A financial market is a market in which peopletrade financial securities, commodities, and value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural products.

1. financial market and services
Vishnu Raj C R
T4 MBA
RBS

2. The financial system
The financial system consist of verity of institution, market and instrument related in a systematic
manner. The processes and procedures used by an organization's management to exercise financial
control and accountability. These measures include recording, verification, and timely reporting of
transactions that affect revenues, expenditures, assets, and liabilities.
FINANCIAL CONCEPTS
An understanding of the financial system requires an understanding of the following concepts:
(i) Financial assets
(ii) Financial intermediaries
(iii) Financial markets
(iv) Financial rates of return
(v) Financial instruments
Financial Assets
In any financial transaction, there should be a creation or transfer of financial assets. Hence, the basic
product of any financial system is the financial asset. A financial asset is one which is used for
production or consumption or for further creation of assets. For instance, A buys equity shares and
these shares are financial assets since they earn income in future.
Classification of Financial Assets
Financial assets can be classified differently under different circumstances. One such classification is
a) Marketable assets
b) Non-marketable assets
Marketable Assets: Marketable assets are those which can be easily transferred from one person to
another without much hindrance
Non-Marketable Assets: On the other hand, if the assets cannot be transferred easily, they come under
this category.
Yet another classification is as follows:
(i) Money or cash asset
(ii) Debt asset

3. (iii) Stock asset
Cash Asset: In India, all coins and currency notes are issued by the RBI and the Ministry of Finance,
Government of India. Besides, commercial banks can also create money by means of creating credit.
When loans are sanctioned, liquid cash is not granted. Instead an account is opened in the borrower’s
name and a deposit is created. It is also a kind of money asset.
Debt Asset: Debt asset is issued by a variety of organizations for the purpose of raising their debt
capital. Debt capital entails a fixed repayment schedule with regard to interest and principal
Stock Asset: Stock is issued by business organizations for the purpose of raising their fixed capital.
There are two types of stock namely equity and preference.
Financial Intermediaries
The term financial intermediary includes all kinds of organizations which intermediate and facilitate
financial transactions of both individual and corporate customers. Thus, it refers to all kinds of
financial institutions and investing institutions which facilitate financial transactions in financial
markets. They may be in the organized sector or in the unorganized sector. They may also be classified
into two :
A) Capital market intermediaries
b) Money market intermediaries
Capital Market Intermediaries: These intermediaries mainly provide long term funds to individuals
and corporate customers. They consist of term lending institutions like financial corporations and
investing institutions like LIC.
Money Market Intermediaries: Money market intermediaries supply only short term funds to
individuals and corporate customers. They consist commercial banks, co- operative banks, etc.
Financial Markets
Generally speaking, there is no specific place or location to indicate a financial market. Wherever a
financial transaction takes place, it is deemed to have taken place in the financial market. Hence
financial markets are pervasive in nature since financial transactions are themselves very pervasive
throughout the economic system. For instance, issue of equity shares, granting of loan by term lending
institutions, deposit of money into a bank, purchase of debentures, sale of shares and so on.
(a) Unorganized Markets

4. In these markets there are a number of money lenders, indigenous bankers, traders etc., who lend
money to the public. Indigenous bankers also collect deposits from the public. There are also private
finance companies, chit funds etc., whose activities are not controlled by the RBI.
(b) Organized Markets
In the organized markets, there are standardized rules and regulations governing their financial
dealings. There is also a high degree of institutionalization and instrumentalisation. These markets are
subject to strict supervision and control by the RBI or other regulatory bodies.
These organized markets can be further classified into two. They are :
(i) Capital market
(ii) Money market
Capital Market: The capital market is a market for financial assets which have a long or indefinite
maturity. Generally, it deals with long term securities which have a maturity period of above one year.
Capital market may be further divided into three namely:
(i) Industrial securities market
(ii) Government securities market and
(iii) Long term loans market
I. Industrial securities market
As the very name implies, it is a market for industrial securities namely: (i) Equity shares or ordinary
shares, (ii) Preference shares, and (iii) Debentures or bonds. It is a market where industrial concerns
raise their capital or debt by issuing appropriate instruments. It can be further subdivided into two.
They are :
a) Primary market or New issue market
b) Secondary market or Stock exchange
II. Government Securities Market
It is otherwise called Gilt-Edged securities market. It is a market where Government securities are
traded. In India there are many kinds of Government Securities-short term and long term. Long term
securities are traded in this market while short term securities are traded in the money market.
Securities issued by the Central Government, State Governments, Semi-Government authorities like
City Corporations, Port Trusts. Improvement Trusts, State Electricity Boards, All India and State level
financial institutions and public sector enterprises are dealt in this market.

5. The Government securities are in many forms. These are generally:
a) Stock certificates or inscribed stock
b) Promissory Notes
c) Bearer Bonds which can be discounted.
Government securities are sold through the Public Debt Office of the RBI while Treasury Bills (short
term securities) are sold through auctions.
III. Long Term Loans Market
Development banks and commercial banks play a significant role in this market by supplying long
term loans to corporate customers. Long term loans market may further be classified into :
a) Term loans market
b) Mortgages market
c) Financial Guarantees market
Term Loans Market : In India, many industrial financing institutions have been created by thee
Government both at the national and regional levels to supply long term and medium term loans to
corporate customers directly as well as indirectly. These development banks dominate the industrial
finance in India. Institutions like IDBI, IFCI, ICICI, and other state financial corporations come under
this category.
Mortgages Market : The mortgages market refers to those centers which supply mortgage loan mainly
to individual customers. A mortgage loan is a loan against the security of immovable property like real
estate.
Financial Guarantees Market : A Guarantee market is a center where finance is provided against the
guarantee of a reputed person in the financial circle. Guarantee is a contract to discharge the liability
of a third party in case of his default
In India, the market for financial guarantees is well organized. The financial guarantees in India relate
to:
(i) Deferred payments for imports and exports
(ii) Medium and long-term loans raised abroad
(iii) Loans advanced by banks and other financial institutions.

