The document provides an overview of the Indian financial system, including financial markets, intermediation, and instruments. It discusses key components of the system such as money markets, capital markets, credit markets, and foreign exchange markets. It also describes various financial intermediaries that operate in the markets, including investment bankers, underwriters, and mutual funds. The role of the Reserve Bank of India in regulating the financial system is summarized as well.

1. FINANCIAL MARKETS AND INSTITUTIONS BY A . ARULDOS S VITHAKAN 9/11/10 1

3. The term "finance" in our simple understanding it is perceived as equivalent to 'Money‘. But finance exactly is not money, it is the source of providing funds for a particular activity.

4. Finance refers to assessing the requirements of funds, identify sources , sourcing, deployment and evaluating the results of such investment with a view to improve performance in the future.

5. The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.9/11/10 2

7. The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. 9/11/10 3

9. Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year.

10. Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

11. Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.9/11/10 4

13. To serve this purpose, Financial intermediaries came into existence.

14. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. 9/11/10 5

16. FINANCIAL INTERMEDIARIES 9/11/10 7

17. NATURE AND ROLE OF FINANCIAL SYSTEMSTRUCTURE OF FINANCIAL SYSTEM 9/11/10 8

19. All participants are rational.

20. All are well informed and there is smooth and faster flow of required information.

21. There is homogeneous expectations from all participants in the market.

22. There are no taxes.

23. There are no transaction costs.

24. The financial assets are infinitely divisible.9/11/10 9

26. Savings is the difference between possible income and consumption expenditure..

27. The level of current and expected income has a definite bearing on volume of savings . Other factors are age wise variations, certainty of income, inflation, desire to save for old age, tax benefits, economic development, desire to consume.

28. Demand for funds are dependent on investment climate, growth of economy, investment in working capital, expansion, new establishments of industry or service units,expoprts, technological changes capacity utilisation,investment in housing, infrastructure development, availability of internal funds, cost of capital etc.9/11/10 10

29. FINANCIAL SYSTEM AND ECONOMIC DWVELOPMENT 9/11/10 11

31. Theory of forced savings— According to this theory investments are not determined by savings but it is savings which determine investments which can be increased automatically through monetary expansion The monetary expansion speed up development through four channels:1.if resources are unemployed it would increase aggregate demand, output and savings. `2. If resources are fully employed it would generate inflation which will lower the rate of return on financial instruments or money. This will make the wealth holders to invest in physical capital. 3. Inflation changes income distribution in favour of profit earners which will increase savings'. Inflation tax effect- Inflation imposes tax on real money therby savings are transferred to Government fo investments. 9/11/10 12

33. Financial Liberalisation Theory- It is argued tha the Government intervention and control of financial sector not only lower the quantum of investments but also tne quality as finacial institutions are forced to have directed investments in government specified priority sectors which normally non productive assets . Also they are primarily in l sectors which do not contribute to economic development/GDP growthh9/11/10 13

35. Board for Financial Supervision was set up under the aegis Reserve Bank under Reserve Bank of India (Board for Financial Supervision) Regulations, 1994 with the objective of paying undivided attention to the supervision of the institutions in the financial sector.

36. Prior to 1993, the supervision and regulation of commercial banks was handled by the Department of Banking Operations & Development (DBOD). In December 1993 the Department of Supervision was carved out of the DBOD with the objective of segregating the supervisory role from the regulatory functions of RBI. 9/11/10 14

37. Department of Banking Supervision (DBS) The Department of Banking Supervision at present exercises the supervisory role relating to commercial banks in the following forms: Preparing of independent inspection programmes for different institutions. Undertaking scheduled and special on-site inspections, off-site surveillance, ensuring follow-up and compliance. Determining the criteria for the appointment of statutory auditors and special auditors and assessing audit performance and disclosure standards. Dealing with financial sector frauds. Exercising supervisory intervention in the implementation of regulations which includes – recommendation for removal of managerial and other persons, suspension of business, amalgamation, merger/winding up, issuance of directives and imposition of penalties. 9/11/10 15

38. Department of Non-Banking Supervision(DNBS) Department of Non-Banking Supervision has following responsibilities: Administration of Chapter IIIB of the RBI Act, formulating regulatory framework and issuing directions to the NBFCs (including residuary non-banking companies, mutual benefit companies, chit fund companies); Administration of Chapter III-C of the RBI Act in respect of unincorporated bodies, Chit Funds Act in respect of chit fund companies, Prize Chits and Moneys Circulation Schemes (Banning) Act in respect of prize chits; Identification and classification of NBFCs; Registration of NBFCs under section 45-IA of the RBI Act; On-site inspection and follow up; Off-site surveillance and scrutiny of various returns; Attending to complaints relating to NBFC sector; and Initiating deterrent action against the errant companies 9/11/10 16

40. Supervision of overseas branches of Indian banks

41. Financial Institutions

42. Non-Banking Financial Companies

43. Off-site Monitoring & Surveillance System-Banks, All India Development Financial Institutions, Non-Banking Financial Companies9/11/10 17

45. Advisory Council to BFS was constituted on November 16, 1994 and was in place till March 27, 1998.

46. The BFS also constituted an Audit Sub-Committee in January 1995

47. The supervision by BFS at present covers commercial banks, all India development financial institutions and non-banking finance companies. 9/11/10 18

49. Transparency and Disclosure

50. Internal controls and housekeeping in banks

51. Reconciliation of inter-branch accounts

52. Balancing of books

53. Reconciliation of Nostro accounts

54. Strengthening of internal audit /control systemAudit system in banks Fraud monitoring Core Principles for Effective Banking Supervision 9/11/10 19

55. ASSIGNMENT -1 Discuss in brief the role, responsibilities and functions of various financial intermediaries in Indian Financial System Note: 1. Assignment must be in your own language, data / information can be gathered from text books and the net. 2. Assignment to be submitted lates by 29.06.2009 9/11/10 20

57. Desired national saving is the level of national saving when consumption is at its desired level:9/11/10 21

58. Consumption and saving decisions: A person can consume less than current income, i.e., saving is positive. A person can consume more than current income i.e., saving is negative 9/11/10 22

59. Consumption and saving decisions: There is a trade-off between current and future consumption: •The price of 1 unit of current consumption is 1 + r units of future consumption, where r is the real interest rate. Consumption-smoothing motive: the desire to have a relatively even pattern of consumption over time. 9/11/10 23

60. Effect of changes in current income: Increases in current income increase both consumption and saving. • Because the marginal propensity to consume—the fraction of additional income consumed—is less than 1. When current income (Y) rises, Cd rises, but not by as much as Y, so Sd also rises. 9/11/10 24

61. Effect of changes in expected future income: 􀂾 Higher expected future income raises current consumption even at the same current income level, so current saving declines. Effect of changes in wealth: Increase in wealth raises current consumption even at the same current income level, so current saving declines 9/11/10 25

62. Effect of changes in the real interest rate: A higher real interest rate has 2 effects. • The Substitution effect on saving is positive because a higher rate of return is a greater reward for saving .• The Income effect on saving is mixed: – It is negative for a net saver because it takes less saving toachieve a given amount in the future (target saving). – It is positive for a net borrower because a higher real interest rate represents a loss of wealth. 9/11/10 26

63. Effect of changes in the real interest rate: Taxes and the real return to saving. • The expected after-tax real interest rate is given by: - Effect of changes in fiscal policy: -Changes in fiscal policy affects desired consumption through changes in both current and expected future income. They directly affect desired national saving: 9/11/10 27

64. Effect of changes in fiscal policy: Government purchases: Higher G financed by higher current taxes reduces after-tax income, lowering desired consumption. • Higher G financed by higher future taxes also lowers desired consumption if people realize that future after-tax income will be lower. 9/11/10 28

65. Effect of changes in fiscal policy: Taxes: • A reduction in current taxes will increase current (disposable) income and desired consumption. • However, consumers may realize that a tax cut today will result in higher taxes in the future, which willreduce future expected income. 9/11/10 29

66. Effect of changes in fiscal policy: 􀂾 Taxes—3 possible situations: • If the decline in future expected income is less than the increase in current income, desired consumption will rise. 9/11/10 30

67. Effect of changes in fiscal policy: Taxes—3 possible situations: • If the decline in future expected income exactly offsets the increase in current income, desired consumption will not change. tax change affects only the timing of taxes, not their ultimate (present value) amount 9/11/10 31

68. Effect of changes in fiscal policy: Taxes: • In practice, people do not fully see that future taxes will rise if taxes are cut today. • Consequently, a tax cut today leads to increased desired consumption and reduced desired national saving. 9/11/10 32

69. Determinants of Desired National Saving Rise in current income. Increase in expected future income. Increase in wealth. Increase in real (after tax) interest rates 9/11/10 33

70. INVESTMENT Why is investment important? 􀂾 Investment fluctuates sharply over the business cycle. • Need to understand investment to understand the business cycle. Investment plays a crucial role in long-term growth. 9/11/10 34

71. Investment is determined by changes in the desired capital stock. The desired capital stock is the amount of capital that allows firms to earn the largest expected profit. • Depends on benefits and costs of additional capital. 9/11/10 35

