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  • 2. INDIAN FINANCIAL SYSTEN-AN OVERVIEW o Financial System of any country consists of financial markets, financial intermediation and financial instruments or financial products. o 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. o 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. o 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. 1/30/2015 2
  • 3. o There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities. o 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. 1/30/2015 3
  • 4. FINANCIAL MARKETS o Money Market- The money market ifs a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions. o 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. o 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. o Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals. 1/30/2015 4
  • 5. FINANCIAL INTERMEDIATION o To ensure that financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. o To serve this purpose, Financial intermediaries came into existence. o 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. 1/30/2015 5
  • 6. FINANCIAL INTERMEDIARIES o Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in move than one market e.g. underwriter. However, the services offered by them vary from one market to another. 1/30/2015 6
  • 7. FINANCIAL INTERMEDIARIES Intermediary Market Role Stock Exchange Capital Market Secondary Market to securities Investment Bankers Capital Market, Credit Market Corporate advisory services, Issue of securities Underwriters Capital Market, Money Market Subscribe to unsubscribed portion of securities Registrars, Depositories, Custodians Capital Market Issue securities to the investors on behalf of the company and handle share transfer activity Primary Dealers Satellite Dealers Money Market Market making in government securities Forex Dealers Forex Market Ensure exchange ink currencies 1/30/2015 7
  • 9. EQUILLIBRIUM IN FINANCIAL MARKETS EQULLIBRIUM IS BASED ON THE ASSUMPTION THE WORLD IS PERFECT Financial market is expected to be perfect when:  There are large number of savers, investors and operators in the market.  All participants are rational.  All are well informed and there is smooth and faster flow of required information.  There is homogeneous expectations from all participants in the market.  There are no taxes.  There are no transaction costs.  The financial assets are infinitely divisible. 1/30/2015 9
  • 10. DETERMINANTS OF SUPPLY AND DEMAND OF FUNDS o Aggregate savings by the household sector., business sector and the government in a given economy. o Savings is the difference between possible income and consumption expenditure.. o 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. o 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. 1/30/2015 10
  • 12. RELATIONSHIP BETWEEN FINANCIAL SYSTEM AND ECONOMIC DEVELOMENT  Credit creation theory.- Investments are made in anticipation of savings  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. 1/30/2015 12
  • 13.  Financial market Regulation Theory- According to this theory fincial market are prone to market failures and that government intervention make them to function better like RBI’s interest rate and monetary policy, SEBI guidelines.  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 growthh 1/30/2015 13
  • 14. RBI AND INDIAN FINANCIAL SYSTEM  Until 1994, different departments in Reserve Bank of India were exercising supervision over banks, non- banking financial companies and financial institutions.  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.  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. 1/30/2015 14
  • 15.  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. 1/30/2015 15
  • 16.  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 1/30/2015 16
  • 17. SUPERVISORY PROCESS  On-site inspection  Supervision of overseas branches of Indian banks  Financial Institutions  Non-Banking Financial Companies  Off-site Monitoring & Surveillance System- Banks, All India Development Financial Institutions, Non-Banking Financial Companies 1/30/2015 17
  • 18. BOARD FOR FINANCIAL SUPERVISION: CONSTITUTION  Board for Financial Supervision (BFS) was constituted on November 16, 1994 by the Governor as a committee of the Central Board of Directors of the Reserve Bank of India (RBI). It functions under the RBI (BFS) Regulations, 1994 exclusively framed for the purpose in consultation with the Government of India.  Advisory Council to BFS was constituted on November 16, 1994 and was in place till March 27, 1998.  The BFS also constituted an Audit Sub-Committee in January 1995  The supervision by BFS at present covers commercial banks, all India development financial institutions and non-banking finance companies. 1/30/2015 18
  • 19.  Corporate Governance and Management Guidance  Transparency and Disclosure  Internal controls and housekeeping in banks  Reconciliation of inter-branch accounts  Balancing of books  Reconciliation of Nostro accounts  Strengthening of internal audit /control system  Audit system in banks  Fraud monitoring  Core Principles for Effective Banking Supervision 1/30/2015 19
  • 20. 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 1/30/2015 20
  • 21. SAVINGS AND INVESTMENTS Consumption and saving decisions  Desired consumption is the consumption amount desired by households  Desired national saving is the level of national saving when consumption is at its desired level: 1/30/2015 21
  • 22. 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 1/30/2015 22
  • 23.  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. 1/30/2015 23
  • 24.  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. 1/30/2015 24
  • 25.  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 1/30/2015 25
  • 26.  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. 1/30/2015 26
  • 27.  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: 1/30/2015 27
  • 28.  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. 1/30/2015 28
  • 29.  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. 1/30/2015 29
  • 30. 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. 1/30/2015 30
  • 31. 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 1/30/2015 31
  • 32.  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. 1/30/2015 32
  • 33. DETERMINANTS OF DESIRED NATIONAL SAVING  Rise in current income.  Increase in expected future income.  Increase in wealth.  Increase in real (after tax) interest rates 1/30/2015 33
  • 34. 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. 1/30/2015 34
  • 35.  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. 1/30/2015 35
  • 36.  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. 1/30/2015 36
  • 37.  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. 1/30/2015 37
  • 38.  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. 1/30/2015 38
  • 39.  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. 1/30/2015 39
  • 40.  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: 1/30/2015 40
  • 41.  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 1/30/2015 41
  • 42. INTEREST RATE STRUCTURE  Impact of interest rate is both in savings and investment in the economy- borrowing and lending decisions are primarily based on interest rate.  In the macro sense interest rate and interest income has vital role in the economy.  Savings and investments which are influenced by interest rates are the economic variables. 1/30/2015 42