6. WEAKNESSES OF INDIAN FINANCIAL SYSTEM
After the introduction of planning, rapid industrialization has taken place. It has in turn led to the
growth of the corporate sector and the Government sector. In order to meet the growing requirements
of the Government and the industries, many innovative financial instruments have been introduced.
Besides, there has been a mushroom growth of financial intermediaries to meet the ever growing
financial requirements of different types of customers. Hence, the Indian financial system is more
developed and integrated today than what it was 50 years ago. Yet, it suffers from some weaknesses
as listed below:
(i) Lack of Co-ordination between different Financial Institutions
There are a large number of financial intermediaries. Most of the vital financial institutions are owned
by the Government. At the same time, the Government is also the controlling authority of these
institutions. In these circumstances, the problem of co- ordination arises. As there is multiplicity of
institutions in the Indian financial system, there is lack of co-ordination in the working of these
institutions.
(ii) Monopolistic Market Structures
In India some financial institutions are so large that they have created a monopolistic market structures
in the financial system. For instance the entire life insurance business is in the hands of LIC. The UTI
has more or less monopolized the mutual fund industry. The weakness of this large structure is that it
could lead to inefficiency in their working or mismanagement or lack of effort in mobilizing savings
of the public and so on. Ultimately it would retard the development of the financial system of the
country itself.
(iii) Dominance of Development Banks in Industrial Financing
The development banks constitute the backbone of the Indian financial system occupying an important
place in the capital market. The industrial financing today in India is largely through the financial
institutions created by the Government both at the national and regional levels. These development
banks act as distributive agencies only, since, they derive most of their funds, from their sponsors. As
such, they fail to mobilize the savings of the public. This would be a serious bottleneck which stands
in the way of the growth of an efficient financial system in the country.
(iv) Inactive and Erratic Capital Market
The important function of any capital market is to promote economic development through
mobilization of savings and their distribution to productive ventures. As far as industrial finance in
India is concerned, corporate customers are able to raise their financial resources through development
banks. So, they need not go to the capital market. Moreover, they don’t resort to capital market since
it is very erratic and inactive. Investors too prefer investments in physical assets to investments in
financial assets. The weakness of the capital market is a serious problem in our financial system.

7. (v) Imprudent Financial Practice
The dominance of development banks has developed imprudent financial practice among corporate
customers. The development banks provide most of the funds in the form of term loans. So there is a
preponderance of debt in the financial structure of corporate enterprises. This predominance of debt
capital has made the capital structure of the borrowing concerns uneven and lopsided.
Capital market
Capital market is a market where buyers and sellers engage in trade of financial securities like bonds,
stocks, etc. The buying/selling is undertaken by participants such as individuals and institutions.
capital markets help channelize surplus funds from savers to institutions which then invest them into
productive use. Generally, this market trades mostly in long-term securities.
Capital market consists of primary markets and secondary markets. Primary markets deal with trade
of new issues of stocks and other securities, whereas secondary market deals with the exchange of
existing or previously-issued securities. Another important division in the capital market is made on
the basis of the nature of security traded, i.e. stock market and bond market.
Various functions and significance of capital market
• Link between Savers and Investors
• Capital formation
• Encouragement to Saving
• Encouragement to Investment
• Promotes Economic Growth
• Stability in Security Prices
• Benefits to Investors
Primary Capital Market
The primary capital markets is also called the New Issue Market or NIM. The securities which are
introduced in the market are sold for first time to the general public in this market. This market is also
known as the long-term debt market as the fund raised from this market provides long-term capital.
The act of selling new issues in the primary capital market follows a particular process. This process
requires the involvement of a syndicate of the securities dealers. The dealers who are running the
process get a certain amount for as commission. The price of the security offered in the primary capital
market includes the dealer, commission also. Again, if the issue is a primary issue, the investors get
the issue directly from the company and no intermediary is needed in the process. For the purpose, the
investor needs to send the exact amount of money to the respective company and after receiving the
money, the particular company provides the security certificates to the investors. The primary issues

8. which are offered in the primary capital market provide the essential funds to the companies. These
primary issues are used by the companies for the purpose of setting new businesses or to expanding
the existing business. At the same time, the funds collected through the primary capital market, are
also used for the modernization of the business. At the same time, the primary capital market is also
involved in the process of creating capital for the respective economy.
Initial Public Issue (IPO)
When a company makes public issue of shares for the first time, it is called Initial Public Offer. The
securities are sold through the issue of prospectus to successful applicants on the basis of their demand.
The company has to appoint underwriters in order to guarantee the minimum subscription.
An underwriter is generally an investment banking company. They agree to pay the company a certain
price and buy a minimum number of shares, if they are not subscribed by the public. The underwriter
charges some commission for this work. He can sell these shares in the market afterwards and make
profit. There may be two or more underwriters in case of large issue.
Private Placement
It involves sale of securities to a limited number of sophisticated investors such as financial
institutions, mutual funds, banks and so on. It refers to sale of equity or equity related instruments of
an unlisted company.
A company makes to offer of sale to individuals and institutions privately without the issue of
prospectus.
Right issue
When a listed company proposes to issue securities to its existing share holders, whose name appear
in the register of members on record date, in the proportion to their existing holding, through an offer
document, such issues are called Right Issue. This mode of raising capital is best suited when the
dilution of controlling interest is not intended.
Bonus-issue
Bonus shares are usually issued when a company earns extra profit or have extra reserves and they
want to convert the same into share capital. These shares are issued in proportion to the number of
shares held by the shareholders. Rules regarding issue of bonus shares are given in the SEBI. Issue of
bonus shares reduces the market price of the company's shares and keeps it within the reach of ordinary
investors. Issue of bonus shares is generally indicates future growth.
Book Building
Book Building may be defined as a process used by companies raising capital through Public
Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and
demand discovery. It is a mechanism where, during the period for which the book for the offer is open,
the bids are collected from investors at various prices, which are within the price band specified by the

9. issuer. The process is directed towards both the institutional investors as well as the retail investors.
The issue price is determined after the bid closure based on the demand generated in the process.
follow-on public
A follow-on public offer (FPO) is an issuing of shares to investors by a public company that is already
listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a company
that is already publicly listed and has gone through the IPO process. FPOs are popular methods for
companies to raise additional equity capital in the capital markets through a stock issue.
New Fund Offer - NFO
A security offering in which investors may purchase units of a closed-end mutual fund. A new fund
offer occurs when a mutual fund is launched, allowing the firm to raise capital for purchasing
securities.
secondary market
The secondary capital market deals with those securities that are already issued in an initial public
offering in the primary market. Typically, the secondary markets are those where previously issued
securities are purchased and sold. In the secondary capital market, the securities are generally sold by
and transferred from one investor to another. Hence, the secondary capital market needs to be highly
liquid in nature. A high transparency for the secondary market trading is also required. With the
advancement of the technology, the trading concept in secondary market has changed substantially. In
the earlier days, the investors needed to meet at fixed place in order to carry out the transactions. But
now trading in secondary capital market has become much easier for the investors.
Role and functions of stock exchange
• Raising capital for businesses
Exchanges help companies to capitalize by selling shares to the investing public.
• Mobilizing savings for investment
They help public to mobilize their savings to invest in high yielding economic sectors, which results
in higher yield, both to the individual and to the national economy.
• Facilitating company growth
They help companies to expand and grow by acquisition or fusion.
• Profit sharing
They help both casual and professional stock investors, to get their share in the wealth of profitable
businesses.
• Corporate governance
Stock exchanges impose stringent rules to get listed in them. So listed public companies have better
management records than privately held companies.

