Financial institutions and markets notes as per BPUT syllabus for MBA 2nd semester

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lecture notes on Financial institutions and markets notes as per BPUT syllabus for MBA 2nd semester

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Financial institutions and markets notes as per BPUT syllabus for MBA 2nd semester

  1. 1. MGT- 205: FINANCIAL MARKETS AND INSTITUTIONS Module – I: Financial Market and Financial Institutions Topic -1: Meaning and Structure of Financial Market Financial market refers to those centers and arrangements which facilitate buying & selling of financial assets / instruments. Whenever a financial transaction takes place, it is deemed to have taken place in financial market. There is no specific place or location to indicate a financial market. Financial market is a mechanism enabling participants to deal in financial claims. The markets also provide a facility in which their demands & requirements interact to set a price for such claims. The main organized financial markets in India are the money market & capital market. The first is a market for short-term securities. Structure of Financial Market Topic -2: Money Market Money Market is the market for short term funds i.e. for a period up to one year. The money market is divided into two: Unorganized and Organized Money Market. 1. Unorganized Market: Unorganized market consists of: Money lenders, Indigenous Bankers, Chit Funds, etc. • • • Money Lenders: Money Lenders lend money to individuals at a high rate of interest. Indigenous Bankers: They operate like money lenders. They also accept deposits from public. Chit Funds: These collect funds from members and provide loans to members and others.
  2. 2. 2. Organized Money Market: Organized Markets work as per the rules and regulations of the RBI. RBI keeps a strict control over the Organized Financial Market in India. Organized Market consists of: Treasury Bills, Commercial Paper (CP), Certificate Of Deposit (CD), Call Money Market, and Commercial Bill Market. • • • • • Treasury Bills: To raise short term funds treasury bills are issued by Government. It is purchased by Commercial Banks. At present, Government issues 91 days and 364 days treasury bills. Commercial Paper (CP): Commercial paper is issued by companies who are listed on Stock Exchange. CP is issued at discount and repaid at face value. The maturity period ranges from 7 days to one year. CP's are issued in multiple of 5 lakh. The company issuing CP must have tangible net worth of at least 4 crore. Certificate Of Deposit (CD): CD's are used by Commercial Banks and Financial Institutions to raise finance from the market. The maturity period for CD's is between 7 days to 1 year. CD's is issued at a discount and repaid at face value. CD's is issued for a minimum of 25 lakhs. Call Money Market: A loan which is taken or given for a very short period, that is for one day is called Call Money Market. It involves lending and borrowing of money on a daily basis. No security is required for these very short-term loans. Commercial Bill Market (CBM): This market deals with Bills of exchange. The drawer of the bill can get the bills discounted with Commercial Banks. The Commercial Banks can get the bills rediscounted with Financial Institutions. Topic -3: Capital Market A capital market is an organized market. It provides long term finance for business. “Capital Market refers to the facilities and institutional arrangements for borrowing and lending long-term funds”. Capital Market is divided into three groups: 1. Industrial / Corporate Securities Market: It is a market for industrial securities. Corporate securities are equity and preference shares, debentures and bonds of companies. Industrial security's market is very Sensitive and Active Financial Market. It can be divided into two groups: Primary and Secondary Market. • • Primary Market: It is a market for new issue of securities, which are issued to the public for first time. It is also called as New Issue Market. Secondary Market: In the secondary market, there is a sale of secondary securities. It is also called as Stock Market. It facilitates buying and selling of securities. 2. Government Securities Market: In this market, government securities are bought and sold. It is also called as Gilt-Edged Securities Market. The securities are issued in the form of bonds and credit notes. The buyers of such securities are Banks, Insurance Companies, Provident funds, RBI and Individuals. These securities may be of short-term or long term. 3. Long-Term Loans Market: Banks and Financial institutions provide long-term loans to firms, for modernization, expansion and diversification of business. Long-Term Loan Market can be divided into: • • • Term Loans Market: Banks and Financial Institutions provide term loans to companies for a period of one year. The financial institutions help in recognizing investment opportunities to motivate emerging businessmen. They also give encouragement to modernization. Mortgages Market: It provides loans against securities of immovable assets like land and buildings. Financial Guarantees Market: Financial Institutions (FIS) and banks provide financial guarantees on behalf of their clients to third parties.
  3. 3. Topic -4: FOREIGN EXCHANGE MARKET The term foreign exchange refers to the process of converting the home currencies into foreign currencies and vice versa. According to Dr. Paul Einzing “Foreign exchange is the system or process of converting one national currency into account, and of transferring money from one country to another”. The market where foreign exchange transitions take place is called a foreign exchange market. It does not refer to a market place in the physical sense of the term. In fact, it consists of a number of dealers, banks and brokers engaged in the business of buying and selling foreign exchange. It also includes the central bank of each country and the treasury authorities who enter into this market as controlling authorities. Those engaged in the foreign exchange business are controlled by the foreign exchange maintenance act (FEMA). FUNCTIONS: The most important functions of this market are: 1. To most important necessary arrangements to transfer purchasing power from one country to another. 2. To provide adequate credit facilities for the promotion of foreign trade. 3. To cover foreign exchange risks by providing hedging facilities. In India, the foreign exchange business has a three- tired structure consisting of: 1. Trading between banks and their commercial customers. 2. Trading between banks through authorized brokers. 3. Trading with banks abroad. Brokers play an important role in the foreign exchange market in India. Apart from authorized dealers, the RBI has permitted licensed hotels and individuals (known as authorized money changers) to deal in foreign exchange business. The FEMA helps to smoothen the flow of foreign currency and to prevent any misuse of foreign exchange which is a scarce commodity. CHARACTERISTICS: Some of the important features of foreign exchange market are: 1) Electronic market: Foreign exchange market does not have a physical place. It is a market where trading in foreign currencies takes place through the electronically linked network banks , foreign exchange brokers and dealers whose function is to bring together buyers and sellers of foreign exchange. 2) Geographical dispersal: A redeeming feature of the foreign exchange market is that it is not to be found in one place. The market is vastly dispersed throughout the leading financial centers of the
  4. 4. world such as London, New York, Paris, Zurich, Amsterdam, Tokyo, Hong Kong, Toronto, Frankfurt, Milan, and other cities. 3) Transfer of purchasing power: Foreign exchange market aims at permitting the transfer of purchasing power denominated in one currency to another whereby one currency to another whereby one currency is traded for another currency. For example, an Indian exporter sells software to a U.S firm for dollars and a U.S firm sells super computers to an Indian company for rupees. In these transactions, firms of respective countries would like to have the payment settled in their currencies, i.e. Indian firm in rupees and U.S dollars. It is the foreign exchange market, which facilitates such a settlement between countries in their respective currency units. 4) Intermediary: Foreign exchange markets provide a convenient way of converting the currencies earned into currencies wanted of their respective countries. For this purpose, the market acts as an intermediary between buyers and sellers of foreign exchange. 5) Volume: A special feature of the FEM is that out of the total trading transactions that take place in the FEM, around 95% takes the form of cross border purchase and sales of assets, that is, international capital flows. Only around 5% relates to the export and import activities. 6) Provision of credit: A foreign exchange market provider’s credit through specialized instruments such as banker’s acceptance and letters of credit. The credit thus provided is of much help to the traders and businessmen in the international market. 7) Minimizing risks: The FEM helps the importer and exporter in the foreign trade to minimize their risks of trade. This is being done through the provision of ‘Hedging’ facility. This enables traders to transact business in the international market with a view to earning a normal business profit without exposure to an expected change in anticipated profit. This is because exchange rates suddenly change. CONSTITUENTS: The activities of the foreign exchange market are carried out predominantly through the world wide bank interbank market. The trading is generally done by telephone, telex or the swift (Society for Worldwide Interbank Financial Telecommunications) system. In addition, there are a number of players who assist in trading of foreign currencies. Several of the foreign exchange markets are discussed briefly. The Interbank market: It is an important segment of the foreign exchange market. It is the wholesale market through which most currency transactions are channeled. It is used for trading amongst bankers. It is a typical foreign exchange market through which around 95 percent of the foreign exchange transactions are carried out. 20 major banks dominate the market. There are three constituents of interbank market. They are spot market, forward market and swap market. The spot market, currencies are traded for immediate delivery extending for a period not exceeding two business days after the completion of the transaction. Spot transactions account for a share of 60 percent
  5. 5. of the foreign exchange market. In the case of forward market, delivery of currencies takes place at a future date and contracts for buying and selling take place at the current date. Its transactions account for 10 percent of the foreign exchange market. Swap market comprises around 30 percent of the transactions of the foreign exchange market. The Society for Worldwide Interbank Financial Telecommunications: The swift is an important mode of trading in a foreign exchange market. It is an international bank communications network that links electronically all brokers and traders in foreign exchange. PARTICIPANTS: The categories of participants take part in the operations of the foreign exchange market. They are bank and non-bank foreign exchange dealers, individuals and firms conducting commercial and investment transactions, speculators and arbitragers, central banks, and treasuries and foreign exchange brokers. Foreign Exchange Dealers: Banks and non-bank agencies take part in the activities of the foreign exchange dealers. Their role comprise, in actual market making. They are the actual market makers in the foreign exchange market. They actively deal in foreign exchange for their own accounts. These banks buy and sell major foreign currencies on a continuous basis. They trade with other banks in their own monetary centers and in other centers of the world in order to maintain the inventory of foreign currencies within the trading limits. Their profit comes from buying foreign exchange at a bid price and reselling it at a slightly higher offer/ask price. Competition among dealers worldwide makes the foreign exchange market efficient and vibrant. Individuals and Firms: These are the exporters and importers, international portfolio investors, MNCs, tourists and others who use foreign exchange market to facilitate the execution of commercial or investment transactions. Firms that operate internationally must pay suppliers and workers in the local currency of each country in which they operate and may receive payments from customers in many different countries. They will eventually convert their foreign currency earnings into their home currency. In fact, for ages, supporting international trade and travel has been the main aim of currency trading. It is interesting to note that some of these participants use the foreign exchange market for hedging foreign exchange risks. The activities of FDI require the investor to obtain the currency of the foreign country. Large sums of money are committed to international portfolio investments, the purchase of bonds, shares or other securities denominated in a foreign currency. For this purpose, the investor needs to enter the foreign exchange markets to obtain the currency to make a purchase, to convert the earnings from its foreign investments into home currency and repatriate the capital when the investment is terminated.
