Fin Mkts and Inst MBA

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Unit 1

Meaning of financial system

Financial system is a set of inter-related and inter dependent activities working together to

achieve some predetermined purpose or goal. It includes different markets, the institutions,

instruments, services and mechanisms which influence the generation of savings, investment ,

capital formation and growth.

Functions of financial system

A financial system performs the following functions:

It serves as a link between savers and investors. It helps in utilizing the mobilized

savings of scattered savers in more efficient and effective manner.

It channelises flow of saving into productive investment.

It assists in the selection of the projects to be financed and also reviews the

performance of such projects periodically.

It provides payment mechanism for exchange of goods and services.

It provides a mechanism for the transfer of resources across geographic boundaries.

It provides a mechanism for managing and controlling the risk involved in mobilizing

savings and allocating credit.

It promotes the process of capital formation by bringing together the supply of saving

and the demand for investible funds.

It helps in lowering the cost of transaction and increase returns. Reduced cost motives

people to save more.


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It provides detailed information to the operators/players in the market such as

individuals, business houses, Government

Factors affecting the stability financial systemThere are various factors which affect the stability of financial system are as follows

* social factors* legal factors* economic factors

social factors :the social factors of a nation determine the value system of the society which, in turn affects thefunctioning of the financial system. Sociological factors such as costs structure, customs andconventions, cultural heritage, view toward wealth and income and scientific methods, respectfor seniority ,mobility of labor, etc.,have far- reaching impact on the financial system. these factorsdetermine the work culture and mobility of labor, workgroups, etc.thus, social factor includes living pattern of a nation. It decades the population composition of thecountry .thus financial system is highly influenced by these factors.

legal factors :these can be simply described as the laws and regulations that financial system has to follow. Itincludes :

i. taxation systemii. SEZ and EPZ conceptiii. Regulatory systemiv. International laws and regulations,etc.

Non-compliance of above regulations may impose fines and penalties on financial system.

Economic factors

i. Trade business cyclesii. Monetary policyiii. Fiscal policyiv. Currency exchange ratesv. Corporate activity

An Overview of Universal Banking

Universal Banking includes not only services related to savings and loans but also investments.However in practice the term universal banks refers to those banks that offer a wide range offinancial services, beyond commercial banking and investment banking, insurance etc. Universalbanking is a combination of commercial banking, investment banking and various other activitiesincluding insurance. If specialised banking is the one end universal banking is the other. This is

most common in European countries.

The main advantage of universal banking is that it results in greater economic efficiency in theform of lower cost, higher output and better products. The spread of universal banking ideas willbring to the fore issues such as mergers, capital adequacy and risk management of banks.Universal banks may be comparatively better placed to overcome such problems of asset-liabilitymismatches (for banks). However,larger the banks the greater the effects of their failure on thesystem. Also there is the fear that such institutions, by virtue of their sheer size, would gainmonopoly power in the market, which can have significant undesirable consequences for


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economic efficiency. Also combining commercial and investment banking can give rise to conflictof interests.

Universal Banking In India

The issue of universal banking resurfaced in Year 2000, when ICICI gave a presentation to RBI to

discuss the time frame and possible options for transforming itself into an universal bank.Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance, itsproposed policy for universal banking, including a case-by-case approach towards allowingdomestic financial institutions to become universal banks.

Now RBI has asked FIs, which are interested to convert itself into a universal bank, to submittheir plans for transition to a universal bank for consideration and further discussions. FIs need toformulate a road map for the transition path and strategy for smooth conversion into an universalbank over a specified time frame. The plan should specifically provide for full compliance withprudential norms as applicable to banks over the proposed period.

The Narsimham Committee II suggested that DFIs should convert ultimately into eithercommercial banks or non-bank finance companies. The Khan Working Group held the view that

DFIs should be allowed to become banks at the earliest. The RBI released a Discussion Paper(DP) in January 1999 for wider public debate. The feedback indicated that while the universalbanking is desirable from the point of view of efficiency of resource use, there is need for cautionin moving towards such a system. Major areas requiring attention are the status of financialsector reforms, the state of preparedness of the concerned institutions, the evolution of theregulatory regime and above all a viable transition path for institutions which are desirous ofmoving in the direction of universal banking.

Financial Institutions

Financial institutions include the banking and non-banking institutions. Financial institutions are

the intermediaries who facilitate smooth functioning of the financial system by making investors

and borrowers meet. They mobilize savings of the surplus units and allocate them in productive

activities promising a better rate of return. Financial institutions also provide services to entities

seeking advice on various issues ranging from restructuring to diversification plans. They provide

whole range of services to the entities who want to raise funds from the markets elsewhere.

Financial institutions act as financial intermediaries because they act as middlemen between

savers and borrowers.


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Role of financial institutions

In transferring resource allocation from direct financing to indirect financing, financial institutions

provide the following five basic services:

Currency Alteration: Buying financial claims denominated in one currency and selling financial

claims denominated in another currencies.

Quantity Divisibility: Financial institutions are capable in producing a broad range of quantity

from one dollar to many millions, by gathering from different people.

Liquidity: Easy to liquidate the instruments by buying direct financial claims with low liquidity and

issuing indirect financial claims with more liquidity.

Maturity Flexibility: Creating financial claims with wide range of maturities so as to balance thematurity of different instruments so as to reduce the gap between assets and liabilities.

Credit Risk Diversification (Portfolio Investment): By purchasing a broad range of instruments,

financial institutions are able to diversify the risk.


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RBI and its role

Bank Issue:

Under Section 22 of the Reserve Bank of India Act, the bank has the sole sight to issue bank

notes of all denominations. The notice issued by the Reserve bank has the following advantages:

It brings uniformity to note issue.

It is easier to control credit when there is a single agency of note issue.

It keeps the public faith in the paper currency alive.

It helps in the stabilization of the internal and external value of the currency and

Credit can be regulated according to the needs of the business.

The system of note issue as it exists today is known as the minimum reserve system. Thecurrency notes issued by the Bank arid legal tender everywhere in India without any limit. Atpresent, the Bank issues notes in the following denominations: Rs. 2, 5, 10, 20, 50 100, and 500.The responsibility of the Bank is not only to put currency into, or withdraw it from, the circulation

but also to exchange notes and coins of one denomination into those of other denominations asdemanded by the public. All affairs of the Bank relating to note issue are conducted through itsIssue Department.

Banker, Agent and Financial Advisor to the State:

As a banker agent and financial advisor to the State, the Reserve Bank performs the followingfunctions:

It keeps the banking accounts of the government.

It advances short-term loans to the government and raises loans from the public.

It purchases and sells through bills and currencies on behalf to the government.

It receives and makes payment on behalf of the government. It manages public debt and

It advises the government on economic matters like deficit financing price stability,management of public debts. etc.