10. • Creating investment opportunities for small investors
Small investors can also participate in the growth of large companies, by buying a small number of
shares.
• Government capital raising for development projects
They help government to rise fund for developmental activities through the issue of bonds. An investor
who buys them will be lending money to the government, which is more secure, and sometimes enjoys
tax benefits also.
• Barometer of the economy
They maintain the stock indexes which are the indicators of the general trend in the economy.They
also regulate the stock price fluctuations.
Bombay Stock Exchange (BSE)
The Bombay Stock Exchange (BSE) is Asia's oldest stock exchange. Based in Mumbai, India, BSE
was established in 1875 as the Native Share & Stock Brokers' Association. Prior to that brokers and
traders would gather under banyan trees to conduct transactions.
BSE functions as the first-level regulator in the securities market, providing monitoring and
surveillance mechanisms that are able to detect irregularities and manipulations in stock prices. The
Exchange also provides counter-party risk management in all transactions that take place on its trading
platform through its clearing and settlement services. Shares of more than 5,000 companies are traded
on BSE. In addition to equity and debt, the Exchange allows for trading of mutual fund units and
derivatives.
The National Stock Exchange (NSE) is a stock exchange in India.
Set up in November 1992, NSE was India's first fully automated electronic exchange with a nationwide
presence. The exchange, unlike Bombay Stock Exchange (BSE), was the result of the
recommendations of a high-powered group set up to study the establishment of new stock exchanges,
which would operate on a pan-India basis. Its shareholders consist of 20 financial institutions including
state-owned banks and insurance companies.
Headquartered in Mumbai, NSE offers capital raising abilities for corporations and a trading platform
for equities, debt, and derivatives -- including currencies and mutual fund units. It allows for new
listings, initial public offers (IPOs), debt issuances and Indian Depository Receipts (IDRs) by overseas
companies raising capital in India.

11. S&P CNX Nifty is the benchmark index introduced by NSE. Some of its other indices are CNX Nifty
Junior, India VX, S&P CNX Defty, S&P CNX 500, etc. The exchange offers clearing and settlement
services through its wholly-owned unit, the National Securities Clearing Corporation set up in 1995.
The other main subsidiaries/ associate companies of NSE include the National Commodity Clearing,
National Securities Depository (which is the repository of all securities in electronic form), and
National Commodity and Derivatives Exchange.
Bombay Stock Exchange was recognized as an exchange under the Securities Contracts (Regulation)
Act in 1957. Its benchmark index, the Sensitive Index (Sensex) was launched in 1986. In 1995, the
BSE launched its fully automated trading platform called BSE On-Line Trading system (BOLT) which
fully replaced the open outcry system.
In 2005, the Exchange changed from being simply an association of brokers to became a corporate
entity. The administrative structure of the Exchange is headed by a board of directors, below which is
a governing council and management that presides over its day-to-day functioning.
Securities Exchange Board of India (SEBI)
Securities Exchange Board of India (SEBI) was set up in 1988 to regulate the functions of securities
market. SEBI promotes orderly and healthy development in the stock market but initially SEBI was
not able to exercise complete control over the stock market transactions.
It was left as a watch dog to observe the activities but was found ineffective in regulating and
controlling them. As a result in May 1992, SEBI was granted legal status. SEBI is a body corporate
having a separate legal existence and perpetual succession.
Reasons for Establishment of SEBI:
With the growth in the dealings of stock markets, lot of malpractices also started in stock markets such
as price rigging, ‘unofficial premium on new issue, and delay in delivery of shares, violation of rules
and regulations of stock exchange and listing requirements. Due to these malpractices the customers
started losing confidence and faith in the stock exchange. So government of India decided to set up an
agency or regulatory body known as Securities Exchange Board of India (SEBI).
Objectives of SEBI:
The overall objectives of SEBI are to protect the interest of investors and to promote the development
of stock exchange and to regulate the activities of stock market. The objectives of SEBI are:
1. To regulate the activities of stock exchange.

12. 2. To protect the rights of investors and ensuring safety to their investment.
3. To prevent fraudulent and malpractices by having balance between self regulation of business and
its statutory regulations.
4. To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.
Powers of SEBI
The important powers of SEBI (Securities and Exchange Board of India) are:-
• Powers relating to stock exchanges & intermediaries
• Power to impose monetary penalties
• Power to initiate actions in functions assigned
• Power to regulate insider trading
• Powers under Securities Contracts Act
• Power to regulate business of stock exchanges
Functions of SEBI:
The SEBI performs functions to meet its objectives. To meet three objectives SEBI has three important
functions. These are:
1. Protective functions
2. Developmental functions
3. Regulatory functions.
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide safety of
investment.
As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main objective of inflating or
depressing the market price of securities. SEBI prohibits such practice because this can defraud and
cheat the investors.
(ii) It Prohibits Insider trading:

13. Insider is any person connected with the company such as directors, promoters etc., e.g., the directors
of a company may know that company will issue Bonus shares to its shareholders at the end of year
and they purchase shares from market to make profit with bonus issue. This is known as insider trading.
SEBI keeps a strict check when insiders are buying securities of the company and takes strict action
on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are likely to induce the sale
or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities of various
companies and select the most profitable securities.
(v) SEBI promotes fair practices and code of conduct in security market by taking following steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies cannot
change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine and
imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to market prices.
2. Developmental Functions:
These functions are performed by the SEBI to promote and develop activities in stock exchange and
increase the business in stock exchange. Under developmental categories following functions are
performed by SEBI:
(i) SEBI promotes training of intermediaries of the securities market.
(ii) SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach in
following way:
(a) SEBI has permitted internet trading through registered stock brokers.
(b) SEBI has made underwriting optional to reduce the cost of issue.
(c) Even initial public offer of primary market is permitted through stock exchange.
3. Regulatory Functions:
These functions are performed by SEBI to regulate the business in stock exchange. To regulate the
activities of stock exchange following functions are performed:

14. (i) SEBI has framed rules and regulations and a code of conduct to regulate the intermediaries such as
merchant bankers, brokers, underwriters, etc.
(ii) These intermediaries have been brought under the regulatory purview and private placement has
been made more restrictive.
(iii) SEBI registers and regulates the working of stock brokers, sub-brokers, share transfer agents,
trustees, merchant bankers and all those who are associated with stock exchange in any manner.
(iv) SEBI registers and regulates the working of mutual funds etc.
(v) SEBI regulates takeover of the companies.
(vi) SEBI conducts inquiries and audit of stock exchanges.
INVESTOR PROTECTION MEASURES BY SEBI
Investor protection legislation is implemented under the Section 11(2) of the SEBI Act. The measures
are as follows:
• Stock Exchange and other securities market business regulation.
• Registering and regulating the intermediaries of the business like brokers, transfer agents,
bankers, trustees, registrars, portfolio managers, investment consultants, merchant bankers, etc.
• Recording and monitoring the work of custodians, depositors, participants, foreign investors,
credit rating agencies, etc.
• Registering investment schemes like Mutual fund & venture capital funds, and regulating their
functioning.
• Promotion and controlling of self-regulatory companies.
• Keeping a check on frauds and unfair trading methods related to the securities market.
• Observing and regulating major transactions and take-over of the companies.
• Carry out investor awareness and education programme.
• Train the intermediaries of the business.
• Inspecting and auditing the security exchanges (SEs) and intermediaries.
• Assessment of fees and other charges.
The Reserve Bank of India (RBI)
The Reserve Bank of India (RBI) is the central bank of India, which was established on April 1, 1935,
under the Reserve Bank of India Act. The Reserve Bank of India uses monetary policy to create
financial stability in India, and it is charged with regulating the country's currency and credit systems.