72. The desired capital stock: The benefit associated with additional capital depends on the future marginal product of capital, • Because the marginal productivity of capital falls a K increase, the MPKf also falls as K increases. 9/11/10 36

73. The desired capital stock: The cost associated with additional capital is the real cost of using a unit of capital per year. • This is called the user cost of capital, uc, which equals the sum of the real interest cost and depreciation. 9/11/10 37

74. Changes in the desired capital stock: Any factor that changes the user cost of capital willalso cause a change in the desired capital stock: The real interest rate, • The depreciation rate, or • The price of capital. 9/11/10 38

75. Changes in the desired capital stock: Any factor that shift the MPKf curve will also cause a change in the desired capital stock: Technology, or • The labor force. 9/11/10 39

76. Changes in the desired capital stock: Taxes and the desired capital stock: • With taxes, the return to capital is (1 – τ) MPKf • The desired capital stock is where the after tax return also cause a change in the desired capital stock: 9/11/10 40

77. Changes in the desired capital stock: 􀂾 Taxes and the desired capital stock: • Tax-adjusted user cost of capital is uc/(1 – τ). • An increase in τ raises the tax-adjusted user cost of Changes in the desired capital stock: 􀂾 Taxes and the desired capital stock: • Tax-adjusted user cost of capital is uc/(1 – τ). • An increase in τ raises the tax-adjusted user cost of 9/11/10 41

79. In the macro sense interest rate and interest income has vital role in the economy.

80. Savings and investments which are influenced by interest rates are the economic variables.9/11/10 42

82. A return on savings

83. Cost to investments.

84. An instrument of monetary policy in credit control. In addition to influencing the cost and availability of funds from the supply side, interest rate also influence the quantum of investments from the demand side and thus determine the income and the employment in the economy.9/11/10 43

86. He took money as an asset with opportunity cost , namely return on short term bonds.

87. In a partial equilibrium approach, we can assume that the forces in the real economic system remain constant and analyzed the financial factors which explain the interest rate.

88. Under this theory interest is the function of supply and demand in the economy

89. Transactions are generally pre cautionary or specuklative and the late is known as aset approach.9/11/10 44

91. According to Irwing Fisher interest rate is also a function of inflation as the nominal rate is affected by expected rate of inflation.

92. During inflationary periods the gap in the rates between organised financial system and the unorganised financial system widens.

93. Funds flow from organised to unorganised and vice versa inluencethecrates in both the sectors.9/11/10 45

95. Difference in maturity periods.

96. Degree of default risk.

97. Tax provisions-incentives or disincentives.

98. Marketability-liquidity.

99. Sfety of funds.9/11/10 46

101. Normally bank rate is for discounting bills of exchanges etc,

102. In view if limited money and bills market bank rate is not the leader for interest rate and the refinance rate is the rate at which various windows of RBI provides refinance to banks. These rates are known as reference rates.

103. Bank rate is made active indicator of f bank funds.

104. Bank rate is revised by RBI under the RBI Act as needed9/11/10 47

105. MONEY MARKET ORGANISATION IN INDIA 9/11/10 48

106. 9/11/10 49

107. Regulator of money and credit/ Monetary authority. Open market operations- sale and purchase of central and stae securities and Treasury Bills. Bank Rate-Rate at which the RBI buy or rediscount bills Refinance – to ease the liquidity issues in the system. CRR-Cash which the banks has to keep with RBI as a percentage of their demand and time liabilities to ensure safety and liquidity of bank deposits. SLR-Secondary and supplementary requirements to (i) restrict expansion of bank credit; (ii)ensure solvency of banks and (iii) augment bank’s investment in government securities. Liquidity Adjustment Faculty- RBI was providing specific and sector based refinance like Export credit refinance, Collateralized Lending Faculty i.e advance against excess (over SLR requirements) holdings of Government securities, T- Bills . 9/11/10 50

110. Both CLF and ACLF are for 2 weeks.

111. Restriction on participation in money market was withdrawn

112. Scheduled commercial banks were eligible export credit refinance.at Bank Rate

113. Liquidity support were made available to primary dealers at B/Rfor 90 days.9/11/10 51

115. The seller agrees to sell specified security with an agreement to buy the same security at a future price and date.

116. Likewise a buyer agree to buy the same security with an agreement to sell the same security at a future date and price.

117. The same transaction is known as repo from the view point of the seller and reverse repo from the point of the buyer.

118. Repo is a collateralized short term borrowing and lending.9/11/10 52

120. Repo rate is the annual interest rate for the funds transferred by the lender to the buyer. Repo rate is generally lower than the B/R.

121. There are two legs in Repo transactions: 1.Borrower sells the security. The calculation is;

122. Total consideration = Deal rate*face value+ Accrued interest

123. In the second leg interest paid for borrowing-repo rate-is adjusted against the interest earned on the securities during the holding period to arrive at the reversal price. The calculation is:

124. Reversal price = Deal rate* face value+ ( interest for holding period-interest paid at repo rate)/face value

125. Total consideration = reversal price + face value+ Accrued interest.9/11/10 53

127. Security chosen is 13.6% GS -2010. The repo rate is 5%

128. The agreed purchase price is 101.12.

129. The last coupon was paid 30 days ago.

130. You are required to calculate first leg and second leg net cash outflow and purchase price rate.9/11/10 54

131. Calculation for first leg: -Sale price 1011200000 -Accrued interest (30 Days) 113333 - cash out flow 1011313333 Calculation for second leg: -Repo interest income 1011313333*0.05*14/365 1939500 Cash in flow(1011313333+1939500) 1013252833 Les Accrued interest (14days) 163945 Purchase Price 1013099893 Rate =101.31 9/11/10 55

132. 1. CALL MONEY MARKET-MOSTLY SURPLUS FUNDS OF BANKS ARE TRADED WITH MATURITY PERIOD OF 1-15 DAYS. IF FOR ONE DAY IT IS CALLED ‘CALL MONEY’ MORE THAN 1 DAY ‘NOTICE MONEY’. PURPOSE IS-1.TO MEET TEMPORARY GAP OR 2. TO MEET CRR OR 3.TO MEET SUDDEN DEMAND FUNDS. LOCATED IN COMMERCIAL CENTRES. PRTICPANTS ARE BANKS, ICICI, RBI ETC. 2. COMMERCIAL PAPER(CP) ARE S.T. UNSECURED PROMISSORY NOTES AT A DISCOUNT OF FACE VALUE ISSUED BY WELL KNOWN COMPAMIESAS PER RBI GUIDELINES. ISSUE EXPENSES INCLUDE STAMP DUTY (BASED ON PERIOD), BROKER’S FEESRATING AGENCIES FEES(CRISIL) 9/11/10 56

133. CERTIFICATE OF DEPOSITS-ISSUED BY BANKS AND ARE NEGOTIABLE -RISK IS NIL -NEGOTIABLE FREELY BY ENDORSEMENT -ISSUED AT A DISCOUNT TO FACE VALUE. -MYB IN BEARER FORM ALSO. -ALSO ISSUED TO DEMAT FIRMS -MINIMUM SIZE 1 LAKH. -CD ATTRACT STAMP DUTY. MONEY MARKET MUTUAL FUNDS: - TO BENEFIT SMALL INVESTORS IN MONEY MARKET. BSE/NSE 9/11/10 57

134. 9/11/10 58

135. STOCK EXCHANGE-WHERE OUTSTANDING SECURITIES(ISSUED SHARES ) ARE TRADED. ORDER: LIMIT ORDER-LIMITED BY FIXED PRICE. BEST RTAE ORDER IMMEDIATE OR CANCEL ORDER LIMITED DISCRETIONARY ORDER.STOP LOSS ORDER OPEN ORDER ORDER IS EXECUTED ON TRADING DAYS. TRADING SYSTEM TRADING BY ‘PUBLIC OUTCR’ OTCEI-SCREEN BASED TRADING. OTCEI RESTRICTED TO SMALL MIIDCAP COMPANIES. 9/11/10 59

136. DEPOSITORIES-ARE AGENCIES WHO HOLD THE SECURITIES ON BEHALF OTHE INVESTORS IN ELECTRONIC FORM TO OVERCOME THE PROBLEM OF PHYSICAL MOVEMENT OF DOCUMENTS. DEMATERIALISATION IS PROCESS BY WHICH PHYSICAL CERTIFICATESARE DESTROYED AND EQUIVALENT SECURITIES ARE CREDITED TO INVESTORS ACCOUNT. CARRY FORWARD RESULTING IN DELAYS , DEFAULTS IS BANNED BY SEBI NAD A MODIFED CARRY FORWARD SYSTEM IS INTRODUCED. SETTLEMENT TO BE MADE COMPULSORILY BYSEPTEMBER 3. 9/11/10 60