  6. 6. Speculators and Arbitragers: Speculators buy and sell currencies solely to profit from anticipated changes in exchange rates, without engaging in other sorts of business dealings for which foreign exchange is essential. Currency speculation is often combined with speculation in short-term financial instruments, such as treasury bills. The biggest speculators include leading banks and investment banks. Speculators and arbitragers trade in the foreign exchange market in their own way trying to make profit through normal and speculative operations. Main source of profit for dealers is the spread between the bid price and offer price whereas speculators profit from exchange rate changes. It is interesting to note that a large portion of the speculation and arbitrage takes place on behalf of major banks. Central Banks and Treasuries: National treasuries or central banks may trade currencies for the purpose of affecting exchange rates. A government’s deliberate attempt to alter the exchange rate between two currencies by buying one and selling the other is called ‘intervention’. The amount of currency intervention varies greatly from country to country and time to time, and depends mainly on how the government has decided to manage its foreign exchange arrangements. Central banks and treasuries use the foreign exchange market for the purposes of buying and selling country’s foreign exchange reserves. They also aim at influencing the value of their own currencies in accordance with the priorities of the national economic planning. They also use the foreign exchange market to work in unison with the commitment entered into with the international trade agreements such as European Monetary System etc. This is often done by the central bank in order to ensure stability and orderliness in the matters of foreign currency transactions. Foreign Exchange Brokers: These are the commission agents who bring together suppliers and buyers of foreign currency. They specialize in certain currency although they deal in all major foreign currencies such as American Dollar, British Pound, Sterling, and Deutsche Mark, etc. Some of the services rendered by the brokers include provision of information on the prevailing and future rates of exchange; maintaining confidentiality of participants in the foreign exchange market and helping banks to keep at minimum the contacts with other traders. TRANSACTIONS: Several types of transactions are carried out in a foreign exchange market among the various players. They are: Spot transactions, Forward transactions and Swap transactions. Spot Transaction: An inter-bank transaction whereby the purchase of foreign exchange, and delivery and payment for the same take place between banks usually on the following second business day is referred to as
  7. 7. ‘spot transaction’. The rate quoted in such transactions is called ‘spot rate’. The date of settlement is known as ‘value date’. Forward Transaction: Where a specified amount of one currency is exchanged for a specified amount of another currency at a future value date, it is a case of a ‘forward transaction’. Under this transaction, only the delivery and payment take place at a future date, the exchange rate being determined at the time of agreement. The rate quoted in such transactions is called ‘forward rate’. Forward exchange rates are normally quoted for value dates of one, two, three, six and twelve months. Swap Transaction: The simultaneous purchase and sale of a given amount of foreign exchange for different value dates is referred to as ‘swap transactions’. Both the purchase and sale are with the same counter party. There are two types of swap transactions. They are spot-against-forward swaps and forward-forward swaps. In the case of spot-against-forward swaps, the dealer buys a currency in the spot market and simultaneously sells the same amount back to the same bank in the forward market. The dealer incurs no unexpected foreign exchange risk since the transaction is executed within a single counter party. Topic -5: The Nature of the unorganized sector of the Indian Money Market UNORGANISED SECTOR: The segment of money market which is not under control of RBI is known as the unorganized segment of Indian money market. It consists of: 1. Moneylenders: money lenders are of three types:  Professional moneylenders  Itinerant moneylenders  Non-professional moneylenders. Professional money lenders are those whose main activity is money lending. Pathans and kabulls are itinerant money lenders charge very high rate of interest; they do not receive deposits from people. Their lending activities are based on their own funds and interest receipts. Mainly economically weaker section of people goes to these moneylenders for consumption and production loans. 2. Indigenous bankers: since commercial banks do not provide unsecured loans, the credit needs of a large section of small traders remain unfulfilled. Indigenous bankers to some extent bridge this gap, since their operation and establishment costs are lower. Although they do some important activity, they do not care about the end use of these loans and they are not regulated by RBI. There are mainly four types of
  8. 8. indigenous bankers, viz., Guajarati shroffs, multani or shikarpuri shroffs, south Indian chettiars and Marwari kayas. Indigenous bankers accept deposits and provide loans to individuals or organizations. 3. Unregulated non-bank financial intermediaries: most notable unregulated non-bank financial intermediaries are chit funds and Nidhis. Chit funds have regular members making periodical subscriptions to the funds. Some members of the funds, selected by some previously agreed criteria are then allotted the fund. Nidhis are also like chit funds, as their principal source of capital base is provided by its members and some of its members receive the loan. Both chit funds and Nidhis operate mainly in south India and RBI has no control on them. Topic -6: Various constituents of the organized sector of the Indian Money Market The segment of money market which is under the control of RBI is known as organized market. It includes: 1. Reserve bank of India: the reserve bank of India is the highest institution of the Indian money market. This is the central bank of the country. The reserve bank of India plays a dominant role in controlling the money market. 2. Public sector banks: the public sector banks are those banks whose ownership lies with the government. The government controls them. In India, in 1969, 14th and in 1980, 6 banks were nationalized all these banks are in the public sector. Their chief aim is social service. After the merger of the new bank of India with the Punjab national bank in 1993, their number now stands at 19. In addition to this the state bank of India and its subsidiaries are also included in the same category. Their number is 8. In this way, a total number of 27 banks are working in the public sector. 3. Private sector banks: private sector banks are those banks which are owned by private individuals. They run them. Such banks include the Jammu and Kashmir bank ltd. The Punjab bank ltd., etc. an individual has control over the bank to the extent of the shares he holds in it. Their main aim is to earn profit. 4. Co-operative banks: co-operative banks are organized collectively by some individuals. These people alone run these banks. The aim of these banks is to help their own members. They include the state cooperative bank, the central district co-operative bank and primary loan committees. Topic -7: Classification of Financial Institutions in India: 1. Regulatory institutions  Reserve Bank of India (RBI)  Securities and Exchange Board of India (SEBI)  Central Board of Direct Taxes (CBDT)  Central Board of Excise& Customs 2. Intermediaries.  Securities Trading Corporation of India (STCI)  Unit Trust of India (UTI)  Industrial Development Bank of India (IDBI) Ltd.