15. The main purpose of the RBI is to conduct consolidated supervision of the financial sector in India,
which is made up of commercial banks, financial institutions and nonbanking finance firms. Initiatives
taken on by the RBI include restructuring bank inspections, introducing off-site surveillance of banks
and financial institutions and strengthening the role of auditors.
The current focus of the RBI is to continue its increased supervision of financial institutions while
dealing with legal issues in banking fraud and consolidated accounting. It also is trying to create a
supervisory rating model for its banks and aims to cut interest rates.
1) One governor and four deputy governors appointed by the central government.
2) Four directors nominated by the central government, each from local board
3) Ten directors nominated by central government.
4) One governor official nominated by the central government
Main Role and Functions of RBI
• Monetary Authority: Formulates, implements and monitors the monetary policy for;
a) maintaining price stability, keeping inflation in check.
b) ensuring adequate flow of credit to productive sectors.
• Regulator and supervisor of the financial system: lays out parameters of banking operations
within which the country”s banking and financial system functions for-
a) maintaining public confidence in the system.
b) protecting depositors’ interest.
c) providing cost-effective banking services to the general public.
• Manager of Foreign Exchange: RBI manages forex under the FEMA- Foreign Exchange
Management Act, 1999. in order to ;
a) facilitate external trade and payment.
b) promote development of foreign exchange market in India.
• Issuer of currency: RBI issues and exchanges currency as well as destroys currency & coins
not fit for circulation to ensure that the public has adequate quantity of supplies of currency
notes and in good quality.
• Developmental role : RBI performs a wide range of promotional functions to support national
objectives. Under this it setup institutions like NABARD, IDBI, SIDBI, NHB, etc.

16. • Banker to the Government: performs merchant banking function for the central and the state
governments; also acts as their banker.
• Banker to banks: An important role and function of RBI is to maintain the banking accounts
of all scheduled banks and acts as banker of last resort.
• Agent of Government of India in the IMF.
• Regulator and supervisor of the payment systems:
a) Authorises setting up of payment systems
b) Lays down standards for working of the payment system.
c) lays down policies for encouraging the movement from paper-based payment systems to
electronic modes of payments.
d) Setting up of the regulatory framework of newer payment methods
e) Enhancement of customer convenience in payment systems.
f) Improving security and efficiency in modes of payment.
Money market instruments
Call Money Market: The call money market is a market for extremely short period loans say one
day to fourteen days. So, it is highly liquid. The loans are repayable on demand at the option of either
the lender or the borrower. In India, call money markets are associated with the presence of stock
exchanges and hence, they are located in major industrial towns like Bombay, Calcutta, Madras,
Delhi, Ahmedabad etc. The special feature of this market is that the interest rate varies from day to
day and even from hour to hour and centre to centre. It is very sensitive to changes in demand and
supply of call loans.
Participants
i. Commercial bank
ii. Stock brokers & speculation
iii. Bill market
Treasury Bills Market : It is a market for treasury bills which have ‘short-term’ maturity. A
treasury bill is a promissory note or a finance bill issued by the Government. It is highly liquid
because its repayment is guaranteed by the Government. It is an important instrument for short term
borrowing of the Government. There are two types of treasury bills namely (i) ordinary or regular
and (ii) adhoc treasury bills popularly known as ‘adhocs’.
Ordinary treasury bills are issued to the public, banks and other financial institutions with a
view to raising resources for the Central Government to meet its short term financial needs. Adhoc
treasury bills are issued in favour of the RBI only. They are not sold through tender or auction. They
can be purchased by the RBI only. Adhocs are not marketable in India but holders of these bills can

17. sell them back to 364 days only. Financial intermediaries can park their temporary surpluses in these
instruments and earn income.
Repo Instruments: 'Repo' stands for repurchase under Repo transaction, the borrower
parts with securities to the lender with an agreement to repurchase them at the end of the fixed period
at a specific price. At the end of the period, the borrower will repurchase the securities at the
predetermined price. The difference between the purchase price and original price is the cost for the
borrower. This cost of borrowing is called 'Repo rate’ It is little cheaper than pure borrowing
From the viewpoint of the seller a transaction is Repo, but to the supplier of funds it is a
'Reverse Repo An agreement is termed as ‘Repo’ or ‘Reverse Repo' depends on the party initiates the
transaction. In India Repos are normally conducted for a period of 3 days. The eligible securities are
decided by RBI.
Opening
Sell 100 worth of stock
Pay 100 cash for stock
closing
pay 100 cash + repo interest
sells 100 worth of stock
Commercial Papers (CPs): A commercial paper is an unsecured promissory note issued with a
fixed maturity by a company approved by RBI. It is negotiable by endorsement and delivery issued
in bearer form and at a discount determined by the issuing company. Commercial paper was
originated as a short-term paper issued by a
companies to the public for raising working capital. It is issued by well rated companies for a
minimum period of three months and maximum six months.
Certificate of Deposits (CDs): Certificate of Deposits are money market instruments issued by
scheduled commercial banks excluding Regional Rural Banks. Certificate of Deposits can be issued
to individuals, corporation, trusts, funds etc. The maturity period of Certificate of Deposits should be
not less than three months and not more than one year.
Certificate of Deposits are short term deposit instruments issued by banks and financial institutions
to raise large sum of money.
Bank A Bank B
Bank A Bank B

