect the interest of the small investors from frauds and
malpractices in the capital market.
 UNIT-2

Q 1. What are various NBFCs? explain norms and roles.

Ans: NBFC’s:
 A Non-Banking Financial Company (NBFC) is a company registered under
the Companies Act,2013.
 NBFCs are financial institutions that offer various banking services but
don’t have a banking license. These institutions are not allowed to take
traditional demand deposits.
 They are engaged in the business of loans and advances and acquisition
of shares/stocks/bonds/debentures/securities issued by Government or
local authority or other marketable securities of a like nature, leasing,
hire-purchase, insurance business, chit business.
NBFC VS BANKS:
 NBFC cannot accept demand deposits
 NBFCs do not form part of the payment and settlement system and can
not issue cheques drawn on itself.
 Deposit insurance facility of deposit insurance and credit guarantee
corporation is not available to depositors of NBFCs, unlike in the case of
banks.
Types of NBFCs:
1. Hire-Purchase Companies: Whose principal business is a hire-purchase
transaction or financing of the hire-purchase transaction.
2. Leasing Companies: Whose principal business is the leasing of
equipment or financing of such activities.
3. Investment Companies: Which carry the business of acquisition of
securities.
4. Housing Finance Companies: Which finance acquisition or construction
of houses or development of land for housing purpose.
Functions of NBFCs:
Various types of NBFCs play the role of intermediaries in the money market
and their functions are below:
1. They play the role of intermediaries between the creditors and the
debtors and become helpful in providing them the opportunity of
economic advantage.
2. They play the role of intermediaries between the creditors and the
debtor for contacting them.
3. They play the role of money merchant.
4. They exchange the various assets in to financial form immediately.
Q 2. What is hire purchasing? Explain the importance of hire purchasing.
Ans: Hire Purchasing:
1. Hire purchase is an arrangement for buying expensive consumer
goods, where the buyer makes an initial down payment and
pays the balance plus interest in installments.
2. Hire purchase system is a special system of the purchase and sale
of goods. Under this system, the purchaser pays the price of the
goods in installments. The installments may be monthly, quarterly,
six-monthly, or yearly.
3. Under this system the goods are delivered to the purchaser at the
time of agreement before the payment of installment, but the title
of the goods is transferred after the payment of all installments as
per the hire-purchase agreement.
 The hire purchase transaction takes place in the following manner:
1. The seller (hiree) purchases the asset from the
supplier/manufacturer and hires it to the hirer who is required to
make a cash down payment of, say 20-25% of the cost of the
asset.
2. The balance of the cost price of the asset with interest thereon is
payable in equated monthly installments either in advance or in
arrears, over a predetermined period which ranges between 36
months to 48 months.
3. Sometimes, in place of a cash down payment, a fixed deposit is
required to be made with the seller and the entire amount of the
cost is recovered through EMIs. The amount of FDR plus interest
is returned to the hirer on payment of the last installment.
4. Each installment comprises of the (a) cost of the asset, and (b)
interest thereon. Interest is computed on the basis of a flat rate of
interest. Thereafter the effective rate of interest is applied to the
reduced balance of the original cost of an asset to find out the
interest component of each installment. The effective rate of
interest happens to be higher than the flat rate of interest.
5. The hirer is entitled to terminate the hire purchase contract by
giving due notice to the seller (hiree).
 Difference of Leasing & Hire Purchase
Basis LEASING
OWNERSHIP OF Ownership lies with the lesser.
ASSET The lessee has the right to use
the equipment and does not
have the option to purchase it.
DEPRECIATION The depreciation is claimed as
an expense in the books of
lesser.
TAX IMPACT The total lease rentals are
shown as the expenditure by the
lessee in the lease agreement.
RENTAL PAYMENTS The rentals cover the cost of
using an asset. Normally, it is
derived
with the cost of an asset over
the asset’s life.
DURATION Lease agreements are generally
done for longer duration and for
bigger assets like land, property,
etc.
REPAIRS AND Repairs and maintenance of the In hire purchase, the responsibility
MAINTENANCE asset in a financial lease is the
responsibility of the lessee but in
operating lease, it is the
responsibility of the lesser
Difference of Hire Purchase & Installment System
Basis HIRE PURCHASE
OWNERSHIP Transfer of ownership takes
place after the payment of all
installments.
TYPE OF CONTRACT The hire purchase agreement is
like a contract of hire though
later on, it may become a
purchase after the payment of
the last installment.
POSSESSION In case of default payment, in
the hire purchase system the
vendor has a right to back goods
from the possession of the hire
purchase.
HIRE PURCHASE
The hirer has the option to purchase.
The hirer becomes the owner of the
assets/equipment immediately after
the installment is paid.
Here, the depreciation claim is
allowed to the hirer.
In hire purchase, the hirer claims the
depreciation of assets as an expense.
The installment is inclusive of the
the principal amount and the
interest for the time period the asset
is utilized.
These agreements are done mostly
for shorter duration and cheaper
assets like hiring a car, machinery,
etc.
lies with the hirer.
INSTALLMENT SYSTEM
In the case on an installment
payment system, the ownership is
transferred immediately at the time
of agreement.
In the installment payment system,
the agreement is like a contract of
credit purchase.
Here, the vendor has no right to take
back the goods from the possession
of the purchases; he can simply sue
for the balance due.
Q 3. What is the meaning of Leasing? Explain its type.
Ans: LEASING:
 A lease is a contract whereby the owner of an asset (the lessor) grants to
another person (the lessee) exclusive right to use the asset for an agreed
period of time, in return for the payment of a rent (called lease rental).
 Capital assets like land, buildings, equipments, machinery, vehicles are
the usual assets which are generally acquired on lease basis.
 The lessor remains the owner of the asset, but the possession and
economic use of the asset is vested in the lessee.
TYPES OF LEASE:
1) Operating Lease:
 Operating lease is one of the short-term and cancelable leases.
 In Operating lease, the owner, called the Lessor, permits the user, called
the Lesse, to use of an asset for a particular period which is shorter than
the economic life of the asset without any transfer of ownership rights.
 Example: Hiring a building for an event for 7 days