  9. 9.         Reconstruction Bank of India (IRBI), now (Industrial Investment Bank of India) Export - Import Bank of India (EXIM Bank) National Bank for Agriculture and Rural Development (NABARD) Life Insurance Corporation of India (LIC) General Insurance Corporation of India (GIC) Housing and Urban Development Corporation Ltd. (HUDCO) Shipping Credit and Investment Company of India Ltd. (SCICI) National Housing Bank (NHB) 3. Banking Institutions and Non Banking Institutions Banking institutions: A bank is an institution that accepts deposits of money from the public, which are repayable on demand and withdraw able by cheques. The banking institutions of India play a major role in the economy of the country. The banking institutions are the providers of depository and transaction services. These activities are the major sources of creating money. The banking institutions are the major sources of providing loans and other credit facilities to the clients. Non Banking Financial Institutions (NBFC): An Institution which carried on as its business or part of its business the following activities: - financing - acquisition of securities - hire purchase - insurance - chit fund mutual benefit company But does not include Institutions which carries on as its principal business: agricultural operations, - industrial activities - Sale and purchase of goods - providing of services - purchase, sale and construction of immovable property.  All India Institutions  IFCI  IDBI  ICICI  SIDBI  LIC  State level Institutions  State Financial Institutions  State Industrial Development Corporations Topic -8: All India Developmental Financial institutions: A wide variety of financial institutions have been set up at the national level. They cater to the diverse financial requirements of the entrepreneurs. They include all India development banks like IDBI, SIDBI, IFCI Ltd, IIBI; specialized financial institutions like IVCF, ICICI Venture Funds Ltd, TFCI; investment institutions like LIC, GIC, UTI; etc. All-India Development Banks (AIDBs):- Includes those development banks which provide institutional credit to not only large and medium enterprises but also help in promotion and development of small scale industrial units. 1. Industrial Development Bank of India (IDBI):- was established in July 1964 as an apex financial institution for industrial development in the country. It caters to the diversified needs of medium and large scale industries in the form of financial assistance, both direct and indirect. Direct assistance is provided by way of project loans, underwriting of and direct subscription to industrial securities, soft loans, technical refund loans, etc. While, indirect assistance is in the form of refinance facilities to industrial concerns.
  10. 10. 2. Industrial Finance Corporation of India Ltd (IFCI Ltd):- was the first development finance institution set up in 1948 under the IFCI Act in order to pioneer long-term institutional credit to medium and large industries. It aims to provide financial assistance to industry by way of rupee and foreign currency loans, underwrites/subscribes the issue of stocks, shares, bonds and debentures of industrial concerns, etc. It has also diversified its activities in the field of merchant banking, syndication of loans, formulation of rehabilitation programmes, assignments relating to amalgamations and mergers, etc. 3. Small Industries Development Bank of India (SIDBI):- was set up by the Government of India in April 1990, as a wholly owned subsidiary of IDBI. It is the principal financial institution for promotion, financing and development of small scale industries in the economy. It aims to empower the Micro, Small and Medium Enterprises (MSME) sector with a view to contributing to the process of economic growth, employment generation and balanced regional development. 4. Industrial Investment Bank of India Ltd (IIBI):- was set up in 1985 under the Industrial reconstruction Bank of India Act, 1984, as the principal credit and reconstruction agency for sick industrial units. It was converted into IIBI on March 17, 1997, as a full-fledged development financial institution. It assists industry mainly in medium and large sector through wide ranging products and services. Besides project finance, IIBI also provides short duration non-project asset-backed financing in the form of underwriting/direct subscription, deferred payment guarantees and working capital/other short-term loans to companies to meet their fund requirements. Topic -9: Investment Institutions:- Investment Institutions are the most popular form of financial intermediaries, which particularly catering to the needs of small savers and investors. They deploy their assets largely in marketable securities. 1. Life Insurance Corporation of India (LIC):- was established in 1956 as a wholly-owned corporation of the Government of India. It was formed by the Life Insurance Corporation Act, 1956, with the objective of spreading life insurance much more widely and in particular to the rural area. It also extends assistance for development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc. In addition, it extends resource support to other financial institutions through subscription to their shares and bonds, etc. The Life Insurance Corporation of India also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom . Besides the branch operations, the Corporation has established overseas subsidiaries jointly with reputed local partners in Bahrain, Nepal and Sri Lanka. 2. Unit Trust of India (UTI):- was set up as a body corporate under the UTI Act, 1963, with a view to encourage savings and investment. It mobilizes savings of small investors through sale of units and channelises them into corporate investments mainly by way of secondary capital market operations. Thus, its primary objective is to stimulate and pool the savings of the middle and low income groups and enable them to share the benefits of the rapidly growing industrialization in the country. In December 2002, the UTI Act, 1963 was repealed with the passage of Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002, paving the way for the bifurcation of UTI into 2 entities, UTI-I and UTI-II with effect from 1st February 2003. 3. General Insurance Corporation of India (GIC):- was formed in pursuance of the General Insurance Business (Nationalization) Act, 1972(GIBNA), for the purpose of superintending, controlling and carrying on the business of general insurance or non-life insurance. Initially, GIC had four subsidiary branches, namely, National Insurance Company Ltd , The New India Assurance Company Ltd , The Oriental Insurance Company Ltd and United India Insurance Company Ltd . But these branches were delinked from GIC in 2000 to form an association known as 'GIPSA' (General Insurance Public Sector Association). Topic -10: Specialized Financial Institutions (SFIs):- Specialized Financial Institutions are the institutions which have been set up to serve the increasing financial needs of commerce and trade in the area of venture capital, credit rating and leasing, etc.
  11. 11. 1. IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital & Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was promoted with the objective of broadening entrepreneurial base in the country by facilitating funding to ventures involving innovative product/process/technology. Initially, it started providing financial assistance by way of soft loans to promoters under its 'Risk Capital Scheme’. Since 1988, it also started providing finance under 'Technology Finance and Development Scheme' to projects for commercialization of indigenous technology for new processes, products, market or services. Over the years, it has acquired great deal of experience in investing in technology-oriented projects. 2. ICICI Venture Funds Ltd: - formerly known as Technology Development & Information Company of India Limited (TDICI), was founded in 1988 as a joint venture with the Unit Trust of India. Subsequently, it became a fully owned subsidiary of ICICI. It is a technology venture finance company, set up to sanction project finance for new technology ventures. The industrial units assisted by it are in the fields of computer, chemicals/polymers, drugs, diagnostics and vaccines, biotechnology, environmental engineering, etc. 3. Tourism Finance Corporation of India Ltd. (TFCI):- is a specialized financial institution set up by the Government of India for promotion and growth of tourist industry in the country. Apart from conventional tourism projects, it provides financial assistance for non-conventional tourism projects like amusement parks, ropeways, car rental services, ferries for inland water transport, etc. Topic -11: State level financial institutions: Several financial institutions have been set up at the State level, which supplement the financial assistance provided by the all India institutions. They act as a catalyst for promotion of investment and industrial development in the respective States. They broadly consist of 'State financial corporations' and 'State industrial development corporations'. 1. State Financial Corporations (SFCs):- are the State-level financial institutions which play a crucial role in the development of small and medium enterprises in the concerned States. They provide financial assistance in the form of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/ special capital, etc. SFCs have been set up with the objective of catalyzing higher investment, generating greater employment and widening the ownership base of industries. They have also started providing assistance to newer types of business activities like floriculture, tissue culture, poultry farming, commercial complexes and services related to engineering, marketing, etc. There are 18 State Financial Corporations (SFCs) in the country: Andhra Pradesh State Financial Corporation (APSFC)  Himachal Pradesh Financial Corporation (HPFC)  Madhya Pradesh Financial Corporation (MPFC)  North Eastern Development Finance Corporation (NEDFI)  Rajasthan Finance Corporation (RFC)  Tamil Nadu Industrial Investment Corporation Limited  Uttar Pradesh Financial Corporation (UPFC)  Delhi Financial Corporation (DFC)  Gujarat State Financial Corporation (GSFC)  The Economic Development Corporation of Goa ( EDC)  Haryana Financial Corporation ( HFC )  Jammu & Kashmir State Financial Corporation ( JKSFC)  Karnataka State Financial Corporation (KSFC)  Kerala Financial Corporation ( KFC )  Maharashtra State Financial Corporation (MSFC )  Odisha State Financial Corporation (OSFC)  Punjab Financial Corporation (PFC)  West Bengal Financial Corporation (WBFC) 2. State Industrial Development Corporations (SIDCs):- have been established under the Companies Act, 1956, as wholly-owned undertakings of State Governments. They have been set up with the aim of promoting industrial development in the respective States and providing financial assistance to small