18. Certificate of Deposits are short term deposits by way of usance promissory notes payable on a fixed
date. They are issued in multiples of Rs.5 lakhs subject to a minimum of Rs.25 lakhs.
Capital market instrument
Equity shares
Equity shares were earlier known as ordinary shares. The holders of these shares are the real owners
of the company. They have a voting right in the meetings of holders of the company. They have a
control over the working of the company. Equity shareholders are paid dividend after paying it to the
preference shareholders.
The rate of dividend on these shares depends upon the profits of the company. They may be paid a
higher rate of dividend or they may not get anything. These shareholders take more risk as compared
to preference shareholders.
Characteristics of Equity shares
1 .Maturity:- equity shares provide permanent capital to the company and cannot be redeemed during
the life of the company. Equity shareholders demand refund of their capital only at the time of
liquidating the company.
2. Claims/Right to income:- equity shareholders have a right to claim on the income of a company.
They have a claim on income left after paying dividend to preference share holders. The rate of
dividend on these shares is not fixed.
3. Claim on asset:- Equity share holder have a right to claim the ownership’s company's assets.
4. Voting rights:- Equity share holders are the real owners of the company. They have the meeting
rights in the meeting of the company and have control over the working of the company. Board of
directors are elected by the equity share holders, directors are appointed in the annual general meeting
by majority of votes.
5. Pre-emptive right:- Section 81 of the companies Act 1956 provides when ever a public limited
company proposes to increases their capital through the issue of shares, such share must be offered to
the existing equity share on the basis of there holding.
6. Limited liability:- The liability of equity share is limited to the value of share they have purchased.
Advantages of raising funds by issue of equity shares are:
1. It is a permanent source of finance.

19. 2. The issue of new equity shares increases flexibility of the company.
3. The company can make further issue of share capital by making a right issue.
4. There are no mandatory payments to shareholders of equity shares.
Preference shares
Preference shares are those shares which carry certain special or priority rights. Firstly, dividend at a
fixed rate is payable on these shares before any dividend is paid on equity shares.
Secondly, at the time of winding up of the company, capital is repaid to preference shareholders prior
to the return of equity capital. Preference shares do not carry voting rights. However, holders of
preference shares may claim voting rights if the dividends are not paid for two years or more on
cumulative preference shares and three years or more on non-cumulative preference shares.
Features of preference shares
1. Maturity: - the preference share can be repayable only at the time of liquidation after meeting the
claims of creditors and before the payment of equity shares.
2. Claims on income: - a fixed rate of dividend is payable on preference shares. Preference share
holder have a prior claim on income (dividend) over equity shareholders. whenever the company as
distributable profit, the dividend is first paid on preference shares.
3. Claims on assets: - preference share have the preference in the repayment of capital at the time of
liquidation of the company. Their claims on assets are superior to those on equity shareholders.
4. Control: - preference share holder has no voting rights
The advantages of taking the preference share capital route are:
1. No dilution in EPS on enlarged capital base – if equity is issued it reduces EPS, thus affecting the
market perception about the company.
2. There is leveraging advantage as it bears a fixed charge.
3. There is no risk of takeover.
4. There is no dilution of managerial control.
5. Preference capital can be redeemed after a specified period
Types of preference shares
1. Cumulative preference share

20. These shares have a right to claim dividend for those years also for which there are no profits.
Whenever there are divisible profits, cumulative preference shares are paid dividend for all the
previous year n which dividend could not be declared.
2. Non-cumulative preference share
The holders of these shares have no claim for the arrears of dividend. They are paid dividend if they
are sufficient profits.
3. Redeemable preference shares
The company can issue redeemable preference share if the article of association allow such an issue.
The company has a right to redeemable preference share capital after a certain period.
4. Irredeemable preference share:-
Those share which cannot be redeemable unless the company is liquidated are known as irredeemable
preference share.
5. Participating preference share
The holders of these shares participate the surplus profit of the company. They are firstly paid fixed a
rate of dividend and then reasonable rate of dividend is paid on equity share holders, if some profits
remain, then preference share holder participate in the surplus profit.
6. Non participating preference share
These share do not carry additional right of sharing of profit of the company.
7.Convertible preference share
The holder of these share may be iven a right to conver their holding into equity share after a specific
period.
8. Non-convertible preference share
These share which cannot be converted in to equity share is known as non-convertible preference
share.
Debentures or Bonds
Loans can be raised from public by issuing debentures or funds by public limited companies.
Debentures are normally issued in different denominations ranging from 100 to 1,000 and carry
different rates of interest. By issuing debentures, a company can raise long-term loans from public.
Normally, debentures are issued on the basis of a debenture trust deed, which list the terms and
conditions on which the debentures are floated. Debentures are normally secured against the assets of

21. the company. As compared with preference shares, debentures provide a more convenient mode of
long-term funds. The cost of capital raised through debentures is quite low since the interest payable
on debentures can be charged as an expense before tax. From the investors’ point of view, debentures
offer a more attractive prospect than the preference shares since interest on debentures is payable
whether or not the company makes profits. Debentures are, thus, instruments for raising long-term debt
capital. Secured debentures are protected by a charge on the assets of the company. While the secured
debentures of a well established company may be attractive to investors, secured debentures of a new
company do not normally evoke same interest in the investing public.
Advantages of raising finance by issue of debentures are:
• The cost of debentures is much lower than the cost of preference or equity capital as the interest
is tax deductible. Also, investors consider debenture investment safer than equity or preferred
investment and, hence, may require a lower return on debenture investment.
• Debenture financing does not result in dilution of control.
• In a period of rising prices, debenture issue is advantageous. The fixed monetary outgo
decreases in real terms as the price level increases.
Features of debentures
• Maturity: Debenture provide long term fund to the company, they mature after a specific
period.
• Claims on income: A fixed rate of interest is payable to the debenture holder
• Claims on assets: Debenture holders have the priority of claim on assets of the company. They
have to be paid first before making any payment to the preference or equity share holders in
the event of the liquidation of the company.
• Control: Debenture holders are the creditor’s of the company and not its owners, they do not
have any control over the management of the company.They do not have any voting rights.
Types of debentures
1. Simple or unsecured debenture
These debentures are not given any security on assets.
2. Secured or Mortgaged debenture
These debentures are given the security on asses of the company. N case default of payment of interest
and principal amount debenture holder can sell their asset in order to satisfy the assets.
3. Bearer debenture
These dentures are easily transferable. They are just like a negotiable instrument. The debentures are
handed over to the purchaser without any registration deed.
4. Registered debenture

22. Registered debenture required a procedure to be followed for their transfer. In registered denture the
name of purchaser is entered in the register.
5. Redeemable debenture
These debentures are to redeemable on the expiry of a certain period.
6. Irredeemable debenture
Such debenture is not being debentured during the life time of the company
7. Convertible debenture
In convertible debenture, debenture holders are given an option to exchange the debenture in to equity
share after a specified period.
8. Zero coupon Bond
Zero coupon bond does not carry any interest but is sold by the issuing company at a deep discount. The
difference between issue price and and maturity value represents the gain of the investors.
Financial Institutions in India
1.Industrial Financial Corporation of India(IFCI)
IFCI was setup in 1948, it is the 1 st development bank in India.it provides medium and long-
term credit. Any limited company or cooperative society incorporated and registered in India
which is engaged itself in the manufacture, preservation, or processing of goods, shipping,
mining, hotel industry, generation and distribution of electricity or any other form of power is
eligible for financial assistance from the IFCI.The financial assistance takes the form of:
• Rupee loans
• Sub-loans in foreign currencies
• Underwriting of and/or direct subscription to the shares and debentures of public limited
companies.
2.State Financial Corporations(SFCs)
The State Financial Corporations(SFCs) are established under the State Financial
Corporations Act,1951 with a view to provide medium and long term finance to medium and
small industries. There are 18 SFCs operating in different states. The maximum amount of
loan for a single concern is Rs. 60lakhs.As per the Amendment Act,1962, the SFCs are
authorized to render financial assistance to hotels and transport industries. The financial
resources of SFCs consists of:
• Share capital
• Issue of bonds
• Refinance from IDBI
• Borrowing from RBI
• Loans from State Government