2) Financial Lease:

A lease in which all risks and rewards related to asset ownership are
transferred to the Lessee for the leased asset is called finance lease. It is
one of the long-term leases and cannot be cancelable before the expiry of
the agreement.
Example : Hiring a factory, or building for a long period.

3) Sale and Lease Back:

 A sale and lease back is a type of lease where the Lessee sells one of his
assets to a prospective Lessor and then immediately leases it back for a
guaranteed minimum time period for a specified amount of Rental
payments. It may be in the form of operating leasing or financial leasing.
This type of lease is popular in Real estate matters.

4) Leveragde Lease:

 Under this lease, there are three parties involved; the Lessor, the lender
and the lessee. Under the leverage lease, the Lessor acts as equity
participant supplying a small portion of the total cost of the assets while
 the lender supplies the major part. In this the lessor has no risk on the
finance the lender gave. And the lessee’s payments go to the lender who
takes the leased asset on default and lender holds the title of asset.

Q 4. Write a note on financial institutions and their services.

Ans:
 According to Dr. LM. Bhole, “Financial institutions are business organizations that act
as mobilizers and depositories of savings and as purveyors of credit or finance.”
 Financial institutions are also called financial intermediaries. They are classified into (a)
banking institutions. (b) non-banking institutions

(a) Banking institutions or banks- Banks mobilize savings By accepting deposits and
granting loans to people and firms. They are called “creators” of credit e.g., the RBI,
commercial banks, and co. operative banks.
(b) Non-banking institutions: Nonbanking institutions also mobilize financial resources
directly or indirectly from the people and lend funds but they do not create credit.
They are called as “purveyors” of credit.

Example: Like Insurance Corporation (LIC), Unit Trust of India (UTI) and Industrial
Development Bank of India (IDBI).
 Financial institutions can be also classified into intermediaries and non-intermediaries.
 Financial intermediaries intermediate between savers and investors. They lend money as
well as mobilize savings.
 All banking institutions are intermediaries. Nonbanking intermediaries give financial
assistance for specific purposes, sectors, and regions.
 For example, non-banking institutions like LIC, GIC, UTI, and PF channel the funds from
savers under the various schemes and lend the funds for investment

UNIT. 3

Q1. Explain Housing finance and types of housing finance

Ans: Housing Finance:
 It refers to finance that is provided to individuals or group of individuals
including cooperative societies for purchase/build house or houses.
 Housing finance refers to the finance for meeting the various needs related
to housing:
 Purchase of land
 Construction of a house
 Extension of a house
 Acquisition of a flat
 Housing loans from other banks/HFCs.
Types of Housing Finance: 1) Direct finance,2) Supplementary
finance,3)indirect finance
1. Direct Finance:
 It refers to the finance provided to individuals or groups of individuals
including cooperative societies.
 Under this category the following types of bank finance are included:
1. Bank finance extended to a person who already owns a house in
the town/village where he resides, or for buying/constructing a
second house in the same or other towns/villages for the purpose
of self-occupation.
2. Bank finance extended for the purchase of a house by a borrower
who proposes to let it out on a rental basis on account of his
posting outside the headquarters or because he has been
provided accommodation by his employer.
3. Bank finance extended to a person who proposes to buy an old
house where he is presently residing as a tenant.
2. Supplementary Finance:
 Banks may consider requests for additional finance within the overall
ceiling for carrying out alterations/additions/repairs to the house/flat
already financed by them.
 In the case of individuals who might have raised funds for
construction/acquisition of accommodation from other sources and
need supplementary finance, banks may extend such finance after
mortgaging charge over lenders and or against such other security, as
they may deem appropriate.
3. Indirect Finance:
  The banks ensure that their indirect housing finance is channeled by way
of term loans to housing finance institutions, housing boards, other
public housing agencies, etc. primary for augmenting the supply of
serviced land for the constructed units.
 It should also be ensured that the supply of plots/houses is time bound
and public agencies do not utilize the bank loan merely for acquisition of
land.