  12. 12. entrepreneurs. They are also involved in setting up of medium and large industrial projects in the joint sector/assisted sector in collaboration with private entrepreneurs or wholly-owned subsidiaries. They are undertaking a variety of promotional activities such as preparation of feasibility reports; conducting industrial potential surveys; entrepreneurship training and development programmes; as well as developing industrial areas/estates. The State Industrial Development Corporations in the country are:1. Assam Industrial Development Corporation Ltd (AIDC) 2. Andaman & Nicobar Islands Integrated Development Corporation Ltd (ANIIDCO) 3. Andhra Pradesh Industrial Development Corporation Ltd (APIDC) 4. Bihar State Credit and Investment Corporation Ltd. (BICICO) 5. Chhattisgarh State Industrial Development Corporation Limited (CSIDC) 6. Goa Industrial Development Corporation 7. Gujarat Industrial Development Corporation (GIDC) 8. Haryana State Industrial & Infrastructure Development Corporation Ltd. (HSIIDC) 9. Himachal Pradesh State Industrial Development Corporation Ltd. (HPSIDC) 10. Jammu and Kashmir State Industrial Development Corporation Ltd. 11. Karnataka State Industrial Investment & Development Corporation Ltd. (KSIIDC) 12. State Infrastructure & Industrial Development Corporation of Uttaranchal Ltd. (SIDCUL) 13. Tripura Industrial Development Corporation Ltd. (TIDC) 14. Kerala State Industrial Development Corporation Ltd. (KSIDC) 15. Maharashtra Industrial Development Corporation (MIDC) 16. Manipur Industrial Development Corporation Ltd. (MANIDCO) 17. Nagaland Industrial Development Corporation Ltd. (NIDC) 18. Odisha Industrial Infrastructure Development Corporation 19. Omnibus Industrial Development Corporation (OIDC), Daman & Diu and Dadra & Nagar Haveli. 20. Pondicherry Industrial Promotion Development and Investment Corporation Ltd. (PIPDIC) 21. Uttar Pradesh State Industrial Development Corporation 22. Punjab State Industrial Development Corporation Ltd. (PSIDC) 23. Rajasthan State Industrial Development & Investment Corporation Ltd. (RIICO) 24. Sikkim Industrial Development & Investment Corporation Ltd. (SIDICO) 25. Tamilnadu Industrial Development Corporation Ltd. (TIDCO)
  13. 13. Module-II Capital Market Topic -1: Introduction to Capital Market: Capital market is a market for financial assets which have a long or indefinite maturity. Generally it deals with long term securities having a maturity period of above one year. Capital market may be further divided into three parts i.e. (i) Industrial security market (ii) Govt. securities market (iii) Long term loan market Capital market serves as a important source for the productive use of economy’s savings and investment. These savings and investments facilitate capital formation and through this facilitate increase in production and productivity in the economy. A capital market thus serves as an important link between those who saves and those who aspire to invest their savings. Capital markets – Types (i) Industrial Security Market – It is market where industrial concerns raise their capital or debt by issuing instruments like equity hares or ordinary shares, preference shares, debentures or bonds. This market can be sub divided into: (a) Primary Market or new issue market (b) Secondary Market or stock Exchange Primary Market is a market for new issues and hence it is called new issue market. It deals with securities which are issued to the public for the first time. There are three ways through which capital is raised in primary market. These are: - Public issue - Right Issue - Private placement Secondary market is a market for secondary sale of securities i.e. securities which already passed through the new issue market are traded in this secondary market. Generally, such securities are quoted in stock exchange and it provides a continuous; and regular market for buying and selling of securities. (ii) Govt. Security Market – It is a market where Long term Govt securities are traded which are issued by central Govt, State Govt, Semi Govt authorities like City Corporations, Port Trusts, Improvement Trusts, State Electricity Boards, All India and State level financial institutions and public sector organizations/enterprises are dealt in this market. Govt. Securities are in many forms such as: - Stock Certificates or inscribed stock - Promissory Notes - Bearer bonds. Govt securities are sold through public debt office of RBI. Interest on these securities influences price and yield in market.
  14. 14. (iii) Long Term loan market – Commercial banks and development banks play a significant role in this market by supplying long term loans to corporate customers. Long term loan market may further be classified into: - Term loan market - Mortgage Market - Financial guarantee Market. Term Loan Market – In India many industrial finance institutions have been created by Central and State Govts. which provide medium and long term loans to corporate customers. Institutions like IDBI, IFCI, ICICI and other state financial corporations come in this category. Mortgage Market – Refers to those centres which supply mortgage loan mainly to individual customers against security of immovable property like real estate. Financial guarantee Market – Refers to centres where finance is provided against the guarantee of reputed person in financial circle. This guarantee may be in the form of (i) Performance guarantee or (ii) Financial guarantee. Performance guarantee covers the payment of earnest money retention money, advance payments and non compilation of contracts etc. The financial guarantee covers only financial contracts. Topic -2: Primary Market, Role of the Primary market A primary market issues new securities on an exchange. Companies, governments and other groups obtain financing through debt or equity based securities. Primary markets, also known as "new issue markets," are facilitated by underwriting groups, which consist of investment banks that will set a beginning price range for a given security and then oversee its sale directly to investors. The primary markets are where investors have their first chance to participate in a new security issuance. The issuing company or group receives cash proceeds from the sale, which is then used to fund operations or expand the business. The key role of the primary market is to facilitate capital growth by enabling individuals to convert savings into investments. It facilitates companies to issue new stocks to raise money directly from households for business expansion or to meet financial obligations. It provides a channel for the government to raise funds from the public to finance public sector projects. “Going public” marks a milestone in a company's growth. The primary market is the first place where the company's securities are sold. The major players of the primary market are large institutional investors, and the market requirements are stringent. Therefore, the company as an investment potential is evaluated on multiple levels. The primary issue is traded in the secondary market by individual investors. Failure to generate interest in the primary market is translated as poor investment potential. Role of the Primary market     Capital Generation Liquidity Diversification Cost Reduction 2. Need for Companies to issue shares to the public: Most companies are usually started privately by their promoter(s). However, the promoters' capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares
  15. 15. to individual investors. The way to invite share capital from the public is through a 'Public Issue'. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI. Topic -3: Different kinds of Issues: Capital instruments, namely, shares and debentures can be issued to the market by adopting any pf the four modes: Public issues, Private placement, Rights issues and Bonus issues. Let us briefly explain these different modes of issues. A. Public Issue Only public limited companies can adopt this issue when it wants to raise capital from the general public. The company has to issue a prospectus as per requirements of the corporate laws in force inviting the public to subscribe to the securities issued, may be equity shares, preference shares ;or debentures/bonds. A private company cannot adopt this route to raise capital. The prospectus shall give an account of the prospects of investment in the company. Convinced public apply to the company for specified number of shares/debentures paying the application money, i.e., money payable at the time of application for the shares/debentures usually 20 to 30% of the issue price of the shares/debentures. Public issues enable broad-based share-holding. General public's savings directed into corporate investment. Economy, company and individual investors benefit. The company management does not face the challenge of dilution of control over the affairs of the company. And good price for the share and competitive interest rate on debentures are quite possible. B. Private Placement Private placement involves the company issuing security places the same at the disposal of financial institutions like mutual funds, investment funds >r banks the entire issue for subscription at the mutually agreed upon pro-rata of interest. This mode is preferred when the capital market is dull, shy and] depressed During the late 1990s and early 2010s, Indian companies preferred private placement, even the debt issues, as the general public totally deserted the} capital market since their hopes in the capital market were totally shattered, Private placement is inexpensive as no promotion is issued. It is a wholesale} deal. C. Right Shares Whenever an existing company wants to issue new equity shares, the existing shareholders will be potential buyers of these shares. Generally the Articles or Memorandum of Association of the Company gives the right to existing shareholders to participate in the new equity issues of the company. This right is known as 'pre-emptive right" and such offered shares are called ‘Right shares' or 'Right issue. A right issue involves selling securities in the primary market by issuing rights to the existing shareholders. When a company issues additional share capital, it has to be offered in the first instance to the existing shareholders on a pro rata basis. This is required in India under section 81 of the Companies' Act,
  16. 16. 1956. However, the shareholders may by a special resolution forfeit this right, partially or fully, to enable the company to issue additional capital to public. Significance of rights issue i) The number of rights that a shareholder gets is equal to the number of shares held by him. ii) The number rights required to subscribe to an additional share is determined by the issuing company. iii) Rights are negotiable. The holder of rights can' sell them fully or partially. iv) Rights can be exercised only during a fixed period which is usually less than thirty days. v) The price of rights issues is generally quite lower than market price and that a capital gain is quite certain for the share holders. vi) Rights issue gives the existing shareholders an opportunity for the protection of their pro-rata share in the earning and surplus of the company. vii) There is more certainty of the shares being sold to the existing shareholders. If a rights issue is successful it is equal to favourable image and evaluation of the company's goodwill in the minds of the existing shareholders. D. Bonus Issues Bonus issues are capital issues by companies to existing shareholders whereby no fresh capital is raised but capitalization of accumulated earnings is done. The shares capital increases, but accumulated earnings fall. A company shall, while issuing bonus shares must ensure the following: i) The bonus issue is made out of free reserves built out of the genuine profits and shares premium collected in cash only. ii) Reserves created by revaluation of fixed assets are not capitalized. iii) The development rebate reserves or the investment allowance reserve is considered as free reserve for the purpose of calculation of residual reserves only. iv) All contingent liabilities disclosed in the audited accounts which have, bearing on the net profits, shall be taken into account in the calculation; of the residual reserve. v) The residual reserves after the proposed capitalization shall be at k 40 per cent of the increased paid up capital. vi) 30 per cent of the average profits before tax of the company for previous three years should yield a rate of dividend on the net capital base of the company at 10 per cent. vii) The capital reserves appearing in the balance sheet of the company as a result of revaluation of assets or without accrual of cash resources are capitalized nor taken into account in the computation of the residual reserves of 40 percent for the purpose of bonus issues. viii) The declaration of bonus issue, in lieu of dividend is not made. ix) The bonus issue is not made unless the partly paid shares, if any existing, are made fully paid-up.