137. SETTLEMENT PROCEDURE AT NSE HAS A COMPUTRISED TRADING MECHANISM. TRADING IS DONE ON THE BASIS OF ORDERS IN THE SYSTEM AND BETWEEN 9.55 AM TO 3,30 PM. TILL THE TRANSACTION IS EXECUTED, IDENTITY OF BROKER IS PROTECTED. SETTLEMENT IS DONE THROUGH BOOK ENTRY TRANSFER IN DEPOSITORY. IN THE CENTRAL DEPOSITORY FUNDS AND SECURITIES POSITION IS DEBITED/CREDITED THROUGH ELECTRONIC BOOK TRANSFER. AT THE END OF THE DAY COMPUTER GENERATE A STAEMENT SHOWING NET POSITION FOR EACH MEMBER. 9/11/10 61

138. GOVERNMENT SECURITIE MARKET CENTRAL GOVERNMENT SECURITIES STATE GOVERNMENT SECURITIES SECURITIES GUARANTEED BY CENTRAL GOVERNMENT FOR ALL INDIA FINANCIAL INSTITUTIONS LIKE IDBI,ICISI,IFCI ETC. SECURITIES GUARANTEED BY STATE GOVERNMENT FOR SATAE INSTITUTIONS LIKE SEBS, HOUSING BOARDS TREASURY BILLS ISSUED BY RBI FORMS OF GOVERNMENT SECURITIES STOCK CERTIFICATES PROMISSORY NOTES BEARER BONDS 9/11/10 62

139. MARKET FOR GOVERNMENT SECURITIES PRIMARY MARKET- RBI IS GIVEN THE TASK OF MANAJING THE PUBLIC DEBTIN THE ECONOMY QUANTUM OF BORROWING IS SPECIFIED IN BUDGET. AUCTION IS TIMED DURING HIGH LIQUIDITY PERIODS TO RAISE MAXI,UM AMOUNT AT BEST PRICE. TERMS OF ISSUE INVOLVE COUPON, MATURITY TERMS AND NORMALL LONG TERM YIELD CURVE DRAWN BY RBI IS FOLLOWED. INVESTORS-COMMERCIAL BANKS, FIs, LARGE CORPORATE BODIES, RBI, AND FIIs. SECONDARY MARKET IS ACTIVE AFTER 1990s 9/11/10 63

140. SETTLEMET PROCEDURE RBI IS ACTING AS DEPOSITORY AND SETTLEMENTS ARE DONE BY THEM THROUGH SGL ACCOUNT. IF INVESTOR DOES NOT HAVE SGL ACCOUNTTHEN IT NEEDS TO OPEN WITH ANY REGISTERED BANK . TRANSHER IS THROUGH BOOK ENTRY. SECURITY DEALS ARE CARRIED OUT ON EX-INTEREST BASIS AS PER THE BYE-LAWS OF THE STOCK EXCHANGES. THIS ALSO LED TO ‘VOUCHER TRADING’-AMOUNT OF INCOME TAX DEDUCTIBLE AT SOURCEON THE ACCRUED INTEREST INCOMEOF GOVERNMENT SECURITIES ID KNOWN AS ‘VOCHER’ THUS SELLER IS TO GET=PRICE+INTEREST-TDS. BUYER GETS TDS CERTIFICATE. 9/11/10 64

141. TREASURY BILLS TBs ARE ISSUED TO MEET SHORT TERM NEED OF THE GOVT. REVENUE COLLECTIONS ARE BUNCHED BUT EXPENDITURE IS DISPERSED. HENCE THIS NEED. TBs ARE ISSUED IN THE FORM OF PROMISSORY NOTES OR SCRIP AND CREDITED TO INVESTORS SGL ACCOUNT TBs ARE ISSUED IN FOUR TYPES 91-DAY,182 DAT, 14/28 DAY AND 364 DAY BILLS. RBI DO OPEN MARKET OPERATIONS AND THE ECONOMY IS GRAETLY INFLUENCED BYGOVT. SECURITIES. T-BILL YIELD CALCULATION: FACE VALUE=100 BID RECEIVED BY RBI=88.24 FOR 364 DAY 9/11/10 65

142. THEN YIELD-k=F-P/P * 365/D. K=YIELD F=FACE VALUE P=PRICE D=MATURITY PERIOD IN DAYS K=100-88.24/88.24 * 365/364=13.36% 9/11/10 66

145. Eventually in April 1988 Discount and Finance House of India was set up with an authorised capital of Rs.250 crores. In a ratio of %:3:2 RBI, Psbs and Indian Financial Institutions have contributed Rs. 200 crores as paid up capita. In addition refinance facility with RBI and a line of credit of RS.100 crores from 28 PSBs on a consortium basis is the source of funds.

146. The role of the DHFI is both developmental and stabilizing

147. By developing active primary and secondary money markets it facilitates smoothening of short term liquidity imbalances.

148. It discounts and deals in not only commercial bills but a;so in TBs, and money market instruments.

149. It acts as a specialised money market intermediary

150. It undertakes short term buy back in Government and approved- dated securities9/11/10 68

152. It helps in smoothening of short term liquidity imbalances by devloping primary and secondary money markets.

153. It acts a s a specialised money market intermediary for stimulating activity in the money market instruments and developing secondary market for those instruments.

154. It not only deals in commercial bills but also in Treasury billsand other money market instruments.

155. It undertakes buy-back of governments and approved dated securities.

156. RBI provides re-finance facility to DHFI9/11/10 69

158. It function as market maker at the long end of the market which means that it along with otherPDs has to take up part or whole of the auction of government securities.

159. It primarily concentrate on government securities..

160. DHFI was set up for Shoer term –TBs – government securities and STCE was set up for long-dated government securities.9/11/10 70

162. PRIMARY SECURITIES MARKET The primary capital market (PCM) plays an important role in the overall functioning of securities market. Despite several measures the primary market remained lackluster till recently and the pick up is gradual. According to the SEBI annual report fewer number of issues accessed the primary market during the year and the significantly lower than that of the Previous financial year. Share of the equity issues, in terms of number and amount Mobilized, however, was higher in this financial year compared to the previous one. More than three-fourths of the total amount was occupied second and no resourced were in the previous years, banks and financial institutions continued for 84.5% of the resourced mobilized compared to 68.1% in 2001-02. All other industries shared the remaining portion. 9/11/10 72

163. PRIMARY MARKET ORGANISATION 9/11/10 73

165. Should offer through offer documents-Prospectus or statement in lieu of prospectus; letter of offer in case of rights issue.

166. Draft Offer documents are to be filed with SEBI- through a merchant Banker in case of rights issue in exces ofRs.50 lakh

167. Fast track issues- In case of listed company filing of offer documents in case of public/rights issue provided certain conditions are fulfilled

168. Separate conditions are to be complied with in case of unlisted companies.9/11/10 74

169. PRIMARY MARKET INTERMEDIARIES 9/11/10 75

170. SECONDARY MARKET ORGANISATION 9/11/10 76

171. CAPITAL RAISED DURING 2002-03 During the financial year 2002-03, primary market witnessed a decrease of 46.0% in the amount raised and also a decrease of 25.7% in the number of issues launched compared to the same period in 2001-02. A total of 26 issues (14 public issues and 12 rights issues) opened during the financial year 2002-03 raising Rs. 4070.29 crore (Rs. 3638.6 crore through public issues and 431.6 crore through rights issues). In 2001-02 a total of 35 issues opened for raising Rs. 7543.0 crore (20 public issues – Rs. 6501.8 crore and 15 rights issues – Rs. 1041.2). 9/11/10 77

172. INDUSTRY WISE CAPITAL MOBILIZATION Three industries ciz. Banks / Fls, Engineering and Telecommunications accounted for 93.2 per cent of the resourced mobilized in 2001-02. In the current year, the same three industries accounted for 84.7 per cent of the funds raised. With the banks and Fls, increasing their share from 68.3 per cent to 84.5 per cent and companies in the Telecommunications sector and raising any resourced. In 2002-03 the three industries which accounted for 95.3 per cent of the resources where Banking / Fls, Information Technology, Paper and Pulp. 9/11/10 78

173. SECONDARY MARKET During 2002-03, performance of Indian Stock market was, by and large, a lackluster one, S&P CNX NIFTY and BSE Sensex both registered negative returns of 13.4 percent and 12.1 percent respectively over the previous year. Other board indicators also fell down. Fall in the market in not specific too India alone and it appears a global phenomena. Turnover has been increasing and its reached peak in the month of December 2002. 9/11/10 79

174. DEVELOPMENT IN GOVERNMENT DEBT MARKET Government securities market during the past financial year witnesses significant upturns in pries until mid-January 2003 when the trend was reversed. The pattern of downturn in yields was halted due to the war tensions and consequent uncertainly leading to a heavy selling pressure. According to the report on Macro Economic and Monetary Developments in 2002-03 published by the RBI Major developments in government securities market in 2002-03 were: 9/11/10 80

175. Introduction of the system of publishing a calendar by RBI that outlines the issue of date government securities every half-year. The calendar for the financial year 2002-03 was issued in March 2003. Screen based order driven trading in government securities on the stock exchanges introduced on January 16, 2003. CSGL account holders permitted to enter into repo transactions in government securities effective from March 3, 2003. Guidelines for uniform accounting for repo/reverse repo transactions were issued by RBI. Under the securities lending scheme, the clearing corporation of India limited (CCIL) has government securities from select members 9/11/10 81