  • 43. ROLE OF INTEREST RATES  Reward to capital-a factor of production.  A return on savings  Cost to investments.  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. 1/30/2015 43
  • 44. THEORIES OF INTEREST RATE  Keynes considered interest rate as monetary phenomenon.  He took money as an asset with opportunity cost , namely return on short term bonds.  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.  Under this theory interest is the function of supply and demand in the economy  Transactions are generally pre cautionary or specuklative and the late is known as aset approach. 1/30/2015 44
  • 45. NEO-CLASSICAL THEORY  According to this theory interest rate is also based on the expectations of the public and the rate of inflation in the economy.  According to Irwing Fisher interest rate is also a function of inflation as the nominal rate is affected by expected rate of inflation.  During inflationary periods the gap in the rates between organised financial system and the unorganised financial system widens.  Funds flow from organised to unorganised and vice versa inluence thecrates in both the sectors. 1/30/2015 45
  • 46. INTEREST RATE STRUCTURE- FACTORS INFLUENCING INTEREST RATES  Since the risk for an investor is greater than a lender, interest on ownership capital must be more than on loan capital.  Difference in maturity periods.  Degree of default risk.  Tax provisions-incentives or disincentives.  Marketability-liquidity.  Sfety of funds. 1/30/2015 46
  • 47. INTEREST RATES IN INDIA  Bank rate- the rate fixed by the central bank-RBI rate for advances to commercial and co-operative banks.  Normally bank rate is for discounting bills of exchanges etc,  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.  Bank rate is made active indicator of f bank funds.  Bank rate is revised by RBI under the RBI Act as needed 1/30/2015 47
  • 48. MONEY MARKET ORGANISATION IN INDIA Money Market Organisation In India RBI FUNCTIONS ROLE MONEY MArket Institutional Development Primary Dealers Money Market Mutual Funds SU Markets CALL/BILLS/ T>Bills/CDs/CPs 1/30/2015 48
  • 49. Reserve Bank Of India Functions: To Maintan Monetary stability Financial stability Stable payment system Promote development of financial infrastructure To ensure credit allocation to meet national economic priorities Regulate volume of money and credit ROLE Note Issue Govt.Banker Banbker’s Bank Regulator Ex.Control Authority Promotional Functions 1/30/2015 49
  • 50. 1. Regulator of money and credit/ Monetary authority. 2. Open market operations- sale and purchase of central and stae securities and Treasury Bills. 3. Bank Rate-Rate at which the RBI buy or rediscount bills 4. Refinance – to ease the liquidity issues in the system. 5. 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. 6. 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. 7. Liquidity Adjustment Faculty- RBI was providing specific and sector based refinance like Export credit refinance, Collateralized Lending Faculty 8. i.e advance against excess (over SLR requirements) holdings of Government securities, T- Bills . 1/30/2015 50
  • 51.  Based on the recommendation of Narasimhan committee RBI policy has changed from sector specific direct refinancing to indirect and general refinancing through changes in REPO Reverse REPO rates which would provide reasonable corridor for market play  Provisions of Interim LAF: -CLF at 0.25% of fortnightly aggregate deposits of 1997-98 which would be available for 2 weeks at Bank rate wef 21st April 1999. - An Additional amount equivalent to CLF would be available at 2% over Bank Rate- - Both CLF and ACLF are for 2 weeks. - Restriction on participation in money market was withdrawn - Scheduled commercial banks were eligible export credit Bank Rate - Liquidity support were made available to primary dealers at B/Rfor 90 days. 1/30/2015 51
  • 52.  Repo /reverse repo//ready forward/repurchase (Buy back) refers to transactions where two parties agree to sell and repurchase the same security  The seller agrees to sell specified security with an agreement to buy the same security at a future price and date.  Likewise a buyer agree to buy the same security with an agreement to sell the same security at a future date and price.  The same transaction is known as repo from the view point of the seller and reverse repo from the point of the buyer.  Repo is a collateralized short term borrowing and lending. 1/30/2015 52
  • 53.  The terms of such a contract is in terms of repo rate representing the money market borrowing / lending rate.  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.  There are two legs in Repo transactions: 1.Borrower sells the security. The calculation is;  Total consideration = Deal rate*face value+ Accrued interest  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:  Reversal price = Deal rate* face value+ ( interest for holding period-interest paid at repo rate)/face value  Total consideration = reversal price + face value+ Accrued interest. 1/30/2015 53
  • 54.  Bank X entered into a repo with Bank Y for 10 crores for 14 days  Security chosen is 13.6% GS -2010. The repo rate is 5%  The agreed purchase price is 101.12.  The last coupon was paid 30 days ago.  You are required to calculate first leg and second leg net cash outflow and purchase price rate. 1/30/2015 54
  • 55. 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 1/30/2015 55
  • 66.  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% 1/30/2015 66
  • 67. DISCOUNT AND FINANCE HOUSE OF INDIA(DHFI)  Role and Functions: (Ghore committee recommendations) -It should be the sole depositor of surplus funds of the banking system and Non-banking financial institutions. -It should use the surplus funds to even out the liquidity imabalances in the banking system subject to RBI guidelines. - It should create ready market for commercial bills, treasury bills , government guaranteed securities by being ready to purchase from banks or sell to banks such securities. The committee also recommended that this discount house is to be sponsored by commercial banks,LIC,UTI,GIC with participation by IDBI, ICICI, SFCs. 1/30/2015 67
  • 68.  Till Vaghul committee reviewed and recommended no action was taken on this.  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.  The role of the DHFI is both developmental and stabilizing  By developing active primary and secondary money markets it facilitates smoothening of short term liquidity imbalances.  It discounts and deals in not only commercial bills but a;so in TBs, and money market instruments.  It acts as a specialised money market intermediary  It undertakes short term buy back in Government and approved- dated securities 1/30/2015 68
  • 69.  Role of DHFI is both developmental and stabilising.  It helps in smoothening of short term liquidity imbalances by devloping primary and secondary money markets.  It acts a s a specialised money market intermediary for stimulating activity in the money market instruments and developing secondary market for those instruments.  It not only deals in commercial bills but also in Treasury billsand other money market instruments.  It undertakes buy-back of governments and approved dated securities.  RBI provides re-finance facility to DHFI 1/30/2015 69
