The document discusses the globalization of capital markets and financial services. It provides context on how capital markets became global in the late 20th century due to abandoning fixed exchange rates and eliminating foreign exchange controls. As technology advanced, it allowed global capital mobility and integration of once separate national markets. Over time, more types of markets and more countries became interconnected in the global capital market. The document also examines the impacts of globalization and financial deregulation in driving mergers and acquisitions, geographic expansion, and consolidation in the financial services industry.

1. 1. INTRODUCTION
Today’s global capital market developed after the major nations of the world abandoned the adjustable peg
system rates in the early 1970s and eliminated their grid foreign exchange controls that went
with them. Advances in technology that enables great capital mobility, coupled with lack of
fiscal discipline, mostly on the part the united states, made a quasi-fixed rate system unworkable
and inefficient. In 20 years since abandonment, the resulting financial freedom and the boom in
the technology, have allowed profit seeking investors, issuers, and intermediaries to create an
ever expanding global market for financial instrument in all denominations. As trading volumes
soared and the variety of instruments multiplied, this global market acquired considerable power.
But the process is only help complete. While the markets for the money ,foreign exchange and
bonds have already became global, the equities market share only in the process of globalizing.
Moreover, as bank deposits continue to be securitized around the world, more and more of the
flow of funds in the economies of the developed world will be in instruments which can be
traded and there by linked directly to the global capital market. Finally, more and more of the
developing countries of the world are reforming there financial systems and, in the process
linking into the global capital market.
As this process continues, the global capital market will continue to grow, becoming more
powerful and integrated, until it reaches maturity sometime in the next century. Worldwide
capital supply and demand will be intermediated through this market, which will be the
mechanism for capital pricing and allocation.
The phenomenon of globalization began in a primitive form when humans first settled into
different areas of the world; however, it has shown a rather steady and rapid progress in the
recent times and has become an international dynamic which, due to technological
advancements, has increased in speed and scale, so that countries in all five continents have been
affected and engaged.
The financial crisis and worldwide recession has abruptly halted a nearly three-decade-long
expansion of global capital markets. After nearly quadrupling in size relative to GDP since 1980,
world financial assets including equities, private and public debt, and bank deposits fell by $16
trillion last year to $178 trillion in 2008, the largest setback on record. MGI research suggests
that the forces fueling growth in financial markets have changed. For the past 30 years, most of
the overall increase in financial depth the ratio of assets to GDP was driven by rapid growth of
equities and private debt in mature markets. By 2007, the total value of global financial assets
reached a peak of $194 trillion, equal to 343 percent of GDP. But the upheaval in financial
markets in late 2008 marked a break in this trend.
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2. 2. GLOBALIZATION
Globalization is defined as a process which, based on international strategies, aims to expand
business operations on a worldwide level and was precipitated by the facilitation of global
communications due to technological advancements, and socioeconomic, political and
environmental developments. The goal of globalization is to provide organizations a superior
competitive position with lower operating costs, to gain greater numbers of products, services
and consumers. This approach to competition is gained via diversification of resources, the
creation and development of new investment opportunities by opening up additional markets,
and accessing new raw materials and resources. Diversification of resources is a business
strategy that increases the variety of business products and services within various organizations.
Diversification strengthens institutions by lowering organizational risk factors, spreading
interests in different areas, taking advantage of market opportunities and acquiring companies
both horizontal and vertical in nature. Globalization has become the buzz word of the new
millennium. It is viewed as the cause of many of the world’s problems as well as a panacea. The
debate over globalization is manifest both in public demonstrations against the WTO in Seattle in
the Fall of 1999 and the IMF and World Bank earlier.
Industrialized or developed nations are specific countries with a high level of economic
development and meet certain socioeconomic criteria based on economic theory such as gross
domestic product, industrialization and human development index as defined by the
International Monetary Fund, the United Nations and the World Trade Organization. Using
these definitions, some industrialized countries in 2010 were: Austria, United Kingdom,
Belgium, Denmark, Finland, France, Germany, Japan, Luxembourg, Norway, Sweden,
Switzerland, and the United States.
 COMPONENTS OF GLOBALIZATION
The components of globalization include GDP, industrialization and the Human Development
Index . The GDP is the market value of all finished goods and services produced within a
country's borders in a year and serves as a measure of a country's overall economic output.
Industrialization is a process which, driven by technological innovation, effectuates social
change and economic development by transforming a country into a modernized industrial, or
developed, nation. Until three years ago the consensus view among economists on the issue of
the international integration of financial markets was very positive. The benefits of open capital
markets stressed include: optimal international resource allocation; inter temporal optimization;
international portfolio diversification and discipline on policy makers
The Human Development Index comprises three components. Specifically, a country's
 population's life expectancy,
(b) knowledge and education measured by the adult literacy and
(c) income.
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3.  THE ECONOMIC IMPACT ON DEVELOPED NATIONS
Globalization compels businesses to adapt to different strategies based on new ideological trends
that try to balance rights and interests of both the individual and the community as a whole. This
change enables businesses to compete world wide and also signifies a dramatic change for
business leaders, labor and management by legitimately accepting the participation of workers
and government in developing and implementing company policies and strategies. Risk
reduction via diversification can be accomplished through company involvement with
international financial institutions and partnering with both local and multinational businesses.
Globalization brings reorganization at the international, national and sub-national levels.
Specifically, it brings there organization of production, international trade and the integration of
financial markets, thus affecting capitalist economic and social relations via multilateralism and
microeconomic phenomena, such as business competitiveness, at the global level. The
transformation of the production systems affects the class structure, the labor process, the
application of technology and the structure and organization of capital. Globalization is now seen
as marginalizing the less educated and low-skilled workers. Business expansion will no longer
automatically imply increased employment. Additionally, it can cause high remuneration of
capital due to its higher mobility compared to labor. The phenomenon seems to be driven by
three major forces: globalization of all product and financial markets, technology and
deregulation. Globalization of product and financial markets refers to an increased economic
integration in specialization and economies of scale, which will result in greater trade in financial
services through both capital flows and cross-border entry activity. The technology factor,
specifically telecommunication and information availability, have facilitated remote delivery and
provided new access and distribution channels while revamping industrial structures for financial
services by allowing entry of non-bank entities such as telecoms and utilities .Deregulation
pertains to the liberalization of capital account and financial services in products, markets and
geographic locations. It integrated banks by offering a broad array of services, allowed entry of
new providers and increased multinational presence in many markets and more cross-border
activities. In a global economy, power is the ability of a company to command both tangible and
intangible assets that create customer loyalty, regardless of location. Independent of size or
geographic location, a company can meet global standards and tap into global networks, thrive
and act as a world class thinker, maker and trader, by using its greatest assets: its concepts,
competence and connections.
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4.  BENEFICIAL EFFECTS
Some economists have a positive outlook regarding the net effects of globalization
on economic growth. These effects have been analyzed over the years by several
studies attempting to measure the impact of globalization on various nations'
economies using variables such as trade, capital flows and their openness, GDP per
capita, foreign direct investment and more. These studies examined the effects of
several components of globalization on growing time series cross sectional data on
trade, FDI and portfolio investment. Although they provide an analysis of
individual components of globalization on economic growth, some of the results
are inconclusive or even contradictory. However, overall, the findings of those
studies seem to be supportive of the economists' positive position instead of the
one held by the public and non-economist view. Trade among nations via the use
of comparative advantage promotes growth, which is attributed to a strong
correlation between the openness to trade flows and the affect on economic growth
and economic performance. Additionally there is a strong positive relation between
capital flows and their impact one economic growth. Foreign Direct Investment's
impact on economic growth has had a positive growth effect in wealthy countries
and an increase in trade and FDI resulted in higher growth rates. Empirical
research examining the effects of several components of globalization on growth
using time series and cross sectional data on trade, FDI and portfolio investment
found that a country tends to have a lower degree of globalization if it generates
higher revenues from trade taxes. Further evidence indicates that there is a positive
growth-effect in countries which are sufficiently rich as are most of the developed
nations. The World Bank reports that integration with global capital markets can
lead to disastrous effects without sound domestic financial systems in place.
Furthermore globalized countries have lower increases in government out lays, as
well as taxes, and lower levels of corruption in their governments. One of the
potential benefits of globalization is to provide opportunities for reducing
macroeconomic volatility on output and consumption via diversification of risk.
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5.  HARMFUL EFFECTS
Non-economists and the wide public expect the costs associated with globalization
to outweigh the benefits, especially in the short-run. Less wealthy countries from
those among the industrialized nations may not have the same highly-accentuated
beneficial effect from globalization as more wealthy countries measured by GDP
per capita etc. Free trade, although increases opportunities for international trade, it
also increases the risk of failure for smaller companies that cannot compete
globally.
Additionally it may drive up production and labor costs including higher wages for
more skilled workforce. Domestic industries in some countries may been dangered
due to comparative or absolute advantage of other countries in specific industries.
Another possible danger and harmful effect is the over use and abuse of natural
resources to meet the new higher demand in the production of goods.
 THE BOTTOM LINE
One of the major potential benefits of globalization is to provide opportunities for
reducing macroeconomic volatility on output and consumption via diversification
of risk. The overall evidence of the globalization effect on macroeconomic
volatility of output indicates that, although in theoretical models the direct effects
are ambiguous, financial integration helps in a nation's production base
diversification, leads to an increase in specialization of production. However, the
specialization of production based on the concept of comparative advantage can
also lead to higher volatility in specific industries within an economy and society
of a nation. As time passes, successful companies, independent of size, will be the
ones that are part of the global economy.
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6. 3. GLOBALIZATION OF FINANCIAL SERVICES
In this age of globalization, the key to survival and success for many financial institutions is to
cultivate strategic partnerships that allow them to be competitive and offer diverse services to
consumers. In examining the barriers to - and impact of - mergers, acquisitions and
diversification in the financial services industry, it's important to consider the keys to survival in
this industry:
1.Understanding the individual client's needs and expectations
2.Providing customer service tailored to meet customers' needs and expectations
In 2008, there were very high rates of mergers and acquisition in the financial services sector.
Let's take a look at some of the regulatory history that contributed to changes in the financial
services landscape and what this means for the new landscape investors now need to traverse.
Diversification Encouraged by Deregulation Because large, international mergers tend to impact
the structure of entire domestic industries, national governments often devise and implement
prevention policies aimed at reducing domestic competition among firms. Beginning in the early
1980s, the Depository Institutions Deregulation and Monetary Control Act of 1980 and the Garn-
St. Germaine Depository Act of 1982 were passed.
By providing the Federal Reserve with greater control over non-member banks, these two acts
work to allow banks to merge and thrift institutions to offer checkable deposits. These changes
also became the catalysts for the dramatic transformation of the U.S. financial service markets in
2008 and the emergence of reconstituted players as well as new players and service channels.
Nearly a decade later, the implementation of the Second Banking Directive in1993 deregulated
the markets of European Union countries. In 1994, European insurance markets underwent
similar changes as a result of the Third Generation Insurance Directive of 1994.
These two directives brought the financial services industries of the United States and Europe
into fierce competitive alignment, creating a vigorous global scramble to secure customers that
had been previously unreachable or untouchable.
The ability for business entities to use the internet to deliver financial services to their client else
also impacted the product-oriented and geographic diversification in the financial services arena.
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7.  GOING GLOBAL
Asian markets joined the expansion movement in 1996 when "Big Bang" financial reforms
brought about deregulation in Japan. Relatively far- reaching financial systems in that country
became competitive in a global environment that was enlarging and changing swiftly. By 1999,
nearly all remaining restrictions on foreign exchange transactions between Japan and other
countries were lifted.
Following the changes in the Asian financial market, the United States continued to implement
several additional stages of deregulation, concluding with the Gramm-Leach-Bliley Act of
1999.This law allowed for the consolidation of major financial players, which pushed U.S.-
domiciled financial service companies involved in M&A transactions to a total of $221 billion
in2000.
According to a 2001 study by Joseph Teplitz, Gary Apanaschik and Elizabeth Harper Briglia in
Bank Accounting & Finance, expansion of such magnitude involving trade liberalization, the
privatization of banks in many emerging countries and technological advancements has become
a rather common trend.
The immediate effects of deregulation were increased competition, market efficiency and
enhanced consumer choice. Deregulation sparked unprecedented changes that transformed
customers from passive consumers to powerful and sophisticated players. Studies suggest that
additional, diverse regulatory efforts further complicated the running and managing of financial
institutions by increasing the layers of bureaucracy and number of regulations.
Simultaneously, the technological revolution of the internet changed the nature, scope and
competitive landscape of the financial services industry. Following deregulation, the new reality
has each financial institution essentially operating in its own market and targeting its audience
with narrower services, catering to the demands of a unique mix of customer segments. This
deregulation forced financial institutions to prioritize their goals by shifting their focus from rate-
setting and transaction-processing to becoming more customer-focused.
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8.  CHALLENGES AND DRAWBACKS OF FINANCIAL PARTNERSHIPS
Since 1998, the financial services industry in wealthy nations and the United States has been
experiencing a rapid geographic expansion; customers previously served by local financial
institutions are now targeted at a global level. Additionally, according to Alen Berger and Robert
De Young in their Article” Technological Progress and the Geographic Expansion of the Banking Industry”
of Journal of Money, Credit and Banking, September 2006, between1985 and 1998, the average
distance between a main bank and its affiliates within U.S. multi bank holding companies has
increased by more than 50%,from 123.4 miles to 188.9 miles. This indicates that the increased
ability of banks to make small business loans at greater distances enabled them to suffer fewer
diseconomies of scale and boost productivity.
Deregulation has also been the major factor behind this geographic diversification, and
beginning in the early 1980s, a sequence of policy changes implemented a gradual reduction of
intrastate and interstate banking restrictions.
In the European Union, a similar counterpart of policy changes enabled banking organizations
and certain other financial institutions to extend their operations across the member-states. Latin
America, the transitional economies of Eastern Europe and other parts of the world also began to
lower or eliminate restrictions on foreign entry, thus enabling multinational financial institutions
headquartered in other countries to attain considerable market shares.
Transactions without Boundaries, Borders: Recent innovations in communications and
information technology have resulted in a reduction in diseconomies of scale associated with
business costs faced by financial institutions contemplating geographic expansion. ATM
networks and banking websites has enabled efficient long-distance interactions between
institutions and their customers, and consumers have become so dependent on their new found
ability to conduct boundary-less financial transactions on a continuous basis that businesses lose
all competitiveness if they are not technologically connected.
An additional driving force for financial service firms' geographic diversification has been the
proliferation of corporate combination strategies such as mergers, acquisitions, strategic
alliances and outsourcing. Such consolidation strategies may improve efficiency within the
industry, resulting in M&As, voluntary exit, or forced withdrawal of poorly performing firms.
Consolidation strategies further empower firms to capitalize on economies of scale and focus on
lowering their unit production costs. Firms often publicly declare that their mergers are
motivated by a desire for revenue growth, an increase in product bases, and for increased
shareholder value via staff consolidation, overhead reduction and by offering a wider array of
products. However, the main reason and value of such strategy combinations is often related to
internal cost reduction and increased productivity
Unfavorable facts about the advantages and disadvantages of the major strategies used as a tool
for geographic expansions within the financial services sectors were obscured in 2008 by the
very high rates of M&As, such as those between Nations Bank and Bank of America, Travelers
Group and Citicorp, JP Morgan Chase and Bank One. Their dilemma was to create a balance that
maximized overall profit.
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9. 4. MERGERS AND ACQUISITIONS
Mergers and acquisitions is an aspect of corporate strategy, corporate finance and management
dealing with the buying, selling, dividing and combining of different companies and similar
entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field
or new location, without creating a subsidiary, other child entity or using a joint venture. The
distinction between a "merger" and an "acquisition" has become increasingly blurred in various
respects, although it has not completely disappeared in all situations.
An acquisition or takeover is the purchase of one business or company by another company or
other business entity. Such purchase may be of 100%, or nearly 100%, of the assets or ownership
equity of the acquired entity. Consolidation occurs when two companies combine together to
form a new enterprise altogether, and neither of the previous companies survives independently.
Acquisitions are divided into "private" and "public" acquisitions, depending on whether the
acquire or merging company is or is not listed on a public stock market. An additional
dimension or categorization consists of whether an acquisition is friendly or hostile.
Achieving acquisition success has proven to be very difficult, while various studies have shown
that 50% of acquisitions were unsuccessful. The acquisition process is very complex, with many
dimensions influencing its outcome.
As you can see, an acquisition may be only slightly different from a merger. In fact, it may be
different in name only. Like mergers, acquisitions are actions through which companies seek
economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all
acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation
as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal.
Other times, acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a company can buy another
company with cash, stock or a combination of the two. An other possibility, which is common in
smaller deals, is for one company to acquire all the assets of another company. Company X buys
all of Company Y's assets for cash, which means that Company Y will have only cash. Of
course, Company Y becomes merely a shell and will eventually liquidate or enter another area of
business.
Another type of acquisition is a reverse merger, a deal that enables a private company to get
publicly-listed in a relatively short time period. A reverse merger occurs when a private company
that has strong prospects and is eager to raise financing buys a publicly-listed shell company,
usually one with no business and limited assets. The private company reverse merges into the
public company, and together they become an entirely new public corporation with tradable
shares.
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10.  Distinction between mergers and acquisitions
Mergers Acquisitions
A merger involves the mutual decision A takeover, or acquisition, on the other
of two companies to combine and hand, is characterized by the purchase of a
become one entity; it can be seen as a smaller company by a much larger one.
decision made by two “equal”. This combination of “unequal’s” can
produce the same benefits as a merger, but
it does not necessarily have to be mutual
decision.
The combined business, through A larger company can initiate a hostile
structural and operational advantages takeover of a smaller firm, which
secured by the merger, can cut cost and essentially amounts to buying the
increase profits, boosting shareholders company in the face of resistance from the
values for both groups of shareholders. smaller company’s management.
A typical merger, in other words, Unlike in a merger, in an acquisition, the
involves two relatively equal companies, acquiring firm’s usually offers a cash price
which combine to become one legal per share to the target firm’s shareholders
entity with the goal of producing a or the acquiring firm’s share’s to the
company that is worth more than the sum shareholder of the target firm according
of its parts. to a specified conversion ratio.
In a merger of two corporations, the Either way, the purchasing company
shareholders usually have their shares in essentially finances the purchase of the
the old company exchanged for an equal target company, buying it outright for its
number of shares in the merged entity. shareholders
10