176. FII INVESTMENT Foreign institutional Investors (FIIS) were net buyers in equities at Rs. 1 56bn on January 07, 2004. According to data available from the Securities and Exchange Board of India (SEBI) web site, their purchases for the day stood at Rs. 8.0.16bn. With this, they have poured in Rs. 15.19bn or US$333.7mn in Indian equities so far in January. Their cumulative investment in Indian equities in July stood Rs. 23.46bn or US$501.7mn. They have pumped in a net of Rs. 15.45mn or so far in the 2004. In the entire 2002, FIIs had poured in a net ot Rs36.77bn, or US$763.5mn. The stock markets continue its upward surge. By the end of the September 2003 the BSE Sensex has added more than 1300 points and climbed up to 4302. In fact the pick up in stock prices in August 2003 has been the highest over the previous four months of the bull run. The trend continues into September except for a minor correction 9/11/10 82

177. The Trade-off Between Risk and Return The return earned on investments represents the marginal benefit of investing. Risk represents the marginal cost of investing. A trade-off always arises between expected risk and expected return. Valuing risky assets is a task fundamental to financial management Three-step procedure for valuing a risky asset. 1. Determine the asset’s expected cash flows 2. Choose discount rate that reflects asset’s risk 3. Calculate present value (PV cash inflows - PV outflows) This three-step procedure is called discounted cash flow (DCF) analysis. 9/11/10 83

178. Effect of taxes on investment • Do changes in the tax rate have a significant effect on investment? 􀂾 One study found that after major tax reforms, investment responded strongly with an elasticity of investment to changes in the user cost of capita about –0.66. 9/11/10 84

180. Components of the total return

181. Income stream from the investment

182. Capital gain or loss due to changes in asset prices

183. Total return can be expressed either in Rupee terms or in percentage terms.

184. Return on 30 shares of Rs.10 each =( 30*Rs.2,25) = 67.5=22.5%

185. Capital Gain( Purchase for RS.12 and current market price is 15 =

186. Rs.(15-12)*30 =RS.90= 30%

187. Total Return in Rs= 67.5+90 =157.50

188. Total Return in Percentage = 22.5+30 =%2.5%9/11/10 85

189. The Risk Dimension Percentage Returns on Bills, Bonds, and Stocks, 1900 – 2006 Nominal% Reaal % Asset Class Average Best yr Worst yr Average Best yr Worst yr Bills 4.0 1.47 0.00 1.1 1.97 -15.1 Bonds 5.2 4.04 -9.2 2.3 35.1 -19.4 Stocks 11.7 5.76 -43.9 8.5 56.5 -38.0 COMPARISON Risk Premium % Stocks-Bills 11.7-4.0 7.7 Stocks-Bonds 11.7-5.2 6.5 Bonds-Stocks 5.2-4.0 1.3 Risk premium: the additional return that an investment must offer, relative to some alternative, because it is more risky than the alternative. 9/11/10 86

191. Individuals use both for investing

192. Corporations and governments use both for financing9/11/10 87

193. Overview of Financial Markets Primary Markets versus Secondary Markets Money Markets versus Capital Markets Foreign Exchange Markets 9/11/10 88

194. Money Markets versus Capital Markets Money Markets markets that trade debt securities with maturities of one year or less (e.g. CD’s, Treasury bills) Capital Markets markets that trade debt (bonds) and equity (stock) instruments with maturities of more than one year 9/11/10 89

195. Foreign Exchange Markets “FX” markets deal in trading one currency for another (e.g. dollar for yen) The “spot” FX transaction involves the immediate exchange of currencies at the current exchange rate The “forward” FX transaction involves the exchange of currencies at a specified date in the future and at a specified exchange rate 9/11/10 90

196. Overview of Financial Institutions Institutions that perform the essential function of channeling funds from those with surplus funds to those with shortages of funds (e.g. banks, thrifts, insurance companies, securities firms and investment banks, finance companies, mutual funds, pension funds) 9/11/10 91

197. Types of FIs Commercial banks depository institutions whose major assets are loans and major liabilities are deposits Thrifts depository institutions in the form of savings and loans, credit unions Insurance companies financial institutions that protect individuals and corporations from adverse events 9/11/10 92

198. Securities firms and investment banks financial institutions that underwrite securities and engage in securities brokerage and trading Finance companies financial institutions that make loans to individuals and businesses Mutual Funds financial institutions that pool financial resources and invest in diversified portfolios Pension Funds financial institutions that offer savings plans for retirement 9/11/10 93

199. Services Performed by Financial Intermediaries Monitoring Costs aggregation of funds provides greater incentive to collect a firm’s information and monitor actions Liquidity and Price Risk provide financial claims to savers with superior liquidity and lower price risk Transaction Cost Services transaction costs are reduced through economies of scale Maturity Intermediation greater ability to bear risk of mismatching maturities of assets and liabilities Denomination Intermediation allow small investors to overcome constraints imposed to buying assets imposed by large minimum denomination size 9/11/10 94

200. Services Provided by FIs Benefiting the Overall Economy Money Supply Transmission Depository institutions are the conduit through which monetary policy actions impact the economy in general Credit Allocation often viewed as the major source of financing for a particular sector of the economy (e.g. farming and real estate) 9/11/10 95

201. Intergenerational Wealth Transfers life insurance companies and pension funds provide savers with the ability to transfer wealth from one generation to the next Payment Services efficiency with which depository institutions provide payment services directly benefits the economy 9/11/10 96

202. Risks Faced by Financial Institutions Interest Rate Risk Foreign Exchange Risk Market Risk Credit Risk Liquidity Risk Off-Balance-Sheet Risk Technology Risk Operation Risk Country or Sovereign Risk Insolvency Risk 9/11/10 97

203. Regulation of Financial Institutions FIs provide vital financial services to all sectors of the economy; therefore, their regulation is in the public interest In an attempt to prevent their failure and the failure of financial markets overall 9/11/10 98

204. Globalization of Financial Markets and Institutions Financial Markets became more global as the value of stocks traded in foreign markets soared Foreign bond markets have served as a major source of international capital Globalization also evident in the derivative securities market 9/11/10 99

205. Factors Leading to Significant Growth in Foreign Markets The pool of savings from foreign investors has increased International investors have turned to U.S. and other markets to expand their investment opportunities Information on foreign investments and markets is now more accessible (e.g. internet) Some mutual funds allow ability to invest in foreign securities with low transaction costs Deregulation has enhanced globalization of capital flows 9/11/10 100

206. New Trading Mechanisms:A Year After Technology has been a change driver Created Virtual market place Widened reach Increased market efficiencies Competitive market structures- ECNs? 9/11/10 101

207. Reach Geographical Made a distribution framework available Product Diversity Efficiencies Better order executions Increased liquidity 9/11/10 102

208. Price transparency Cost reduction Shorter settlement cycles Full line service from order capture to settlement and risk management Regulatory issues with each new development 9/11/10 103

209. Rolling settlement Derivatives Client-level approach 9/11/10 104

210. Emerging Trends Wider client access to systems Order routing systems Net Trading More access to information Facilitating overseas interest Increased emphasis on due risk management Know Your client 9/11/10 105

211. Services becoming more commoditised Need to add value propositions Single line of service model to clients right through to Risk Management Need to facilitate Technology Leverage by Intermediaries Leverage the trading infrastructure 9/11/10 106

212. Customised products and OTC Large value investors and OTC Standardised products and contracts Changing product profile Time Horizons changing to span time zones 9/11/10 107

213. Changing Settlement scenario Changing Risk Management scenario Straight Through Processing Processing oriented to client level Interfaces with other settlement Agencies Integration emerging across markets 9/11/10 108

215. Equity shares with detachable warrants

216. Non voting equity share

217. Preference share-redeemable

218. Preferences share- cumulative convertible

219. Debentures Non-convertible

220. Debentures –convertible

221. Zero interest fully convertible denture

222. Deep discount bonds

223. Stock invest

224. Euro issue

225. Zero coupon bonds

226. Company fixed deposits

227. warrants9/11/10 109

228. NEW ISUE Kinds of Issue; Public- IPO- Initial Public Offer by a new company and unlisted company .] Public- FPO- Further r Public Offer by a company already issued shares to public and a listed company Rights Issue Preferential (private placement) to select persons subject to provisions under the Companies Act and further subject to SEBI guidelines relating to pricing,, disclosures in notice etc. SEBI has laid down eligibility norms in 3 entry forms 9/11/10 110

229. 9/11/10 111

230. Documents of Issue Offer document: Structure of offer document: Cover page Risk factors- both internal external risks faced by the ompany Introduction-summary of the industry, business of the issuing company, summary of consolidated financials, operating and other data. Important details like capital structure, objects of offering , funds requirement, funding plan, schedule of implementation, funds deployed already, balance funds required, , basic terms of issue, basis for issue price, tax benefits etc. are covered. About us: includes a review of the details of the business of the company, business strategy, competitive strengths, insurance, industry regulation ,factory /corporate structure Corporate governance 9/11/10 112