Q2. What are the various norms for Housing Finance Companies?

Ans:
 Housing Finance Companies:
 Finance is provided for housing as mortgage loans. It is one of the most
important finance required by the middle class and cover middle-class
individuals.
 Housing finance is supplied by
(i) Specialized institutions like:
HUDCO i.e., Housing and Urban Development Corporation, HDFC i.e.,
Housing Development Finance Corporation.
(ii) Government at the State and Central level
(iii) Insurance companies like LIC & GIC
(iv) Commercial banks
(v) Private housing finance companies and Nidhi’s
 Functions of Housing Finance companies:
(a) Financing of the acquisition of a house.
(b) Financing the construction of a house.
(c) Financing of the acquisition of a plot of land and I
(d) Financing the repair and extension of a house.
There are more than 400 housing finance companies in operation .
The RBI has stipulated that the housing finance companies should mobilize
household savings in the form of deposits with maturities beyond two years.

Q 3. Write a note on Venture Capital Financing.

Ans: Venture Capital Financing:
 Venture capital is generally supplied to new, unknown, and unregistered
firms which do not have access to institutional sources of funds.
 Other than merely financial provisions, venture capital firms provide
management and marketing services to new business firms.
 Venture financing caters to the needs of technology-oriented and
knowledge-intensive business firms in the fields of
 1. electronics,
2. chemicals,
3. plastics,
4. biotechnology, etc.
the firms providing venture capital are ready to take high risks in
anticipation of high returns.
 A venture financing firm provides the services like –
I. seed capital or initial capital for starting a business
II. additional capital for expanding the business
III. equity financing for takeover
IV. capital for globalizing the business
V. capital for diversification of business.

Q4. Write a note on Mutual funds. It’s regulation and types of Mutual funds.
Advantage and Disadvantage of Mutual Funds.
Ans: Mutual Fund:
 Mutual fund is a scheme of indirect investment in the capital market. A
mutual fund is a trust that pools the money or the saving of the investors
for the purpose of investment in the capital/share market.
 An investor who buys the units of the mutual fund is known as a Unit
Holder. A unit holder is the port owner of the assets of the mutual fund in
proportion to the amount invested.
 Mutual fund employs experts and investment consultant who invests the
money into stocks, bonds, government securities, etc. as per the object of
the fund.
 Fund managers earn a return on investment in the form of dividends,
interest, capital gains, etc. out of which it charges a fee for managing the
portfolio and after deducting the expenses, net income is shorted among
the unit holders in the proportion of units held by them.
Types of Mutual Fund:
1) Open-Ended Fund:
 An open-ended scheme allows the investor to make entry and exit at any
point in time.
 Consequently, the capital of the fund is unlimited and the redemption
period is indefinite.
2) Close-Ended Fund:
 In a CEF an investor can buy the units during the IPO or from the stock
market after the units have been listed.
 The scheme has a limited life at the end of which the corpus is liquidated.
The investor can exit the scheme only (a) by selling in the stock market or
(b) during repurchase period or (c) at the end of the scheme.
ADVANTAGES TO AN INVESTOR IN MUTUAL FUND
Mutual Funds offer numerous benefits to investors, which are as below:
1. Since the shares/units of mutual fund are traded on stock exchange, they
are encashable on any day. So, it offers liquidity to its units.
2. The worries of investment complexities are taken care of by mutual fund.
Individual investor need not bother about it.
3. Different tax benefits are available to investors in mutual funds.
4. Since the total funds available to mutual fund are substantially greater than
available to a particular investor, the mutual funds can judicially deploy the
huge fund to a grater extent for the sake of the individual investor.
5. Because of different regulations of SEBI, the RBI and Government on mutual
funds, the funds are in safe hands.
6. The continuous return from investment in mutual fund is automatically
reinvested on behalf of investors.
7. It induces saving habit.