11.  Types of Mergers And acquisitions
There are many types of mergers and acquisitions that redefine the business world with
new strategic alliances and improved corporate philosophies. From the business structure
perspective, some of the most common and significant types of mergers and acquisitions
are listed below:
o Horizontal Merger
This kind of merger exists between two companies who compete in the same industry
segment. The two companies combine their operations and gains strength in terms of
improved performance, increased capital, and enhanced profits. This kind substantially
reduces the number of competitors in the segment and gives a higher edge over competition.
o Vertical Merger
Vertical merger is a kind in which two or more companies in the same industry but in
different fields combine together in business. In this form, the companies in merger decide to
combine all the operations and productions under one shelter. It is like encompassing all the
requirements and products of a single industry segment.
o Co-Generic Merger
Co-generic merger is a kind in which two or more companies in association are some way or
the other related to the production processes, business markets, or basic required
technologies. It includes the extension of the product line or acquiring components that are
all the way required in the daily operations. This kind offers great opportunities to businesses
as it opens a hue gateway to diversify around a common set of resources and strategic
requirements.
o Conglomerate Merger
Conglomerate merger is a kind of venture in which two or more companies belonging to
different industrial sectors combine their operations. All the merged companies are no way
related to their kind of business and product line rather their operations overlap that of each
other. This is just a unification of businesses from different verticals under one flagship
enterprise or firm.
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12.  Mergers and Acquisitions Failure
Despite the goal of performance improvement, results from mergers and acquisitions are often
disappointing compared with results predicted or expected. Numerous empirical studies show
high failure rates of mergers and acquisitions deals. Studies are mostly focused on individual
determinants.
A book by Thomas Straub 2007 "Reasons for frequent failure in Mergers and Acquisitions"
develops a comprehensive research framework that bridges different perspectives and promotes
an understanding of factors underlying mergers and acquisitions performance in business
research and scholarship. The study should help managers in the decision making process.
The first important step towards this objective is the development of a common frame of
reference that spans conflicting theoretical assumptions from different perspectives. On this
basis, a comprehensive framework is proposed with which to understand the origins of mergers
and acquisitions performance better and address the problem of fragmentation by integrating the
most important competing perspectives in respect of studies on mergers and acquisitions
Furthermore according to the existing literature relevant determinants of firm performance are
derived from each dimension of the model. For the dimension strategic management, the six
strategic variables: market similarity, market complementarities, production operation similarity,
production operation complementarities, market power, and purchasing power were identified
having an important impact on mergers and acquisitions performance. For the dimension
organizational behavior, the variables acquisition experience, relative size, and cultural
differences were found to be important.
Finally, relevant determinants of mergers and acquisitions performance from the financial field
were acquisition premium, bidding process, and due diligence. Three different ways in order to
best measure post mergers and acquisitions performance are recognized: Synergy realization,
absolute performance and finally relative performance.
Employee turnover contributes to mergers and acquisitions failures. The turnover in target
companies is double the turnover experienced in non-merged firms for the ten years following
the merger.
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13. 5. CREDIT RATING AGENCY
The credit rating agency of debt securities began in USA in 1841.At present credit rating agency
are operating throughout the globe. Credit rating agency can be define as the opinion expressed
by an independent rating agency about the credit quality of the issuer of the debt instrument.
A credit rating agency (CRA) are the company’s that assigns credit ratings for issuers of certain
types of debt obligations as well as the debt instruments themselves. In some cases, the servicers
of the underlying debt are also given ratings.
In most cases, the issuers of securities are companies, special purpose entities, state and local
governments, non-profit organizations, or national governments issuing debt-like securities that
can be traded on a secondary market. A credit rating for an issuer takes into consideration the
issuer's credit worthiness and affects the interest rate applied to the particular security being
issued.
The value of such security ratings has been widely questioned after the 2007-09 financial crisis.
In 2003, the U.S. Securities and Exchange Commission submitted a report to Congress detailing
plans to launch an investigation into the anti-competitive practices of credit rating agencies and
issues including conflicts of interest. More recently, ratings downgrades during the European
sovereign debt crisis of 2010-11 have drawn criticism from the EU and individual countries.
A company that issues credit scores for individual credit-worthiness is generally called a credit
bureau or consumer credit reporting agency . The rating agencies respond that their advice
constitutes only a "point in time" analysis, that they make clear that they never promise or
guarantee a certain rating to a tranche, and that they also make clear that any change in
circumstance regarding the risk factors of a particular tranche will invalidate their analysis and
result in a different credit rating.
Credit ratings are used by investors, issuers, investment banks, broker-dealers, and governments.
For investors, credit rating agencies increase the range of investment alternatives and provide
independent, easy-to-use measurements of relative credit risk; this generally increases the
efficiency of the market, lowering costs for both borrowers and lenders. This in turn increases
the total supply of risk capital in the economy, leading to stronger growth. It also opens the
capital markets to categories of borrower who might otherwise be shut out altogether: small
governments, startup companies, hospitals, and universities.
Credit rating agencies may also play a key role in structured financial transactions. Unlike a
"typical" loan or bond issuance, where a borrower offers to pay a certain return on a loan,
structured financial transactions may be viewed as either a series of loans with different
characteristics, or else a number of small loans of a similar type packaged together into a series
of "buckets". Credit ratings often determine the interest rate or price ascribed to a particular
tranche, based on the quality of loans or quality of assets contained within that grouping.
Credit rating agency do not involve in any recommendation to purchase, sell or hold that
Security.
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14.  Credit Rating Agencies Of The World
Agencies that assign Credit Ratings for Corporations include:-
 A. M. Best (U.S.)
 Baycorp Advantage (Australia)
 Bulgarian Credit Rating Agency (Bulgaria, European Union)
 Capital Intelligence (Cyprus)
 Capital Standards Rating (Kuwait)
 CARE Ratings (India)
 Credo line (Ukraine)
 Creditsiren (European Union)
 Credit Rating Information and Services Limited(CRISL), (Bangladesh)
 CRISIL (India)
 Dagong Global (People's Republic of China)
 Dominion Bond Rating Service (Canada)
 Egan-Jones Rating Company (U.S.)
 First Afghan Credit Risk Ratings (Afghanistan)FACRR
 First Report, (UK)
 Fitch Ratings (Dual-headquartered U.S./UK), 80% of which is owned by FIMALAC, a
French firm.
 Global Credit Ratings Co. (Africa)
 ICRA Limited (India)
 SMERA INDIA
 Japan Credit Rating Agency, Ltd. (Japan)
 Kroll Bond Rating Agency (U.S.)
 Moody's Investors Service (U.S.)
 Muros Ratings (Russia alternative rating agency)
 Rapid Ratings International (U.S.)
 Standard & Poor's (U.S.)
 Weiss Ratings (U.S.)
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15. Credit Rating Agencies Of The World
1. Standard & Poor's
Standard & Poor's is an American financial services company. It is a division of The McGraw-
Hill Companies that publishes financial research and analysis on stocks and bonds. It is well
known for its stock market indices, the U.S.-based S&P 500, the Australian S&P/ASX 200, the
Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX Nifty. The company is one of
the Big Three credit-rating agencies, which also include Moody's Investor Service and Fitch
Ratings. Its head office is located on 55 Water Street in Lower Manhattan, New Yor The
company traces its history back to 1860, with the publication by Henry Varnum Poor of History
of Railroads and Canals in the United States. This book was an attempt to compile
comprehensive information about the financial and operational state of U.S. railroad companies.
Henry Varnum went on to establish H.V. and H.W. Poor Co. with his son, Henry William, and
published annually updated versions of this book.
In 1906, Luther Lee Blake founded the Standard Statistics Bureau, with the view to providing
financial information on non-railroad companies. Instead of an annually published book,
Standard Statistics would use 5" x 7" cards, allowing for more frequent updates.
In 1941, Poor and Standard Statistics merged to become Standard & Poor's Corp. In 1966, the
company was acquired by The McGraw-Hill Companies, and now encompasses the Financial
Services d he company issues credit ratings for the debt of public and private corporations. It is
one of several CRAs that have been designated a nationally recognized statistical rating
organization by the U.S. Securities and Exchange Commission.
S&P issues both short-term and long-term credit ratings.
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16. 2. MODDY’S
Moody’s is the oldest credit rating agency. It is also the first rating agency to be recognized by
Nationally Recognized Statistical Rating Organizations (NRSRO) in 1975. The company
became public in 2000. It has been earning huge profits. Average profit margin was 53% from
2000 to 2007. Structured finance products was its top source of revenue by 2000.
Moody's, is the bond credit rating business of Moody's Corporation, representing the company's
traditional line of business and its historical name. Moody's Investors Service provides
international financial research on bonds issued by commercial and government entities and,
with Standard & Poor's and Fitch Group, is considered one of the Big Three credit rating
agencies.
The company ranks the creditworthiness of borrowers using a standardized ratings scale which
measures expected investor loss in the event of default. Moody's Investors Service rates debt
securities in several market segments related to public and commercial securities in the bond
market. These include government, municipal and corporate bonds; managed investments such
as money market funds, fixed-income funds and hedge funds; financial institutions including
banks and non-bank finance companies; and asset classes in structured finance.[1] In Moody's
Investors Service's ratings system securities are assigned a rating from Aaa to C, with Aaa being
the highest quality and C the lowest quality.
Moody's was founded by John Moody in 1909 to produce manuals of statistics related to stocks
and bonds and bond ratings. In 1975, the company was identified as a Nationally Recognized
Statistical Rating Organization (NRSRO) by the U.S. Securities and Exchange Commission.
Following several decades of ownership by Dun & Bradstreet, Moody's Investors Service
became a separate company in 2000; Moody's Corporation was established as a holding
company.
16