231. History and main objects Name and address of promoters, managers, managing directors etc. Location of project Collaboration, if any. Schedule for implementation. Profile of the products. Future prospects Stock market data 9/11/10 113

232. Financial statements including changes in accounting policies in the last 3 years and the difference between accounting policies of the company and Indian Accounting Policies. Legal and other information Mandatory disclosures covering authority for issue, prohibition of SEBI, eligibility of the company to issue, 9/11/10 114

233. Prospectus for New Issueto public. Part I A. General information: Name and address of the company Consent letter of Government (SEBI) and a certificate fro Govt (SEBI) non- responsibilty relating to financial soundness or correctness of the statements Name of stock exchange where application is made for listing. Compliance to applicable sections of Companies Act for issue of shares to public. Statement/declaration regarding of refund if 90% subscription. 9/11/10 115

234. Declaration regarding issue of allotment letters. Date of opening and closing of issue. Name of auditors and managers. Name and address of trustee. Rating of CRISIL Underwriting agreements and details. B. Capital structure C. Terms of issue D. Particulars of the issue E. company management and Project F- Declarations of public issues made by the company G.- Disclosure of outstanding litigations, general prosecutions, defaults H- perception of risk factors. 9/11/10 116

235. Part II of the prospectus A. General Information: Consent letters of Directors, Auditors, managers to the issue. Solicitors/ advocates, bankers to the company, bankers to the issue etc. changes , if any in the last 3 years of directors, auditors. Authority to the issue Procedure and time schedule for allotment and issue of certificates. Name and address of the legal advisors, managers, auditors etc. 9/11/10 117

236. B. Financial information: Auditors report Chartered accountants report when a business is proposed to be acquired regarding financial standing of the company C. Statutory and other information: Minimum subscription. Expenses of the issue Underwriting commission Issue previously made for cash. Previous public or rights isue , if any. Date of allotment, date of closing, date of refund, date of listing in stock exchange Shares issued at premium or discount and the amount thereof. Commission, brokerage on previous issueissue of shares other than for cash. 9/11/10 118

237. Debentures,preference shares etc issued by the company. Details of property purchased or proposed to purchase. Details of directors, whole time directors, government and financial institution nominee directors etc. Every other material information. PART III Declaration confirming that all provisions of companies Act and guidelines of SEBI are complied with. Application with prospectus. Types of Prospectus: Abridged prospectus Prospectus for rights issue Red-herring prospectus – a prospectus which does not have complete particulars on the price of securities offered and the quantum of securities offered. Here the securities offered through ‘Book Building” process 9/11/10 119

238. Book building method of offer to public A company can issue 100% of share through book building or 75% through book building and 25% at the price determined through book building. Reservation in firm allotment can be made for promoter , permanent employees or permanent employees of promoter company in case of new company issue The issuer company should appoint eligible merchant bankers as Book runner(s). The issuer company should enter into an agreement with a stock exchange having the requisite facility of online offering specifying inter alia their interse rights, responsibilities and obligations. It should also provide dispute resolving mechanism. 9/11/10 120

239. The lead book runners should ensure compliance of the following conditions: The cap of the price band should not exceed 20% of the floor or the price band should be less than or equal to 120% of the floor price. The price band can be revised during the building period. The maximum revision on either sude should not exceed 20%. Any revision should be widely disseminated by – informing stock exchange, press release, indicating the changes in the relevant website Building period should be extended by 3 days subject to a maximum building period of 13 days. The manner in which the shortfall as result of reduction in the price band is to be met for meeting the requirements of the project. 9/11/10 121

240. Underwriting and sebi’s role Certificate of registration has to be obtained from SEBI by institutions and agencies who would like to take up underwriting obligations. The following requirements need to be complied with: Availability of office space, equipment and manpower to effectively functioning. Previous experience in underwriting or have a minimum of 2 persons having sufficient experience in underwriting . Capital adequacy requirements of minimu net worth of Rs. 20 lakhs. The applicant (Director, Principal officer, or the partner) has not been convicted for nay offence, moral turpitude or economic offence. 9/11/10 122

241. Undertaking to fulfill of obligations under SEBI Act anf rules and regulations. Undertaking to fulfill obligations under the Companies Act and requirements to be complied as per ROC notifications. Payment of prescribed fee for registration. Agreement with issuing company. Code of Conduct including (1) not to derive any benefit from the issuing company other than underwriting commission at agreed rate subject to a ceiling of 5% for shares and 2.5% for debentures (2) not to take up , at any time, total undertaking obligations exceeding 20 times the networth. (3) duty bound to subscribe within 45 days fronm the date of receipt of the information from the issuing company. 9/11/10 123

242. Issue of securities Government securities are the marketable debt issued by government or semi government bodies are called government securities. Government securities market is where government securities or gilt-edged securities are bought and sold. RBI takes special care in purchase and sale of securitties issued by the agencies- like Central and state governments, metropolitan councils, IDBI,IFCI, SFCs, NABARD, port trusyt etc. These securities are safe and guaranteed payment of interest and repayment Offers comparatively lower rate of interest. Liquidity of securities varies lkie central Government securities liquidity are high but not State Government securities. 9/11/10 124

243. These securities offer wide ranging tax incentives. Market:- Gilt edged securities are over the counter securities and government securities has Two markets- Primary market consists of issuers like Central and Sate Governments, and The secondary market consists of banks, financial institutions, insurance companies,, provident funds, primary dealers and RBI.the forms of central ansstae government securities are inscribed stock or stock certificate, promissory notes and bearer bonds 9/11/10 125

244. Stock Holding Corporation of India Ltd. Stock Holding Corporation of India Ltd. (SHCIL) was incorporated at the special initiative of the Government of India as a Public Limited Company in 1986. It has been jointly promoted and owned by the All India Banks and Financial Institutions, viz., IDBI Bank Ltd, ICICI Bank, SU-UTI, IFCI Ltd, LIC, GIC, NIA, NIC, UIC, and TOICL all leaders in their fields of business. SHCIL began by offering custodial and post trading services, adding depository services and other services to its portfolio over a period of time. SHCIL has established itself in India as a one-stop solution provider in the Financial Services domain. 9/11/10 126

245. SHCIL, apart from being the country’s premier Custodian and Depository Participant, SHCIL is also the largest Professional Clearing Member; backed by an immense capacity to process volumes with precision. To give an idea of our capability, every year we process around…. SHCIL also provides Derivatives clearing, PF fund accounting, SGL constituent account services, distribution of mutual funds and other capital market instruments, besides distribution of life and non-life insurance policies. Other offerings added to the bouquet are online net trading, loan against shares, Western Union Money Transfer & E-stamping. In the pipeline are a host of services that will complement the range of services offered by SHCIL. 9/11/10 127

246. Our Depository Participant services cater to all your individual investment needs. With a parentage of leading financial institutions and insurance majors and a proven track record in the Custodian business, we have reiterated our past success by establishing ourselves as the first ever and largest Depository Participant in India. 9/11/10 128

247. From a tentative foray in 1998 into the individual investor arena to servicing around seven lakh accounts, we have endeavored to constantly add and innovate to make business a pleasure for you Over 191 of our networked branches ensure we are available wherever you look out for us. Across the country, thirteen Depository Participant Machines (DPMs) connected to NSDL and seven connected to CDSL ensure fast and direct processing of your instructions. Our customer-centric account schemes have been designed keeping in mind the investment psyche of our clients. Your DP account with us takes care of your Depository needs like dematerializations, dematerializations and pledging of shares. 9/11/10 129

248. Matching of your scanned signature on every debit instruction with a digitally scanned original in our system makes all your trading transactions absolutely secure. Proactive backup of your instructions prior to execution in the Depository makes us oblivious to system crashes. At SHCIL, we place a very high premium on client reporting .Periodic statements sent to you keep you informed of your account status. Dedicated Customer Care lines manned by trained staff answer your queries on demat / trades / holdings. 9/11/10 130

249. SHCIL's long-standing association with Clearing Members has enabled it to develop services based on an understanding of their working and their requirement for timely and accurate information. We accept deposits of collaterals( bank guarantees, FD's, Demat shares) towards base capital and additional base capital requirements stipulated by NSE for clearing members trading on its capital market, Futures & OPTIONS, CURRENCY FUTURES DERIVATIVE segment. Besides, our new products with a broker empanelment clause ensures a mutually beneficial tie-up. Clearing members stand to earn a steady income from our product transactions and new additions to their client-base, while we capitalize on their rapport with the market. 9/11/10 131

250. We currently offer Depository services to more than 680 clearing members of various exchanges connected with NSDL and CDSL. Our Customer Care lines answer all your DP queries while the Interactive Voice Response (IVR) system gives you information on your account and other valuable data like CC calendar details, tariff, ISIN information, etc. via telephone, fax and e-mail. 9/11/10 132