  17. 17. x) The company - a) has not defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption thereof and (b) has sufficient reason to believe that it has not defaulted in respect of the payment of statutory dues of the employees such as contribution to provident fund, gratuity on bonus. xi) A company which announces its bonus issue after the approval of the board of directors must implement the proposals within a period of six months from the date of such approval and shall not have the option of changing the decision. xii) There should be a provision in the Articles of Association of the Company for capitalization of reserves, etc. and if not, the company shall pass a resolution at its general body meeting making decisions in the Articles of Association for capitalization. xiii) Consequent to the issue of bonus shares if the subscribed and paid-up capital exceeds the authorized share capital, a resolution shall be passed by the company at its general body meeting for increasing the authorized capital. xiv) The company shall get a resolution passed at its generating for bonus issue and in the said resolution the management's intention regarding the rate of dividend to be declared in the year immediately after the bonus issue should be indicated. xv) No bonus shall be made which will dilute the value or rights of the holders of debentures, convertible folly or partly. SEBI General Guidelines for public issues i) Subscription list for public issues should be kept open for at least 3 working days and disclosed in the prospectus. ii) Rights issues shall not be kept open for more than 60 days. iii) The quantum of issue, whether through a right or public issue, shall not exceed the amount specified in the prospectus/letter of offer. No retention of over subscription is permissible under any circumstances, except the special case of exercise of green-shoe option. iv) Within 45 days of the closures of an issue a report in a prescribed form with certificate from the chartered accounts should be forwarded to SEBI to the lead managers. v) The gap between the closure dates of various issue e.g. Rights and Indian public should not exceed 30 days. vi) SEBI will have right to prescribe further guidelines for modifying the existing norms to bring about adequate investor protection, enhance the quality of disclosures and to bring about transparency in the primary market. vii) SEBI shall have right to issue necessary clarification to these guidelines to remove any difficulty in its implementation.
  18. 18. viii) Any violation of the guidelines by the issuers/intermediaries will be punishable by prosecution by SEBI under the SEBI Act. ix) The provisions in the Companies Act, 1956 and other applicable lai shall be complied with the connection with the issue of shares debentures. Topic -4: Prospectus: A large number of new companies float public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of information to the public. This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of 'Prospectus' which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company. Topic -5: Pricing an issue: The pricing of issues is done by companies in consultation with Merchant bankers. An existing company with 5 years track record of profitability can freely price the issue. The premium has to be decided after taking into account net asset value, profit earning capacity and market price. The justification for price has to be stated and included in the prospectus. Topic -6: Price discovery through Book building process: Book Building: - Is a method of issuing / offering shares to investors in which the price at which share are issued is discovered through bidding process. In this, bidder’s (potential investors) have the flexibility to bid for shares at a price they are willing to pay. Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date. Book Building Process Book Building process is price discovery mechanism in an IPO. This process is helpful to discover a better offer prices based on the price and demand discovery .under this process bids are collected from the investors using the network of BSE/ NSE, which are above , below or equal to the floor price. Floor price is a minimum bid price it is decided at beginning of the bidding process. Offer price is determined after the bid closing date. The process Bidding shall be permitted only if electronic linked facility is used. Issuing company appoint a lead merchant banker called book runner. Issuing company should disclose the following information:  Price band  Nominated lead merchant banker  Syndicated members with who orders can be placed by the investors. Investor can quota the price with the help of syndicate members. Bid price should always be more than the floor price and it can be revised before closure of the issue. After closing the issue book runner analysis the bids and evaluated the bid prices. This evaluation is based on many factors example Price Aggression, investor quality or earliness of bids. Company and the book runner finalized the price. Finally Securities allocated to the success. Topic -7: Registrar to an Issue: The Registrar finalizes the list of eligible allottees after deleting the invalid applications and ensures that the corporate action for crediting of shares to the demat accounts of the applicants is done and the dispatch of refund orders to those applicable are sent. The Lead Manager coordinates with the Registrar to ensure follow up so that that the flow of applications from collecting bank branches, processing of the applications and other
  19. 19. matters till the basis of allotment is finalized, dispatch security certificates and refund orders completed and securities listed. Topic -8: Listing of securities: Listing of securities means that the securities are admitted for trading on a recognized stock exchange. Transactions in the securities of any company cannot be conducted on stock exchanges unless they are listed by them. Hence, listing is the very basis on stock exchange operations. It is the green signal given to selected securities to get the trading privileges of the stock exchange concerned. Securities become eligible for trading only through listing. Listing means admission of the securities for trading on the stock exchange through a formal agreement between the stock exchange and the company. Securities are buy and sell in the recognized through members who are known as brokers. The price at which the securities are buy and sales are known as official Quotation. Listing is compulsory for those companies which intend to offer shares/debentures to the public for subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting permission to a new issue by a public limited company. Again, financial institutions do insist on listing for underwriting new issues. Thus, listing becomes an unavoidable one today. The companies which have got their shares/debentures listed in one or more recognized stock exchanges must submit themselves to the various regulatory measures of the stock exchange concerned as well as the SEBI. They must maintain necessary books; documents etc. and disclose any information which the stock exchange may call for. Types of listing A. Initial listing  Listing public issue of shares and debentures  Listing of right issue of shares and debentures  Listing of Bonus issue of shares  Listing share issued on Amalgamation, mergers etc. Advantage of listing To The Company:  The company enjoys concession under direct tax laws.  The company goodwill increase at the international & national Level.  Term loan facilities/extend by the financial institution / bankers the form of Rupee currency and the foreign currency.  Avoiding the fear of easy takeovers of the organization by others because of wide distribution. To the investors  Maintain liquidity and safety in securities.  Listed securities are preferred by the bankers for extending term facility.  Rule of the stock exchange protect the interest of the investor.  Official quotation of the securities on the stock exchange corroborate the valuation taken by the investor for the purpose of tax assessments under income tax act , wealth tax act . 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.
  20. 20. ELIGIBILITY CRITERIA FOR IPOs/FPOs a. 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. I. In respect of Large Cap Companies i. The minimum post-issue paid-up capital of the applicant company (hereinafter referred to as "the Company") shall be Rs. 3 crores; and ii. The minimum issue size shall be Rs. 10 crores; and iii. 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). II. In respect of Small Cap Companies i. The minimum post-issue paid-up capital of the Company shall be Rs. 3 crores; and ii. The minimum issue size shall be Rs. 3 crores; and iii. 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 iv. The minimum income/turnover of the Company should be Rs. 3 crores in each of the preceding three 12-months period; and v. The minimum number of public shareholders after the issue shall be 1000. vi. 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 in the preceding 12 months. III. For all companies: I. In respect of the requirement of paid-up capital and market capitalization, 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 capitalization (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. II. The applicant, promoters and/or group companies, should not be in default in compliance of the listing agreement. III. The above eligibility criteria would be in addition to the conditions prescribed under SEBI (Disclosure and Investor Protection) Guidelines, 2000. 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. 1. The company should have minimum issued and paid up equity capital of Rs. 3 crores. 2. 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. 3. Minimum net worth of Rs. 20 crores (net worth includes Equity capital and free reserves excluding revaluation reserves). 4. Minimum market capitalization of the listed capital should be at least two times of the paid up capital.