Banker to the Banks:

It acts as a guardian for the commercial banks. Commercial banks are required to keep a certainproportion of cash reserves with the Reserve bank. In lieu of this, the Reserve bank provide themvarious facilities like advancing loans, underwriting securities etc. The RBI controls the volume ofreserves of commercial banks and thereby determines the deposits/credit creating ability of thebanks. The banks hold a part or all of their reserves with the RBI. Similarly, in times of their

needs, the banks borrow funds from the RBI. It is, therefore, called the bank of last resort or thelender of last resort.

Custodian of Foreign Exchange Reserves:

It is the responsibility of the Reserve bank to stabilize the external value of the national currency.The Reserve Bank keeps golds and foreign currencies as reserves against note issue and alsomeets adverse balance of payments with other counties. It also manages foreign currency inaccordance with the controls imposed by the government.


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As far as the external sector is concerned, the task of the RBI has the following dimensions:

To administer the foreign Exchange Control;

To choose ,the exchange rate system and fix or manages the exchange rate between therupee and other currencies;

To manage exchange reserves;

To interact or negotiate with the monetary authorities of the Sterling Area, Asian ClearingUnion, and other countries, and with International financial institutions such as the IMF,World Bank, and Asian Development Bank.

The RBI is the custodian of the countrys foreign exchange reserves, id it is vested with theresponsibility of managing the investment and utilization of the reserves in the mostadvantageous manner. The RBI achieves this through buying and selling of foreign exchangemarket, from and to schedule banks, which, are the authorized dealers in the Indian, foreignexchange market. The Bank manages the investment of reserves in gold counts abroad and theshares and securities issued by foreign governments and international banks or financialinstitutions.

Lender of the Last Resort:

At one time, it was supposed to be the most important function of the Reserve Bank. WhenCommercial banks fail to meet obligations of their depositors the Reserve Bank comes to theirrescue as the lender of the last resort, the Reserve Bank assumes the responsibility of meetingdirectly or indirectly all legitimate demands for accommodation by the Commercial Banks underemergency conditions.

Banks of Central Clearance, Settlement and Transfer:

The commercial banks are not required to settle the payments of their mutual transactions incash, It is easier to effect clearance and settlement of claims among them by making entries intheir accounts maintained with the Reserve Bank, The Reserve Bank also provides the facility for

transfer to money free of charge to member banks.

Controller of Credit:

In modern times credit control is considered as the most crucial and important functional of aReserve Bank. The Reserve Bank regulates and controls the volume and direction of credit byusing quantitative and qualitative controls. Quantitative controls include the bank rate policy, theopen market operations, and the variable reserve ratio. Qualitative or selective credit control, onthe other hand includes rationing of credit, margin requirements, direct action, moral suasionpublicity, etc. Besides the above mentioned traditional functions, the Reserve Bank also performssome promotional and supervisory functions. The Reserve Bank promotes the development ofagriculture and industry promotes rural credit, etc. The Reserve Bank also acts as an agent forthe international institutions as I.M.F., I.B.R.D., etc.

Supervisory Functions:

In addition to its traditional central banking functions, the Reserve Bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India.The supervisory functions of the RBI have helped a great deal in improving the methods of theiroperation. The Reserve Bank Act, 1934, and Banking Regulation Act, 1949 have given the RBIwide powers of:


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Supervision and control over commercial and cooperative banks, relating to licensing andestablishments.

Branch expansion.

Liquidity of their assets.

Management and methods of working, amalgamation reconstruction and liquidations.

The RBI is authorized to carry out periodical inspections off the banks and to call for returns andnecessary information from them.

Promotional Role

A striking feature of the Reserve Bank of India Act was that it made agricultural credit the Banksspecial responsibility. This reflected the realisation that the countrys central bank should makespecial efforts to develop, under its direction and guidance, a system of institutional credit for amajor sector of the economy, namely, agriculture, which then accounted for more than 50 percent of the national income. However, major advances in agricultural finance materialised onlyafter Indias independence. Over the years, the Reserve Bank has helped to evolve a suitableinstitutional infrastructure for providing credit in rural areas.

Another important function of the Bank is the regulation of banking. All the scheduled banks arerequired to keep with the Reserve Bank a consolidated 3 per cent of their total deposits, and theReserve Bank has power to increase this percentage up to 15. These banks must have capitaland reserves of not less than Rs.5 lakhs. The accumulation of these balances with the ReserveBank places it in a position to use them freely in emergencies to support the scheduled banksthemselves in times of need as the lender of last resort. To a certain extent, it is also possible forthe Reserve Bank to influence the credit policy of scheduled banks by means of an open marketoperations policy, that is, by the purchase and sale of securities or bills in the market. TheReserve bank has another instrument of control in the form of the bank rate, which it publishesfrom time to time.

Further, the Bank has been given the following special powers to control banking companies

under the Banking Companies Act, 1949:

The power to issue licenses to banks operating in India.

The power to have supervision and inspection of banks.

The power to control the opening of new branches.

The power to examine and sanction schemes of arrangement and amalgamation.

The power to recommend the liquidation of weak banking companies.

The power to receive and scrutinize prescribed returns, and to call for any otherinformation relating to the banking business.

The power to caution or prohibit banking companies generally or any banking company inparticular from entering into any particular transaction or transactions.

The power to control the lending policy of, and advances by banking companies or any

particular bank in the public interest and to give directions as to the purpose for whichadvances mayor may not be made, the margins to be maintained in respect of securedadvances and the interest to be charged on advances.

Financial Engineering

Leaders of successful businesses build long-term relationships with customers, suppliers,employees, and shareholders. They make farsighted investments to support and develop theircore competencies. They act quickly to ensure that short-term obstacles do not disrupt their long-


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term strategies. In conceiving and implementing corporate strategies, managers have alwaysdrawn on the skills of many specialists, from marketers to production experts.Now a small but growing number of senior managers have found that practitioners of a newtechnical specialtyfinancial engineeringcan help them achieve their companies strategicobjectives. They have found that, like other technological breakthroughs such as cheapcomputing power, financial engineering has the potential not only to reduce the cost of existing

activities but also to make possible the development of new products, services, and markets.Financial Engineering is an area of finance that deals with the method of implementing financialinnovations to find better solutions to specific financial problems. It would generally be carried outwith the diagnosis of a problem, analysis of the possible solutions understanding therewith apossibility a new financial instrument, producing or evolving of a new financial instrument. It alsoinvolves the activity of pricing and customizing this new financial instrument when the solution isfelt to be relevant to more than one client. It has also been defined as the use of derivatives tomanage risk and create customized financial instruments.It involves the design, the development, and the implementation of innovative financialinstruments and processes, and the formulation of creative solutions to the problems of finance.Broadly financial engineering is thus, an area which is involved with the analysis of an existingfinancial problem, designing a financial solution in the form of a financial product or service orsystem using the various financial tools and techniques including that of financial derivatives, the

development of the solution based on the data collected after the implementation of the solution,and then standardizing this solution for future uses.