17. 3.Fitch Group
The Fitch Group is a jointly owned subsidiary of FIMALAC and Hearst Corporation. On April
12, 2012, Hearst increased their stake in the Fitch Group to 50%.[2] Fitch Ratings and Fitch
Solutions are part of the Fitch Group.
Fitch Ratings, dual-headquartered in New York and London, was one of the three Nationally
Recognized Statistical Rating Organizations designated by the U.S. Securities and Exchange
Commission in 1975, together with Moody's and Standard & Poor's. It is considered one of the
"Big Three credit rating agencies"
The firm was founded by John Knowles Fitch on December 24, 1913 in New York City as the
Fitch Publishing Company. It merged with London-based IBCA Limited in December 1997. In
2000 Fitch acquired both Chicago-based Duff & Phelps Credit Rating Co. and Thomson
Financial BankWatch Fitch Ratings is the smallest of the "big three" NRSROs, covering a more
limited share of the market than S&P and Moody's, though it has grown with acquisitions and
frequently positions itself as a "tie-breaker" when the other two agencies have ratings similar, but
not equal, in scale.
In September 2011, Fitch Group announced the sale of Algorithmics to IBM for $387 million.
The deal closed on October 21, 201
Credit rating agencies such as Fitch Ratings have been subject to criticism in the wake of large
losses in the collateralized debt obligation market that occurred despite being assigned top
ratings by the CRAs. For instance, losses on $340.7 million worth of collateralized debt
obligations issued by Credit Suisse Group added up to about $125 million, despite being rated
AAA by Fitch. However, differently from the other agencies, Fitch has been warning the market
on the constant proportion debt obligations with an early and pre-crisis report highlighting the
dangers of CPDO's
17

18. Sebi orders operational audit of credit rating agencies
The Securities and Exchange Board of India (Sebi) has said all credit rating agencies have to get
an internal audit done every six months.
The market regulator, in a note, said: “It (internal audit) shall cover all aspects of CRA
operations and procedures, including the investor grievance redressal mechanism.”
The audit will be conducted by chartered accountants, company secretaries or cost and
management accountants who are in practice and do not have any conflict of interest with the
cras.
“The report shall state the methodology adopted, deficiencies observed and consideration of
response of the management on the deficiencies,” the note added.
Sebi said the report should comment on the adequacy of systems adopted by the CRA for
compliance with the regulations issued by it and for investor grievance redressal.
Roopa Kudva, managing director & CEO, Crisil, and Region Head, South Asia, Standard &
Poor’s, said: “Crisil welcomes the move by Sebi to strengthen the control function at credit
rating agencies. We are fully compliant with the Sebi Regulations, 1999. These internal audits
are conducted by an independent chartered accountant firm, and cover compliance with Sebi
guidelines.”
“The way our business is growing, we had appointed a firm to undertake internal audit. But the
role was limited to doing a financial check. This year onwards, our board has already asked us to
undertake operational audit. We have appointed an internal auditor to do the same,” said Care’s
Managing Director, D R Dogra.
Agencies must get the internal audit report within two months from the end of the half-year.
Then, their board will have to consider the report and take steps to rectify any deficiencies, and
send an action taken report to Sebi within two months.
The move follows a review of the regulatory architecture initiated by the financial sector
regulators in 2008. The exercise, initiated by the high-level committee on capital markets, which
is headed by the Reserve Bank of India Governor, was spurred by international developments
and the debate over the role played by rating agencies before the global financial crisis.
The committee had reviewed the functioning of the agencies last month, based on a paper
prepared by Sebi and feedback from the agencies themselves.
18

19. 6.Emerging markets
Emerging markets are nations with social or business activity in the process of rapid growth and
industrialization. The economies of China and India are considered to be the largest. According
to The Economist many people find the term outdated, but no new term has yet to gain much
traction. Emerging market hedge fund capital reached a record new level in the first quarter of
2011 of $121 billion. The seven largest emerging and developing economies by either nominal
GDP or GDP are China, Brazil, Russia, India, Mexico, Indonesia, and Turkey.
The ASEAN–China Free Trade Area, launched on January 1, 2010, is the largest regional
emerging market in the world
N the 1970s, "less economically developed countries" was the common term for markets that
were less "developed" than the developed countries such as the United States, Western Europe,
and Japan. These markets were supposed to provide greater potential for profit, but also more
risk from various factors. This term was felt by some to be not positive enough so the emerging
market label was born. This term is misleading in that there is no guarantee that a country will
move from "less developed" to "more developed"; although that is the general trend in the world,
countries can also move from "more developed" to "less developed".
Originally brought into fashion in the 1980s by then World Bank economist Antoine van
Agtmael, the term is sometimes loosely used as a replacement for emerging economies, but
really signifies a business phenomenon that is not fully described by or constrained to geography
or economic strength; such countries are considered to be in a transitional phase between
developing and developed status. Examples of emerging markets include Indonesia, Iran, some
countries of Latin America, some countries in Southeast Asia, South Korea, most countries in
Eastern Europe, Russia, some countries in the Middle East, and parts of Africa. Emphasizing the
fluid nature of the category, political scientist Ian Bremmer defines an emerging market as "a
country where politics matters at least as much as economics to the markets".[6]
The research on emerging markets is diffused within management literature. While researchers
including C. K. Prahalad, George Haley, Hernando de Soto, Usha Haley, and several professors
from Harvard Business School and Yale School of Management have described activity in
countries such as India and China, how a market emerges is little understood.
In the 2008 Emerging Economy Report, the Center for Knowledge Societies defines Emerging
Economies as those "regions of the world that are experiencing rapid information nalization
under conditions of limited or partial industrialization." It appears that emerging markets lie at
the intersection of non-traditional user behavior, the rise of new user groups and community
adoption of products and services, and innovations in product technologies and platforms.
19