23. 3.Industrial Development Bank of India(IDBI)
The IDBI was established on 1 st july,1964 under the Industrial Development Bank of India
Act,1964 as a wholly owned subsidiary of the Reserve Bank of India.in terms of the Public
Financial Institutions Laws(Amendment)Act,1975, the ownership of IDBI has been
transferred to the Central Government with effect from February 16, 1976.IDBI is the apex
institution in the area of development banking.
Capital:
The entire share capital of Rs.50 crores of the IDBI was held by the RBI.The authorized
capital has been raised to Rs.1000 crores.
4.Industrial Credit and Investment Corporation of India(ICICI)
It was founded on January5,1955 as a public limited company with government support and
under the sponsorship of the World Bank and representatives of the Indian industry. It has
played an important role in setting up institutions, such as Over-the- Counter Exchange,
CRISIL, Venture capital.
The organization structure of ICICI Bank is divided into 5 principal groups:
• Retail banking
• Wholesale banking
• Project finance &special assets management.
• International business
• Corporate Centre.
5.Industrial Reconstruction Bank of India(IRBI)
In April 1971, the IDBI had setup, at the instance of the GOI, the Industrial Reconstruction
Corporation of India(IRCI), as a joint stock company to provide reconstruction and
rehabilitation assistance. The IRCI was constituted and renamed as IRBI in 1985 in terms of
the IRBI Act. It functions as a principal credit and reconstruction agency for industrial
revival, modernization, rehabilitation, expansion, reorganization, diversification and
rationalization.
6.Unit Trust of India(UTI)
Unit Trust of India(UTI) is a statutory public sector investment institution which was setup in
February 1964 under the UTI Act, 1963.UTI began its operations in July 1964.It provides
opportunity for small-savers to invest in areas where their risk is diversified. One of the
attraction is that the investment in UTI has an income-tax rebate and the income from the

24. UTI is exempted; from the income tax subject to certain limit.
Financial services
In general, all types of activities, which are of a financial nature could be brought under the term
'financial services'. The term financial services' in a broad, sense means &mobilizing and allocating
savings. Thus, it includes all activities involved in the transformation of savings into investment.
financial services can also be called 'financial inter mediation'. Financial intermediation is a process
by which funds are mobilizing from a large number of savers and make them available to all those
who are in need of it and particularly to, corporate customers
thus, financial services sector is a key area and it is very vital for industrial developments. A well-
developed financial services industry is absolutely necessary to mobilize the savings and to allocate
them to various invest able channels and thereby to promote industrial development in a country.
Scope of Financial Services
Financial services cover a wide range of activities. They can be broadly classified into two, namely
1) Traditional. Activities
2) Modern activities
Traditional Activities
Traditionally, the financial intermediaries have been rendering a wide range of services encompassing
both capital and money market activities. They can be grouped under two heads,
a) Fund based activities
b) Non-fund based activities
Fund based activities
• Underwriting or investment in shares, debentures, bonds, etc. of new issues (primary market
activities).
• Dealing in secondary market activities
• Participating in money market instruments like commercial Papers, certificate of deposits,
treasury bills, discounting of bills etc. Involving in equipment leasing, hire purchase, venture
capital, seed capital,
• Dealing in foreign exchange market activities.
Non-fund based activities
This can be called ‘fee based’ activity

25. • Managing the capital issue — i.e. management of pre-issue and post-issue activities relating to
the capital issue in accordance with the SEBI guidelines and thus enabling the promoters to
market their issue.
• Making arrangements for the placement of capital and debt instruments with investment
institutions.
• Arrangement of funds from financial institutions for the clients’ project cost or his working
capital requirements.
• Assisting in the process of getting all Government and other clearances.
Modern Activities
Beside the above traditional services, the financial intermediaries render innumerable services in recent
times. Most of them are in the nature of non-fund based activity. In view of the importance, these
activities have been in brief under the head 'New financial products and services'. However, some of
the modern services provided by them are given in brief here under.
• Rendering project advisory services.
• Guiding corporate customers in capital restructuring.
• Acting as trustees to the debenture holders
• Structuring the financial collaborations / joint ventures
• Rehabilitating and restructuring sick companies.
• Hedging of risks due to exchange rate risk, interest rate risk, economic risk, and political risk
by using swaps and other derivative products.
• Managing In- portfolio of large Public-Sector Corporations
• Undertaking risk management services like insurance services, buy-hack options etc.
• Promoting credit rating agencies Undertaking services relating to the capital market, such as
1) Clearing services,
2) Registration and transfers,
3) Safe custody of securities,
4) Collection of income on securities.
FINANCIAL INNOVATION
It includes institutional (eg. new types of financial firms), and product (eg. new types of derivatives
and securitized assets) and process (eg. online banking, phone banking, or other forms of information,
and communication technology applications) innovations.
“Financial innovation can be broadly defined as creating new financial instruments, technologies,
institutions and markets.”

26. TYPES OF FINANCIAL INNOVATION
• Institutional innovations - creation or changes in organizational structures, the setting up of
new types of financial intermediaries
• Product innovations - introduction of a good or service or improvements made to existing
products.
• Process innovations – combination of skills and technologies that are used to produce products
or provide services.
BENEFITS
• Financial innovation, introduction of new products and services , accelerate economic growth.
• Reduces transaction cost, simply facilitates risk sharing;
• Financial innovation lowers the cost of capital and promotes efficiency in financial market
• Financial innovation, by increasing the variety of products available and facilitating
intermediation, has promoted savings and channelled these resources to the most productive
uses.
• Moving funds across time
CAUSES OF FINANCIAL INNOVATION
• Low profitability: increase in profit is the main indicator of banks. A decline in the
profitability of traditional banking products may lead to low profitability. As they are forced to
increase the interest rate, inflation, equity prices, and exchange rates.
• Investor awareness: to meet the growing awareness of pubic, innovation has made through
greater sophisticated, educational training among professional market participants.
• Global impact: Financial intermediaries are changing the global patterns of financial wealth.
As a consequence, many innovations have taken place in the global financial sector.
• Customer service: to meet customer expectation, the financial intermediaries are to invent a
new product which may suit to the requirement of the investing public. Innovations thus help
them in new business.
• Economic liberalization: The recent economic liberalization measures have opened the door
to foreign competitors to enter into our domestic market. Deregulation in the form of
elimination of exchange controls and interest rate ceilings have made the market more
competitive. Innovation has become a must for survival.
• Increased Financial Intermediaries competition
INNOVATIVE FINANCIAL INSTRUMENTS