Financial Innovation

Financial innovation is not a new phenomenon in the area of f inance. Earlier, innovations werecarried out using the traditional instruments of debt and equity and customizing them suitablyaccording to the needs of the clients. As early as 1934, there were many such instruments whichdeviated from the traditional debt and equity models as highlighted by Benjamin Graham. In hisseminal work on investing with David Dodd Security Analysis, he includes as an appendix APartial List of Securities which deviate from the Normal Patterns.In this appendix, they list out 258 different types of securities which do not follow the traditionalpattern of either the debt or the equity like zero-coupon bonds, convertible bonds, exotic bonds,inflation-indexed bonds, different types of warrants, voting bonds and others.This area of finance has also elicited the interests of the financial academia. There are a hugebundle of resources on this area of f inance. One of the main areas they have concentrated is onfinancial innovation and security design and I have listed some of them here.


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Unit 2

Structure of banking system in india


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Structure of commercial banks in india

Comparative performance of public and private sector banksThe private sector banks of India have made significant progress in the last few years. It was in

mid 90's when some new private sector banks entered into the foray and in the period between

2002 -2007 these banks have grown by leaps and bounds. They have increased their incomes,

margins, asset sizes and outperformed their public sector counterparts in many areas. The new

private sector banks include Axis, Development Credit, HDFC, ICICI, Indusind, Kotak Mahindra

and Yes Bank whereas the public sector banks consists of 19 nationalized banks, IDBI bank and

State Bank group. The performance of the two sectors is being judged on eight key parameters

that enable banks to achieve better bottom line and remain competitive in a highly volatile and

regulatory environment.

Parameter1: Banks Network

Today banks follow a willful strategy of building a network of branches and ATMs with effective

penetration so that they can continue to enlarge their geographical coverage of centres with

potential for growth. The banks try to deeply entrench across the country with significant density

in areas conducive to the growth of their businesses.


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Fig.1 % YoY growth in Banks network (Source: RBI)

The private sector banks are spreading its wings at a much faster rate than public sector banks.

The customer base of these banks has grown manifold since they are able to provide innovative

services to the customers at a much faster pace. This is leading them to capture more market

share and eating up some of the share of their public sector counterparts.

Parameter2: Banks Growth

Every bank aspires to grow and its growth can be judged by various parameters like

growth in balance sheet size i.e. asset base, improvement in the bottom line and many

others.

% Growth in Balance

Sheet Size

% Growth in Total

Income

2010 2011 2010 2011

New Private Sector

Banks 10.86% 23.51% -2.19% 14.63%

Public Sector

Banks 17.93% 19.21% 12.46% 16.71%

Fig.2 % Growth in banks Balance Sheet & Income (Source: RBI)

The public sector banks asset base and income grew at a decent rate in the last 2 years whereas

there was a great fluctuation in case of new private sector banks mainly due to recession. But the

growth of these banks was phenomenal during 2010-11 that shows their ability to recover fast

after such a catastrophe.

Parameter3: Productivity

Productivity can be considered as one measure of efficiency of banks. Productivity growth is

important to the banks because it means that the firm can meet its obligations to employees,

shareholders, and governments (taxes and regulation), and still remain competitive in the market

place. It is a ratio of what is produced to what is required to produce. In the banking scenario

productivity can be measured by profit per employee, business per employee.


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Fig.3 Productivity (Source: RBI)

These ratios can be misleading since banks can improve these ratios by trimming their

employees during recessionary environment. This is evident since asset base and profit levels

declined during 2009-10 for new private sector banks but still the above ratios showing acontinuous increasing trend. This was only possible when there is large lay-off of employees

which is actually what had happened with these banks during the period 2008-10. It was only in

2010 when the business started to pick up back again they started to hire. Overall public sector

banks scores higher when it comes to employee retention which is also evident from the graph.

Parameter4: Capital Adequacy

Capital Adequacy signals the banks ability to maintain capital commensurate with the nature and

extent of all types of risk and the ability of management to identify, measure, monitor and control

these risks. It also tells about the ability of bank to absorb a reasonable amount of loss and still

complies with statutory Capital requirements. Currently Reserve Bank of India (RBI) prescribes

banks to maintain Capital Adequacy Ratio (CAR) of 9% with regard to credit risk, market risk andoperational risk on an ongoing basis, as against 8% prescribed in BASEL framework.

Fig.4 Capital Adequacy Ratio (BASEL-II) (Source: RBI)

The Capital Adequacy ratio (BASEL-II) of new private sector banks is way above RBIs minimum

requirement of 9%. This shows that these banks are in comfortable position to absorb losses

since they have more capital to cover for their risk weighted assets. Or on the other hand they

have less risky assets in their portfolio for a fixed capital base.


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Parameter5: Asset Quality

Asset Quality reflects the amount of existing credit risk associated with the loan and investment

portfolio as well as off-balance sheet activities.

Loan & Investment Portfolio: The asset quality of banks can be judged by the non-performing

assets (NPA) ratio. Non-performing assets (NPA) are assets which fail to make either interest orprincipal payments for more than 90 days. RBI has set guidelines to classify NPA into different

categories like sub-standard, doubtful or loss assets.

There are two effects of NPA on bank financial statements:

1) Loss incurred due to non-payment of principal and interest by borrowers

2) Reduction of capital base due to its allocation to provision for doubtful assets

It is mandatory for all banks to have their asset base well diversified so that risk can be mitigated.

It has been seen that this practice has been followed by both private and public sector banks

meticulously.

Fig.5 Asset Quality (Source: RBI)

However there is huge difference in asset qualities of public & new private sector banks. The

main reason being that public sector banks have higher NPAs in services sector. The NPAs in

other sectors like Agriculture, Industry and Personal Loans are almost similar for these banks.

The asset quality of a bank directly affects its credit rating for example recently Moody

downgraded State Bank of India (SBI) credit rating due to its low asset quality.

Off-Balance Sheet (BS) activities: These are activities of banks which are not recorded on its

balance sheet. It is very important to consider the effect of these items since it can have

disastrous effect on banks business.


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Fig.6 Off- Balance Sheet Exposure (Source: RBI)

The Off-Balance Sheet (BS) activities under the purview of New Private Sector banks are

astoundingly large as compared to public sector banks. The main reason being the liability of

these banks on outstanding derivative contracts like Interest rate swaps, currency options and

interest rate futures. This makes their business highly susceptible to market risk but these banks

generally get involved in these activities because it gives them huge opportunity to earn

commission, exchange, brokerage fees and also to make profit on exchange transactions.Parameter6: Management Efficiency

Sound management is a key element to bank performance but is very difficult to measure since it

is primarily a qualitative factor. However several indicators can be used to measure the efficiency

for example ratio of non-interest exp to total assets which explains the management controls on

operating expenses. Similarly efficiency ratios like Asset Turnover ratio can be used to assess

how efficiently company is using its assets to earn the revenue.