20. Newly industrialized countries as of 2010. This is an intermediate category between fully
developed and developing.
The term "rapidly developing economies" is being used to denote emerging markets such as The
United Arab Emirates, Chile and Malaysia that are undergoing rapid growth.
In recent years, new terms have emerged to describe the largest developing countries such as
BRIC that stands for Brazil, Russia, India, and China, along with BRICET i.e BRIC + Eastern
Europe and Turkey, BRICS i.e BRIC + South Africa, BRICM i.e BRIC + Mexico, BRICK i.e.
BRIC + South Korea, Next Eleven Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria,
Pakistan, Philippines, South Korea, Turkey, and Vietnam and CIVETS i.e. Colombia, Indonesia,
Vietnam, Egypt, Turkey and South Africa. These countries do not share any common agenda,
but some experts believe that they are enjoying an increasing role in the world economy and on
political platforms.
It is difficult to make an exact list of emerging markets; the best guides tend to be investment
information sources like ISI Emerging Markets and The Economist or market index makers such
as Morgan Stanley Capital International. These sources are well-informed, but the nature of
investment information sources leads to two potential problems. One is an element of historicity;
markets may be maintained in an index for continuity, even if the countries have since developed
past the emerging market phase. Possible examples of this are South Korea and Taiwan. A
second is the simplification inherent in making an index; small countries, or countries with
limited market liquidity are often not considered, with their larger neighbours considered an
appropriate stand-in.
In an Opalesque.TV video, hedge fund manager Jonathan Binder discusses the current and future
relevance of the term "emerging markets" in the financial world. Binder says that in the future
investors will not necessarily think of the traditional classifications of "G10" versus "emerging
markets". Instead, people should look at the world as countries that are fiscally responsible and
countries that are not. Whether that country is in Europe or in South America should make no
difference, making the traditional "blocs" of categorization irrelevant.
The Big Emerging Market economies are : Brazil, China, Egypt, India, Indonesia, Mexico,
Philippines, Poland, Russia, South Africa, South Korea and Turkey.
Newly industrialized countries are emerging markets whose economies have not yet reached first
world status but have, in a macroeconomic sense, outpaced their developing counterparts.
Individual investors can invest in emerging markets by buying into emerging markets or global
funds. If they want to pick single stocks or make their own bets they can do it either through adrs
or through exchange traded funds. The exchange traded funds can be focused on a particular
country or region .
20

21. 7.GLOBAL EQUITY MARKET
A stock market or equity market is a public entity for the trading of company stock and
derivatives at an agreed price; these are securities listed on a stock exchange as well as those
only traded privately.
The size of the world stock market was estimated at about $36.6 trillion at the beginning of
October 2008. The total world derivatives market has been estimated at about $791 trillion face
or nominal value, 11 times the size of the entire world economy.[3] The value of the derivatives
market, because it is stated in terms of notional values, cannot be directly compared to a stock or
a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority
of derivatives 'cancel' each other out (Many such relatively illiquid securities are valued as
marked to model, rather than an actual market price.
The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual
organization specialized in the business of bringing buyers and sellers of the organizations to a
listing of stocks and securities together. The largest stock market in the United States, by market
capitalization, is the New York Stock Exchange (NYSE). In Canada, the largest stock market is
the Toronto Stock Exchange. Major European examples of stock exchanges include the
Amsterdam Stock Exchange, London Stock Exchange, Paris Bourse, and the Deutsche Börse. In
Africa, examples include Nigerian Stock Exchange, JSE Limited, etc. Asian examples include
the Singapore Exchange, the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the
Shanghai Stock Exchange, and the Bombay Stock Exchange. In Latin America, there are such
exchanges as the BM&F Bovespa and the BMV.
Market participants include individual retail investors, institutional investors such as mutual
funds, banks, insurance companies and hedge funds, and also publicly traded corporations
trading in their own shares. Some studies have suggested that institutional investors and
corporations trading in their own shares generally receive higher risk-adjusted returns than retail
investors.
A few decades ago, worldwide, buyers and sellers were individual investors, such as wealthy
businessmen, usually with long family histories to particular corporations. Over time, markets
have become more "institutionalized"; buyers and sellers are largely institutions
The rise of the institutional investor has brought with it some improvements in market
operations. There has been a gradual tendency for "fixed" fees being reduced for all investors,
partly from falling administration costs but also assisted by large institutions challenging brokers'
oligopolistic approach to setting standardized fees.
21

22. The equity market have been slower to globalize than the foreign exchange or the
bond markets. Price linkages remain weak across equity markets. Significant
differences in valuation still exist across different national equity market even for
comparable companies in identical industries. Equity market have been difficult
and slow to globalize for many reasons. Unlike foreign exchange and government
bonds, equities and not pure commodities. The valuation of the equity of a
company is highly unique to the particular circumstances of that company and the
total amount of market value being traded can also be relatively small. As a result
of both of these factors, these markets are less liquid and the full transaction costs
such as equities, research, commission, etc. are higher than in the other markets.
While the total daily volume of the global foreign exchange markets is on the
market is on the order of $1 trillion a day and the total daily trading volume of the
government bonds is on the order of $200 billion a day, the total daily volume
of all the world’s stock exchanges is only $23 billion a day
22

23. DAILY TRADING VOLUME OF FOREIGN EXCHANGE, GOVERNMENT
BONDS AND EQUITES 1992
Estimate based on U.S daily transaction volume
Strictly speaking there is no international equity market in the sense that there are
international bond and international currency market. Rather many countries have
their own domestic equity market in which stock are traded. The largest of these
domestic equity market are to be found in the United States, Great Britain, Japan
and Germany. Although each domestic equity market is still dominated by
investors who are citizens of that country and companies incorporated in that
country, development are internationalizing the world equity market. Investors are
investing heavily in foreign equity markets to diversify the portfolio.
One of the greatest limitations to the globalization of the equity markets has been
the lack of any agent to drive the process. The illiquidity and volatility
of individual equity prices makes it prohibitively risky for the highly leveraged,
multinational commercial banks to hold equities in volume for even a short period
of time. As a result, multinational banks have historically been reluctant to try to
make money by trading or investing in international equities, and therefore, have
not driven the globalization of equity.
23

24. 8.STOCK EXCHANGES
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks,
bonds, and other securities .Stock exchanges also provide facilities for issue and redemption of
securities and other financial instruments, and capital events including the payment of income
and dividends. Securities traded on a stock exchange include shares issued by companies, unit
trusts, derivatives, pooled investment products and bonds.
To be able to trade a security on a certain stock exchange, it must be listed there. Usually, there
is a central location at least for record keeping, but trade is increasingly less linked to such a
physical place, as modern markets are electronic networks, which gives them advantages of
increased speed and reduced cost of transactions. Trade on an exchange is by members only.
The initial offering of stocks and bonds to investors is by definition done in the primary market
and subsequent trading is done in the secondary market .A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is driven by
various factors that, as in all free markets, affect the price of stocks.
There is usually no compulsion to issue stock via the stock exchange itself, norms stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.
This is the usual way that derivatives and bonds are traded. Increasingly, stock exchanges are
part of a global market for securities.
Stock is basically part ownership of a business. A person invests his or her money in the business
which the business uses to better the company. When the company does well, the person who
invested in the company gets a certain percentage of the profits of the company. Depending on
how well the business is doing, a percent of that business is worth a certain amount of money
that can change either decreasing the money in the stockholder's pocket or increasing it. Trading
stocks is a way for people to make money by investing money in companies.
There is usually no compulsion to issue stock via the stock exchange itself, nor must stock be
subsequently traded on the exchange. Such trading is said to be off exchange or over-the-counter.
This is the usual way that bonds are traded. Increasingly, stock exchanges are part of a global
market for securities.
A stock exchange, share market or bourse is a corporation or mutual organization which provides
"trading" facilities for stock brokers and traders, to trade stocks and other securities. Stock
exchanges also provide facilities for the issue and redemption of securities as well as other
financial instruments and capital events including the payment of income and dividends. Trade
on an exchange is by members only. The initial offering of stocks and bonds to investors is by
definition done in the primary market secondary market. A stock exchange is often the most
important component of a stock market. Supply and demand in stock markets is driven by
various factors which, as in all free markets, affect the price of stocks . And subsequent trading is
done.
24

25.  The Role Of Stock Exchanges
o Mobilizing saving for investment
When people draw their savings and invest in shares, it leads to a more rational allocation of
resources because funds, which could have been consumed, or kept in idle deposits with banks,
are mobilized and redirected to promote business activity with benefits for several economic
sectors such as agriculture, commerce and industry, resulting in a stronger economic growth and
higherproductivity levels and firms
o .Facilitating company growth
Companies view acquisitions as an opportunity to expand product lines, increase distribution
channels, hedge against volatility, increase its market share, or acquire other necessary
businessassets. A takeover bid or a merger agreement through the stock market is one of the
simplest and most common ways for a company to grow by acquisition or fusion.
o Redistribution of wealth
Stocks exchanges do not exist to redistribute wealth. However, both casual and
professional stock investors, through dividends and stock price increases that may result
in capital gains, will share in the wealth of profitable businesses.
o Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve on
theirmanagementefficiency in order to satisfy the demands of these shareholders and the more
stringent rules for public corporations imposed by public stock exchanges and the government.
Consequently, it is alleged that public companies tend to have better management records
than privately-held companiescorporate governance on the part of some public companies.
However, some well-documented cases are known where it is alleged that there has been
considerable slippage in
o Gives the right to shareholders to vote in the general meetings
It permits for the investor to have a political power in the companies in which he invests
its savings due that the acquisition of ordinary shares gives him the right to vote in the general
shareholders meetings of the company in question
25

26. o Creating investment opportunity of small investor
As opposed to other businesses that require huge capital outlay, investing in shares is open to
both the large and small stock investors because a person buys the number of shares they can
afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares
of the same companies as large investors.
o Govt. capital- raising for development project
Governments at various levels may decide to borrow money in order to finance infrastructure
projects such as sewage and water treatment works or housing estates by selling another category
of securities known as bonds. These bonds can be raised through the Stock Exchange whereby
members of the public buy them, thus loaning money to the government. The issuance of such
bonds can obviate the need to directly tax the citizens in order to finance development, although
by securing such bonds with the full faith and credit of the government instead of with collateral,
the result is that the government must tax the citizens or otherwise raise additional funds to make
any regular coupon payments and refund the principal when the bonds mature.
o Barometer of the economy
At the stock exchange, share prices rise and fall depending, largely, on market forces. Share
prices tend to rise or remain stable when companies and the economy in general show signs of
stability and growth. An economic recession, depression, or financial crisis could eventually lead
to a stock market crash. Therefore the movement of share prices and in general of the stock
indexes can be an indicator of the general trend in the economy.
o To provide liquidity to the investors.
The investor can recover the money invested when needed. For it, he has to go to the stock
exchange market to sell the securities previously acquired. This function of the stock market is
done on the secondary market. It offers liquidity to the security investments, through a place in
which to sell or buy securities
o Transparency
Investor make informed and intelligent decision about the particular stock based on information.
Listed companies must disclose information in timely, complete and accurate manner to the
Exchange and the public on a regular basis. Required information include stock price, corporate
conditions and developments dividend, mergers and joint ventures, and management changes etc.
26