  • 70. SECURITIES TRADING CORPORATION OF INDIA  STCI wa sset up in 1994 with the objective of providing good secondary market for debt instruments  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.  It primarily concentrate on government securities..  DHFI was set up for Shoer term –TBs – government securities and STCE was set up for long-dated government securities. 1/30/2015 70
  • 71. CAPITAL MARKET STRUCTURE • Stock market volatility touches every participant directly/indirectly in the capital market. General feeling is that the stock markets worldwide have become very fragile in the recent past on account of various developments such as Asian crisis. Brazil Real fall and Russian debacle. Many far-reaching stock reforms have been introduced in the Indian market for the last few years. These reforms, in turn, changed market structure. Changing market structure influences nature of stock price behavior. 1/30/2015 71
  • 72.  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. 1/30/2015 72
  • 74. o Eligibility Norms: o Should offer through offer documents-Prospectus or statement in lieu of prospectus; letter of offer in case of rights issue. o Draft Offer documents are to be filed with SEBI- through a merchant Banker in case of rights issue in exces ofRs.50 lakh o Fast track issues- In case of listed company filing of offer documents in case of public/rights issue provided certain conditions are fulfilled o Separate conditions are to be complied with in case of unlisted companies. 1/30/2015 74
  • 77.  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). 1/30/2015 77
  • 78.  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. 1/30/2015 78
  • 79.  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. 1/30/2015 79
  • 80.  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: 1/30/2015 80
  • 81.  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 1/30/2015 81
  • 82.  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 1/30/2015 82
  • 83. 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. 1/30/2015 83
  • 84.  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. 1/30/2015 84
  • 85. UNDERSTANDING RETURNS  Total return: the total gain or loss experienced on an investment over a given period of time  Components of the total return  Income stream from the investment  Capital gain or loss due to changes in asset prices  Total return can be expressed either in Rupee terms or in percentage terms.  Return on 30 shares of Rs.10 each =( 30*Rs.2,25) = 67.5=22.5%  Capital Gain( Purchase for RS.12 and current market price is 15 =  Rs.(15-12)*30 =RS.90= 30%  Total Return in Rs= 67.5+90 =157.50  Total Return in Percentage = 22.5+30 =%2.5% 1/30/2015 85
  • 86. 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. 1/30/2015 86
  • 87. WHY STUDY FINANCIAL MARKETS AND INSTITUTIONS? • They are the cornerstones of the overall financial system in which financial managers operate • Individuals use both for investing • Corporations and governments use both for financing 1/30/2015 87
  • 88. OVERVIEW OF FINANCIAL MARKETS Primary Markets versus Secondary Markets Money Markets versus Capital Markets Foreign Exchange Markets 1/30/2015 88
  • 89. 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 1/30/2015 89
  • 90. 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 1/30/2015 90
  • 91. 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) 1/30/2015 91
  • 92. 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 1/30/2015 92
  • 93.  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 1/30/2015 93
  • 94. 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 1/30/2015 94
  • 95. 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) 1/30/2015 95
  • 96.  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 1/30/2015 96
  • 97. 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 1/30/2015 97
  • 98. 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 1/30/2015 98
  • 99. 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 1/30/2015 99
  • 100. 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 1/30/2015 100
  • 101. 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? 1/30/2015 101
  • 102.  Reach  Geographical  Made a distribution framework available  Product Diversity  Efficiencies  Better order executions  Increased liquidity 1/30/2015 102
  • 103.  Price transparency  Cost reduction  Shorter settlement cycles  Full line service from order capture to settlement and risk management  Regulatory issues with each new development 1/30/2015 103
  • 104.  Rolling settlement  Derivatives  Client-level approach 1/30/2015 104
  • 105. 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 1/30/2015 105
  • 106.  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 1/30/2015 106
  • 107.  Customised products and OTC  Large value investors and OTC  Standardised products and contracts  Changing product profile  Time Horizons changing to span time zones 1/30/2015 107
  • 108.  Changing Settlement scenario  Changing Risk Management scenario  Straight Through Processing  Processing oriented to client level  Interfaces with other settlement Agencies  Integration emerging across markets 1/30/2015 108
  • 109. MARKET INSTRUMENTS- FINANCIAL INSTRUMENTS  Equity shares  Equity shares with detachable warrants  Non voting equity share  Preference share-redeemable  Preferences share- cumulative convertible  Debentures Non-convertible  Debentures –convertible  Zero interest fully convertible denture  Deep discount bonds  Stock invest  Euro issue  Zero coupon bonds  Company fixed deposits  warrants 1/30/2015 109
  • 110. 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 1/30/2015 110
  • 111. Entry form I Entry form II Entry form III Net tangible assets of 3 crores for 3 full years Alterative 1 for companies not eligible under entry form I Alterative 2 for companies not eligible under entry form I Distributable profit in 3 years Issue through book building route with 50% allotted to qualified buyers The project to be appraised by Fis and SCBs with 10% comes from appraisers Net worth of 1 crore for 3 years Change in name 50% of revenue rom pr3ceeding 1 year should be from new activity Post issue face value should be 10 crores or compulsory market making for at least 2 years Post issue face value should be 10 crores or compulsory market making for at least 2 years Issue size should niot exceed 5 times of pre-issue net worth. 1/30/2015 111
  • 112. 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 1/30/2015 112
  • 113.  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 1/30/2015 113
  • 114.  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, 1/30/2015 114
  • 115. 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. 1/30/2015 115
  • 116.  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. 1/30/2015 116
  • 117. 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. 1/30/2015 117
  • 118.  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. 1/30/2015 118
  • 119.  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: 1. Abridged prospectus 2. Prospectus for rights issue 3. 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 1/30/2015 119
  • 120. 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. 1/30/2015 120