  21. 21. 5. The company should have a dividend paying track record for the last 3 consecutive years and the minimum dividend should be at least 10%. 6. 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. 7. The company should have at least two years listing record with any of the Regional Stock Exchange. 8. The company should sign an agreement with CDSL & NSDL for demat trading. Topic -9: Regulations Governing Primary capital markets in India: The overall responsibility of development, regulation and supervision of the stock market rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as an independent authority. Since then, SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach. Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The company can proceed further on the issue only after getting observations from SEBI. The validity period of SEBI's observation letter is three months only i.e. the company has to open its issue within three months period. Topic -10: Public issue in foreign capital markets: Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as 'Euro' issues and b) issue of ordinary shares through depository receipts namely 'Global Depository Receipts (GDRs)/American Depository Receipts (ADRs)' to foreign investors i.e. to the institutional investors or individual investors. Topic -11: The Secondary Market/ Stock Exchanges: The market where existing securities are traded is referred to as the secondary market or stock market. In a stock market, purchases and sales of securities whether of Government or SemiGovernment bodies or other public bodies and also shares and debentures issued by joint stock companies are affected. The securities of government are traded in the stock market as a separate component, called guilt edged market. Government securities are traded outside the trading wing in the form of over the counter sales or purchases. Another component of the stock market deals with trading in shares and debentures of limited companies. Control over Secondary Market For the effective functioning of secondary market, proper control must be exercised. At present, control is exercised through the following three important processes: a) Recognition of Stock Exchanges b) Listing of Securities c) Registration of Brokers. a) Recognition of Stock Exchanges : Stock exchanges are the important ingredient of the capital market. They are the citadel of capital and fortress of finance. They are the theatres of trading in
  22. 22. securities and as such they assist and control the buying and selling of securities. Thus, according to Husband and Dockeray “securities or stock exchanges are privately organized markets which are used to facilities trading in securities.” However, at present stock exchanges need not necessarily be privately organized once. As per the securities Contacts Regulation Act, 1956 a stock exchange has been defined as follows: “It is an association, organization or body of individuals whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.” In brief, stocks exchanges constitute a market where securities issued by the central and state governments, public bodies and joint stock companies are traded. b. Listing of securities: Listing of securities means that the securities are admitted for trading on a recognized stock exchange. Transactions in the securities of any company cannot be conducted on stock exchanges unless they are listed by them. Hence, listing is the very basis on stock exchange operations. It is the green signal given to selected securities to get the trading privileges of the stock exchange concerned. Securities become eligible for trading only through listing. Listing is compulsory for those companies which intend to offer shares/debentures to the public for subscription by means of issuing a prospectus. Moreover, the SEBI insists on listing for granting permission to a new issue by a public limited company. Again, financial institutions do insist on listing for underwriting new issues. Thus, listing becomes an unavoidable one today. The companies which have got their shares/debentures listed in one or more recognized stock exchanges must submit themselves to the various regulatory measures of the stock exchange concerned as well as the SEBI. They must maintain necessary books; documents etc. and disclose any information which the stock exchange may call for. C. Registration of Brokers: A broker is none other than a commission agent who transacts business in securities on behalf of his clients who are non-members of a stock exchange. Thus, a non-member can purchase and sell securities only through a broker who is the member of the stock exchange. To deal in securities on recognized stock exchanges, the broker should register his name as a broker with the SEBI. A stock broker must possess the following qualification to register as a broker: (a) He must be an Indian citizen with 21 years of age. (b) He should neither be a bankrupt nor compounded with creditors. (c) He should not have been convicted for any offence, fraud etc.
  23. 23. (d) He should not have engaged in any other business other than that of a broker in securities. (e) He should not be a defaulter of any stock exchange. (f) He should have completed 12th std examinations. Functions of stock exchange: Stock market performs pivotal position in the financial system. It performs several economic functions and renders invaluable service to the investors, and to the economy as a whole 1. Liquidity and marketability of securities: Stock exchanges provide liquidity to securities since securities can be converted to cash at any time according to the discretion of the investor by selling them at the listed prices. They facilitate buying and selling of securities at listed prices by providing continuous marketability to the investors in respect of securities they hold or intend to hold. Thus, they create a ready outlet for dealing in securities 2. Safety of funds: Stock exchanges ensure safety of funds invested because they have to function under strict rules and regulations and bye-laws are meant to ensure safety of investible funds. Over- trading, illegitimate speculation etc. are prevented through carefully designed set of rules. This would strengthen the investor’s confidence and promote larger investment. 3. Supply of long term funds: The securities traded in the stock market are negotiable and transferable in character and as such they can be transferred with minimum of formalities from one hand to another. So, when a security is transacted, one investor is substituted by another, but company is assured of long term availability of funds 4. Flow of capital to profitable ventures: The profitable and popularity of companies are reflected in stock prices. The prices quoted indicate the relative profitability and performance of companies. Funds tend to be attracted towards securities of profitable companies and this facilitates the flow of capital into profitable channels. 5. Motivation for improved performance: The performance of a company is reflected on the prices quoted in the stock market. These prices are more visible in the eyes of the public. Stock market provides room for this price quotation for these securities listed by it. This public exposure makes a company conscious of its status in the market and it acts as a motivation to improve its performance further 6. Promotion of investment: Stock exchanges mobilize the savings of the public and promote investment through capital formation. But for these Stock exchanges, surplus funds available with individuals and institutions would not have gone for productive and remunerative ventures 7. Reflection of business cycle: The changing business conditions in the economy are immediately reflected on the stock exchanges. Booms and depressions can be identified through the dealings on
  24. 24. the Stock exchanges and suitable monetary and fiscal policies can be taken by the government. Thus a Stock market portrays the prevailing economic situation instantly to all concerned so that suitable actions can be taken. 8. Marketing of new issues: If the new issues are listed, they are readily acceptable to the public, since listing presupposes their evaluation by concerned stock exchange authorities. Costs of underwriting such issues would be less. Public response to such new issues would be relatively high. Thus, a stock market helps in the marketing of new issues also 9. Miscellaneous services: Stock exchange supplies securities of different kinds with different maturities and yields. It enables the investors to diversify their risks by a wider portfolio of investment. It also inculcates saving habits among the community and paves the way for capital formation. It guides the investors in choosing securities by supplying the daily quotation of listed securities and by disclosing the trends of dealings on the Stock exchange. It enables companies and the government to raise resources by providing a ready market for their securities. FEATURES OF SECONDARY MARKET: The market where securities are traded after they are initially offered in the primary market. Most trading is done in the secondary market.  In Secondary market share are traded between two investors.  In secondary market there is no issuing of the fresh securities but trading of the already issued securities  In secondary market both buying and selling can take place  It has a special and fixed place known as stock exchange. However, it must be noted that it is not essential that all the buying and selling of securities will be done only through stock exchange. Two individuals can buy or sell them manually. This will also be called a transaction of the secondary market. Generally, most of the transactions are made through the medium of stock exchange. Example are the New York Stock Exchange (NYSE), Bombay Stock Exchange (BSE),National Stock Exchange NSE, bond markets, over-the-counter markets, residential mortgage loans, governmental guaranteed loans etc.  The prices of securities in secondary market are determined by demand and supply.  Only investors do the trading among themselves in secondary market.  The trading of securities does not take place first. A security can be traded in the secondary market only if issued in the primary market.  Secondary market creates liquidity, hence, indirectly promotes capital formation.
  25. 25.  It creates liquidity in securities. Liquidity means immediate conversion of securities into cash. This job is performed by the secondary market.  Secondary market comes after primary market. New securities are first sold in the primary market and thereafter it is the turn of the secondary market. Topic -12: Trading Mechanisms: Trading at Indian stock exchanges takes place through an open electronic limit order book, in which order matching is done by the trading computer. There are no market makers or specialists and the entire process is order-driven, which means that market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed. All orders in the trading system need to be placed through brokers, many of which provide online trading facility to retail customers. Institutional investors can also take advantage of the direct market access (DMA) option, in which they use trading terminals provided by brokers for placing orders directly into the stock market trading system. Topic -13: Dematerialization of shares: In order to mitigate the risks associated with share trading in paper format, dematerialization concept was introduced in Indian Financial Market. Dematerialisation or Demat in short is the process through which an investor’s physical share certificate gets converted to electronic format which is maintained in an account with the Depository Participant. India adopted the demat System successfully and there are plans to facilitate trading of almost all financial assets in demat format in future. Through this article, we will try to understand the demat process and its benefits from common investor’s perspective. What is it? Dematerialisation is the process of converting physical shares into electronic format. An investor who wants to dematerialize his shares needs to open a demat account with Depository Participant. Investor surrenders his physical shares and in turn gets electronic shares in his demat account. Storage of Dematerialized Shares – Depository Depository is the body which is responsible for storing and maintaining investor's securities in demat or electronic format. In India there are two depositories i.e. NSDL and CDSL. Who is a Depository Participant? Depository Participant (DP) is the market intermediary through which investors can avail the depository services. Depository Participant provides financial services and includes organizations like banks, brokers, custodians and financial institutions. Advantages of Demat Dealing in demat format is beneficial for investors, brokers and companies alike. It reduces the risk of holding shares in physical format from investor’s perspective. It’s beneficial for brokers as it reduces the risk of delayed settlement and enhances profit because of increased participation. From share issuing company’s perspective, issuance in demat format reduces the cost of new issue as papers are not involved. Efficiency and timeliness of the issue is also maintained while companies deal in demat format. There are a lot of other benefits, but let’s focus on benefits with respect to common investor and the same are listed below.