DISADVANTAGES OF MUTUAL FUNDS – M-I-I-P-B-C-L-T

Mutual funds suffer from various risks. They are as follows:
1. Market Risk: Market risk arises out of fluctuations in the market value of
securities. It may lead to a loss of principal. The market value of shares,
debentures etc. fluctuates due to various factors such as demand for and
supply of securities, quantum of money supply, economic policy, political
conditions etc. So, it cannot be avoided in its entirety. However, it can be
minimized by diversifying among a variety of securities rather than investing in
one or two securities. This is because, when one stock is adversely affected
another stock may do well or less affected. That is why mutual funds invest
their money in many companies.
2. Interest Rate Risk: The value of a fixed income security like debentures,
bonds etc. depends upon the rates of interest prevailing in the market. If the
interest rates rise, the value of the security will fall and vice versa. This risk also
cannot be avoided.
3. Inflation Risk: The return on investments does not change proportionately
with the change in consumer prices. It is what is called inflation risk. This risk
also cannot be avoided. However, it can be managed by investing a portion of
its fund in equity shares, which always provide for higher return as compared
to debt instruments.
4. Business Risk: Business risk is associated with the financial soundness,
proper management etc of the business. If any business is poorly managed, it
denotes that it is not financially sound. Such companies value of securities will
fall automatically in the market. This kind of risk also can be avoided by
diversifying the portfolio of mutual funds.
5. Credit Risk: Sometimes the issuer of fixed income security fails to pay
interest or principal when it becomes due Such risk is called as credit risk.
Normally, this kind of risk arises due to the mismanagement, dissolution etc. of
the company. In order to avoid this kind of risk, mutual funds should get the
ratings of reliable credit rating agency. The companies with high rating only
should be selected for investments
6. Political Risk: Political risk refers to the change in the market value of a
security due to political events like war, change in law, change in Government
etc. This risk cannot be avoided. However, diversification to a certain extent
will help to minimize it.
7. Liquidity Risk: Liquidity risk is associated with the marketability of the
securities. Mutual funds have different schemes each one has its own time for
exiting the market. So, mutual funds cannot enter and exit the market as they
like, which affects the marketability of their investments This risk cannot be
avoided
8. Timing Risk: Each investment is to be properly timed Wrong timing of buying
and selling the securities will naturally lead to a loss should be avoided.
Otherwise, iaats very purpose will be defeated. Expertsin mutual funds
schemes should study the market situation and find out whether climate in the
market is suitable for purchase/sale and decide accordingly.

UNIT. 4
Q1. Write a note on the functioning of the Depository and Custodians.
Ans: Depository:

 Depository definition refers to the financial institutions that accept currency

deposits from businesses and individuals and assist them in trading financial
assets. In addition, they utilize deposits to provide financial assistance to
businesses and individuals.
 There are various advantages of depositories. For example, they ensure
economic stability and growth and eliminates the risk of losing financial
instruments.
 A crucial difference between a depository and a custodian is that the
former legally owns the financial instruments it holds.
 A vital function of depositories is accelerating the process of transferring
financial assets.

 Depository Types:
here are three main types of depositories. Let us look at them in detail.

1 – Credit Unions

 These organizations are financial cooperatives; members of a particular

group own them. For example, credit unions pay interest in dividends to the
members every month or every quarter. One has to pay a certain fee to
become a member.
 Such non-profit organizations aim to provide financial services to their
community. Typically, they do not need to pay federal or state taxes.
2 – Savings Associations

 Also known as thrift banks or savings institutions, savings associations

serve a local community.

 The offerings of these financial institutions are similar to regular banks.

Their products include credit cards, consumer loans, and small business
loans.

 Sometimes, these organizations can be financial  cooperatives  or

corporations, thus enabling the depositors to become partial owners.

3 – Commercial Bank

 Typically, private investors own commercial banks; the main objective of

such organizations is to earn profits. Therefore, their range of offerings
depends on their size.
 For instance, if a commercial bank’s size is small, it might offer only
small loans and simple deposits. Also, it might offer banking services for
small businesses only. One must also note that small banks have a limited
market range.

 Functions

The functions of depositories are as follows:

1 – It is a link between shareholders and public companies

 These institutions are a connecting link between public companies

issuing financial instruments and shareholders or investors.
 The agents associated with the institutions are the DPs. They are
responsible for transferring the financial assets from the depositories to
shareholders. Brokerages and banks are two examples of DPs.

2 – Offers loans to individuals and businesses

 An institution accepts currency deposits from customers who can withdraw

the amount anytime.
 The organization pays interest on the deposits while it earns a
higher interest income by lending the money in the form of mortgages or
loans.
3 – Reduces paperwork and facilitates the faster transfer of securities   

 When a trade takes place, depositories transfer the ownership of the

financial instruments from one investor’s account to another.
 This reduces the paperwork involved in a trade’s finalization, thus
accelerating the securities transfer process. M-I-S-O-E-F

Depository Custodian
MEANIN Holds electronic versions of financial A Custodian is a bank or
G securities. Allows for the clearing financial institution that
and settlement of these securities, only holds financial
as well as the facilitation of their securities for safekeeping
transfer.
Includes Such as shares, debentures, and Such as stocks, bonds, and
mutual funds gold
Owner It is the legal owner. The securities it holds are
not legally owned by it.
Scope Every Depository serves as a Not every Custodian is a
Custodian. Depository.
Function Custody is one of a Depository's A Custodian's sole
functions. function is custody.
Example Examples: CDSL, NSDL Examples: HDFC Bank,
ICICI Bank, SBI