  • 121.  The lead book runners should ensure compliance of the following conditions: 1. 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. 2. The price band can be revised during the building period. The maximum revision on either sude should not exceed 20%. 3. Any revision should be widely disseminated by – informing stock exchange, press release, indicating the changes in the relevant website 4. Building period should be extended by 3 days subject to a maximum building period of 13 days. 5. 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. 1/30/2015 121
  • 122. 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: 1. Availability of office space, equipment and manpower to effectively functioning. 2. Previous experience in underwriting or have a minimum of 2 persons having sufficient experience in underwriting . 3. Capital adequacy requirements of minimu net worth of Rs. 20 lakhs. 4. The applicant (Director, Principal officer, or the partner) has not been convicted for nay offence, moral turpitude or economic offence. 1/30/2015 122
  • 123.  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. 1/30/2015 123
  • 124. 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. 1/30/2015 124
  • 125.  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 ans stae government securities are inscribed stock or stock certificate, promissory notes and bearer bonds 1/30/2015 125
  • 126. 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. 1/30/2015 126
  • 127.  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. 1/30/2015 127
  • 128.  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. 1/30/2015 128
  • 129.  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. 1/30/2015 129
  • 130.  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. 1/30/2015 130
  • 131.  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. 1/30/2015 131
  • 132.  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. 1/30/2015 132
  • 133.  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. 1/30/2015 133
  • 134.  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.  1/30/2015 134
  • 135.  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. 1/30/2015 135
  • 136.  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. 1/30/2015 136
  • 137.  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. 1/30/2015 137
  • 138. 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:- 1/30/2015 138
  • 139.  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 1/30/2015 139
  • 140.  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). 1/30/2015 140
  • 141.  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 1/30/2015 141
  • 142.  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. 1/30/2015 142
  • 143.  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%. 1/30/2015 143
  • 144.  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 1/30/2015 144
  • 145.  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 1/30/2015 145
  • 146.  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. 1/30/2015 146
  • 147. 1/30/2015 147
  • 148.  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. 1/30/2015 148
  • 149. 1 Initial Listing Fees 20,000 2 Annual Listing Fees (i) Companies with paid-up capital* upto Rs. 5 crores (ii) AboveRs. 5 crores and upto Rs. 10 crores (iii) Above Rs. 10 crores and upto Rs. 20 crores 10,000 15,000 30,000 3 Companies which have a paid-up capital* of more than Rs. 20 crores will pay additional fee of Rs. 750/- for every increase of Rs. 1 crores or part thereof. 4 In case of debenture capital (not convertible into equity shares) of companies, the fees will be charged @ 25% of the fees payable as per the above mentioned scales. *includes equity shares, preference shares, fully convertible debentures, partly convertible debenture capital and any other security which will be converted into equity shares. Kindly Note the last date for payment of listing fee for the year 2006-2007 is April 30, 2006. Failure to pay the listing fee(for the equity and/or debt segment) before the due date i.e. April 30, 2006 will attract imposition of interest @ 12% per annum w.e.f. May 1, 2006. 1/30/2015 149
  • 150. 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 with Equity 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 1/30/2015 150
  • 151.  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 - 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. 1/30/2015 151
  • 152.  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. 1/30/2015 152
  • 153.  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) 1/30/2015 153
  • 154.  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. 1/30/2015 154
  • 155.  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. 1/30/2015 155
  • 156.  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,” 1/30/2015 156
  • 157.  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,merchant bankers,portfolio managers and such other intermediaries who may be associated with securities markets in any manner 1/30/2015 157
  • 158.  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. 1/30/2015 158
  • 159. 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 reasons i. To increase promoters holding ii. Increase earning per share iii. Rationalise the capital structure by writing off capital not represented by available assets. iv. Support share value v. To thwart takeover bid vi. To pay surplus cash not required by business Infact 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. 1/30/2015 159
  • 160.  Resources of Buy Back A 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. 1/30/2015 160
  • 161.  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 following i. in repayment of deposit or interest payable thereon, ii. redemption of debentures, or preference shares or iii. payment of dividend, if declared, to all shareholders within the stipulated time of 30 days from the date of declaration of dividend or 1/30/2015 161
  • 162.  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 statement The 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 1/30/2015 162
  • 163.  Filing of Declaration of solvency After 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. 1/30/2015 163
  • 164.  Issue of further shares after Buy back Every 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 Regulator A 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 Back A 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 1/30/2015 164
  • 165.  Procedure for buy back a. 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. 1/30/2015 165
  • 166.  The date of opening of the offer shall not be earlier than seven days or later than 30 days after the specified date g. 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.  Penalty If 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. 1/30/2015 166
  • 167. 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. 1/30/2015 167
  • 168.  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. 1/30/2015 168
  • 169.  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. 1/30/2015 169
  • 170.  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. 1/30/2015 170
  • 171.  Depository Participant Similar 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. 1/30/2015 171
  • 172.  Impact 1. Institutional Structure There 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. 1/30/2015 172