Fig.7(a) Management Efficiency (Source: RBI)


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Fig.7(b) Management Efficiency (Source: RBI)

The efficiency ratios of new private sector banks are better than public sector banks which

eventually lead to enhanced bottom line. The asset turnover of both sectors banks is decreasing

over the last 3 years which is mainly due to a combination of decrease in non-interest income and

increase in asset base.

Parameter7: Earnings Quality

This parameter reflects not only the quantity and trend in earnings but also the factors that may

affect the sustainability or quality or earnings.

Fig.8 Earnings Quality (Source: RBI)

The above two graphs signifying the new private sector banks have better ratios since:


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a) The interest expense is less in comparison to interest income due to better asset liability

management which is good for banks.

b) The share of fee income is more in total income which in a way is good since it reflects that

banks have other options to earn money like in exchanges, commissions, brokerages etc. This

becomes essentially important for banks in volatile interest rate environments.

Parameter8: Liquidity

Liquidity reflects the adequacy of the institutions current and prospective sources of liquidity and

funds management practices. The inadequacy of liquidity in a bank causes liquidity risk which is

the risk of inability to meet financial commitments as they fall due, through available cash flows or

through sale of assets at fair market value.

Liquidity risk is two-dimensional: risk of being unable to fund portfolio of assets at appropriate

maturity and rates (liability dimension) and the risk of being unable to liquidate assets in a timely

manner at a reasonable price (asset dimension).

Fig.9 Liquidity (Source: RBI)

The credit deposit (C-D) ratio of any bank signifies the proportion of loan-assets created by banks

from the deposits received. The higher this ratio good it is for the banks since they earn more oninterest income but higher ratio also indicates that the bank doesnt hold cash with itself which

may create liquidity problems.

Similarly the investment deposit (I-D) ratio signifies the amount of investment bank has done from

the deposits received. The higher this ratio good it is as it increases the opportunity of earning but

on the other hand may also create liquidity problems. Therefore it is essential for the banks to

have a pool of short-term investments which have higher liquidity.

DEA Analysis

Data envelopment analysis (DEA) is a linear programming methodology which is used to

measure the efficiency of multiple decision-making units (DMUs) when there are multiple inputsand multiple outputs inconsideration.

A comparative analysis of 12 Indian banks is being done here using DEA that includes seven

public sector banks and five new private sector banks. The multiple inputs considered for

evaluation were equity capital, labour, loanable funds and the multiple outputs were Net Interest

Income, Fee Income. The data used for this analysis is the average of all the above mentioned

inputs & outputs over the period 2009-11.


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NPA

A NPA is a loan or an advance where;

Interest and/ or installment of principal remain overdue for a period of more than 90 days inrespect of a term loan,

The account remains out of order in respect of an overdraft/ cash creditThe bill remains overdue for a period of more than 90 days in the case of bills purchased anddiscounted

The installment or interest remains overdue for two crop seasons in case of short duration cropsand for one crop season in case of long duration crops

CATEGORIES OF NPA

Substandard Assets Which has remained NPA for a period less than or equal to 12 months.

Doubtful Assets Which has remained in the sub-standard category for a period of 12 months

Loss Assets where loss has been identified by the bank or internal or external auditors or theRBI inspection but the amount has not been written off wholly.

PROVISIONING NORMS

Standard Assets general provision of a minimum of 0.25%

Substandard Assets 10% on total outstanding balance, 10 % on unsecured exposures identifiedas sub-standard & 100% for unsecured doubtful assets.

Doubtful Assets 100% to the extent advance not covered by realizable value of security. In caseof secured portion, provision may be made in the range of 20% to 100% depending on the periodof asset remaining sub-standard

Loss Assets 100% of the outstanding

FACTORS CONTRIBUTING TO NPAS

Poor Credit discipline

Inadequate Credit & Risk Management

Diversion of funds by promoters

Funding of non-viable projects

The magnitude of NPAs have a direct impact on banks profitability as legally they are not allowedto book income on such accounts and at the same time banks are forced to make provision onsuch assets as per the RBI guidelines. The Indian Banking sector is facing a serious situation inview of the Mounting NPAs which are the tune of Rs.56,000 crores in March 2002.NPAs is animportant parameter in the analysis of financial performance of banks. The reduction of NPAs isnecessary to improve profitability of the banks and comply with capital adequacy norms.


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Therefore, to solve the problems of existing NPAs, quality of appraisal supervision and follow upshould be improved. The NPAs can be avoided at the initial stage of credit consideration byputting rigorous and appropriate credit appraisal mechanism. This is in order to recover the NPAdebt, the judicial systems should revamped and is essential to enforce the SARFAESI Act withmore stringent provisions to realize the securities and personal assets of the defaultersMajor steps taken to solve the problems of Non-Performing Assets in India :-

1. Debt Recovery Tribunals (DRTs)

Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals toreduce the time required for settling cases. Accepting the recommendations, Debt RecoveryTribunals (DRTs) were established. There are 22 DRTs and 5 Debt Recovery AppellateTribunals. This is insufficient to solve the problem all over the country (India).

2. Securitisation Act 2002

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act2002 is popularly known as Securitisation Act. This act enables the banks to issue notices todefaulters who have to pay the debts within 60 days. Once the notice is issued the borrowercannot sell or dispose the assets without the consent of the lender. The Securitisation Act further

empowers the banks to take over the possession of the assets and management of the company

NBFC

Non-bank financial companies(NBFCs) are financial institutions that provide banking serviceswithout meeting the legal definition of a bank, i.e. one that does not hold a banking license.

NBFCs include a loan company, an investment company, asset finance company ( i.e. acompany conducting the business of equipment leasing or hire purchase finance) and ResiduaryNon-Banking Companies. NBFCs are incorporated under the Companies Act, 1956.

NBFCs can be classified into two broad categories, viz.,

(i) NBFCs accepting public deposit (NBFCs-D) and(ii) NBFCs not accepting/holding public deposit (NBFCs-ND).

An NBFC must be registered with the Reserve Bank of India (RBI) and have specificauthorization to accept deposits from the public.NBFC must display the Certificate of Registration or a certified copy thereof at the Registeredoffice and other offices/branches.Registration of an NBFC with the RBI merely authorizes it to conduct the business of NBFC. RBIdoes not guarantee the repayment of deposits accepted by NBFCs. .NBFCs cannot use thename of the RBI in any manner while conducting their business.The NBFC whose application for grant of Certificate of Registration (CoR) has been rejected orcancelled by the RBI is neither authorized to accept fresh deposits nor renew existing deposit.Such rejection or cancellation is also published in newspapers from time to time

DIFFERENCE BETWEEN NBFCs AND BANK

NBFCs operate almost like banks, except for running accounts, where money can be easilywithdrawn by writing cheques or using a debit card.NBFCs are doing functions akin to that ofbanks; however there are a few differences:

An NBFC cannot accept demand deposits;An NBFC is not a part of the payment and settlement system and as such an NBFC cannot issuecheques drawn on itself; andDeposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available


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for NBFC depositors unlike in case of baTYPES OF NBFC

Originally, NBFCs registered with RBI were classified as:

(i) Equipment leasing company:Means any company which is a financial institution carrying on asits principal business,the activity of leasing of equipment or the financing of such activity.