27. Commercial paper: A paper is a short-term negotiable money market instrument. It has the character
of an unsecured promissory note with a fixed maturity of 3 to 6 months.
Certificate of deposits: The scheduled commercial banks have been permitted to issue certificate of
deposit without any regulation on interest rates. This is also a money market instrument and unlike a
fixed deposit receipt, it is a negotiable instrument and hence it offers maximum liquidity.
Treasury bill: A treasury bill is also a money market instrument issued by the Central Government.
It is also issued at a discount and redeemed at par. Recently, the Government
has come out with short term treasury bills of 182-days bills
and 364-days bills.
Interbank participation: The scheme of inter-bank participation is confined to scheduled banks only
for a period ranging between 91 days and 180 days. This may be ‘with risk’ participation or ‘without
risk’ participation. IBPs carrying an interest rate ranging between 14 and 17 per cent per annum.
Secured Premium Notes: These are instruments which carry no interest of three years. In other words,
their interest will be paid only after 3 years, and hence, companies with high capital-intensive
investments can resort to this type of financing.
Convertible bonds: A convertible bond is one which can be converted into equity shares at a per
determined timing neither fully or partially. The conversion may be compulsory or optional.
Convertible bonds provide for conversion within 18 months of their issue.
Zero interest convertible bonds: These instruments carry no interest till the time of conversion. These
instruments are converted into equity shares after a period of time.
Deep discount bonds: There will be no interest payments in the case of deep discount bonds also.
Hence, they are sold at a large discount to their nominal value.
Option bonds: These bonds may be cumulative or non-cumulative as per the option of the holder of
the bonds. In the case of cumulative bonds, interest is accumulated and is payable only on maturity.
But, in the case of non-cumulative bond, the interest is paid periodically. This option has to be
exercised by the prospective investor at the time of investment.
Global depository receipts: A global depository receipt is a dollar denominated instrument traded on
a stock exchange in Europe or the U.S.A./ or both. It represents a certain number of underlying equity
shares. The shares are issued by the company to an intermediary called depository in whose name the
shares are registered. It is the depository which subsequently issues the GDRs.
CHALLENGES FACING THE FINANCIAL SERVICE SECTOR
Lack of qualified personnel: The lack of qualified and trained personnel is an important constraint.
Hence, it is very vital that a proper and comprehensive training must be given to the various financial
intermediaries to increase growth.

28. Lack of investor awareness: The information's related to introduction of new financial products and
instruments will be unaware to many users. Hence, the financial intermediaries should educate the
prospective investors about the advantages of the various innovative instruments through literature,
seminars, workshops, advertisements and even through audio-visual aids.
Lack of transparency: This sector should opt for better levels of transparency. In other words, they
have to disclose the requirements and the accounting practices have to be in connected with the
international standards.
Lack of specialization: financial intermediary seems to deal with many financial products without
specializing in one or two areas dealing in different varieties of instruments. Hence, financial
intermediaries can go for specialization.
Lack of recent data: Most of the intermediaries do not spend more on research. It is very vital that
one should build up a proper data base on the basis of ‘financial creativity’. Moreover, a proper data
base would enable the fund managers to take sound financial decisions.
Lack of efficient risk management system: Utilization of multi-currency transactions leads to
exchange rate risk, interest rate risk and economic and political risk. A proper risk management
system is to be developed by the financial intermediaries to fulfil the growing requirements of their
customers. Hence, it is absolutely essential that they should introduce Futures, Options, Swaps and
other derivative products which are necessary for an efficient risk management system.
fund based financial services
merchant bank
A merchant bank can be defined as a bank that deals mostly in (but is not limited to) international
finance, long-term loans for companies and underwriting. Merchant banks do not provide regular
banking services to the general public. Their knowledge in international finances make merchant
banks specialists in dealing with multinational corporations.
In India merchant banking services were started only in 1967 by National Grindlays Bank followed
by Citi Bank in 1970. The State Bank of India was the first Indian Commercial Bank having set up
separate Merchant Banking Division in 1972. In India merchant banks have been primarily operating
as issue houses than full- fledged merchant banks as in other countries.
Functions of Merchant Banks:
The basic function of a merchant banker is marketing corporate and other securities. Now they are
required to take up some allied functions also.
1) Promotional Activities:
A merchant bank functions as a promoter of industrial enterprises in India He helps the entrepreneur
in conceiving an idea, identification of projects, preparing feasibility reports, obtaining Government

29. approvals and incentives, etc. Some of the merchant banks also provide assistance for technical and
financial collaborations and joint ventures
2) Credit Syndication:
Merchant banks provide specialised services in preparation of project, loan applications for raising
short-term as well as long- term credit from various bank and financial institutions, etc. They also
manage Euro-issues and help in raising funds abroad.
3) Portfolio Management:
Merchant banks offer services not only to the companies issuing the securities but also to the investors.
They advise their clients, mostly institutional investors, regarding investment decisions. Merchant
bankers even undertake the function of purchase and sale of securities for their clients so as to provide
them portfolio management services. Some merchant bankers are operating mutual funds and off shore
funds also.
a) Servicing of Issues:
Merchant banks have also started to act as paying agents for the service of debt- securities and to act
as registrars and transfer agents. Thus, they maintain even the registers of shareholders and debenture
holders and arrange to pay dividend or interest due to them
b) Project Counselling
Project counselling includes preparation of project reports, deciding upon the financing pattern to
finance the cost of the project and appraising the project report with the financial institutions or banks.
It also includes filling up of application forms with relevant information for obtaining funds from
financial institutions and obtaining government approval.
c) Underwriting of Public Issue
Underwriting is a guarantee given by the underwriter that in the event of under subscription, the
amount underwritten would be subscribed by him. Banks/Merchant banking subsidiaries cannot
underwrite more than 15% of any issue.
Non-fund based financial services
LEASING:
It is a contract by which one party conveys land, property, services etc., to another for a specified time.
Leasing is not a concept which emerged in the modern days. Even in the olden days we had leasing in
the form of Charter Party agreement, when in an entire ship is taken on lease either for a particular