Q2. Write a note on Credit Rating. Which are the Major Credit Rating Agencies
in India? Discuss their role.
Ans:
 Credit Rating:
 Credit Rating is “a guidance to investors and creditors in determining the
risk involved in the debt instruments or credit obligation institutions.”
 Standard & Poors (S&P) “CR helps investors by providing an easily
recognizable simple tool that couples a possibly unknown issuer with an
informative and meaningful symbol of credit quality”
 Rating agency Moody’s - “a rating is an opinion on the future ability and
legal obligation of the issuer to make timely payment for principal and
interest on a specific fixed income security. The rating measures the
probability term rating incorporate an assessment of the expected
monetary loss should a default occur.”
 FEATURES: The above definitions bring forth the following features
1. Rating is compulsory for issue of any debt instrument.
2. It may be extended from debt instruments to equity or other securities.
3. It guides investors in their decisions of portfolio investments.
4. It is valid at a point of time, because it is on current information of
company.
5. It may be revised and changed by the rating agency.
6. Rating assigned to an instrument is applicable to that only. It is not
general-purpose evaluation.
7. An investor has his own freedom either to consider the rating or not.
8. Rating is done on the basis of business analysis, financial analysis,
management evaluation and fundamental analysis.
9. Rating is done on request by a desired company. A company has to get
rating from at least one agency or more.
10. Rating not only acts as a marketing tool for an instrument but also it
enhances a company’s reputation.
 OBJECTIVES:
1. To boost confidence of investors for making their decision about where,
how much and why to invest?
2. To serve as an intermediary between the financial system and investors
by vanishing the dilemma about risk of investment.
3. To save the precious time of investors by supplying detailed info.
4. To reduce the unnecessary cost of issue of instruments.
5. To help to companies for maintaining a good recognition in corporate
sector, and by which investors can take a corrective decision about lending
or investments by referring ratings.
6. To control unethical trade practices, ensure stability and soundness in
capital market.
 7. Other factors like: Globalized capital market, increased volume of private
players, entry of foreign investors and companies rosy picture information
rating is required.
 INSTITUTIONS:
I) World Level:
 In year 1909 John Moody founder of Moody’s Services, rated the Bonds
issued by US Rail Road Organization. It was the first rating of bonds by an
expert agency.
 The second credit rating agency in the world was Standard and Poor (S & P)
which was introduced in 1916.
 The third institution to join these two was Fitch Investors Services.
The above three agencies have received the recognition from Securities and
Exchange Commission (SEC), USA.
 These institutions are very strong and functioning independently and
impartially.
 In U.S.A. Moody’s ratings have greater value among investors and equated
to bombs used by super power to destroy.
II) In India:
 The credit rating services appeared for the first in India in 1988 with
establishment of CRISIL. Following are the prominent credit rating
institutions in India:
1. CRISIL (1988)- Credit Rating Information Services of India Ltd.
2. CARE (1993)- Credit Analysis and Research Ltd.
3. Brickwork Ratings Ltd
1. Credit Rating and Information Services of India Limited (CRISIL)
 It is India’s first credit rating agency which was incorporated and promoted
by the erstwhile ICICI Ltd, along with UTI and other financial institutions in
1987.
 After 1 year, i.e., in 1988 it commenced its operations
 It has its head office in Mumbai.
 It is India’s foremost provider of ratings, data and research, analytics, and
solutions, with a strong track record of growth and innovation.
 It delivers independent opinions and efficient solutions.
 CRISIL’s businesses operate from 8 countries including USA, Argentina,
Poland, UK, India, China, Hong Kong, and Singapore.
 CRISIL’s majority shareholder is Standard & Poor’s.
 It also works with governments and policy-makers in India and other
emerging markets in the infrastructure domain.
2. Investment Information and Credit rating agency (ICRA)
 The second credit rating agency incorporated in India was ICRA in 1991.
 It was set up by leading financial/investment institutions, commercial
banks, and financial services companies as an independent and professional
investment Information and Credit Rating Agency.
 It is a public limited company.
 It has its head office in New Delhi. • ICRA’s majority shareholder is Moody’s.
3. Credit Analysis & Research Ltd. (CARE)
 The next credit rating agency to be set up was CARE in 1993.
 It is the second-largest credit rating agency in India.
 It has its head office in Mumbai. • CARE Ratings is one of the 5 partners of
an international rating agency called ARC Ratings.
4. ONICRA
 It is a private sector agency set up by Onida Finance.
 It has its head office in Gurgaon.
 It provides ratings, risk assessment, and analytical solutions to Individuals,
MSMEs, and Corporates.
 It is one of only 7 agencies licensed by NSIC (National Small Industries
Corporation) to rate SMEs.
 They have Pan India Presence with offices over 125 locations.

Q 3. Write a note on Factoring & Forfeiting.