(ii) Hire-purchase company- Means any company which is a financial institution carrying on as itsprincipal business hire purchase transactions or the financing of such transactions.

(iii) Loan companymeans any company which is a financial institution carrying on as itsprincipal business the providing of finance whether of making loans or advances or otherwise forany activity other then its own

(iv) investment companymeans any company which is a financial institution carrying on as itsprincipal business the acquisition of securities

RBI REGULATIONS

The RBI Act regulates different types of NBFC'S under the provision of Chapter III- B and ChapterIII- C

i) Corporate NBFCs fall under Chapter III-B, andii) Uncorporate NBFCs fall under Chapter III-C

REGISTRATION In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that everyNBFC should be registered with RBI to commence or carry on any business of non-bankingfinancial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.NET OWNED FUNDS- Under Section 45 I(a) of the RBI Act, 1934 NBFC should have a minimumnet owned fund of Rs 25 lakh to Rs 200 lakhMAINTENANCE OF ASSETS-The NBFCs are required to invest in India in approved securitiesatleast 5% or higher percentage as specifiedby the RBI from time to time,of the outstanding

deposits at the close of the business on the second preceeding quarterRESERVE FUND-Every NBFC must create a reserve fund to which atleast 20% of its net profitmust be transferred before the declaration of any dividendPOWER OF REGULATION/PROHIBITION-The RBI can by general/special order regulate orprohibit the issue by any NBI the issue of any prospectus or advertisement soliciting deposits ofmoney from the publicPOWER TO COLLECT INFORMATION FROM ANY NBI's-The RBI can issue direction to NBIs tofurnish information relating to/connected with deposits.POWER TO CALL FOR INFORMATION FROM FIs AND ISSUE DIRECTIONS-To regulate thecredit system,the RBI can ask for information from FIs relating to their business as well asdirections for the conduct of their businessPENALTIES-If any prospectus/advertisement inviting deposit from the public,whoever willfullymakes a false statement in any material particular knowing it to be false or willfully omits to make

a material statement,would be punishable with imprisonment for a term upto three years andwould also be liable to a fine.Failure by a person to produce any book/account/other documentsor to furnish any statement/information/particulars is punishable with fine.The penalty imposed bythe RBI is payable within 30 days from the date on which the notice demanding payment isserved on the NBFC .The Regulatory and Supervisory objective is to:

Ensure healthy growth of the financial companies;Ensure that these companies function as a part of the f inancial system within the policyframework, in such a manner that their existence and functioning do not lead to systemic


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aberrations;The quality of surveillance and supervision exercised by the Bank over the NBFCs is sustainedby keeping pace with the developments that take place in this sector of the financial system.Two aspects of NBFCs functioning

A) REGULATORY FRAMEWORKB) SUPERVISORY FRAMEWORK

A) REGULATORY FRAMEWORK

Ensure that NBFCs serve the financial system efficiently.Protect the interest of depositors.The activities of NBFCs were being regulated by the provisions of Chapter III-B of the RBI Act,1934 for over three decades. The emphasis of these regulations was, however, on theacceptance of deposit by NBFCs mainly as an adjunct to monetary and credit policy.Entry norms for NBFCs and prohibition of deposit acceptance by unincorporated bodies engagedin financial business.Compulsory registration, maintenance of liquid assets and creation of reserve fund.Power of the RBI to issue directions for NBFCs.Basic Structure

Comprehensive regulation and supervision of deposit taking NBFCs and limited supervision overthose not accepting public deposits.Prescription of prudential norms akin to those applicable to banks.Submission of periodical returns for the purpose of off-site surveillance

Asset liability and risk management system for NBFCsPunitive action like cancellation of Certificate of Registration (CoR), prohibition from acceptanceof deposits and alienation of assets.For Protection Of Depositors'Interest

Co-ordination with State Governments to curb unauthorized and fraudulent activities.Publicity for depositors' education and awareness, workshops / seminars for trade and industryorganizations

B) SUPERVISORY ASPECTS:

Reserve Bank of India has instituted a comprehensive supervisory mechanism

On-site InspectionOff-site Surveillance SystemMarket intelligenceON-SITE INSPECTION:

It includes that an NBFC

1. Is complying with regulatory stipulation and supervisory guidelines2. Has adequate capital and liquidity

3. Is being properly managed4. Has adequate systems and controls in place

OFF-SITE SURVEILLANCE:

It includes to be an in house review and an analytical system based on receipt of variousstatutory returns and other statements from the supervised entites at fixed intervals.

MARKET INTELLIGENCE:


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It includes a system of capturing developments that takes place in the financial services sectorthrough various channels including press,electronic media and put the information to proper usewith utmost sensitivity so that RBI remains alert in its actions.

Unit 4

Financial Services

Financial services can be defined as the products and services offered by institutions like banks

of various kinds for the facilitation of various financial transactions and other related activities in

the world of finance like loans, insurance, credit cards, investment opportunities and money

management as well as providing information on the stock market and other issues like market

trends

Financial services refer to services provided by the finance industry. The f inance industry

encompasses a broad range of organizations that deal with the management of money. Among

these organizations are banks, credit card companies, insurance companies, consumer finance

companies, stock brokerages, investment funds and some government sponsored enterprises.

Functions of financial services

1. Facilitating transactions (exchange of goods and services) in the economy.

2. Mobilizing savings (for which the outlets would otherwise be much more limited).

3. Allocating capital funds (notably to finance productive investment).

4. Monitoring managers (so that the funds allocated will be spent as envisaged).

5. Transforming risk (reducing it through aggregation and enabling it to be carried by those

more willing to bear it).

Characterstics and Features of Financial Services

i) Customer-Specific: Financial services are usually customer focused. The firms providing these

services, study the needs of their customers in detail before deciding their financial strategy,

giving due regard to costs, liquidity and maturity considerations. Financial services firms

continuously remain in touch with their customers, so that they can design products which can

cater to the specific needs of their customers. The providers of financial services constantly carry

out market surveys, so they can offer new products much ahead of need and impending

legislation. Newer technologies are being used to introduce innovative, customer friendly

products and services which clearly indicate that the concentration of the providers of financial

services is on generating firm/customer specific services.