  • 173.  2. Market Microstructure Trading 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. 1/30/2015 173
  • 174.  Review of Literature The 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.  Methodology The 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. 1/30/2015 174
  • 175.  Demat Companies Compulsory 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 Companies Another 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 1/30/2015 175
  • 176.  Liquidity The 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. Volatility Volatility 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. 1/30/2015 176
  • 177.  Volatility Volatility 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. 1/30/2015 177
  • 178.  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. 1/30/2015 178
  • 179. 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 reasons to be recorded in writing, extend the said period upto a maximum of six months form such date . 1/30/2015 179
  • 181. PROMOTER OF CREDIT RATING AGENCY  The Board shall not consider an application under regulation (3) unless the applicant is promoted by a person belonging to any of the following categories, namely i. A public limited company ii. A scheduled commercial bank iii. A foreign bank operating in India iv. A foreign credit rating agency v. A company or a body corporate having continuous net worth of 100 crores. Eligibility criteria  A registered company under Companies Act 1956  The net worth should be not less than 5 crores  Credit rating activity is included in the Memorandum of Association  The provisions of the Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 shall, as far as may be, apply to all applicants or the credit rating agencies under these regulations 1/30/2015 181
  • 182.  Conditions of certificate and validity period  9. (1) The certificate granted under regulation 8 shall be, subject to the following conditions, namely:  (a) the credit rating agency shall comply with the provisions of the Act, the regulations made there under and the guidelines, directives, circulars and instructions issued by the Board from time to time on the subject of credit rating.  (b) (1) where any information or particulars furnished to the Board by a credit rating agency:  (i) is found to be false or misleading in any material particular ; or  (ii) has undergone change subsequently to its furnishing at the time of the application for a certificate; the credit rating agency shall forthwith inform the Board in writing.  (2) the period of validity of certificate of registration shall be three years. 1/30/2015 182
  • 183. CODE OF CONDUCT  Agreement with the client  Monitoring of ratings must be done by the agency during the life time of the security rated by it  Procedure for review of rating- There must be periodic reviews..  f the company do not cooperate, the agency can rate based on best available information and this fact should be disclosed  Rating cannot be withdrawn except when the company merges or gets amalgamated with another company.  Internal procedures to be framed  17. Every credit rating agency shall frame appropriate procedures and systems for monitoring the trading of securities by its employees in the securities of its clients, in order to prevent contravention of –  (a) the Securities and Exchange Board of India (Insider Trading) Regulations, 1992;  (b) the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 1995; and  (c) other laws relevant to trading of securities. 1/30/2015 183
  • 184.  Disclosure of Rating Definitions and Rationale  18. (1) Every credit rating agency –  (a) shall make public the definitions of the concerned rating, along with the symbol and,  (b) shall also state that the ratings do not constitute recommendations to buy, hold or sell any securities  (2) Every credit rating agency shall make available to the general public information relating to the rationale of the ratings, which shall cover an analysis of the various factors justifying a favourable assessment, as well as factors constituting a risk.  Submission of information to the Board  Compliance with circulars etc., issued by the Board  Appointment of Compliance Officer  (1.) Every credit rating agency shall appoint a compliance officer who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions etc issued by the Board or the Central Government. 1/30/2015 184
  • 185.  Maintenance of Books of Accounts records, etc.  Steps on auditor’s report  Every credit rating agency shall, within two month’s from the date of the auditor’s report, take steps to rectify the deficiencies if any, made out in the auditor’s report, insofar as they relate to the activity of rating of securities.  Confidentiality  Every credit rating agency shall treat, as confidential, information supplied to it by the client and no credit rating agency shall disclose the same to any other person, except where such disclosure is required or permitted by under or any law for the time being in force. 1/30/2015 185
  • 186. RATING PROCESS  (1) Every credit rating agency shall –  (a) specify the rating process;  (b) file a copy of the same with the Board for record; and file with the Board any modifications or additions made therein from time to time.  (2) Every credit rating agency shall, in all cases, follow a proper rating process.  (3) Every credit rating agency shall have professional rating committees, comprising members who are adequately qualified and knowledgeable to assign a rating.  (4) All rating decisions, including the decisions regarding changes in rating, shall be taken by the rating committee  .(5) Every credit rating agency shall be staffed by analysts qualified to carry out a rating assignment. 1/30/2015 186
  • 187.  (6) Every credit rating agency shall inform the Board about new rating instruments or symbols introduced by it.  (7) Every credit rating agency, shall, while rating a security, exercise due diligence in order to ensure that the rating given by the credit rating agency is fair and appropriate.  (8) A credit rating agency shall not rate securities issued by it.  (9) Rating definition, as well as the structure for a particular rating product, shall not be changed by a credit rating agency, without prior information to the Board.  (10) A credit rating agency shall disclose to the concerned stock exchange through press release and websites for general investors, the rating assigned to the securities of a client, after periodic review, including changes in rating, if any. 1/30/2015 187
  • 188.  Participatory Notes  What moves the Capital Market is a question that needs to be explained in the extraordinary movement of the SENSEX.  The Foreign Institutional Investors have played an important role in the Sensex’s movement because of fund inflows.  Liquidity then is critical factor. The recent issue was about Participatory Notes through which foreign funds flowed into the market.  • The issue may be seen in a Q & A format  What are Participatory Notes?  Participatory Notes are derivative instruments issued against an underlying security (Shares, Debentures and Derivatives) 1/30/2015 188