  26. 26. • Demat format reduces the risk of bad deliveries • Time and money is saved as you are not dealing in paper now. You need not go to the notary, broker for taking delivery or submitting the share certificate • Liquidity is very high in case of demat format as whole process in automated. • All the benefits of corporate action like bonus, stock split, rights etc are managed through the depository leading to elimination of transit losses • Interest on loan against demat shares are less as compared to physical shares • Investors save stamp duty while transferring shares in demat format. • One needs to pay less brokerage in case of demat shares Demat Conversion Most of the trading in shares are done in demat format now a day, but there are few investors who still hold shares in paper format. You cannot deal in paper shares now, so you need to dematerialize them first. In order to dematerialize physical/paper shares, investors need to fill Demat Request Form (DRF), and submit the same along with physical shares. DRF is available with the DP and you simply need to raise a request for demat conversion with the DP. Their representative will come and get the DRF form signed. So the complete process of dematerialization involves: 1. Investor surrenders the physical certificates for dematerialization to the DP along with DRF. 2. DP updates the account of the investor and shares are allocated in investor demat holding. Topic -14: Settlement cycle: Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place on Monday gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of shares must be made in dematerialized form, and each exchange has its own clearing house, which assumes all settlement risk, by serving as a central counterparty. Topic -15: Clearing corporations: An organization associated with an exchange to handle the confirmation, settlement and delivery of transactions, fulfilling the main obligation of ensuring transactions are made in a prompt and efficient manner. They are also referred to as "clearing firms" or "clearing houses". In order to make certain that transactions run smoothly, clearing corporations become the buyer to every seller and the seller to every buyer. In other words, they take the offsetting position with a client in every transaction. Topic -16: Price bands: The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing a press release and also indicating the change on the relevant website and the terminals of the trading members participating in the book building process. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding ten days. It may be understood that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers. Topic -17: Risk management: The risk management system in case of Indian stock exchanges is based on two pillars. While margins calculated on open positions and collateral deposited against it forms the first line of defence, deposit based capital (base minimum capital, liquid net worth) given by trading member (TM)/clearing member (CM) becomes the second line of defence against failure of any market participant. As against net positions serving as the basis for levying margins on brokers for positions taken by them and their clients as implemented in other jurisdictions, in India VaR (Value at Risk) based margins are imposed at a client level i.e. net for a client and gross across all clients for the broker, thereby ignoring any
  27. 27. netting-off that may occur between client-client and client proprietary positions. VaR based margins are updated 5 times per day to keep the margin requirements in sync with the current level of market volatility. In addition to VaR based initial margins there are additional requirements specified, as a second level of defence, in the form of an exposure margin/extreme loss margins which provides extra cushion in case of tail risk events and finally mark-to-market losses are collected and paid in cash on a daily basis. Indian stock exchanges have a deposit based capital requirement over and above entry level and continuing net worth criteria for market participants undertaking the trading/clearing activity. Such net worth requirements vary based on the nature of the business activity, trading or clearing or both, of the participant. Further in addition to the minimum capital requirements, Stock Exchanges/Clearing Corporations have been empowered to collect additional deposits in order to satisfy itself on the parameter of credit risk. This is as against a balance sheet based capital adequacy requirement prevalent in many other jurisdictions. A sound risk management system is integral to an efficient clearing and settlement system. NSE introduced for the first time in India, risk containment measures that were common internationally but were absent from the Indian securities markets. Risk containment measures include capital adequacy requirements of members, monitoring of member performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached, etc. Topic -18: Trading Rules: A Stock exchange is a corporation or organization that provides trading facilities for stockbrokers and traders. Instruments traded on stock exchanges include stocks, investment trusts, commodities, options, mutual funds, unit trusts and bonds. Only members can trade on an exchange. Specialists: A stock specialist is a member of a stock exchange who provides several services. They make a market in stocks by providing the best bid and best ask during trading hours. Specialists also maintain a fair and orderly market. Floor Brokers: Floor brokers trade on the floor on the major exchanges. Floor brokers buy and sell securities in their own account. Floor brokers are required to take and pass written tests in order to trade. They must abide by exchange rules, and they must be a member of the exchange on which they trade. Stock brokers/Financial Advisers: Stock brokers, financial advisers, certified financial planners and registered representatives buy and sell stocks on behalf of their clients and customers. They must pass certain written exams in order to carry out trades and adhere to ethical standards. Day Traders: Day traders are individuals who buy and sell securities for their own accounts. Day traders will trade quickly--making purchases and sales on the same day. Casual Traders: A casual trader is a person who tries to build up a portfolio by buying and selling securities for his own account over a period of time. Technology has simplified the process and given the casual trader much of the same information and tools available to professional traders. Online Trading: Online trading is available to any person that has an account at an online trading firm. A person can enter trades from a personal computer and set price limits and targets. Commissions are often much less than at a full-service brokerage firm. How to do Buying and Selling of Stocks Now a days, there is no any physical trading, means going physical to stock exchange and do buying and
  28. 28. selling of shares. Now everything is done online in electronic format .No need to go to any stock exchange. Stock transaction takes place in 3 major steps. 1. You place order (buy or sell) online 2. The order goes to your broker (broker like indiabulls, 5paisa etc) 3. From broker the order goes to stock exchange (either BSE or NSE) And finally based on your price your order gets executed. Your role is to place only buy or sell order. No need to worry about broker part and stock exchange part. You just need to place your order. There are two methods for placing orders; Online trading and Offline trading. Online Stock Trading - The online stock trading is done by self. If you want to do trading yourself then you can go for online trading. For online trading you need computer, Internet connection, demat and trading account. You can even make use of internet café, if you do not want buy computer and internet connection at the beginning. But demat account and trading accounts are must for trading in stock market. Offline stock trading - In this method the orders will be placed by the broker on your behalf. Means you have to tell your broker which stocks to buy and sell and based on your instruction he carries out transaction. In this method you don’t need any computer and internet connection. Topic -19: Regulatory Framework:  Capital issue (control) act ,1947  Securities contract (regulation) act, 1956  SEBI act, 1992 Depositories Act, 1996  Companies Act, 1956 Capital issue (control) act ,1947 Any firm, issuing shares needed central government permission Also determine the amount and price of the issue The act was repealed in 1992, Market determined allocation started Securities contract (regulation) act, 1956 It provided for control on: all aspect of securities trading and running of stock exchange to prevent undesirable transaction It give central government regulatory jurisdiction over:  Stock exchanges: recognition and supervision  Contracts in securities  Listing of securities Stock exchanges: recognition and supervision processing application of recognition of stock exchanges grant of recognition to stock exchange, procedure of corporatisation and demutualization of stock exchanges, withdrawal of recognition to stock exchange. Demutualization and BSE: BSE has completed the process of Demutualization in terms of The BSE (Corporatisation and Demutualization) Scheme, 2005. The Bombay Stock Exchange Limited has succeeded 'The Stock Exchange, Mumbai' in accordance with the Scheme The Securities and Exchange Board of India (SEBI) had approved and published the Scheme of 'The Stock Exchange, Mumbai' . This act also empowers the Central government to call for periodical returns and make direct enquiries to direct rules to be made and powers of SEBI to make or amend bye-laws of recognized stock exchanges have been laid down. to supersede governing body of recognized stock exchange and vests with the Central Government the power to suspend business of recognized stock exchanges Contracts in Securities: If the Central Government is not satisfied regarding the nature or the volume of transactions in securities it may, by notification in the Official gazette, declare contracts in notified areas illegal
  29. 29. Listing of Securities: The act also provides conditions of listing, delisting of securities, right of appeal against refusal of stock exchanges to list securities of public companies, right of appeal to SAT against refusal of stock exchange to list securities of public companies, procedures and powers of SAT, Right to legal representation. Penalties and Procedures: The act also provides various cases when a person is liable for penalties such as when there is failure to: Furnish information, return, etc. Enter into agreements with clients Redress investor's grievances Segregate securities or moneys of client or clients Comply with provision of listing and delisting conditions etc. SEBI Act, 1992 The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for protecting the interests of investors in securities, promoting the development of the securities market and regulating the securities market by measures it thinks fit. The measure provide for: Regulating the business in stock exchanges and other securities markets. Registering and regulating the working of: stock brokers, sub-brokers, share transfer agents bankers to an issue, trustee of trust deeds, registrar to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and other intermediaries Registering and regulating the working of the depositories, participants, foreign institutional investors, credit rating agencies and such other Registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds.  Prohibiting fraudulent and unfair trade practices relating to securities markets.  Promoting investors education and training of intermediaries of securities markets.  Prohibiting insider trading in securities.  Regulating substantial acquisition in shares and takeover of companies.  Undertaking inspection, conducting inquires and audits of the stock exchanges, mutual funds, other persons associated with the securities market, Companies Act, 1956 It deals with issue, allotment and transfer of securities and various aspects relating to company management Provide for standard disclosure in public issues Company management. Management perception of the risk factors information about other listed companies under the same management Company ‘s other projects Depositories Act, 1996 Depository Act, 1996 Provides for the  Establishment of depositories in securities  Ensure free transferability of securities with speed and accuracy  By making securities freely transferable  Dematerializing the securities  On line transfer The Depositories Act, 1996 provides for the establishment of depositories for securities to ensure transferability of securities with speed, accuracy and security. The act provides the rights and obligations of depositories, participants, issuers and beneficial owners. A depository is required to enter into an agreement with one or more participants as its agents. Any person through a participant can enter into an agreement for availing its services. Any person who enters into an