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ii) Intangibility: In a highly competitive global environment brand image is very crucial. Unless the

financial institutions providing financial products and services have good image, enjoying the

confidence of their clients, they may not be successful. Thus institutions have to focus on the

quality and innovativeness of their services to build up their credibility.

iii) Concomitant: Production of financial services and supply of these services have to be

concomitant. Both these functions i.e. production of new and innovative financial services and

supplying of these services are to be performed simultaneously.

iv) Tendency to Perish: Unlike any other service, financial services do tend to perish and hence

cannot be stored. They have to be supplied as required by the customers. Hence financial

institutions have to ensure a proper synchronization of demand and supply.

v) People based services: Marketing of financial services has to be people intensive and hence

its subjected to variability of performance or quality of service. The personnel in financial services

organisation need to be selected on the basis of their suitability and trained properly, so that they

can perform their activities efficiently and effectively.vi) Market Dynamics: The market dynamics depends to a great extent, on socioeconomic

changes such as disposable income, standard of living and educational changes related to the

various classes of customers. Therefore financial services have to be constantly redefined and

refined taking into consideration the market dynamics. The institutions providing financial

services, while evolving new services could be proactive in visualising in advance what the

market wants, or being reactive to the needs and wants of their customers.

Scope of Financial Services

Financial services cover a wide range of activities. They can be broadly classified into two,

namely:

i. Traditional. Activities

ii. Modern activities.

i. Traditional Activities

Traditionally, the financial intermediaries have been rendering a wide range of services

encompassing both capital and money market activities. They can be grouped under two heads,

viz.

1. Fund based activities and

2. Non-fund based activities.

Fund based activities: The traditional services which come under fund based activities are the

following:


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Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary

market activities).

Dealing in secondary market activities.

Participating in money market instruments like commercial

Papers, certificate of deposits, treasury bills, discounting of bills etc.

Involving in equipment leasing, hire purchase, venture capital, seed capital,

Dealing in foreign exchange market activities. Non fund based activities

Non fund based activities

Financial intermediaries provide services on the basis of non-fund activities also. This can be

called fee based activity. Today customers, whether individual or corporate, are not satisfied with

mere provisions of finance. They expect more from financial services companies. Hence a wide

variety of services, are being provided under this head. They include:

Managing the capital issue i.e. management of pre-issue and post-issue activities

relating to the capital issue in accordance with the SEBI guidelines and thus enabling the

promoters to market their issue.

Making arrangements for the placement of capital and debt instruments with investment

institutions.

Arrangement of funds from financial institutions for the clients project cost or his working

capital requirements.

Assisting in the process of getting all Government and other clearances.ii. Modern Activities

Beside the above traditional services, the financial intermediaries render innumerable services in

recent times. Most of them are in the nature of non-fund based activity. In view of the importance,

these activities have been in brief under the head New financial products and services.

However, some of the modern services provided by them are given in brief hereunder.

Rendering project advisory services right from the preparation of the project report till the

raising of funds for starting the project with necessary Government approvals.

Planning for M&A and assisting for their smooth carry out.

Guiding corporate customers in capital restructuring.

Acting as trustees to the debenture holders.

Recommending suitable changes in the management structure and management style

with a view to achieving better results.

Structuring the financial collaborations / joint ventures by identifying suitable joint venture

partners and preparing joint venture agreements.


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Rehabilitating and restructuring sick companies through appropriate scheme of

reconstruction and facilitating the implementation of the scheme.

Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political

risk by using swaps and other derivative products.

Managing In- portfolio of large Public Sector Corporations. Undertaking risk management services like insurance services, buy-hack options etc.

Advising the clients on the questions of selecting the best source of funds taking into

consideration the quantum of funds required, their cost, lending period etc.

Guiding the clients in the minimization of the cost of debt and in the determination of the

optimum debt-equity mix.

Promoting credit rating agencies for the purpose of rating companies which want to go

public by the issue of debt instrument.

Undertaking services relating to the capital market, such as 1)Clearing services,

2)Registration and transfers, 3)Safe custody of securities, 4)Collection of income on securitie

Factoring

Factoring is a financial option for the management of receivables. In simple definition it is theconversion of credit sales into cash. In factoring, a financial institution (factor) buys the accountsreceivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amountimmediately on agreement. Factoring company pays the remaining amount (Balance 20%-

finance cost-operating cost) to the client when the customer pays the debt. Collection of debtfrom the customer is done either by the factor or the client depending upon the type of factoring.We will see different types of factoring in this article. The account receivable in factoring caneither be for a product or service. Examples are factoring against goods purchased, factoring forconstruction services (usually for government contracts where the government body is capable ofpaying back the debt in the stipulated period of factoring. Contractors submit invoices to get cashinstantly), factoring against medical insurance etc. Let us see how factoring is done against aninvoice of goods purchased.


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Characteristics of factoring

1. Usually the period for factoring is 90 to 150 days. Some factoring companies allow evenmore than 150 days.

2. Factoring is considered to be a costly source of finance compared to other sources ofshort term borrowings.

3. Factoring receivables is an ideal financial solution for new and emerging firms withoutstrong financials. This is because credit worthiness is evaluated based on the financialstrength of the customer (debtor). Hence these companies can leverage on the financialstrength of their customers.

4. Bad debts will not be considered for factoring.5. Credit rating is not mandatory. But the factoring companies usually carry out credit risk

analysis before entering into the agreement.6. Factoring is a method of off balance sheet financing.7. Cost of factoring=finance cost + operating cost. Factoring cost vary according to the

transaction size, financial strength of the customer etc. The cost of factoring vary from1.5% to 3% per month depending upon the financial strength of the client's customer.

8. Indian firms offer factoring for invoices as low as 1000Rs9. For delayed payments beyond the approved credit period, penal charge of around 1-2%

per month over and above the normal cost is charged (it varies like 1% for the first monthand 2% afterwards).

Different types of Factoring

1. Disclosed and Undisclosed2. Recourse and Non recourse


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A single factoring company may not offer all these services.

Disclosed

In disclosed factoring client's customers are notified of the factoring agreement. Disclosed typecan either be recourse or non recourse.

Undisclosed

In undisclosed factoring, client's customers are not notified of the factoring arrangement. Salesledger administration and collection of debts are undertaken by the client himself. Client has topay the amount to the factor irrespective of whether customer has paid or not. But in disclosedtype factor may or may not be responsible for the collection of debts depending on whether it isrecourse or non recourse.

Recourse factoring

In recourse factoring, client undertakes to collect the debts from the customer. If the customerdon't pay the amount on maturity, factor will recover the amount from the client. This is the mostcommon type of factoring. Recourse factoring is offered at a lower interest rate since the risk bythe factor is low. Balance amount is paid to client when the customer pays the factor.

Non recourse factoring

In non recourse factoring, factor undertakes to collect the debts from the customer. Balanceamount is paid to client at the end of the credit period or when the customer pays the factorwhichever comes first. The advantage of non recourse factoring is that continuous factoring willeliminate the need for credit and collection departments in the organization.