  • 189.  Who issues Participatory Notes?  These are issued by Foreign Portfolio Investors registered in India to overseas clients who may not eligible to invest in the markets in India.  What is the benefit to Participatory Notes` holders?  They gain from the capital appreciation underlying the shares  What is the share of Participatory Notes as a percentage of the total foreign portfolio flow?  It rose from 32% late last year to 51.6% by August 2007.  What is the total outstanding value of Participatory Notes?The outstanding value of Participatory Notes with underlying as securities is 30% of the total outstanding (Rs.3.53484 Cr) at 1,17,071 Cr .The notional value of Participatory Notes outstanding in March 2004 was Rs.31875/-Cr. This shows an increase of 51.6% of the assets under the custody of Foreign Institutional Investor in India. 1/30/2015 189
  • 190.  Why did Reserve Bank of India call for the ban of fresh issue of Participatory Notes by Foreign Institutional Investor’s?  Reserve Bank of India’s proposal is fallout of the desperate battle that the monetary policy authorities are fighting in the face of unprecedented inflow. In the last week of September alone the Reserve Bank of India had mopped up $12 bn with Foreign Institutional Investors pumping in a net amount of over 8.5 bn, since the September 19,fed rate cut.  What is the idea of controlling inflows?The move aims at controlling inflows, which were coming from unknown quarters. The idea is to encourage investors who come through Participatory Notes to invest directly. To tighten “know your customer” norms, investors through Participatory Notes are welcome to invest in India but for the present it is important to moderate these inflows and they must come directly as Foreign Institutional Investors. 1/30/2015 190
  • 191.  What is the foreign portfolio inflow so far this year?  It is $17.6 Bn this year as of October 15,2007  What is the size of India dedicated country funds across the world in assets? What is the future?  It is $42 Bn in assets. It is expected that these portfolio inflows will increase along side a private equity and foreign direct investment inflow.  Is there a cap on the sum of issue of the Participatory Notes?  SEBI has restricted Participatory Notes issued by Foreign Institutional Investors to 40% of assets under custody in India. 1/30/2015 191
  • 192.  Explain why foreign investors choose the Participatory Notes route?Legitimate investors may not register because they are wealthy individuals, trusts or secretive hedge funds that are registered in the US as well. These entities will instead invest through brokers registered as Foreign Institutional Investors in India. It is the job of the brokers (Foreign Institutional Investors) to ensure that they are not invest in underworld money.  What steps SEBI has taken to take the Foreign Institutional Investors onto confidence?A discussion paper on offshore derivative instruments (ODIs) has been issued by SEBI. Broadly the proposals are: -Participatory Notes will not be banned.  Participatory Notes will be regulated.  Cannot issue or renew Participatory Notes invested in derivatives.  Within 18 months existing positions must be wound up.  A limit for each Foreign Institutional Investor  Foreign Institutional Investor registration process will be  simplified and quickened.  – There will be moderation in the quantity of inflow.  – The quantity of the inflows must be ascertained. 1/30/2015 192
  • 193.  Do Foreign Institutional Investors influence the functioning of the Indian capital market and if so how?Yes. Foreign Institutional Investors substantial holdings give them the muscle power to dictate terms on the stock market. Foreign Institutional Investor investments in the equity market have touched Rs.286, 477 Cr (67.07 Bn $). The market value of the investment is presently Rs.685, 000 Cr according to SEBI. The market value of the holdings of Foreign Institutional Investors through Participatory Notes is Rs.353,484 Cr (51.6% of total holdings). Against this total holdings of domestic mutual funds is 1,50,000 Cr. Foreign Institutional Investors hold almost 40% of the paid-up capital (excluding promoters’ holdings) in the Sensex companies. This constitutes the free flow of paid-up capital.  Is the fear that Participatory Notes are becoming a favorite with a host of Indian money launderers justified?  Yes…………..  1/30/2015 193
  • 194.  What is the conclusion after issue of Discussion Paper?  Foreign Institutional Investors can issue PNs only to ‘regulated entities’  May shut the doors to hedge funds; Fund flow may come down in the short- term  Both Proprietary and Corporate sub-accounts can issue PN till registration  Small Mercy. Some have already got registration; for others transition time may be short  Pension Funds, Foundations, University Funds, Endowment and Charitable Trusts can register as Foreign Institutional Investors  Some are PN investors. As new entities register more long-term money will come in.  Cut off date for calculating assets under custody: September 30; operational date: October 25  Any position built by an Foreign Institutional Investor between the two dates will not have to be unwound Foreign Institutional Investors who are above the new limit can stay at that level: Those below the limit can issue PNs of 5% of Asset Under Custody a year 1/30/2015 194
  • 195.  Depository receipts  A firm may wish to list its shares internationally for various legal and financial reasons. Depository receipts offer a means for firms to tap foreign capital markets without directly listing their shares abroad.  The best-known securities of this sort are:American Depository Receipts, or ADRS, which are traded in the United States, and  Global Depository Receipts, or GDRS, which are traded mainly in London  Latin American companies account for a large share of trading in ADRS, and the GDRS of Indian companies are the biggest source of GDR trading in London. 1/30/2015 195
  • 196.  These securities come in two varieties:A sponsored ADR or GDR is set up at the behest of the share issuer, which deposits the desired number of its own shares with a bank in the country where the receipts are to be traded. The receipts themselves are technically securities issued by the bank, giving the holder a claim on the earnings and price appreciation of the shares the bank hold.  An unsponsored ADR or GDR is set upon the initiative of an outside party, such as an investment bank, rather than of the firm that has issued the shares.  • Both sponsored and unsponsored depository receipts trade on stock exchanges.  • The main difference between them is that owners of unsponsored receipts may have more difficulty obtaining financial reports and other information from the share issuer, because the issuer has not sought to issue the receipts. 1/30/2015 196
  • 197.  At July 2005, ADRS of 299 firms were trading on the New York Stock Exchange and a further 117 on NASDAQ. Some 118 firm had listed GDRS on the London Stock Exchange.  Euro Issues  Indian companies raise resources from international markets through the issue of Foreign Currency Convertible Bonds (FCCB’s), GDRs and ADRs.  GDRs/ADRs are similar to Indian shares and are traded on overseas stock exchanges.  In India, they are reckoned as part of foreign direct investment and hence, need to conform to the existing FDI policy.  During 2005-06, there is a significant spurt in the resources mobilised through Euro Issues, that increased to Rs. 113,580 million as against Rs. 33,530 million raised during 2004-2005 1/30/2015 197