27. 9..MAJOR STOCK EXCHANGES
Market
Trade Value
Rank Economy Stock Exchange Headquarters Capitalization
(USD Billions)
(USD Billions)
United
States NYSE Euro next (US & New York
1 14,242 20,161
Europe Europe) City
United
States NASDAQ OMX (US & New York
2 4,687 13,552
Europe North Europe) City
3 Japan Tokyo Stock Exchange Tokyo 3,325 3,972
London Stock
4 United London 3,266 2,837
Exchange
Kingdom
Shanghai Stock
5 China Shanghai 2,357 3,658
Exchange
Hong Kong Stock
6 Hong Kong Hong Kong 2,258 1,447
Exchange
Toronto Stock
7 Canada Toronto 1,912 1,542
Exchange
8 Brazil BM&F Bovespa São Paulo 1,229 931
Australian Securities
9 Australia Sydney 1,198 1,197
Exchange
10 Germany Deutsche Börse Frankfurt 1,185 1,758
11 Switzerland SIX Swiss Exchange Zurich 1,090 887
Shenzhen Stock
12 China Shenzhen 1,055 2,838
Exchange
BME Spanish
13 Spain Madrid 1,031 1,226
Exchanges
Bombay Stock
14 India Mumbai 1,007 148
Exchange
South
15 Korea Exchange Seoul 996 2,029
Korea
National Stock
16 India Mumbai 985 589
Exchange of India
17 Russia MICEX-RTS Moscow 800 514
South
18 JSE Limited Johannesburg 789 372
Africa
27

28. 1. NASDAQ
The NASDAQ Stock Market, also known as simply the NASDAQ, is an American stock
exchange. "NASDAQ" originally stood for "National Association of Securities Dealers
Automated Quotations". It is the second-largest stock exchange by market capitalization in the
world, after the New York Stock Exchange. As of January 25, 2011, there are 2,711 listings, with
a total capitalization of over $4.5 trillion. The NASDAQ has more trading volume than any other
electronic stock exchange in the world. The exchange is owned by NASDAQ OMX Group,
which also owns the OMX stock exchange network.
NASDAQ was founded in 1971 by the National Association of Securities Dealers, who divested
themselves of it in a series of sales in 2000 and 2001. It is owned and operated by the NASDAQ
OMX Group, the stock of which was listed on its own stock exchange beginning July 2, 2002,
under the ticker symbol NASDAQ: NDAQ. It is regulated by the Financial Industry Regulatory
Authority the successor to the NASD. When the NASDAQ stock exchange began trading on
February 8, 1971, it was the world's first electronic stock market. At first, it was merely a
computer bulletin board system and did not actually connect buyers and sellers. The NASDAQ
helped lower the spread but somewhat paradoxically was unpopular among brokerages because
they made much of their money on the spread.
NASDAQ was the successor to the over-the-counter system of trading. As late as 1987, the
NASDAQ exchange was still commonly referred to as the OTC in media and also in the monthly
Stock Guides issued by Standard & Poor's Corporation.
Over the years, NASDAQ became more of a stock market by adding trade and volume reporting
and automated trading systems. NASDAQ was also the first stock market in the United States to
start trading online. Nobody before them had ever done this, highlighting NASDAQ-traded
companies and closing with the declaration that NASDAQ is "the stock market for the next
hundred years." Its main index is the NASDAQ Composite, which has been published since its
inception. However, its exchange-traded fund tracks the large-cap NASDAQ-100 index, which
was introduced in 1985 alongside the NASDAQ 100 Financial Index.
28

29. 2. BOMBAY STOCK EXCHANGE SENSEX
The Bombay Stock Exchange (BSE) is a stock exchange located on Dalal Street, Mumbai and is
the oldest stock exchange in Asia. The equity market capitalization of the companies listed on
the BSE was US$1 trillion as of December 2011, making it the 6th largest stock exchange in
Asia and the 14th largest in the world. The BSE has the largest number of listed companies in the
world.
As of March 2012, there are over 5,133 listed Indian companies and over 8,196 scripts on the
stock exchange, the Bombay Stock Exchange has a significant trading volume. The BSE
SENSEX, also called "BSE 30", is a widely used market index in India and Asia. Though many
other exchanges exist, BSE and the National Stock Exchange of India account for the majority of
the equity trading in India. While both have similar total market capitalization, share volume in
NSE is typically two times that of BSE.
The Phiroze Jeejeebhoy Towers house the Bombay Stock Exchange since 1980.The Bombay
Stock Exchange is the oldest exchange in Asia. The location of these meetings changed many
times, as the number of brokers constantly increased. The group eventually moved to Dalal
Street in 1874 and in 1875 became an official organization known as 'The Native Share & Stock
Brokers Association'. In 1956, the BSE became the first stock exchange to be recognized by the
Indian Government under the Securities Contracts Regulation Act. The Bombay Stock Exchange
developed the BSE SENSEX in 1986, giving the BSE a means to measure overall performance
of the exchange. In 2000 the BSE used this index to open its derivatives market, trading
SENSEX futures contracts. The development of SENSEX options along with equity derivatives
followed in 2001 and 2002, expanding the BSE's trading platform. Historically an open outcry
floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in
1995. It took the exchange only fifty days to make this transition. This automated, screen-based
trading platform called BSE On-line trading currently has a capacity of 8 million orders per day.
The BSE has also introduced the world's first centralized exchange-based internet trading
system, BSEWEBx.co.in to enable investors anywhere in the world to trade on the BSE
platform. The BSE is currently housed in Phiroze Jeejeebhoy Towers at Dalal Street, Fort area.
The BSE Index, SENSEX, is India's first and most popular Stock Market benchmark index.
Exchange traded funds on SENSEX, are listed on BSE and in Hong Kong. Futures and options
on the index are also traded at BSE.
29

30. 3. NATIONAL STOCK EXCHANGE
The National Stock Exchange (NSE) is India's leading stock exchange covering
various cities and towns across the country. NSE was set up by leading institutions
to provide a modern, fully automated screen-based trading system with national
reach. The Exchange has brought about unparalleled transparency, speed &
efficiency, safety and market integrity. It is the 9th largest stock exchange in the
world by market capitalization and largest in India by daily turnover and number of
trades, for both equities and derivative trading.
NSE has a market capitalization of around US$1.59 trillion and over 1,552listings
as of December 2010. The NSE's key index is the S&P CNX Nifty,
known as the NSE NIFTY it means National Stock Exchange Fifty, an index of
fifty major stocks weighted by market capitalization.
There are at least 2 foreign investors NYSE Euro next and Goldman Sachs who
have taken a stake in the NSE. As of 2006, the NSEVSAT terminals, 2799 in total,
cover more than 1500 cities across India. NSE is the third largest Stock Exchange
in the world in terms of the number of trades in equities.
It is the second fastest growing stock exchange in the world with a recorded growth
of 16.6%.
30

31. 4. HANG SENG
The Hang Seng Index is a free float-adjusted market capitalization-weighted stock market index
in Hong Kong. It is used to record and monitor daily changes of the largest companies of the
Hong Kong stock market and is the main indicator of the overall market performance in Hong
Kong. These 43 constituent companies represent about 60% of capitalization of the Hong Kong
Stock Exchange.HSI was started on November 24, 1969, and is currently compiled and
maintained by Hang Seng Index’s
Company Limited, which is a wholly owned subsidiary of Hang Seng Bank, one of the largest
bank registered and listed in Hong Kong in terms of market capitalization. It is responsible for
compiling, publishing and managing the Hang Seng Index and a range of other stock indexes,
such as Hang Seng China Enterprises Index, Hang Seng China A Index Series, Hang Seng China
H-Financials Index, Hang Seng Composite Index Series, Hang Seng China A Industry Top
Index, Hang Seng Corporate Sustainability Index Series and Hang Seng Total Return Index
Series.
There are four sub-indices established in order to make the index clearer and to classify
constituent stocks into four distinct sectors. There are 43 HIS constituent stocks in total under the
sub indices:
1) Hang Seng Finance Sub-index.
2) Hang Seng Utilities Sub-index.
3) Hang Seng Properties Sub-index.
4) Hang Seng Commerce& Industry Sub-index.
On 12 November 1999, the Tracker Fund of Hong Kong, created by government intervention
during the 1997 Asian financial crisis, had its introduction on the exchange.25 November 1999,
two companies were jointly listed on the newly created Growth Enterprise Market .On 6 March
2000, The Stock Exchange, Futures Exchange and the Hong Kong Securities Clearing Company
all became wholly owned subsidiaries of HKEx, which was in turn listed on 27 June 2000.On 23
October 2000, AMS/3 was implemented on the exchange.
31

32.  DIFFERENT STOCK EXCHANGE TIMINGS
32

33. 10.CROSS LISTING
The listing of a company's common shares on a different exchange than its primary and original
stock exchange. In order to be approved for cross-listing, the company in question must meet the
same requirements as any other listed member of the exchange, such as basic requirements for
the share count, accounting policies, filing requirements for financial reports and company
revenues.
Some of the advantages to cross-listing include having shares trade in multiple time zones and in
multiple currencies. This gives issuing companies more liquidity and a greater ability to raise
capital. Most foreign companies that cross-list in the U.S. markets do so via American depositary
receipts.
The term often applies to foreign-based companies that choose to list their shares on U.S.-based
exchanges like the New York Stock Exchange. But firms based in the U.S. may choose to cross-
list on European or Asian exchanges, a strategy that may become more popular if the U.S. dollar
struggles against major foreign currencies for a lengthy period of time. The adoption of
Sarbanes-Oxley requirements in 2002 made cross-listing on U.S. exchanges more costly than in
the past; the requirements put a heavy emphasis on corporate governance and accountability.
This, along with generally accepted accounting principles accounting, makes for a challenging
hurdle for many companies whose "home" exchange may have laxer standards.
Cross listing of shares is when a firm lists its equity shares on one or more foreign stock
exchange in addition to its domestic exchange. Examples include: American Depository Receipt,
European Depository Receipt , International Depository Receipt (IDR) and Global Registered
Shares .
Generally such a company's primary listing is on a stock exchange in its country of corporation,
and its secondary listing is on an exchange in another country. Cross-listing is especially
common for companies that started out in a small market but grew into a larger market. For
example, numerous large Canadian companies are listed on the New York Stock Exchange or
NASDAQ as well as the Toronto Stock Exchange such as Enbridge and Research In Motion.
Some organizations, such as Liberty Media, Comcast and Viacom, have multiple listings
reflecting different voting rights.
A questionnaire asking managers of international companies has shown that firms cross-list in
the US mainly because of specific US business reasons, liquidity and status of US capital
markets, and industry specific reasons. Meeting SEC disclosure requirements and preparing US-
GAAP reconciliations were cited as the most important disadvantages. Officials of ADR
companies without an official listing perceived the expansion of the US shareholder base as the
principal benefit followed by specific US business reasons. On the question of what deters them
from an official US listing, they mentioned the time-consuming and expensive US-GAAP
reconciliations as well as listing fees as the hardest impediments. Additional disclosure
requirements were cited as less difficult to overcome.
33