  30. 30. agreement with depository should surrender the certificate of security for which he requires the services of a depository to the issuer After the issuer receives the certificate of security, he should cancel the certificate of security and substitute in its records the name of the depository as a registered owner in respect of that security the depository should enter the name of the person who has entered into agreement, as the beneficial owner in its records. After receiving intimation from the participant, every depository should register the transfer of security in the name of the transferee. All securities held by a depository should be dematerialized and be in a fungible form. The depositories should be deemed to be the registered owner for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner. The depository as a registered owner should not have any voting rights or other rights in the securities held by it. A Beneficial owner, with the prior approval of the depository creates a pledge or hypothecation of securities owned by him through a depository. The depository is required to maintain a register and an index of beneficial owners. The depositories are required to furnish information about the transfer of securities in the name of beneficial owners at such intervals and in such manner as may be specified by the bye-laws. Topic -20: Current Status of the Market (status is shown in the internet and news papers on daily basis). Topic -21: Corporate Action: A corporate action is an event initiated by a public company that affects the securities (equity or debt) issued by the company. Some corporate actions such as a dividend (for equity securities) or coupon payment (for debt securities (bonds)) may have a direct financial impact on the shareholders or bondholders; another example is a call (early redemption) of a debt security. Other corporate actions such as stock split may have an indirect impact, as the increased liquidity of shares may cause the price of the stock to rise. Some corporate actions such as name change have no direct financial impact on the shareholders. Corporate actions are typically agreed upon by a company's board of directors and authorized by the shareholders. Some examples are stock splits, dividends, mergers and acquisitions, rights issues and spinoffs. Reasons: The primary reasons for companies to use corporate actions are: Return profits to shareholders: Cash dividends are a classic example where a public company declares a dividend to be paid on each outstanding share. Bonus is another case where the shareholder is rewarded. In a stricter sense the Bonus issue should not impact the share price but in reality, in rare cases, it does and results in an overall increase in value. Influence the share price: If the price of a stock is too high or too low, the liquidity of the stock suffers. Stocks priced too high will not be affordable to all investors and stocks priced too low may be de-listed. Corporate actions such as stock splits or reverse stock splits increase or decrease the number of outstanding shares to decrease or increase the stock price respectively. Buybacks are another example of influencing the stock price where a corporation buys back shares from the market in an attempt to reduce the number of outstanding shares thereby increasing the price. Corporate Restructuring: Corporations re-structure in order to increase their profitability. Mergers are an example of a corporate action where two companies that is competitive or complementary come together to increase profitability. Spin-offs are an example of a corporate action where a company breaks itself up in order to focus on its core competencies. TYPES: Corporate actions are classified as voluntary, mandatory and mandatory with choice corporate actions.
  31. 31. Mandatory Corporate Action: A mandatory corporate action is an event initiated by the corporation by the board of directors that affects all shareholders. Participation of shareholders is mandatory for these corporate actions. An example of a mandatory corporate action is cash dividend. All holders are entitled to receive the dividend payments, and a shareholder does not need to do anything to get the dividend. Other examples of mandatory corporate actions include stock splits, mergers, pre-refunding, return of capital, bonus issue, asset ID change, pari-passu and spin-offs. Strictly speaking the word mandatory is not appropriate because the share holder person doesn't do anything. In all the cases cited above the shareholder is just a passive beneficiary of these actions. There is nothing the Share holder has to do or does in a Mandatory Corporate Action. Voluntary Corporate Action: A voluntary corporate action is an action where the shareholders elect to participate in the action. A response is required by the corporation to process the action. An example of a voluntary corporate action is a tender offer. A corporation may request share holders to tender their shares at a pre-determined price. The shareholder may or may not participate in the tender offer. Shareholders send their responses to the corporation's agents, and the corporation will send the proceeds of the action to the shareholders who elect to participate. Sometimes a voluntary corporate action may give the option of how to get the proceeds of the action. For example in case of a cash or stock dividend option, the shareholder can elect to take the proceeds of the dividend either as cash or additional shares of the corporation. (These are commonly known as Mandatory Events with Options, as a dividend is mandatory but a shareholder has the option to elect for the cash or to reinvest their cash dividend into the shares) Other types of Voluntary actions include rights issue, making buyback offers to the share holders while delisting the company from the stock exchange etc. Mandatory with Choice Corporate Action: This corporate action is a mandatory corporate action where share holders are given a chance to choose among several options. An example is cash or stock dividend option with one of the options as default. Share holders may or may not submit their elections. In case a share holder does not submit the election, the default option will be applied. Topic -22: Buyback of shares: The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake. A buyback allows companies to invest in them-selves. By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns. Buybacks can be carried out in two ways: 1. Shareholders may be presented with a tender offer whereby they have the option to submit (or tender) a portion or all of their shares within a certain time frame and at a premium to the current market price. This premium compensates investors for tendering their shares rather than holding on to them. 2. Companies buy back shares on the open market over an extended period of time. Topic -23: Index: Security market Index measures the behaviour of the security prices and the stock market. Indicators represent the entire stock market and its segments which measure the movement of the stock market. The most popular index in India are the Bombay stock exchange sensitivity Index (BSE Sensex or BSE – 100) and the National Stock Exchange Nifty. The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index for equities; it includes shares of 30 firms listed on the BSE, which represent about 45% of the index's free-float market capitalization. It was created in 1986 and provides time series data from April 1979, onwards. Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which represent about 62% of its free-float market capitalization. It was created in 1996 and provides time series data from July 1990, onward.
  32. 32. Purpose of Index Security Index is helpful to show the economic health and analyzing the movement of price of various securities listed into the stock exchange.  Helpful to evaluate the Risk – return portfolio analysis.  Helpful to measure the growth of the secondary market.  Index can be used to compare a given share prices behaviour with its movement.  It is helpful to the investor to make their Investment decision.  Funds can be allocated more rationally between stocks with knowledge of the relationship of price of individual with the movements in the market.  Market indices act as sensitive barometer of the changes in trading pattern in the stock market. Factors that influence the construction of Index numbers  Selecting the shares for inclusion in the index making.  Determine the relative importance of each share included in the sample weighting  Average the included share into single share measure. Sample List of Indices BSE- SENSEX BSE100 Index BSE200 Dollex BSE 500 and Sectoral Indices INDO text S&P CNX 50 CNX Nifty Junior OTCEI – Composite Index
  33. 33. Module-III: Banking Basics and New Age Banking Topic -1: Historical Perspective of Banking, An Overview of development of Banking in India Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955. A bank is a financial institution and a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. Topic -2: Banking Structure Banking Regulator The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.
  34. 34. Scheduled Banks in India Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country. Our focus in this module will be only on the scheduled commercial banks. Public Sector Banks Public sector banks are those in which the majority stake is held by the Government of India (GoI). Public sector banks together make up the largest category in the Indian banking system. There are currently 27 public sector banks in India. They include the SBI and its 6 associate banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd. Public sector banks have taken the lead role in branch expansion, particularly in the rural areas. Regional Rural Banks Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy. Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring public sector commercial bank. RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the Government has introduced a number of measures of improve viability and profitability of RRBs, one of them being the amalgamation of

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