  • 198.  ADR / GDR  Financial capital goods import  Capital expenditure  Prepayment of scheduled payment of ECB  Investments abroad  Equity investment in JV / WOS in India  Governed by SEBI Guidelines on issue of ADR / GDR  - should have consistent track record of 3 years since 1/30/2015 198
  • 199.  Investments in ADRs/GDRs/Foreign securities by MFs  Mutual Funds schemes where disclosure pertaining to investments in ADRs/GDRs/foreign securities has not been made in the offer document, in such cases prior to investment in ADRs/GDRs/foreign securities for the first time, the AMC shall ensure that a written communication about the proposed investment is sent to each unitholder and an advertisement is given in one English daily newspaper having nationwide circulation as well as in a newspaper published in the language of the region where the Head Office of the MF is situated  The communication to unitholders shall also disclose the risk factors associated with such investments. However this provision shall also disclose the risk factors associated with such investments. However this provision shall not applicable to existing MF schemes where relevant disclosure regarding investing in ADRs/GDRs/foreign securities has already been made. 1/30/2015 199
  • 200.  GOVERNMENT  Consistent track record for am minimum period of 3 years can be related for infrastructures.  • Euroissue treated as Direct Foreign Investment.  • Aggregate Foreign Investment not to exceed 51%. FIPB clearance required before financial clearance from Finance Ministry for above 51% of post issue subscribed capital.  • Listing of Depository Receipts in any international Stock Exchange, OTC Exchange etc.,  • NRI’s free to possess, transfer or purchase Depository Receipts  • Companies to go through with the issue within 3 months of the Final approval of the Finance Ministry.  • 10% Deduction of tax at source on Interest payments Dividend  • No capital gains tax on Conversion into shares  Transfer of bonds outside India. 1/30/2015 200
  • 201.  Government’s Role Guidelines  Entire Euro issue proceeds may be retained abroad  Repatriation as and when expenditure for the approval end uses are incurred or may remit funds into India in anticipation of end use of funds.  Packing of the Euro issue proceeds in stock markets and real estates not allowed.  Quarterly statements on the repatriation of Euro issue proceeds into the country and the manner of their deployment for the approval end uses to be submitted to the Government. markets.  • Issue of warrants barred.  elect all India Financial Institutions allowed access to the Euro 1/30/2015 201
  • 202.  End-use Restrictions on the issue proceeds  The five end-use restrictions on the monies raised through Euro issue are as follows:  Financing capital goods import;  Financing domestic purchase/installation of plant, equipment and buildings;  Prepayment or scheduled repayment of earlier external borrowings;  Making Investments abroad where these have been approved by competent authorities;  A margin of 25% of the total proceeds of an issue for other general corporate restructuring uses; and  The five end-use restrictions on the monie 1/30/2015 202
  • 203. ROLE OF FIIS IN INDIAN CAPITAL MARKET  An important feature of the development of stock market in India in the last 15 years has been the growing participation of Institutional Investors, both foreign institutional investors and the Indian mutual funds combined together, the total assets under their management amounts to almost 18% of the entire market capitalization. This paper examines the role of these investors in Indian stock markets and finds that the market movement can be explained  Growing Clout of Institutional Investors on Indian Markets:  A Grave Balance of Payments situation forced the policymakers to take a relook at allowing foreign capital Into the country and the year of 1991 marked the announcement of some fiscal disciplinary measures along with reforms on the external sector made, it possible for the foreign capital to reach the shores of the country. As on 31st March 2005 there were 685 (ISMR 2004-05 NSE, Mumbai) registered foreign institutional  investors in the Indian stock market. As on that date the net cumulative investments made by Flls are around USD 35.9 billion representing around 6.55% of India's market capitalization. 1/30/2015 203
  • 204.  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 1/30/2015 204
  • 205. Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 Net Investments by Flls (Rs Cr.) Year 4.27 5444.60 4776.60 6720.90 7386.20 5908.45 - 729.11 9765.13 9682.52 8272.90 2668.90 44000.03 41416.45 1/30/2015 205
  • 206. LEASING AND HIRE PURCHASE  A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental.  In other words, lease is a contract between the owner of an asset (the lessor) and its user (the lessee) for the right to use the asset during a specified period in return for a mutually agreed periodic payment (the lease rentals).  The important feature of a lease contract is separation of the ownership of the asset from its usage.  Lease financing is based on the observation made by Donald B. Grant:“Why own a cow when the milk is so cheap? All you really need is milk and not the cow.” 1/30/2015 206
  • 207.  FINANCIAL LEASE  Long-term, non-cancellable lease contracts are known as financial leases. The essential point of financial lease agreement is that it contains a condition whereby the lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost. At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease.  Under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease agreement is irrevocable. Practically all the risks incidental to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs  . Only title deeds remain with the lessor. Financial lease is also known as ‘capital lease  ’. In India, financial leases are very popular with high-cost and high technology equipment 1/30/2015 207
  • 208.  An operating lease stands in contrast to the financial lease in almost all aspects. This lease agreement gives to the lessee only a limited right to use the asset.  The lessor is responsible for the upkeep and maintenance of the asset.  The lessee is not given any uplift to purchase the asset at the end of the lease period.  Normally the lease is for a short period and even otherwise is revocable at a short notice.  Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets. 1/30/2015 208
  • 209. ADVANTAGES OF LEASING  SAVING OF CAPITAL: Leasing covers the full cost of the equipment used in the business by providing 100% finance.  FLEXIBILITY AND CONVENIENCE: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees.  (3) PLANNING CASH FLOWS: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets.  (4) IMPROVEMENT IN LIQUADITY: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique. 1/30/2015 209