34.  Motivations for cross-listing
The academic literature has identified a number of different arguments to cross-list abroad in
addition to a listing on the domestic exchange. Roosenboom and van Dijk in 2009 distinguish
between the following motivations:
 Market segmentation
The traditional argument for why firms seek a cross-listing is that they expect to benefit from a
lower cost of capital that arises because their shares become more accessible to global investors
whose access would otherwise be restricted because of international investment barriers.
 Market liquidity
Cross-listings on deeper and more liquid equity markets could lead to an increase in the liquidity
of the stock and a decrease in the cost of capital.
 Information disclosure
Cross-listing on a foreign market can reduce the cost of capital through an improvement of the
firm’s information environment. Firms can use a cross-listing on markets with stringent
disclosure requirements to signal their quality to outside investors and to provide improved
information to potential customers and suppliers (for example, by adopting US GAAP). Also,
cross-listings tend to be associated with increased media attention, greater analyst coverage,
better analysts’ forecast accuracy, and higher quality of accounting information.
 Investor protection
Recently, there is a growing academic literature on the so-called "bonding" argument. According
to this view, cross-listing in the US acts as a bonding mechanism used by firms that are
incorporated in a jurisdiction with poor investor protection and enforcement systems to commit
themselves voluntarily to higher standards of corporate governance. In this way, firms attract
investors who would otherwise be reluctant to invest.
 Other motivations
Cross-listing may also be driven by product and labor market considerations .for example, to
increase visibility with customers by broadening product identification, to facilitate foreign
acquisitions, and to improve labor relations in foreign countries by introducing share and option
plans for foreign employees.
34

35. 11. DEPOSITARY RECEIPT
A depositary receipt is a negotiable financial instrument issued by a bank to represent a foreign
company's publicly traded securities. The depositary receipt trades on a local stock exchange but
represents a security, usually in the form of equity, which is issued by a foreign publicly listed
company. The depositary receipt, which is a physical, allows investors to hold shares in equity of
other countries, which has been offering companies, investors and traders global investment
opportunities since the 1920s
Depositary receipts make it easier to buy shares in foreign companies because the shares of the
company don't have to leave the home state. Depositary receipts are created when a broker
purchases the company's shares on the home stock market and delivers those to the depositary's
local custodian bank, which then instructs the depositary bank, such as the bank of new york, to
issue depositary receipts. Depositary receipts may trade freely, just like any other security, either
on an exchange or in the over-the-counter market and can be used to raise capital.
When the depositary bank is in the u.s., the instruments are known as American depositary
receipts. European banks issue European depositary receipts, and other banks issue global
depositary receipts
Depositary receipts facilitate cross-border trading and settlement, minimize transaction costs and
may broaden a non- us. company's potential investor base, particularly among institutional
investors. Investors gain benefits of diversification while trading in their own market under
familiar settlement and clearance condition .more importantly, depositary receipt investors will
be able to reap the benefits of these usually higher risk, higher return equities, without having to
endure the added risks of going directly into foreign markets, which may pose lack of
transparency or instability resulting from changing regulatory procedures.
A depositary receipt typically requires a company to meet a stock exchange’s specific rules
before listing its stock for sale. For example, a company must transfer shares to a brokerage
house in its home country. Upon receipt, the brokerage uses a custodian connected to the
international stock exchange for selling the depositary receipts. This connection ensures that the
shares of stock actually exist and no manipulation occurs between the foreign company and the
international brokerage house.
The depositary receipt functions as a means to increase global trade, which in turn can help
increase not only volumes on local and foreign markets but also the exchange of information,
technology, regulatory procedure as well as market transparency. Thus, instead of being faced
with impediments to foreign investment, as is often the case in many emerging markets, the
depositary receipt investors and company can both benefit from investment abroad.
A company may option to issue a depositary receipt to obtain greater exposure and raise capital
in the world market. issuing depositary receipt has the added benefit of increasing the shares
liquidity while booting the company’s prestige on its local market.
35

36. Types Depositary Receipts
American Global Indian European Luxembourg
Depositary Depositary Depository Depositary Depositary
Receipts Receipt Receipt Receipt Receipt
Unsponsored Sponsored
Level1 Level2 Level3 Restricted
SEC
Sec Rule 144-A
Regulation S
36

37.  American Depositary Receipts
An American depositary receipts is a negotiable security that represents securities
of a non-us company that trade in the us financial markets. Securities of a foreign company that
are represented by an American depositary receipt are called American depositary shares.
Shares of many non-us companies trade on us stock exchanges through American depositary
receipts. American depositary receipts are denominated and pay dividends in us dollars and may
be traded like regular shares of stock.
The first American depositary receipts was introduced by j.p. morgan in 1927 for the British
retailer Selfridges.
The regulation of American depositary receipts changed its form in 1955, when the u.s. securities
and exchange commission established the from s-12, necessary to register all depositary receipt
programs. The form s-12 was replaced by form f-6 later, but the principles remained the same till
today. An American depositary receipt representing shares of a foreign company not directly
involved in issuance of the adr. Unsponsored adrs are originated by a bank that independently
purchases the foreign firm's shares, holds the shares in trust, and sells the adrs through brokerage
firms. The depositary bank rather than holders of the adrs retains the right to vote shares held in
trust. Compare sponsored American depositary receipt.
O Type American Depositary Receipt:
 Unsponsored American Depositary Receipt
Unsponsored shares trade on the over-the-counter market. These shares are
issued in accordance with market demand, and the foreign company has no formal agreement
with a depositary bank. Unsponsored American depositary receipts are often issued by more
than one depositary bank. Each depositary services only the American depositary receipts it
has issued.
Due to a recent sec rule change making it easier to issue level i depositary receipts, both
sponsored and unsponsored, hundreds of new American depositary receipts have been issued
since the rule came into effect in October 2008. The majority of these were unsponsored level i
American depositary receipts, and now approximately half of all American depositary
receipts programs in existence are unsponsored.
An American issued without the knowledge or cooperation of the company whose stock backs
it. Unlike other sponsored adrs, which are treated just like common shares denominated in
the u.s. Dollar, an unsponsored adr simply gives the monetary benefits of ownership. That is,
the bank issuing the adr pays out dividends as if it were common stock, but the adr does not carry
voting rights. Unsponsored adrs may not be traded on the new York stock exchange, and are
usually traded over-the-counter.
37

38.  Sponsored Levels
Particular Level1 Level2 Level3
Trading pattern Only on over the Listing allowed on Listing allowed on
counter stock exchange in stock exchange in
usa usa
Registration with American American depositary American depositary
securities & depositary receipt receipt and share receipt and share
exchange are registration and both are registrated both are registrated
commission share are not
registrated
Generally accepted Only nominally full Partial full fill Full applicable
accounting policy fill
Disclosure Very less Medium disclosure Full disclosure
disclosure
Capital raising No public issue Public issue without Public issue with
faculties private placement fresh capital fresh capital
O RESTRICTED PROGRAMS
Foreign companies that want their stock to be limited to being traded by only
certain individuals may set up a restricted program. There are two sec rules that allow this type
of issuance of shares in the u.s.: rule 144-a and regulation s.
 Privately Placed (Sec Rule 144a) American Depositary Receipts
Some foreign companies will set up an American depositary receipts program under sec rule
144a. This provision makes the issuance of shares a private placement. Shares of companies
registered under rule 144-a are restricted stock and may only be issued to or traded by qualified
institutional buyers .
 Sec Regulation S American Depositary Receipts
The other way to restrict the trading of depositary shares to us public investors is to issue them
under the terms of sec regulation s. This regulation means that the shares are not, and will not be
registered with any united states securities regulation authority.
38

39.  Global Depositary Receipt
A global depository receipt or global depositary receipt is a certificate issued by a
depository bank, which purchases shares of foreign companies and deposits it on the account.
Global depository receipt represent ownership of an underlying number of shares. global
depository receipts facilitate trade of shares, and are commonly used to invest in companies from
developing or emerging markets. prices of global depositary receipt are often close to values of
related shares, but they are traded and settled independently of the underlying shares. several
international banks issue gdrs, such as JPMorgan chase, city group, deutsche bank, bank of new
York. Gdrs are often listed in the Frankfurt stock exchange, Luxembourg stock exchange and in
the London stock exchange. Normally 1 gdr = 10 shares, but not always. It is a negotiable
instrument which is denominated in some freely convertible currency.
 Indian Depository Receipt
An Indian depository receipt is an instrument denominated in Indian rupees in the form of
a depository receipt created by a domestic depository against the underlying equity of issuing
company to enable foreign companies to raise funds from the Indian securities markets. the
foreign company idrs will deposit shares to an Indian depository. The depository would issue
receipts to investors in India against these shares. The benefit of the underlying shares would
accrue to the depository receipt holders in India the ministry of corporate affairs of the
government of India, in exercise of powers available with it under section 642 read with section
605a had prescribed the companies issue of Indian depository receipts rules, 2004 issue of Indian
depository receipts rules vide notification number gsr 131(e) dated February 23, 2004.standard
chartered plc became the first global company to file for an issue of Indian depository receipts in
India.
 EUROPEAN DEPOSITARY RECEIPT
A European depositary receipt represents ownership in the shares of a non-
European company that trades in European financial markets. The stock of many non-European
companies trade on European stock exchanges like London through the use of european
depositary receipt. European depositary receipt enable European investors to buy shares in
foreign companies without the hazards or inconveniences of cross-border & cross-currency
transactions. Edrs carry prices in euro, pay dividends in euro, and can be traded like the shares of
European-based companies.
 LUXEMBOURG DEPOSITORY RECEIPTS
A Luxembourg depository receipts is a certificate which represents the purchase, or
ownership, of foreign assets which are deposited in a Luxembourg-based account. An ldr
functions in much the same way as a global depositary receipt . Ldrs may represent ownership of
either an underlying number of shares or a notional amount of bonds. Luxembourg depository
receipts are particularly useful where an institution wants to ensure safe keeping of assets, i.e.,
in Luxembourg, but needs a specific national or regional banks' expertise in handling a variety of
transactions. prices of ldrs are often close to the value of the real.
39