251. Well integrated front and back office, paper and electronic systems. A focussed Client Relation Team to manage your needs & queries. A single point contact for your comfort. In-house capability to address all IT needs in terms of software development, maintenance, back office processing, database administration, network maintenance, backups and disaster recovery. Multilevel security is maintained in software, applications and guards to access to various data, client and internal reports. Expertise in running processes utilising digital signatures. Regular Audits internal and external, by SEBI, Depositories, Clients and compliance to rules and regulations Constant review and benchmarking of processes to ensure adherence to global best practices Insurance cover with international re-insurance. Full Confidentiality of business operations. 9/11/10 133

252. We are a zero-debt, financially sound company with healthy reserves. We have a consistent dividend-paying track record. Comprehensive business solutions adept in handling high volume time critical transactions within a secured environment. Zero error approach towards delivery of products and services Single window view of business and up-to date information. Oracle database currently of 1.2 Terabytes size (and growing) managed by competent IT personnel with domain expertise. Data mirroring using cluster technology and fibre optic connection as part of Disaster Management Plan. 9/11/10 134

253. Network Security using Firewall, Proxy, Intrusion Detection System(IDS) and Intrusion Prevention System (IPS) Internet products with built in PKI features. Dedicated communication channels with built-in redundancies in connectivity to Client Institutions, Stock Exchanges, Clearing houses and Depositories. Accolades and certification Citation and Medal from Smithsonian Institute, Washington D.C, U.S.A. for " Visionary and Innovative use of Technology in Finance, Insurance and Real Estate". First South Asian Corporate to receive this. Computer Society of India Award for best IT usage in the Country. Our software processes have been assessed at SEI CMM Level 3. Accepted industry leader and pioneer in Custodial Systems. 9/11/10 135

254. SHCIL is a Custodian/Professional Clearing Member of derivative segment at the Bombay Stock Exchange and at the Futures & Options Segment of the NSEIL respectively. We have developed in-house Back Office systems and procedures to cater to the needs of various entities in the segment. A dedicated team of professionals handle derivative operations and assist its clients. 9/11/10 136

255. As a professional clearing member, SHCIL performs the following functions: Clearing - Computing obligations of all his TM’s i.e. determining positions to settle. Settlement - Performing actual settlement. Collateral Management - Collection of collateral (cash/cash equivalents and securities), valuation on a regular basis (as per J. R. Varma recommendations) and setting up exposure limits for TMs and Institutional clients. Risk Management- Setting position limits based on up front deposits/margins for each TM and monitoring positions on a continuous basis. 9/11/10 137

256. LISTING OF SECURITIES The objectives of listing are mainly to: provide liquidity to securities; mobilize savings for economic development; Protect interest of investors by ensuring full disclosures The Exchange has a separate Listing Department to grant approval for listing of securities of companies in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956, Securities Contracts (Regulation) Rules, 1957, Companies Act, 1956, Guidelines issued by SEBI and Rules, Bye-laws and Regulations of the Exchange. company intending to have its securities listed on the Exchange has to comply with the listing requirements prescribed by the Exchange. Some of the requirements are as under:- 9/11/10 138

257. Minimum Listing Requirements for new companies Minimum Listing Requirements for companies listed on other stock exchanges Minimum Requirements for companies delisted by this Exchange seeking relisting of this Exchange Permission to use the name of the Exchange in an Issuer Company's prospectus Submission of Letter of Application Allotment of Securities Trading Permission Requirement of 1% Security Payment of Listing Fees Compliance with Listing Agreement Cash Management Services (CMS) - Collection of Listing Fees 9/11/10 139

258. Minimum Listing Requirements for new companies The following revised eligibility criteria for listing of companies on the Exchange, through Initial Public Offerings (IPOs) & Follow-on Public Offerings (FPOs), effective August 1, 2006. ELIGIBILITY CRITERIA FOR IPOs/FPOs Companies have been classified as large cap companies and small cap companies. A large cap company is a company with a minimum issue size of Rs. 10 crores and market capitalization of not less than Rs. 25 crores. A small cap company is a company other than a large cap company. In respect of Large Cap Companies The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crores; and The minimum issue size shall be Rs. 10 crores; and The minimum market capitalization of the Company shall be Rs. 25 crores (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price). 9/11/10 140

259. In respect of Small Cap Companies The minimum post-issue paid-up capital of the Company shall be Rs. 3 crores; and The minimum issue size shall be Rs. 3 crores; and The minimum market capitalization of the Company shall be Rs. 5 crores (market capitalization shall be calculated by multiplying the post-issue paid-up number of equity shares with the issue price); and The minimum income/turnover of the Company should be Rs. 3 crores in each of the preceding three 12-months period; and The minimum number of public shareholders after the issue shall be 1000. A due diligence study may be conducted by an independent team of Chartered Accountants or Merchant Bankers appointed by the Exchange, the cost of which will be borne by the company. The requirement of a due diligence study may be waived if a financial institution or a scheduled commercial bank has appraised the project 9/11/10 141

260. For all companies : In respect of the requirement of paid-up capital and market capitalisation, the issuers shall be required to include in the disclaimer clause forming a part of the offer document that in the event of the market capitalisation (product of issue price and the post issue number of shares) requirement of the Exchange not being met, the securities of the issuer would not be listed on the Exchange. The applicant, promoters and/or group companies, should not be in default in compliance of the listing agreement. The above eligibility criteria would be in addition to the conditions prescribed under SEBI (Disclosure and Investor Protection) Guidelines, 2000. 9/11/10 142

261. Minimum Listing Requirements for companies listed on other stock exchanges The Governing Board of the Exchange at its meeting held on 6th August, 2002 amended the direct listing norms for companies listed on other Stock Exchange(s) and seeking listing at BSE. These norms are applicable with immediate effect. The company should have minimum issued and paid up equity capital of Rs. 3 crores. The Company should have profit making track record for last three years. The revenues/profits arising out of extra ordinary items or income from any source of non-recurring nature should be excluded while calculating distributable profits. Minimum networth of Rs. 20 crores (networth includes Equity capital and free reserves excluding revaluation reserves). Minimum market capitalisation of the listed capital should be at least two times of the paid up capital. The company should have a dividend paying track record for the last 3 consecutive years and the minimum dividend should be at least 10%. 9/11/10 143

262. Minimum 25% of the company's issued capital should be with Non-Promoters shareholders as per Clause 35 of the Listing Agreement. Out of above Non Promoter holding no single shareholder should hold more than 0.5% of the paid-up capital of the company individually or jointly with others except in case of Banks/Financial Institutions/Foreign Institutional Investors/Overseas Corporate Bodies and Non-Resident Indians. The company should have at least two years listing record with any of the Regional Stock Exchange. The company should sign an agreement with CDSL & NSDL for demat trading Minimum Requirements for companies delisted by this Exchange seeking relisting of this Exchange The companies delisted by this Exchange and seeking relisting are required to make a fresh public offer and comply with the prevailing SEBI's and BSE's guidelines regarding initial public offerings. Permission to use the name of the Exchange in an Issuer Company's prospectus 9/11/10 144

263. The Indian stock markets have really come of age there were so many developments in the last 15 years that make the markets on par with the developed markets. The important feature of developed markets is the growing clout of institutional investors and this paper sets out to find whether our markets have also being dominated by institutional investors. The regression results show that the combined might of the Flls and mutual funds are a potent force, and they in fact direction can forecast market direction using the direction of the flow of funds from Flls and mutual funds, the Granger causality test has showed that the mutuafunds in fact lead the market rise or fall and Flls follow suit. .This may actually raise questions on the efficiency but on the contrary, markets become more efficient with the growing presence of institutional investors who predominantly go by fundamentals. Noise trading on the part of institutional investors will be less in Indian context since all their trades are delivery based 9/11/10 145

264. Submission of Letter of Application As per Section 73 of the Companies Act, 1956, a company seeking listing of its securities on the Exchange is required to submit a Letter of Application to all the Stock Exchanges where it Allotment of Securities As per Listing Agreement, a company is required to complete allotment of securities offered to the public within 30 days of the date of closure of the subscription list and approach the Regional Stock Exchange, i.e. Stock Exchange nearest to its Registered Office for approval of the basis of allotment. In case of Book Building issue, Allotment shall be made not later than 15 days from the closure of the issue failing which interest at the rate of 15% shall be paid to the investors. Trading Permission As per Securities and Exchange Board of India Guidelines, the issuer company should complete the formalities for trading at all the Stock Exchanges where the securities are to be listed within 7 working days of finalisation of Basis of Allotment. 9/11/10 146

265. Requirement of 1% Security The companies making public/rights issues are required to deposit 1% of issue amount with the Regional Stock Exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding delay in sending refund orders/share certificates, non-payment of commission to underwriters, brokers, etc. Payment of Listing Fees All companies listed on the Exchange have to pay Annual Listing Fees by the 30th April of every financial year to the Exchange as per the Schedule of Listing Fees prescribed from time to time. 9/11/10 147