  • 210.  HIRE PURCHASE::buying after leasing, leasing with the option to buy at the end of the lease period Finance lease::A finance lease effectively allows a firm to finance the purchase of an asset, even if, strictly speaking, the firm never acquires the asset. Typically, a finance lease will give the lessee control over an asset for a large proportion of the asset's useful life, providing them the benefits (and risks) of ownership.  Hire purchase is a purchase of an asset in which customer makes down payment and finance rest of the ammount through financial insti or bank.On rest of the unpaid amnt he pays interest at a certain pre-described rate of interest.After making complete payment the assest becomes the legal right of customer. Lease on the other hand is an agreement of using asset for certain period and paying rent on it at a pre-described rate of interest.It is a temorary acuiring of an asset just to use it.Generally Pvt schools are bulid on lease land. Interest on lease is fully exemt from tax. 1/30/2015 210
  • 211.  Hire purchase is a type of installment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase.  Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid  . The hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines a hire purchase as “an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which:  1) The owner delivers possession of goods thereof to a person on condition that  such person pays the agreed amount in periodic instalments. 1/30/2015 211
  • 212.  2) The property in the goods is to pass to such person on the payment of the last of such instalments, and  3) Such person has a right to terminate the agreement at any time before the property so passes”.  Hire purchase should be distinguished from instalment sale wherein property passes to the purchaser with the payment of the first instalment.  But in case of HP ( ownership remains with the seller until the last instalment is paid) buyer gets ownership after paying the last installment. HP also differs form leasing. 1/30/2015 212
  • 213. DIFFERENCE BETWEEN LEASE FINANCING AND HIRE PURCHASE BASIS LEASE FINANCING HIRE PURCHASE Meaning A lease transaction is a commercial arrangement, whereby an equipment owner or manufacturer conveys to the equipment user the right to use the equipment in return for a rental Hire purchase is a type of instalment credit under which the hire purchaser agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Option to user No option is provided to the lessee (user) to purchase the goods Option is provided to the hirer (user). Nature of expenditure Lease rentals paid by the lessee are entirely revenue expenditure of the lessee. Only interest element included in the HP instalments is revenue expenditure by nature Components Lease rentals comprise of 2 elements (1) finance charge and (2) capital recovery. HP instalments comprise of 3 elements (1) normal trading profit (2) finance charge and (3) recovery of cost of goods/assets. 1/30/2015 213
  • 214. SECURITISATION OF DEBT  Securitization Defined  Securitization of debt, or asset securitization as is more often referred to, is a process by which identified pools of receivables, which are usually illiquid on their own, are transformed into marketable securities through suitable repackaging of cashflows that they generate.  Securitization, in effect, is a credit arbitrage transaction that permits for more efficient management of risks by isolating a specific pool of assets from the originator's balance sheet.  Further, unlike the case of conventional debt financing, where the interest and principal obligations of a borrowing entity are serviced out of its own general cash flows, debt servicing with asset backed securities (ABS) is from the cash flows originating from its underlying assets. 1/30/2015 214
  • 215.  What can be Securitized?  In concept, all assets generating stable and predictable cash flows can be taken up for securitization. In practice however, much of the securitised paper issued have underlying periodic cash flows secured through contracts defining cash flow volumes, yield and timing. In this respect, securitization of auto loans, credit card receivables, computer leases, unsecured consumer loans, residential and commercial mortgages, franchise/royalty payments, and other receivables relating to telecom, trade, toll road and future export have gained prominence.  Typically, asset portfolios that are relatively homogeneous with regard to credit, maturity and interest rate risk could be pooled together to create a securitization structure. 1/30/2015 215
  • 216.  Why Securitize?  Securitization effort will call for considerable investments in time and resources. Hence, on a comparative cost scale it can even be somewhat more expensive than other types of debt financing that may be available to a borrower, at least in the initial stages  . However, it has been demonstrated that a continuing securitization program rather than a single deal often goes to reduce the costs, as economies of scale and expertise pick up over a period of time. Bearing this in mind, many securitization programs are run with a long-term strategic perspective. 1/30/2015 216
  • 217.  Parties in a Securitization Transaction  Securitization programs usually involve several participants, each carrying out a specialist function, such as, creating and analysing the asset pool, include:  Administration, credit rating, accounting, legal negotiation, etc.  • The Originator – also interchangeably referred to as the Seller – is the entity whose receivable portfolio forms the basis for ABS issuance,  • Special Purpose Vehicle (SPV), which as the issuer of the ABS ensures adequate distancing of the instrument from the originator,  • The Servicer, who bears all administrative responsibilities relating to the securitization transaction,  • The Trustee or the Investor Representative, who act in a fiduciary capacity safeguarding the interests of investors in the ABS, 1/30/2015 217
  • 218. SECURITIZATION PROCESS  1. Creation of asset pool and its sale  2. Issuance of the securitised paper This activity is usually performed by the SPV. Design of the instrument however would be based on the nature of interest that investors would have on the asset pool. In the case of pass-through issuances, the investors will have a direct ownership interest in the underlying assets, while pay-throughs are debt issued by the SPV secured by the assets and their cash flows.  3. Credit Risk  It must be made abundantly clear at the very outset that the accretions on the asset-backed security, i.e., interest, amortisation and redemption payments, are entirely dependent on the performance of the pooled assets, and will have nothing to do with the credit of the originator. By the same argument, such cash flows would also be not influenced by events affecting the condition of the originator, including insolvency. 1/30/2015 218
  • 219.  Merchant Banking  Commercial Banking  Investments  Bankers to Issue - Escrow Bankers  Underwriting  Loan Syndication 1/30/2015 219
  • 220.  SPECTRUM OF SERVICES : Equity Issue (Public/Rights) Management  Debt Issue Management  Private Placements  Project Appraisals  Monitoring Agency Assignments  IPO Funding  Security Trustee Services 1/30/2015 220
  • 221.  Agriculture Consultancy Services  Corporate Advisory Services  Mergers and Acquisitions  Buy Back Assignments  Share Valuations  Syndication 1/30/2015 221
  • 222.  ISSUE MANAGEMENT SERVICES : Project Appraisal  Capital structuring  Preparation of offer document  Tie Ups (placement)  Formalities with SEBI / Stock Exchange / ROC etc.,  Underwriting  1/30/2015 222
  • 223.  Promotion /Marketing of Issues  Collecting Banker / Banker to an issue  Post Issue Management  Refund Bankers  Handling of Dividend Warrant/Interest Warrant Payments  Debenture Trusteeship 1/30/2015 223