Ans:
Factoring:
 The word Factoring is derived from the Latin word ‘Facere’. It means ‘to
make’ or ‘to do’. The business firms get their part of the work done through
the Factors. Credit sales create debtors or book debts. These are handed
 over to specialized agencies called ‘Factors’. It is like business process
outsourcing.
 Therefore, factoring means ‘a continuous process in which the business
firms (clients) transfer the book debts to Factor who pays the amounts back
to the client after collecting from debtors and also deducting his
commission’.
 M.Y. Khan - "An agreement in which receivables arising out of the sale of
goods/ services are sold by a firm (Client) to the factor (a financial
intermediary) as a result of which the title to the goods/ services
represented by the said receivables passes on to the factor"
 FEATURES
1. A financial service.
2. A contract between the seller (client) and the collector (factor).
3. Purchasing the receivables or book debts of a client, and collecting and
returning to the client.
4. Advancing amount up to 80% is paid by a factor to the client and the
balance 20% after collection.
5. Shifting the risk of collection of receivables to factor.
6. Like the conversion of credit bills into ready cash.
7. A type of credit management technique.
8. A method of business process outsourcing (BPO) activity.
 PROCESS
 The following diagram narrates the steps involved in the process of
Factoring
1- A Customer places an order with the seller
2- Factor and client fix the customer limit
3- The client delivers goods and invoices with notice to pay to the factory.
4- The client sends an invoice copy to the factory.
5- Factor advances up to 80% of the debt amount to the client.
6- Factor does follow up with the customer.
7- Customer pays to factor on maturity.
8- Factor pays the balance amount to the client.

 Factoring in India:
1. Factoring as a financial service became operational since 1991. Important
events and obstacles in the development of factoring in India are given
below:
 2. A committee was formed by the RBI under C.S. Kalyanasundaram to
explore the scope of factoring in India.
3. SBI, in association with a few more public sector financial institutions,
established SBI Factors and Commercial Services in 1991. Several new
financial products such as KashFLO and Purchase Bill Factoring are launched
by this factoring company.
4. Canbank Factor Limited, established in 1991, has 55% of the market
share as far as factoring services in India are concerned.
5. In the efforts towards introducing international factoring, a private sector
company called Global Trade Finance Private Limited was established in
2001.
6. The growth of factoring services in India is slow mainly due to the
absence of authentic information about the customers and clients.
FORFEITING OR FORFAITING:
 The French word 'forfait' is the original term which means 'surrender of
rights' or 'to give something'.
 The exporter has to give up his rights over receivables to an agency. The
agency collects the payment from receivables. Such an agency is called
'Forfaiter'. But, after receiving the rights over receivables, it pays immediate
cash to the exporter.
 "Forfaiting is a form of debt discounting for exporters in which a forfeiter
accepts at a discount and without recourse a promissory note, bills of
exchange, letter of credit, etc. received from a foreign buyer by an exporter.
Maturities are normally from one to three years. Thus, the exporter
receives payments without risk at the cost of the discount."
 FEATURES
 From, the above definitions, the features of forfeiting can be listed as
follows
1. A contract between the exporter and forfeiter.
2. Exporter surrenders rights over receivables of the importer to forfeiter.
3. Forfeiter assumes the credit risk and provides 100% cash immediately
(less discount)
4. Forfeiter collects the bills, and value from the importer as and when due.
5. It is always done without recourse to the exporter. 6. It covers medium to
long-term maturities
 PROCESS
1) Commercial contract between the foreign buyers and the Indian exporter.
2) Exporter gets commitment to forfeit bill of exchange from forfeiter through
his banker and EXIM Bank.
3) Delivery of goods by the Indian Exporter to the foreign buyer.
4) Importer's Banker collects debt instrument from an importer and gives it to
Exporter's Bank.
5) Exporter's Bank endorses debt instruments without recourse in favor of the
forfeiter through EXIM Bank.
6) Exporter's bank pays the amount of discounted bill to an exporter.
7) Forfeiter submits the bill for payment on maturity to the importer's bank
and the banker submits/presents for payment.
8) Importer's banker collects & pays it to the forfeiter.
FORFAITING V/s FACTORING: M-A-A-S R-T-A
Basis FACTORING FORFEITING
Meaning It is a service towards It is a purchase of export bills in
collection either with or export trade.
without assuming all risks.
Area Relates mostly to domestic Relates only to international
trade. trade.
Scope A variety of services is given The main activity is advance
in addition to the collection financing and assuming risks.
of debts.
No. of Involves three parties. Involves six parties viz. Ex. Imp.
parties Both bankers, EXIM, Forfeiter.
Advance About 80% to 85% Pays 100% in advance after
deducting charges.
Recourse It may be either with or It is always without Recourse.
without Recourse
Term It is a short-term financial It is short-term to medium term
measure
Activities It is simple to arrange a It involves a lot of procedure
factoring relating to foreign trade
 UNIT. 5

Q1. Explain the role of RBI as a central bank and explain the recent controlling
mechanism.