266. 9/11/10 148

267. Role of SEBI in Share Trading Section 3 of SEBI Act protects the interests of the investors in securities and also promotes the development of, and regulates, the securities market and related matters.The following are the financial products/instruments which the secondary market deals withEquity Shares Rights Issue/ Rights Shares Bonus Shares Preferred Stock/ Preference shares Cumulative Preference Shares Cumulative Convertible Preference Shares Participating Preference Share Bond Zero Coupon Bond Convertible Bond Debentures Commercial Paper Coupons Treasury Bills 9/11/10 149

268. In July 2002 SEBI launched Electronic Data Information Filing and Retrieval System (EDIFAR) in association with National Informatics Center (NIC) to facilitate filing of certain material information/ documents/statements by the listed companies on line in the EDIFAR web site - www.sebiedifar.nic.in.What is a Central Listing Authority?The Central Listing Authority (CLA) is set up to address the issue of multiple listing of the same security and to bring about uniformity in the due diligence exercise in scrutinizing all listing applications on any stock exchanges. The functions of CLA as enumerated in SEBI (Central Listing Authority) Regulations, 2003 include: processing the application made by any body corporate, mutual fund or collective investment scheme for the letter of recommendation to get listed at the stock exchange, making recommendations as to listing conditions, and any other functions that may be specified by the SEBI Board from time to time. 9/11/10 150

269. What is the exit opportunity available for investors in case a company gets delisted?SEBI (Delisting of Securities) Guidelines, 2003 provide an exit mechanism, whereby the exit price for voluntary delisting of securities is determined by the promoter of the concerned company which desires to get delisted, in accordance to book building process. The offer price has a floor price ,which is average of 26 weeks average of traded price quoted on the stock exchange where the shares of the company are most frequently traded preceding 26 weeks from the date public announcement is made. There is no ceiling on the maximum price. For infrequently traded securities, the offer price is as per Regulation20 (5) of SEBI (Substantial Acquisition and Takeover) Regulations. Regarding this, infrequently traded securities is determined in the manner as provided in Regulation 20 (5) of SEBI (Substantial Acquisition and Takeover) Regulations. 9/11/10 151

270. What is demutualization of stock exchanges?Demutualization refers to the transition process of an exchange from a "mutually-owned" association to a company "owned by shareholders". In other words, transforming the legal structure of an exchange from a mutual form to a business corporation form is referred to as demutualisation. The above, in effect means that after demutualization, the ownership, the management and the trading rights at the exchange are segregated from one another.How is a demutualised exchange different from a mutual exchange?The three functions of ownership, management and trading are intervened into a single Group in a mutual exchange. The broker members of the exchange over here are both the owners and the traders on the exchange and they further manage the exchange as well. A demutualised exchange has all these three functions clearly segregated. currently there are two stock exchanges in India The National Stock Exchange (NSE) Over the Counter Exchange of India (OTCEI) 9/11/10 152

271. What is the traditional structure of the stock exchanges in India?According to legal structure, the stock exchanges in India could be segregated into 2 broad groups 20 stock exchanges which were set up as companies, either limited by guarantees or by shares 3 stock exchanges which are functioning as associations of persons (AOP) viz. BSE, ASE and Madhya Pradesh Stock Exchange What happens if I do not get my money or share on the due date?You can file a complaint with the respective stock exchange. The exchange is required to resolve the complaints. To resolve the dispute, the complainant can also resort arbitration as provided on the reverse of contract note /purchase or sale note.However, if the complaint is not addressed by the Stock Exchanges or is unduly delayed, then the complaints along with supporting documents may be forwarded to Secondary Market Department of SEBI. Your complaint would be followed up with the exchanges for expeditious redressal. In case of complaint against a sub broker, the complaint may be forwarded to the concerned broker with whom the sub broker is affiliated for redressal. 9/11/10 153

272. What is the maximum brokerage that a broker/sub broker can charge?1.5% of the value mentioned in the respective purchase or sale note.How do I know whether my order is placed?Unique Order Code Number is assigned by Stock Exchanges to each transaction, which is intimated by broker to his client and once the order is executed, this order code number is printed on the contract note. The broker member also maintains the record of time when the client has placed order and reflect the same in the contract note along with the time of execution of the order. 9/11/10 154

273. Sebi and the exchanges have put in place surveillance systems to monitor trading activity of listed companies.During the year 2007-08 and 2008-09, Sebi had completed investigations in 169 and 116 cases, respectively, for various types of irregularities that include market manipulation, price rigging, insider trading and others. "Sebi remains vigilant at all times to detect any malpractices in the market and wherever warranted, takes actions against the entities violating the provision of Sebi Act, Rules and Regulations,” 9/11/10 155

274. SEBI is watch dog of the stock exchanges of India.It has been obligated to protect the interests of the investors in securities and to promote and development of , and to regulate the securities market by such measures as it thinks fit.The measures may provide for 1)regulate the business in stock exchanges and any other securities market 2)registering and regulating the working of stock brokers , sub-brokers, share transfer agents, bankers to an issue,merchantbankers,portfolio managers and such other intermediaries who may be associated with securities markets in any manner 9/11/10 156

275. 3)regulate the working and functions of depositories,participants, custodians of securities, FIIS,credit rating agencies by notification 4)registering and regulating the working of venture capital funds , mutual funds 5)prohibiting unfair trade practices , insider trading in securities 6)under taking inspection, conducting inquiries and audits of exchanges 7)promoting investor education and training of intermediaries of securities markets ref NCFM capital markets ( dealers ) module work book. 9/11/10 157

276. Buy back of shares Objectives of Buy Back: Shares may be bought back by the company on account of one or more of the following reasonsi.To increase promoters holdingii. Increase earning per shareiii. Rationalise the capital structure by writing off capital not represented by available assets. iv. Support share valuev. To thwart takeover bidvi. To pay surplus cash not required by businessInfact the best strategy to maintain the share price in a bear run is to buy back the shares from the open market at a premium over the prevailing market price. 9/11/10 158

277. Resources of Buy BackA Company can purchase its own shares from (i) free reserves; Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve and details of such transfer shall be disclosed in the balance-sheet or(ii) securities premium account; or (iii) proceeds of any shares or other specified securities. A Company cannot buyback its shares or other specified securities out of the proceeds of an earlier issue of the same kind of shares or specified securities. 9/11/10 159

278. Conditions of Buy Back(a) The buy-back is authorised by the Articles of association of the Company; (b) A special resolution has been passed in the general meeting of the company authorising the buy-back. In the case of a listed company, this approval is required by means of a postal ballot. Also, the shares for buy back should be free from lock in period/non transferability.The buy back can be made by a Board resolution If the quantity of buyback is or less than ten percent of the paid up capital and free reserves; (c) The buy-back is of less than twenty-five per cent of the total paid-up capital and fee reserves of the company and that the buy-back of equity shares in any financial year shall not exceed twenty-five per cent of its total paid-up equity capital in that financial year; (d) The ratio of the debt owed by the company is not more than twice the capital and its free reserves after such buy-back; (e) There has been no default in any of the followingi. in repayment of deposit or interest payable thereon,ii. redemption of debentures, or preference shares oriii. payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or 9/11/10 160

279. iv. repayment of any term loan or interest payable thereon to any financial institution or bank; (f) There has been no default in complying with the provisions of filing of Annual Return, Payment of Dividend, and form and contents of Annual Accounts; (g) All the shares or other specified securities for buy-back are fully paid-up; (h) The buy-back of the shares or other specified securities listed on any recognised stock exchange shall be in accordance with the regulations made by the Securities and Exchange Board of India in this behalf; and (i) The buy-back in respect of shares or other specified securities of private and closely held companies is in accordance with the guidelines as may be prescribed. Disclosures in the explanatory statementThe notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating - (a) a full and complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased under the buy-back; (d) the amount to be invested under the buy-back; and (e) the time-limit for completion of buy-back 9/11/10 161

280. Filing of Declaration of solvencyAfter the passing of resolution but before making buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in form 4A. The declaration must be verified by an affidavit to the effect that the Board has made a full inquiry into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any: No declaration of solvency shall be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange. 9/11/10 162

281. Issue of further shares after Buy backEvery buy-back shall be completed within twelve months from the date of passing the special resolution or Board resolution as the case may be.A company which has bought back any security cannot make any issue of the same kind of securities in any manner whether by way of public issue, rights issue up to six months from the date of completion of buy back. Filing of return with the RegulatorA Company shall, after the completion of the buy-back file with the Registrar and the Securities and Exchange Board of India, a return in form 4 C containing such particulars relating to the buy-back within thirty days of such completion. No return shall be filed with the Securities and Exchange Board of India by an unlisted company. Prohibition of Buy BackA company shall not directly or indirectly purchase its own shares or other specified securities - (a) through any subsidiary company including its own subsidiary companies; or 9/11/10 163

282. Procedure for buy backa. Where a company proposes to buy back its shares, it shall, after passing of the special/Board resolution make a public announcement at least one English National Daily, one Hindi National daily and Regional Language Daily at the place where the registered office of the company is situated.b. The public announcement shall specify a date, which shall be "specified date" for the purpose of determining the names of shareholders to whom the letter of offer has to be sent.c. A public notice shall be given containing disclosures as specified in Schedule I of the SEBI regulations.d. A draft letter of offer shall be filed with SEBI through a merchant Banker. The letter of offer shall then be dispatched to the members of the company.e. A copy of the Board resolution authorising the buy back shall be filed with the SEBI and stock exchanges.f. 9/11/10 164