40. 12. BOND MARKET
The environment in which the issuance and trading of debt securities occurs. The bond market
primarily includes government-issued securities and corporate debt securities, and facilitates the
transfer of capital from savers to the issuers or organizations requiring capital for government
projects, business expansions and ongoing operations. Most trading in the bond market occurs
over-the-counter, through organized electronic trading networks, and is composed of the primary
market and the secondary market. Although the stock market often commands more media
attention, the bond market is actually many times bigger and is vital to the ongoing operation of
the public and private sector.
A bond is a negotiable certificate that acknowledges the indebtedness of the bond issuer to the
holder. It is negotiable because the ownership of the certificate can be transferred in the
secondary market. It is a debt security, in which the authorized issuer owes the holders a debt
and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the
principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money
with interest at fixed intervals.
Thus a bond is like a loan or IOU: the holder of the bond is the lender, the issuer of the bond is
the borrower, and the coupon is the interest. Bonds provide the borrower with external funds to
finance long-term investments, or, in the case of government bonds, to finance current
expenditure. Certificates of deposit or commercial paper are considered to be money
market instruments and not bonds.
Bonds and stocks are both securities, but the major difference between the two is that
stockholders have an equity stake in the company , whereas bondholders have a creditor stake in
the company Another difference is that bonds usually have a defined term, or maturity, after
which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is
a consol bond, which is a perpetuity .
In the UK, "bond" is also used to refer to a time deposit with a bank or building society, which in
general is not marketable and is subject to different tax treatment from the bonds
Bonds are issued by public authorities, credit institutions, companies supranational institutions in
the primary markets. The most common process of issuing bonds is through underwriting. In
underwriting, one or more securities firms or banks, forming a syndicate, buy an entire issue of
bonds from an issuer and re-sell them to investors. The security firm takes the risk of being
unable to sell on the issue to end investors. Primary issuance is arranged by book runners who
arrange the bond issue, have direct contact with investors and act as advisers to the bond issuer in
terms of timing and price of the bond issue. The book runners' willingness to underwrite must be
discussed prior to opening books on a bond issue as there may be limited appetite to do so.
In the case of government bonds, these are usually issued by auctions, called a public sale, where
both members of the public and banks may bid for bond. Since the coupon is fixed, but the price
is not, the percent return is a function both of the price paid as well as the coupon.
Because the cost of issuance for a publicly auctioned bond can be cost prohibitive for a smaller
loan, it is also common for smaller bonds to avoid the underwriting and auction process through
the use of a private placement bond. In the case of a private placement bond, the bond is held by
the lender and does not enter the large bond market.
40

41. 13. GLOBAL BOND MARKET
 Asset-Backed securities
Asset-backed securities are bonds that are based on underlying pools of assets. A special
purpose trust or instrument is set up which takes title to the assets and the cash flows are
"passed through" to the investors in the form of an asset-backed security. The types of
assets that can be "securitized" range from residential mortgages to credit card
receivables.
All assets are usually illiquid and private in nature. A securitization occurs to make these
assets available for investment to a much broader range of investors. The "pooling" of
assets occurs to make the securitization large enough to be economical and to diversify
the qualities of the underlying assets. asset-backed securities are securities which are
based on pools of underlying assets.
 Convertible Bond
A convertible bond is a bond that gives the holder the right to "convert" or
exchange the par amount of the bond for common shares of the issuer at some
fixed ratio during a particular period. As bonds, they have some characteristics of
fixed income securities. Convertible bonds are bonds. They have a coupon
payment and are legally debt securities, which rank prior to all equity securities in
a default situation. Their value, like all bonds, depends on the level of prevailing
interest rates and the credit quality of the issuer. The exchange feature of a
convertible bond gives the right for the holder to convert the par amount of the
bond for common shares a specified price or "conversion ratio". For example, a
conversion ratio might give the holder the right to convert $100 par amount of the
convertible bonds of Insolvents Corporation into its common shares at $25 per
share. This conversion ratio would be said to be " 4:1" or "four to one".
 Corporate Bonds
The creditworthiness of corporate bonds are tied to the business prospects and financial capacity
of the issuer.The business prospects of companies are dependent on the economy and the
competitive situation of industries. Issuers are grouped by industry, for example real estate,
resource and retail bonds. Industries with stable revenues and earnings are called "non-cyclicals",
where as those whose revenues and earnings rise and fall with the economy and commodity
prices are called "cyclicals".Issuers are also grouped by their credit ratings. Companies that have
financial risk because of high levels of debt and variable revenues and earnings are called "below
investment grade" or "junk" bonds because of their speculative nature. Higher quality bonds are
considered "investment grade".
41

42.  Euro Bonds
Eurobonds are bonds that are issued for sale outside of the issuer’s home country.
A Eurobond is an international bond that is denominated in a currency not native to the country
where it is issued. Also called external bond; "external bonds which, strictly, are neither
Eurobonds nor foreign bonds would also include: foreign currency denominated domestic
bonds." It can be categorized according to the currency in which it is issued. London is one of
the centers of the Eurobond market, but Eurobonds may be traded throughout the world - for
example in Singapore or Tokyo. Eurobonds are named after the currency they are denominated
in. For example, European and Eurodollar bonds are denominated in Japanese yen and American
dollars respectively. A Eurobond is normally a bearer bond, payable to the bearer. It is also free
of withholding tax. The bank will pay the holder of the coupon the interest payment due.
Usually, no official records are kept.
The word Eurobond was originally created by Julius Strauss. The first European Eurobonds
were issued in 1963 by Italian motorway network Autostrade. The $15 million six year loan was
arranged by London bankers S. G. Warburg. The majority of Eurobonds are now owned in
'electronic' rather than physical form. The bonds are held and traded within one of the clearing
systems . Coupons are paid electronically via the clearing systems to the holder of the Eurobond.
 Extendible And Retractable Bonds
Extendible and retractable bonds have more than one maturity date. An extendible bond gives its
holder the right to extend the initial maturity to a longer maturity date. A retractable bond gives
its holder the right to advance the return of principal to an earlier date than the original maturity.
Investors use extendible/retractable bonds to modify the term of their portfolio to take advantage
of movements in interest rates. The characteristics of these bonds are a combination of their
underlying terms. When interest rates are rising, extendible/retractable bonds act like bonds with
their shorter terms When interest rates fall, they act like bonds with their longer terms.An
extendible bond gives its holder the right to "extend" its initial maturity at a specific date or
dates. The investor initially purchases a shorter term bond combined with the right to extend its
term to a longer maturity date. An investor purchases an extendible bond to have the ability to
take advantage of potentially falling interest rates without assuming the risk of a long term bond.
As interest rates fall, the price of a shorter term bond rises less than the price of a longer term
bond. This means the extendible bond begins to behave or "trade" as a longer term bond. On the
other hand, if interest rates rose, the extendible bond would behave as a shorter term bond.With a
retractable bond, an investor owns a longer term bond with the right to "retract" it at a specific
date. Consider an investor that believes that interest rates will rise and bond prices will fall, but is
not willing or able to sell out of bonds completely.
This investor can buy a longer term retractable bond which behaves initially as a similar term
long term bond. As interest rates rise the bond falls in price. Once its price is low enough, it will
begin to behave as a short term bond and its price fall will be much less than a normal long term
bond. At worst, the investor can retract it at the retraction date and receive the par amount back
to reinvest.
42

43.  Foreign Currency Bond
A "foreign currency" bond is a bond that is issued by an issuer in a currency other than its
national currency. Issuers make bond issues in foreign currencies to make them more attractive
to buyers and to take advantage of international interest rate differentials. Foreign currency
bonds can "swapped" or converted in the swap market into the home currency of the issuer.
Bonds issued by foreign issuers in the United States market in U.S. dollars are known as
"Yankee" bonds. Bonds issued in British pounds in the British bond market are known as
"Bulldogs". Yen denominated bonds by foreign issuers are known as "Samurai" bonds.
The development of the world bond markets allowed bond issuers to bring issues in other than
their home markets. For example, since the 1970s, the Canadian provinces have used the U.S.
bond market as a major source of funding. The Canadian province of Ontario is one of the
world's largest and most sophisticated non-sovereign borrowers. It brings bond issues in many
different currencies and markets, seeking to fund at the lowest possible absolute rate. In the U.S.
bond market, Ontario and Ontario Hydro, its power corporation, have many "Yankee" issues and
is considered an alternative to domestic U.S. corporate issuers.
The "euro market" is another major source of foreign currency bond issues. European investors
will buy the bonds of well known issuers like Ford, Toyota or General Electric or their
international subsidiaries, in many different currencies depending on their currency views. This
makes for a constant arbitrage between the foreign and domestic bond markets as investors seek
to gain the best possible yield employing currency hedges and swaps. A Canadian institutional
investor does not really care if the original Ford Motor Credit Canada bond was issued in U.S.
funds if he has swapped both the interest and principal payments into Canadian dollarsForeign
currency bonds have a vocabulary all their own. Bonds issued in foreign currencies are given the
names listed beside the currencies below:
"Yankee Bonds" for U.S. dollars;
"Samurai Bonds" for Japanese Yen;
"Bulldog Bonds" for British pounds; and
"Kiwi Bonds" for New Zealand dollars.
A more recent innovation are bonds that are hybrids in currency terms, with their coupon and
principal payments in different currencies. For example, some recent bonds have had their
coupon payments in Yen with their principal amounts in Canadian dollars. This satisfies the
needs of Japanese institutional investors for yen income while keeping the eventual return of
principal in the national currency of the issuer. Foreign currency bonds have a much different
risk and return profile than domestic bonds. Not only is their price affected by movements in a
foreign country's interest rate, they also change in value depending on the foreign exchange rates.
In Canada, for example, the Canadian dollar has moved upwards to 4% in U.S. dollar terms in
very short periods of time. This exchange rate movement would result in price changes of 4% in
Canadian dollars which completely overwhelms the coupon income of a bond. Studies have
shown that the longer term risk and return characteristics of foreign bonds in domestic currencies
are closer to domestic equity returns than domestic fixed income returns.
43

44.  GOVERNMENT BONDS
 Supranational Agencies
A supranational agency, such as the World Bank, levies assessments or fees against its member
governments. Ultimately, it is this support and the taxation power of the underlying national
governments that allow these organizations to make payments on their debts.
 National Governments
The "central" or national governments also have the power to print money to pay their debts, as
they control the money supply and currency of their countries. This is why most investors
consider the national governments of most modern industrial countries to be almost "risk-free"
from a default point of view.
 Provincial Or State Governments
Provincial or state governments also issue debt, depending on their constitutional ability to do
this. Canadian provinces, notably Ontario, borrow more than many smaller countries. Most
investors consider provincial or state issuers to be very strong credits because they have the
power to levy income and sales taxes to support their debt payments. Since they can not control
monetary policy like national governments, they are considered lesser credits than national
governments.
 Municipal And Regional Governments
Cities, towns, counties and regional municipalities issue bonds supported by their property taxes.
School boards also issue bonds, supported by their ability to levy a portion of property taxes for
education.
 Quasi-Government Issuers
Many government related institutions issue bonds, some supported by the revenues of the
specific institution and some guaranteed by a government sponsor. In Canada, Federal
government agencies and Crown corporations issue bonds. For example, The Federal Business
Development Bank and the Canadian Mortgage and Housing Corporation bonds are directly
guaranteed by the Federal government. Provincial crown corporations such as Ontario Hydro and
Hydro Quebec are guaranteed by the Provinces of Ontario and Quebec respectively.
44