The Venture Capital Financing

The requirements of funds vary with the life cycle stage of the enterprise. Even before a businessplan is prepared the entrepreneur invests his time and resources in surveying the market, findingand understanding the target customers and their needs. At the seed stage the entrepreneurcontinue to fund the venture with his own or family funds. At this stage the funds are needed tosolicit the consultants services in formulation of business plans, meeting potential customers andtechnology partners. Next the funds would be required for development of the product/processand producing prototypes, hiring key people and building up the managerial team. This isfollowed by funds for assembling the manufacturing and marketing facilities in that order. Finallythe funds are needed to expand the business and attaint the critical mass for profit generation.Venture capitalists cater to the needs of the entrepreneurs at different stages of their enterprises.Depending upon the stage they finance, venture capitalists are called angel investors, venturecapitalist or private equity supplier/investor.

Venture capital was started as early stage financing of relatively small but rapidly growingcompanies. However various reasons forced venture capitalists to be more and more involved inexpansion financing to support the development of existing portfolio companies. With increasingdemand of capital from newer business, Venture capitalists began to operate across a broaderspectrum of investment interest. This diversity of opportunities enabled Venture capitalists tobalance their activities in term of time involvement, risk acceptance and reward potential, whileproviding on going assistance to developing business.
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Different venture capital firms have different attributes and aptitudes for different types of Venturecapital investments. Hence there are different stages of entry for different Venture capitalists andthey can identify and differentiate between types of Venture capital investments, each appropriatefor the given stage of the investee company, These are:-

1. Early Stage Finance

Seed Capital

Start up Capital

Early/First Stage Capital

Later/Third Stage Capital

2. Later Stage Finance

Expansion/Development Stage Capital

Replacement Finance

Management Buy Out and Buy ins

Turnarounds

Mezzanine/Bridge Finance

Not all business firms pass through each of these stages in a sequential manner. For instanceseed capital is normally not required by service based ventures. It applies largely tomanufacturing or research based activities. Similarly second round finance does not alwaysfollow early stage finance. If the business grows successfully it is likely to develop sufficient cashto fund its own growth, so does not require venture capital for growth.
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Definition of merchant banking:

The Notification of the Ministry of Finance defines merchant banker as Any person who isengaged in the business of issue management either by making arrangements regarding selling,buying or subscribing to securities as manager-consultant, advisor or rendering corporateadvisory services in relation to such issue management

The Amendment Regulation specifies that issue management consist of Prospectus and otherinformation relating to issue, determining financial structure, tie-up of financiers and finalallotment and refund of the subscriptions, underwriting and portfolio management services.

In the words of Skully A Merchant Bank could be best defined as a financial institutionconducting money market activities and lending, underwriting and financial advice, andinvestment services whose organization is characterized by a high proportion of professional staffable to able to approach problems in an innovative manner and to make and implement decisionsrapidly.

Nature of merchant banking:

Merchant banking is skill based activities and involves serving every financial need of everyclient. It requires focused skill-base to provide for the requirements of the client. SEBI has madethe quality of man-power as one of the criteria for registration as merchant banker. These skillsshould not be concentrated in issue management and underwriting alone, which may have anadverse impact on business. Merchant bankers can turn to any of the activities mentioned abovedepending upon resources, such as capital, foreign tie-ups for overseas activities and skills. Thedepth and sophistication in merchant banking business are improving since the avenues forparticipating in capital market activities have widened from issue management and underwritingto private placement, bought out deals (BODS), buy-back of shares, merges and takeovers.

The services of merchant bank cover project counseling, pre investment activities, feasibilitystudies, project reports, design of capital structure, issue management, underwriting, loansyndication, mobilization of funds from Non-Resident Indians, foreign currency finance, mergers,

amalgamation, takeover, venture capital, buy back and public deposits. A Category-1 merchantbanker can undertake issue management only. Separate registration is not necessary to carry onthe activity as underwriter.

Characteristics of Merchant Banking:

High proportion of decision makers as a percentage of total staff.

Quick decision process.

High density of information.

Intense contact with the environment.

Loose organizational structure.

Concentration of short and medium term engagements.

Emphasis on fee and commission income.

Innovative instead of repetitive operations.

Sophisticated services on a national and international level.

Low rate of profit distribution.

High liquidity ratio.


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Qualities of a Merchant Banker:

Ability to analyse

Abundant knowledge

Ability to built up relationship

Innovative approach

Integrity

Merchant Banking in India:

Merchant banking activity was formally initiated into the Indian capital Markets when Grind laysbank received the license fromReserve Bank in 1967. Grind lays started with management ofcapital issues, recognized the needs of emerging class of entrepreneurs for diverse financialservices ranging from production planning and system design to market research. Even itprovides management consulting services to meet the requirements of small and medium sectorrather than large sector. Citibank Setup its merchant banking division in 1970. The various tasksperformed by this divisions namely assisting new entrepreneur, evaluating new projects, raisingfunds through borrowing and issuing equity. Indian banks Started banking Services as a part of

multiple services they offer to their clients from 1972. State bank of India started the merchantbanking division in 1972. In the Initial years the SBIs objective was to render corporate adviceAnd Assistance to small and medium entrepreneurs. Merchant banking activities is OF courseorganized and undertaken in several forms. Commercial banks and foreign development financeinstitutions have organized them through formation divisions, nationalized banks have formedsubsidiaries companies and share brokers and consultancies constituted themselves into publiclimited companies or registered themselves as private limited companies. Some merchantbanking outfits have entered into collaboration with merchant bankers abroad with severalbranches.

The important functions of merchant bankers are:

Management of Debt and Equity Offerings:

This forms the main function of the merchant banker. He assists the companies in raising fundsfrom the market. The undergoing tasks include instrument designing, pricing the issue,registration of the offer document, underwriting support, marketing of the issue, allotment andrefund and listing on stock exchanges.

Placement and Distribution:

The merchant banker helps in distributing various securities like equity shares, debt instruments,mutual funds, insurance products, and commercial paper, to name a few. The distribution networkof the merchant banker can be classified as institutional and retail in nature. The institutionalnetwork consists of mutual funds, foreign institutional investors; private equity funds pensionfunds, financial institutions, etc.

Corporate Advisory Services:

Merchant bankers offer customized solutions to their clients financial problems. Financialstructuring includes determining the right debt-equity ratio and the framing of appropriate capitalstructure theory.

Project Advisory Services:
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Merchant bankers help their clients in various stages of the project undertaken by the clients.They assist them in conceptualizing the project idea in the initial stage. Once the idea is formed,they conduct feasibility studies to examine the viability of the proposed project.

Loan Syndication:

Merchant bankers arrange to tie up loans for their clients. This takes place in a series of steps.Firstly, they analyze the pattern of the clients cash flows, based on which the terms of theborrowings can be defined. Then the merchant banker prepares a detailed loan memorandum,which is circulated to various banks and financial institutions and they are invited to participate inthe syndicate. The banks then negotiate the terms of lending on the basis of which the finalallocation is done.