Ans:
 The Reserve Bank of India (RBI) is the central bank of our country. It is the
apex financial institution of India.
 It guides, monitors, regulates, Controls, and promotes the financial system
in India.
 It started functioning from April 1, 1935. Over the period important
developments took place in India.
 India became independent on August 15, 1947, and the government
decided to initiate the process of planned economic development.
 It was felt that a state-owned central bank was better to suit the
requirements of economic development. Hence, the RBI was nationalized
on January 1, 1949.
 Functions of the RBI
(1) Issue of currency notes:
 The RBI has, since its inception, the sole right to issue currency notes other than one-
rupee notes, coins, and coins of smaller denominations.
 One-rupee notes and coins are issued by the government of India and they are put into
circulation by the RBI.
 Under the original Act, the note issue was of a proportional reserve system but later on, it
was replaced by a minimum reserve system.
 According to the RBI Act of 1957, a minimum reserve of Rs.200 crores (of which Rs.115
crore in geld and bullion and the rest in foreign securities) is to be kept.
(2) Banker to the Government:
 The RBI is a banker to the Central and state governments. It provides all types of banking
services to the government, such as acceptance of deposits, making payments, withdrawal
of funds by cheques, transfer of funds, and management of public debt.
 The RBI has a good knowledge of the financial market and thus it offers advice to the
government.
(3) Banker’s bank:
 The RBI has the power to control the commercial banking system under the RBI Act, of
1934, and the Banking Regulation Act, of 1949.
 As per this, all banks are required to maintain a certain percentage of their deposits with
the RBI.
 All scheduled banks are under a statutory obligation to maintain a certain minimum of
cash reserve with the RBI against their demand and time liabilities.
 The RBI provides financial assistance to scheduled banks and state cooperative banks in
the form of loans against securities.
 The RBI has other regulatory functions relating to banks such as licensing of banks,
branch expansion, liquidity of assets, their management, amalgamation, etc.
(4) Controller of Credit:
 Credit control is considered to be the main function of the central bank.
 The RBI, like any other central bank, controls credit by using quantitative and qualitative
methods, Quantitative, methods include Open Market Operations (OMO), Bank Rate
Policy (BRP) and. Cash Reserve Ratio (CRR).
 Qualitative methods include margin requirements, moral suasion, rationing of credit,
direct action, etc.
 The RBI has been using CRR and Statutory Liquidity Ratio (SLR) as potential
instruments of credit control.
 The bank rate is used to change the volume of lending of the banks. Similarly, the RBI is
also using Selective Credit Control methods for qualitative credit control.
(5) Exchange Management and Control:
 One of the important functions of the RBI is to maintain the stability of the external value
of the rupee.
 The RBI functions as the custodian of the nation’s foreign exchange reserves. In 1947, the
Foreign Exchange regulation (FERA) was passed, along with this, foreign exchange
management and control became an important function of the RBI. Thus, it has to
(i) administer foreign exchange control;
(ii) choose the exchange rate system and fix the exchange rate between the rupee
and other currencies.
(iii) manage the exchange reserves; and
(iv) interact with international monetary authorities, Asian Clearing Union, Sterling
area, IMF, World Bank, etc.
(6) Credit Control:
 Credit control is considered to be the main function of the central bank of a country.
 The Reserve Bank regulates and controls the volume and direction of credit by using
quantitative and qualitative methods of credit control.
 Quantitative methods consist of (Open Market Operations (OMO), Bank Rate Policy
(BRP), and Credit Reserve Ratio (CRR). Qualitative methods consist of moral suasion,
rationing of credit, margin requirements, direct action, etc.
(7) Agricultural Finance:
 To provide finance to the agricultural sector is a unique function of the RBI. Through
this, it promotes the agricultural development of India.
 The National Bank for Agriculture and Rural Development (NABARD) was set up on
July 12, 1982, which performs major functions of the Agricultural Credit department of
the RBI.
(8) Development and Promotional functions:
 The RBI’s functions are not only restricted to credit control and other regular functions,
but also to a broader perspective of development and promotion
 Role of the RBI
A) Note Issuing Authority:
 The RBI has the sole authority of printing notes for other than one-rupee notes and all
coins.
 This function is discharged through 18 regional issue offices.
 The notes are printed at four note presses. 1) Currency Note Press, Nasik 2) Bank Note
Press, Dewas 3) Mysore Press 4) Salboni Press
 The Bank can issue notes against the security of gold coins, foreign securities, or govt.
securities.

B) Monetary Authority of the Country:

 The RBI as an apex institution formulates the monetary policy for the country like Bank
rate, Open Market Operations, Cash Reserve Ratio, etc. the RBI regulates the cost and
availability of credit in the country.
 Monetary policy has been used as an important vehicle through which financial sector
reforms are introduced.
 The RBI also tries to regulate the direction or utilization of credit to encourage the flow of
bank credit into the small-scale sector, agriculture, housing, infrastructure, etc.
C) Government’s Banker:
 As a banker to the government, the RBI manages all the financial activities of Central as
well as State governments.
 Accordingly, the RBI i) manages public debt ii) Provides banking services to the
government iii) Handles the government’s banking accounts maintained at Central
Accounts Section, Nagpur iv) Manages special governmental Funds and v) provides
loans to the govt.
D) Regulator of the financial system:
 In order to protect the interest of the depositors and to provide easy banking services to
the public, the RBI gets as a regulator of the financial system.
 Under this function, the RBI
i) supervises the activities of commercial banks, non–bank financial institutions, and
cooperative banks
ii) takes important measures to bring about structural changes and improvements in the
financial system
iii) manages and regulates foreign exchange-related transactions
iv) Takes steps to develop money and capital markets.
v) Takes responsibility of collecting and publishing money, banking, and economy-
related statistics.
E) Promotional Role of the RBI:
 The RBI has performed many more functions, other than the traditional functions of the
central bank.
 As the RBI is the central bank of a developing country like India, it needs to perform
some proportional and developmental functions.
 Under this, the RBI has promoted the establishment of many specialized financial
institutions like NABARD, Finance Limited, etc. Similarly, RBI, ICICI, IDBI, National
Housing Bank, and Infrastructure, Development, has taken deliberate steps to encourage
credit flow to the priority sector in the economy. Rural credit and micro–credit schemes
are initiated by the RBI.
Q 2. Write a note on IRDA.
Ans:
 IRDA
 The Insurance Regulatory Development Authority is a statutory agency established by the
Insurance Regulatory Development Authority Act of 1999.
 IRDAI was founded as an independent body with its headquarters in New Delhi. In 2001,
its headquarters were relocated to Hyderabad, Telangana. The Chairman and other
members of the Insurance Regulatory Development Authority are appointed by the Indian
Government.
 The powers and functions of the Authority are laid down in the IRDAI Act, 1999, and
Insurance Act, 1938.
 The IRDAI's main goals are to promote competition in the insurance sector in order to
improve customer satisfaction through more consumer choice and fair pricing while also
guaranteeing the market's financial stability.
 The Insurance Act of 1938 is the primary law controlling India's insurance industry which
gives the IRDAI the authority to make regulations that set forth the regulatory framework
for the sector's entities to follow.
 Other Acts, such as the Marine Insurance Act of 1963 and the Public Liability Insurance
Act of 1991, control certain areas of the insurance business and functions.
 Functions of the IRDA:
 Section 14 of the IRDA Act, 1999 lays down the duties of the IRDA as follows.
1. To regulate, promote and ensure the growth of the insurance business.
2. To issue a certificate of registration to the applicant to renew or cancel the same, if the
need arises
3. To protect the interest of the policyholders in the settlement of claims and terms and
conditions of the policy.
4. Specifying the code of conduct, qualifications, and practical training for insurance
companies and agents.
5. To control and regulate the rates and the terms and conditions in the context of general
insurance.
6. To call for information, undertake inspection, and conduct investigations including audit
of an insurer, intermediaries, and other related persons.
7. Specifying the manner in which the books of account will be maintained and submitted
by the insurer and intermediaries
8. To regulate the investment of funds by the insurance company.
9. To regulate the margins of solvency.
10. To settle the disputes arising between the insurer and an intermediary.
 Role and performance of IRDA:
 Since its inspection, the IRDA has attempted to introduce many reforms to develop and
regularize the insurance sector.
 IRDA has introduced a file and use procedure for the record of every new financial
product introduced by an insurance company.
 Under this, each company has to file all the details with copies of terms and
conditions, with the IRDA.
 The IRDA has specified the minimum educational qualifications for insurance
agents.
 For encouragement in research and development in the insurance sector, The IRDA
has entered into a Memorandum of Understanding (MoU) with the Indian Institute
of Management (Bangalore).
 The IRDA has taken many steps to protect the interest of the policyholders. The
policy documents should be made available in simple and easy language.
 In order to spread insurance services in rural areas, the IRDA has made it
compulsory for every insurer to do business in rural areas.
Q 3. Write a note on SEBI
Ans:
 Financial liberalization of the Indian economy created a need for Strong measures to
safeguard the interests of small investors.
 In order to maintain capital market discipline, SEBI was established.
 Organisation of SEBI:
SEBI was established on April 12, 1988, but it became functional only since 1992. The board
of members of SEBI consists of a chairperson, two members from the officials of the RBI,
and two other professionals having expertise in the securities market. The main objectives of
SEBI are: -
1) Investor Protection
2) Steady flow of savings
3) Fair practices by issuers
4) Promotion of efficient financial service
5) Transparency
 Functions of the SEBI:
The function performed by the SEBI may be grouped into two categories.:-
a) Regulatory Functions
b) Developmental Functions
1) Under Regulatory Functions:
i) Registers and regulates the working e SEBI of stock brokers, sub-brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisors, and such other intermediaries
associated with the securities market.
ii) Register and regulate the working of the depositories, depository participants, custodians
of securities, foreign institutional investors, credit rating agencies, or any other intermediary
associated with the securities market as the SEBI may specify by notification.
iii) Register and regulate the working of venture capital funds, and collective investment
schemes, including mutual funds. All these intermediaries can function in the securities
market only after obtaining a certificate of registration from the SEBI. The SEBI has the
power to cancel the registration of any intermediary if it is found to be indulging in any unfair
trade practices in the capital market
iv) Undertakes inspection of stock exchanges regularly to ensure fair and free environment
for the investors.

2) Under Development Functions:

i) Promotion of education and knowledge about the securities market among investors.
ii) Promotion of self-regulation mechanisms in the securities market.
iii) Providing training to the market intermediaries.
iv) Promotion of code of conduct and fair practices.
v) Conducting research and publishing of information related to stock market activities