45.  Emerging market debt
Emerging market debt is a term used to encompass bonds issued by less developed countries. It
does not include borrowing from government, supranational organizations such as the IMF or
private sources, though loans that are securitized and issued to the markets would be included. A
broader discussion of all types of borrowing by developing countries exists at Developing
countries' debt. Emerging market debt was historically a small part of bond markets, as primary
issuance was limited, data quality was poor, markets were illiquid and crises were a regular
occurrence. Since the advent of the Brady Plan in the early 1990s, however, issuance has
increased dramatically. The market has continued to be more prone to crises than other debt
markets, including the Tequila Crisis in 1994-95, East Asian financial crisis in 1997, 1998
Russian financial crisis and Argentine economic crisis in 2001-02. Investors tend to use mutual
funds to invest in EMD, as many individual securities become more illiquid in secondary
markets and bid/offer spreads are too wide to actively trade. The dominant market indexes for
US-Dollar denominated investments are the JPMorgan EMBI+ Index, JPMorgan EMBI Global
Index and JPMorgan EMBI Global Diversified Index. Other banks also provide indexes.
 Inflation-Linked Bond
An inflation-linked bond is a bond that provides protection against inflation. Most inflation-
linked bonds, the Canadian "Real Return Bond " the British "Inflation-linked and the new U.S.
Treasury "inflation-protected security" are principal indexed. This means their principal is
increased by the change in inflation over a period. In most countries, the Consumer Price Index
(CPI) or its equivalent is used as an inflation proxy. As the principal amount increases with
inflation, the interest rate is applied to this increased amount. This causes the interest payment to
increase over time. At maturity, the principal is repaid at the inflated amount. In this fashion, an
investor has complete inflation protection, as long as the investor's inflation rate equals the CPI.
We must compare an inflation-linked bond to a conventional or "nominal" bond to understand it
properly. A normal bond pays its coupon on a fixed principal amount. Using the Government of
Canada 8% bond maturing in 2023 as an example, we are due 8%, or $8 on every $100 of
principal, each year until we are finally repaid our principal of $100 at maturity. Contrast this
with the Canadian RRB, the 4.25% maturing in 2021. It pays a 4.25% "real" interest rate or
$4.25 on its principal each year. But the principal increases with inflation, which is based on the
Canadian CPI. For example, when Canadian inflation, the CPI, was 1.8% in 1995, the principal
amount was increased by 1.8%. Since its issue in November 1991, the RRB has seen its principal
amount increase by 8% to $108. The 4.25% coupon now generates a payment of $4.60 versus its
original payment of $4.25. At maturity, when the principal will be repaid by the Canadian
government, the principal amount will have increased to well over $200.
45

46. 14. FOREIGN EXCHANGE RISK
Foreign exchange risk also known as exchange rate risk or currency risk is a financial risk posed
by an exposure to unanticipated changes in the exchange rate between two currencies. Investors
and multinational businesses exporting or importing goods and services or making foreign
investments throughout the global economy are faced with an exchange rate risk which can have
severe financial consequences if not managed appropriately.
Many businesses were unconcerned with and did not manage foreign exchange risk under the
Bretton Woods system of international monetary order. It wasn't until the onset of floating
exchange rates following the collapse of the Bretton Woods system that firms perceived an
increasing risk from exchange rate fluctuations and began trading an increasing volume of
financial derivatives in an effort to hedge their exposure. The outbreak of currency crises in the
1990s and early 2000s, such as the Mexican peso crisis, Asian currency crisis, 1998 Russian
financial crisis, and the Argentine peso crisis, substantial losses from foreign exchange have led
firms to pay closer attention to foreign exchange risk
Foreign exchange risk has been shown to be particularly significant and particularly damaging
for very large, one-off investment megaprojects. Such projects are typically financed by very
large debts denominated in foreign currencies. Megaprojects have been shown to be prone to
ending up in debt traps where, due to cost overruns, schedule delays, unforeseen foreign
currency and interest rate increases, the costs of servicing debt become larger than the revenues
available to do so. Financial restructuring is typically the consequence and is common for
megaprojects.
Managers of multinational firms employ a number of foreign exchange hedging strategies in
order to protect against exchange rate risk. Transaction exposure is often managed either with the
use of the money markets, foreign exchange derivatives such as forward contracts, futures
contracts, options, and swaps, or with operational techniques such as currency invoicing, leading
and lagging of receipts and payments, and exposure netting.
Firms may exercise alternative strategies to financial hedging for managing their economic or
operating exposure, by carefully selecting production sites with a mind for lowering costs, using
a policy of flexible sourcing in its supply chain management, diversifying its export market
across a greater number of countries, or by implementing strong research and development
activities and differentiating its products in pursuit of greater inelasticity and less foreign
exchange risk exposure.
Translation exposure is largely dependent on the accounting standards of the home country and
the translation methods required by those standards. For example, the United States Federal
Accounting Standards Board specifies when and where to use certain methods such as the
temporal method and current rate method. Firms can manage translation exposure by performing
a balance sheet hedge. Since translation exposure arises from discrepancies between net assets
and net liabilities on a balance sheet solely from exchange rate differences.
46

47. o TYPES OF EXPOSURE
Foreign currency exposures are generally categorized into the following four distinct types:
 TRANSACTION EXPOSURE
A firm has transaction exposure whenever it has contractual cash flows whose values are subject
to unanticipated changes in exchange rates due to a contract being denominated in a foreign
currency. To realize the domestic value of its foreign-denominated cash flows, the firm must
exchange foreign currency for domestic currency. As firms negotiate contracts with set prices
and delivery dates in the face of a volatile foreign exchange market with exchange rates
constantly fluctuating, the firms face a risk of changes in the exchange rate between the foreign
and domestic currency. Exchange rates may move by up to 10% within any single year, which
can significantly affect a firm's cash flows, meaning a 10% decline in the value of a receivable or
a 10% rise in the value of a payable.
 ECONOMIC EXPOSURE
A firm has economic exposure to the degree that its market value is influenced by unexpected
exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm's
position with regards to its competitors, the firm's future cash flows, and ultimately the firm's
value. Economic exposure can affect the present value of future cash flows. Any transaction that
exposes the firm to foreign exchange risk also exposes the firm economically, but economic
exposure can be caused by other business activities and investments which may not be mere
international transactions, such as future cash flows from fixed assets.
 TRANSLATION EXPOSURE
A firm's translation exposure is the extent to which its financial reporting is affected by exchange
rate movements. As all firms generally must prepare consolidated financial statements for
reporting purposes, the consolidation process for multinationals entails translating foreign assets
and liabilities or the financial statements of foreign subsidiaries from foreign to domestic
currency. While translation exposure may not affect a firm's cash flows, it could have a
significant impact on a firm's reported earnings and therefore its stock price. Translation
exposure is distinguished from transaction risk as a result of income and losses from various
types of risk having different accounting treatments.
 CONTINGENT EXPOSURE
A firm has contingent exposure when bidding for foreign projects or negotiating other contracts
or foreign direct investments. Such an exposure arises from the potential for a firm to suddenly
face a transactional or economic foreign exchange risk, contingent on the outcome of some
contract or negotiation. While waiting, the firm faces a contingent exposure from the uncertainty
as to whether or not that receivable will happen. If the bid is accepted and a receivable is paid the
firm then faces a transaction exposure, so a firm may prefer to manage contingent exposures.
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48. o MEASUREMENT
If foreign exchange markets are efficient such that purchasing power parity, interest rate parity,
and the international Fisher effect hold true, a firm or investor needn't protect against foreign
exchange risk due to an indifference toward international investment decisions. A deviation from
one or more of the three international parity conditions generally needs to occur for an exposure
to foreign exchange risk.
Financial risk is most commonly measured in terms of the variance or standard deviation of a
variable such as percentage returns or rates of change. In foreign exchange, a relevant factor
would be the rate of change of the spot exchange rate between currencies. Variance represents
exchange rate risk by the spread of exchange rates, whereas standard deviation represents
exchange rate risk by the amount exchange rates deviate, on average, from the mean exchange
rate in a probability distribution. A higher standard deviation would signal a greater currency
risk. Economists have criticized the accuracy of standard deviation as a risk indicator for its
uniform treatment of deviations, be they positive or negative, and for automatically squaring
deviation values. Alternatives such as average absolute deviation and semi variance have been
advanced for measuring financial risk.
 VALUE AT RISK
In financial mathematics and financial risk management, Value at Risk is a widely used risk
measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio,
probability and time horizon, var is defined as a threshold value such that the probability that the
mark-to-market loss on the portfolio over the given time horizon exceeds this value is the given
probability level.
Common parameters for VAR are 1% and 5% probabilities and one day and two week horizons,
although other combinations are in use.
The reason for assuming normal markets and no trading, and to restricting loss to things
measured in daily accounts, is to make the loss observable. In some extreme financial events it
can be impossible to determine losses, either because market prices are unavailable or because
the loss-bearing institution breaks up. Some longer-term consequences of disasters, such as
lawsuits, loss of market confidence and employee morale and impairment of brand names can
take a long time to play out, and may be hard to allocate among specific prior decisions. VAR
marks the boundary between normal days and extreme events. Institutions can lose far more than
the VAR amount; all that can be said is that they will not do so very often.
The probability level is about equally often specified as one minus the probability of a VAR
break, so that the VAR in the example above would be called a one-day 95% VAR instead of
one-day 5% VAR. This generally does not lead to confusion because the probability of VAR
breaks is almost always small, certainly less than 0.5.
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49. 15. CONCLUSION
A number of important changes are taking place in global financial markets that need to be
monitored carefully. There has been a considerable shift in the regional concentration of wealth.
In addition to the traditional public capital markets, recent years have seen the emergence of
private equity and sovereign wealth funds as major players in financial markets. Stock exchanges
have transformed to become global entities. These changes have impacted the landscape of
global financial markets.
Today global financial markets have grown tremendously, becoming large and liquid, and
With substantial depth. At the same time demand for capital has increased significantly, with
capital markets continuing to play a dominant role in the allocation of capital. However, some
major shifts are occurring in the roles of suppliers and users of capital. These shifts became even
more apparent during the recent financial crisis. This chapter focuses on four such shifts that
impact both global firms that are looking to raise funds and institutional investors that are
suppliers of the capital. The four areas that are accounting for the major shifts are: the emergence
of new countries and regions as financial powers; the growth of alternative investments as an
asset class; the role of sovereign wealth funds as a source of capital; and the globalization and
consolidation of stock exchanges. The recent global financial crisis has clearly highlighted the
challenges that companies worldwide face in raising capital. Either funding is simply not
available or the cost has gone up considerably. The combination of the global economic
slowdown and challenges in raising funds in the capital markets has meant that
Companies are cutting costs, capital investments, and jobs. The financial markets and financial
institutions collapsed in a variety of ways, and this has resulted in structural and regulatory
changes that will impact the raising of capital in global financial markets.
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50. 16.BIBLIOGRAPHY
s
 www.money.cnn.com
 www.nasdaq.com
 www.finance.yahoo.com
 www.bseindia.com
 www.nseindia.com
 www.managementparadise.com
 Economic Times
 www.business-standard.com.
 Books-
Global Capital Markets-- Prof. Andrew Chisholm
Financial Services -- Prof. David H. Maister
Equity Markets --Prof. Robert Finkel
Mergers And Acquisitions-- Prof. Patrick A. Gaughan
 Articles-
McKinsey Global Institute
Think global act local
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