Providing Venture Capital Financing:

Merchant bankers help companies in obtaining venture capital financing for financing their newand innovative strategies.

Unit 5

Methods of issue of shares

Following are the five common methods of share issues:

1) Public Issue - This involves a corporation making an invitation to the general public tosubscribe or purchase its shares. For instance, a listed company made a public issue of1,000,000 New Ordinary Shares of $1 each at an issue price of $1.20 per ordinary share payablein full on application.

2) Offers for sale - This method involves a corporation selling a new issue of share to an issuinghouse, and the issuing house will bear the risks of selling shares to other investors.

3) Private placings - This method involves an issue of new shares to financial institutions andlarge private clients rather than making an invitation to the general public to subscribe to shares.

4) Bonus issues - A listed company may capitalize part of its reserves by making a bonus issue tothe existing shareholders, and no cash will be paid to such issues. For instance, if a corporationdeclares a 1 for 5 bonus issue, that means for every 5 shares held, an existing shareholder willreceive 1 share for free.

5) Rights issue - A corporation may make a rights issue to its ordinary shareholders. Existingshareholders will be given the rights to buy a new share at a price lower than that listed in thestock exchange.

The procedure of the managing a public issue by a merchant banker is divided into two phases,viz;

Pre-issue management

Post-issue management

Pre-Issue Management:-

Steps required to be taken to manage pre-issue activity is as follows:-


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(1) Obtaining stock exchange approvals to memorandum and articles of associations.

(2) Taking action as per SEBI guide lines

(3) Finalizing the appointments of the following agencies:

Co-manager/Advisers to the issue Underwriters to the issue

Brokers to the issue

Bankers to the issue and refund Banker

Advertising agency

Printers and Registrar to the issue

(4) Advise the company to appoint auditors, legal advisers and broad base Board of Directors

(5) Drafting of prospectus

(6) Obtaining approvals of draft prospectus from the companys legal advisers, underwritingfinancial institutions/Banks

(7) Obtaining consent from parties and agencies acting for the issue to be enclosed with theprospectus.

(8) Approval of prospectus from Securities and Exchange Board of India.

(9) Filing of the prospectus with Registrar of Companies.

(10) Making an application for enlistment with Stock Exchange along, with copy of theprospectus.

(11) Publicity of the issue with advertisement and conferences.

(12) Open subscription list.

Post-issue Management:-

Steps involved in post-issue management are:-

(1) To verify and confirm that the issue is subscribed to the extent of 90% including devolvementfrom underwriters in case of under subscription

(2) To supervise and co-ordinate the allotment procedure of registrar to the issue as per

prescribed Stock Exchange guidelines

(3) To ensure issue of refund order, allotment letters / certificates within the prescribed time limitof10 weeks after the closure of subscription list

(4) To report periodically to SEBI about the progress in the matters related to allotment andrefunds

(5) To ensure he listing of securities at Stock Exchanges.


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(6) To attend the investors grievances regarding the public issue

The Merchant Bankers for managing public issue can negotiate a fee subject to a ceiling. This feeis to be shared by all lead managers, advisers etc. 0.5% of the amount of public issues up toRs.25 crores 0.2% of the amount exceeding Rs.25crores, if more than one Merchant bankers aremanaging the issue.

SEBI

means Security Exchange Board of India. From the name we can understand the main duty ofSEBI is to protect the investors in securities.

The SEBI was established under the SEBI acts 1992. The SEBI consist of a chairman and eightother members. The Head office is located in Mumbai.

The function of SEBI in monitoring the stock exchange:1. The business of Stock Exchange the regulated.

2. Prevents fraudulent and unfair trade practises in stock exchange.

3. Regulates the acquisition of shares and takeover of companies.

4. Undertakes the checking and inspection of stock exchanges.

5. Conducting enquires and inspection of stock exchange.

6. Protects the interest of the investors.

The various powers of stock exchange:1. Power relating to insider trading.

2. Power relating to stock exchange and dealing in securities.

3. Power relating to violation of rules and regulation.

4. Power to regulate business of stock exchange and control it unfair trade.

5. Power under securities contract act.

Investor protection measures of SEBI

Simplification of share transfer and allotment procedure

SEBI appointed a committee under the chairmanship of Shri R Chandrasekaran,Managing Director of the Stock Holding Corporation of India Limited, to suggest aprocedure for expediting and simplifying share transfer and allotment. The committee hassubmitted its draft report which has been circulated to various market intermediaries fortheir comments. Based on the feedback received, the report will be finalised andnecessary action will be taken to implement the recommendations. It is expected thatimplementation of the recommendations of this committee would considerably ease thedifficulties faced by investors on account of inordinate delays in share transfers and baddeliveries.

Unique order code number


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All stock exchanges have been required to ensure that a system is put in place wherebyeach transaction is assigned a unique order code number which is intimated by thebroker to his client. Once the order is executed, this number is to be printed on thecontract note.

Time stamping of contracts

Stock brokers have been required to maintain a record of time when the client has placedthe order and reflect the same in the contract note along with the time of the execution ofthe order. This will ensure that the broker gives due preference in execution of client'sorder and charges the correct price to his client without taking advantage of any intra-dayprice fluctuation for himself.

Role of sub-brokers

Historically, the brokers have been operating through a network of sub-brokers who forman important link between the brokers and the investors. While the SEBI (Stock Brokersand Sub-Brokers) Regulations, 1992 provide for compulsory registration of sub-brokers,only 1,798 sub-brokers have registered with SEBI. In an attempt to safeguard the interest

of investors and bring sub-brokers under the regulatory framework of SEBI and the stockexchanges, the following measures have been initiated:

1. Efforts have been made to revive the institution of remisier under the rules andbye-laws of the stock exchanges. A remisier is an agent of a broker and isregistered with the stock exchange. However he is not authorised to issue acontract/confirmation note to his investor; instead the contract is issued by thebroker and as such the broker takes full responsibility in respect of that deal. Thisway the interest of the investor vis--vis the remisier or broker is protected.

2. Transfer deeds bearing rubber stamps on the reverse other than those ofclearing members of the stock exchanges/clearing house/clearing corporations,SEBI registered sub-brokers and remisiers registered with the stock exchangeswould become bad delivery in the stock exchanges for all transfer deeds dated

June 1, 1997 and thereafter.3. A stock broker may not deal with a person who is acting as a sub-broker unless

he is registered with SEBI. It shall be the responsibility of the broker to ensurethat his client are not acting in the capacity of a sub-broker unless he isregistered with SEBI as sub-broker or is recognised by the stock exchange as aremisier.

Investor protection fund

The amount of compensation available against a single claim of an investor arising out ofdefault by a member broker of a stock exchange has already been increased to Rs.1 lakhin case of major stock exchanges, to Rs.25,000 in case of smaller stock exchanges viz.Gauhati, Bhubaneshwar, Magadh and Madhya Pradesh and to Rs. 50,000 in case of theother stock exchanges.

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