283. The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified dateg. The buy back offer shall remain open for a period of not less than 15 days and not more than 30 days.h. A company opting for buy back through the public offer or tender offer shall open an escrow Account. PenaltyIf a company makes default in complying with the provisions the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both. The offences are, of course compoundable under Section 621A of the Companies Act,1956. 9/11/10 165

284. Lending and pledging of shares If you wish to take a loan from a Bank against the security of your physical share, the certificate must be physically lodged with the Bank.This action is called a Pledge.In electronic holding also you can pledge the shares by making a request with your DP in favour of any Bank. What are the rules for Pledge Of Locked-in Securities? Locked-in shares can be pledged with a Lendor (such as a Bank) for a loan. However, the pledge cannot be closed or invoked before the lock-in release date. How can I Pledge / Hypothecate Shares? First of all the Bank granting the loan should be a DP or a Client of a DP.You may submit the written Pledge instruction to your DP.The Pledged quantity is blocked in your DP Account by the Bank electronically.The loan is now available for use by you. 9/11/10 166

285. Can I dematerialize shares which are Pledged with a Bank if the Bank is also a DP? Yes. You may, with the permission of the Bank. How to revoke pledged/hypothecated shares? To revoke pledged/hypothecate shares, you need to submit a pledge revocation form to the DP asking for the revocation of your pledged securities. What happens after the closure of my loan with the Bank in case of a Pledge? Upon closure of your loan with the Bank, the Pledge is closed in your DP account by the Bank directly.Those released shares in your DP account are once again available to you as free balances. 9/11/10 167

286. What is Dematerialisation?Dematerialisation (“Demat” in short form) signifies conversion of a share certificate from its physical form to electronic form for the same number of holding which is credited to your demat account which you open with a Depository Participant (DP).Dematerialisation is a process by which the physical share certificates of an investor are taken back by the Company and an equivalent number of securities are credited in electronic form at the request of the investor. An investor will have to first open an account with a Depository Participant and then request for the dematerialisation of his share certificates through the Depository Participant so that the dematerialised holdings can be credited into that account. This is very similar to opening a Bank Account. 9/11/10 168

287. Dematerialisation of shares is optional and an investor can still hold shares in physical form. However, he / she has to demat the shares if he / she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares, he / she will get delivery of the shares in demat form. What is a Depository?A Depository (NSDL & CDSL) is an organisation like a Central Bank where the securities of a shareholder are held in the electronic form at the request of the shareholder through the medium of a Depository Participant.If an investor wants to utilise the services offered by a Depository, the investor has to open an account with the Depository through a Depository Participant. 9/11/10 169

288. Depository ParticipantSimilar to the brokers who trade on your behalf in and outside the Stock Exchange; a Depository Participant (DP) is your representative (agent) in the depository system providing the link between the Company and you through the Depository. Your Depository Participant will maintain your securities account balances and intimate to you the status of your holding from time to time. According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers etc. can become participants in the depository. A DP is one with whom you need to open an account to deal in electronic form. While the Depository can be compared to a Bank, DP is like a branch of your bank with whom you can have an account. 9/11/10 170

289. Impact1. Institutional StructureThere are quite a few institutions that are directly and/or indirectly connected with dematerialised operations of securities. Understanding the inter-linkages and functional responsibilities of these institutions will help us to have correct and holistic perspective about functioning of dematerialisation. The institutions connected with demat operations include; a) Depositories, b) Stock Exchanges (SEs), c) Clearing Corporations (CCs) / Clearing Houses (CHs), d) Depository Participants (DPs), e) Registrars and Transfer Agents (RTAs). Both the depositories NSDL and CDSL are primarily promoted by the two leading stock exchanges viz., National Stock Exchange of India Ltd (NSE) and The Stock Exchange, Mumbai (BSE) respectively. 9/11/10 171

290. 2. Market MicrostructureTrading in dematerialised shares brought in many changes to the entire structure of the capital market functioning. With the introduction of demat, stock exchanges switched over (with a choice) from five day accounting period to T + 5 trading and settlement for demat stocks. Even for demat stocks dual settlement is in operation: fixed account period as well as rolling settlement. This partial change to T + 5 rolling settlement system is a major shift in the market. Thus dematerialisation smoothly paved the way for rolling settlement and India joined other developed markets that are following T+ settlement system. In the physical segment there is a long gap between delivery and payment. This gap narrowed down, and it is almost on Delivery Versus Payment basis (DVP). This near real time DVP reduced market risks considerably. Clearing corporations / clearing houses and stock exchanges are able to smoothly coordinate and settle the trades effectively and timely. Clearing corporations / Clearing houses are electronically directly connected to depositories that make settlements faster and easier. Trading in dematerialised shares attracts lesser brokerage and custodial charges, as a result. Reduced transaction costs prompts investors This also makes bid-ask-spreads narrower, which reduces implicit transaction costs. 9/11/10 172

291. Review of LiteratureThe usefulness of an event study comes from the fact that, given rationality in the market place, the effect of an event will be reflected immediately in asset prices. Thus the event’s economic impact can be measured using asset prices observed over a relatively short time period. MethodologyThe event of importance in the present study is the start-date of compulsory dematerialised trading in equity shares. Therefore, task of conducting an event study and identifying the period over which the event started having its impact on various variables are of interest to. In order to measure impact of the event (demat) on the behaviour of various identified variables (liquidity, returns and volatility), there is a need to consider equal lengths of time periods, as much as possible, before and after the event. Therefore, data on various variables before and after the compulsory trading in dematerialised shares are obtained for various lengths. Trading and settlement in shares, for all classes of investors, is made compulsory starting from January 4, 1999 in select group of companies. Thereafter, gradually, more number of companies are added to the list of compulsory demat trading and settlement. 9/11/10 173

292. Demat CompaniesCompulsory trading in the demat form for all classes of investors was introduced starting from January 4, 1999 in a phased manner. In each phase, a number of companies were added to compulsory demat category. In the first phase 12 companies on January 4, 1999, in the second phase 19 companies from February 15, in the third phase 33 more companies from April 5, and in the fourth phase 40 scrips were included with effect from May 31, 1999. Control Group of CompaniesAnother matching sample group of companies is considered for the study. Matching is, generally, done on the basis of relevant parameters. Parameters considered consist of size of company, market capitalisation, paid-up capital/number of shares outstanding, number of shares traded, sales and others. In this study, the most relevant parameter is number of shares outstanding. In order to measure liquidity, returns and volatility, control group of companies on the basis of paid-up capital of the companies is selected. Paid-up capital has direct bearing on the number of shares issued and traded. Thus, it rightly represents liquidity 9/11/10 174

293. LiquidityThe data on trading volumes in both value and quantity terms and number of trades are also analyzed to see the impact of dematerialisation. In order to observe whether there is any growth (lack of it) in the number of shares traded in the post-demat period compared to pre-demat period, growth rates are calculated over the pre-demat period.VolatilityVolatility has become a topic of enormous importance to almost anyone who is involved in the financial markets even as a spectator. To many among the general public, the term is simply synonymous with risk. High volatility is to be deplored, because it means that security values are not dependable and the capital markets are not functioning as well as they should. While investor protection and solvency of financial institutions are paramount concerns underlying public regulation of securities markets, it is also evident that the regulatory framework is to a considerable extent based on the premise that unregulated securities markets are fragile and prone to inefficiencies and systemic crises. 9/11/10 175

294. VolatilityVolatility has become a topic of enormous importance to almost anyone who is involved in the financial markets even as a spectator. To many among the general public, the term is simply synonymous with risk. High volatility is to be deplored, because it means that security values are not dependable and the capital markets are not functioning as well as they should. While investor protection and solvency of financial institutions are paramount concerns underlying public regulation of securities markets, it is also evident that the regulatory framework is to a considerable extent based on the premise that unregulated securities markets are fragile and prone to inefficiencies and systemic crises. 9/11/10 176

295. What is Pledge Invocation? When a pledgee does not repay the loan amount the shares pledged with the Bank can be transferred in their favour. This is similar to the physical shares being transferred in the name of the lendor in the event of a default.Who will receive the corporate actions like dividends, bonus etc in Pledged shares . You continue to remain the beneficial holder of pledged shares. You will continue to receive the Dividends, Bonus and all other Corporate actions. 9/11/10 177

296. CREDIT RATING Application for grant of certificate 3. (1) Any person proposing to commence any activity as a credit rating agency on or after the date of commencement of these regulations shall make an application to the Board for the grant of a certificate of registration for the purpose (2) Any person, who was immediately before the said date carrying on any activity as a credit rating agency, shall make an application to the Board for the grant of a certificate within a period of three months from such date: Provided that the Board may, where it is of the opinion that it is necessary to do so, for