30. period or for a particular voyage. Similarly we had agricultural lands are given on lease for a specified
period.
Definitions:
The Transfer of Property Act, 1882 (as amended in 1952) describes Lease as follows ―A Lease of the
movable property is a transfer of a right to enjoy such property, made for a certain time, express of
implied, or in perpetuity, inconsideration of a price paid or promised or of money, a share of crops,
service or any other things of value, to be rendered periodically or on specified occasions to the
transferor by the transferee, who accepts the transfer on such terms."
• The transferor is called the Lessor
• The transferee is called the Lessee
• The price is called the Premium
• The money, share, service or other thing to be rendered is called the Rent.
Contents of a Lease Agreement:
The lease agreement specifies the legal rights and obligations of the lessor and the lessee.
It typically contains terms relating to the following:
• Description of the lessor, the lessee, and the equipment.
• Amount, time and place of lease rentals payments.
• Time and place of equipment delivery.
• Lessee‘s responsibility for taking deliver
• Lessee‘s responsibility for maintenance, r case of default by the lessee.
• Lessee‘s right to enjoy the benefits of manufacturer/supplier.
• Insurance to be taken by the lessee on behalf of the lessor.
• Variation in lease rentals if there is a change in certain external factors like bank interest rates,
depreciation rates, and fiscal incentives.
• Options of lease renewal for the lessee.
• Return of equipment on expiry of the lease period.
• Arbitration procedure in the event of dispute.
Types of Leasing
Finance Lease
A Finance lease is mainly an agreement for just financing the equipment/asset, through a lease
agreement. The owner lessor transfers to lessee substantially all the risks and rewards incidental to the
ownership of the assets (except for the title of the asset). In such leases, the lessor is only a financier

31. and is usually not interested in the assets. These leases are also called "Full Payout Lease" as they
enable a lessor to recover his investment in the lease and derive a profit
Sale and Lease Back
In this type of lease, the owner of an equipment/asset sells it to a leasing company (lessor) which leases
it back to the owner (lessee).
Single Investor Lease
This is a bipartite lease in which the lessor is solely responsible for financing part. The funds arranged
by the lessor (financier) have no recourse to the lessee.
Leveraged Lease
This is a different kind of tripartite lease in which the lessor arranges funds from another party linking
the lease rentals with the arrangement of funds. In such lease, the equipment is part financed by a third
party (normally through debt) and a part of lease rental is directly transferred to such lender towards
the payment of interest and installment of principal.
Domestic Lease
A lease transaction is classified as domestic if all the parties to such agreement are domiciled in the
same country.
Advantages of Lease Financing:
Saving Of Capital: Leasing covers the full cost of the equipment used in the business by providing
100% finance. The lessee is not to provide or pay any margin to Manufacturer, Lessor and Lessee.
Flexibility and Convenience: The lease agreement can be tailor- made in respect of lease period and
lease rentals according to the convenience and requirements of all lessees.
Planning Cash Flows: Leasing enables the lessee to plan its cash flows properly. The rentals can be
paid out of the cash coming into the business from the use of the same assets.
Improvement in Liquidity: Leasing enables the lessee to improve their liquidity position by adopting
the sale and lease back technique.
Hire Purchase
It is defined as a peculiar kind of transaction in which the goods are let on hire with an option to the
hirer to purchase them with the following stipulations:
• payment to be made in installments over a specified period
• the possession is delivered to the hirer at the time of entering in to the contract
• the property in the goods passes to the hirer on payment of the last installment

32. • each installment is treated as hire charges so that if default is made in payment of any
installment the seller becomes entitled to take away the goods &
• the hirer is free to return the goods with out being required to pay any further installments
falling due after the return.
Concept A hire purchase agreement is defined in the Hire Purchase Act, 1972 as peculiar kind of
transaction in which the goods are let on hire with an option to the hirer to purchase them, with the
following stipulations:
1. Payments to be made in installments over a specified period.
2. The possession is delivered to the hirer at the time of entering into the contract.
3. The property in goods passes to the hirer on payment of the last installment.
4. Each installment is treated as hire charges so that if default is made in payment of any installment,
the seller becomes entitled to take away the goods.
5. The hirer/purchase is free to return the goods without being required to pay any further installments
falling due after the return.
Features of Hire Purchase Agreement
1. Under hire purchase system, the buyer takes possession of goods immediately and agrees to pay the
total hire purchase price in installments.
2. Each installment is treated as hire charges.
3. The ownership of the goods passes from the seller to the buyer on the payment of the last installment.
4. In case the buyer makes any default in the payment of any installment the seller has right to repossess
the goods from the buyer and forfeit the amount already received treating it as hire charges.
5. The hirer has the right to terminate the agreement any time before the property passes.
Discounting of Bills
In addition to the rendering of factoring services, banks financial institutions also provide bills
discounting facilities provide finance to the client. Bill discounting, as a fund-based activity, emerged
as a profitable business in the early nineties for finance companies and represented a diversification in
their activities in tune with the emerging financial scene in India. According to the Indian Negotiable
Instruments Act, 1881:
"The bill of exchange is an instrument in writing containing an unconditional order, signed by the
maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain
person, or to the bearer of that instrument."
The bill of exchange (B/E) is used for financing a transaction in goods which means that it is essentially
a trade-related instrument.
Factoring

33. • Undertakes the task of realizing ‘receivables’, i.e. accounts receivables, book debts, bills
receivables etc
• Also manages the sales registers, sundry debts of the commercial firms/trading agents , for a
commission.
Mechanism
Credit Transaction (1)
Agreement (2)
Receiving Payment(6)
Factor Financing (5)
Handing over Invoice (4)
Factoring Contract for sale of receivables. (3)
• Seller does not maintain a collection/credit department.
• After sale, a copy of the invoice, delivery challan, the agreement, other papers are handed over
to the Factor.
• The Factor receives payment from the buyer on the due date as agreed, whereby the buyer is
reminded of the due date payment amt. for collection.
• The Factor remits the money collected to the seller after deducting its own service charges at
the agreed rate.
• Thereafter the seller closes all transactions with the Factor.
• The seller passes on papers to the Factor for recovery of the amount.
Types of Factoring
a) Domestic Factoring
b) Export Factoring
c) Cross Border Factoring
Merchant
Factor
Customer

34. Forfaiting
• It is a form of financing of receivables relating tointernational trade.
• It is a form of supplier credit in which an exportersurrenders possession of exportreceivables,
which are usually guaranteed by abank on the importer’s country.
• Forfaiting is a mechanism of financing exports
a) by discounting export receivables
b) evidenced by bills of exchanges or promissory notes
c) without recourse to the seller (viz; exporter)
d) carrying medium to long-term maturities
e) on a fixed rate basis up to 100% of the contract value.
Securitization
Securitization is a process by which a company clubs its different financial assets/debts to form a
consolidated financial instrument which is issued to investors. In return, the investors in such securities
get.interest.
This process enhances liquidity in the market. This serves as a useful tool, especially for financial
companies, as its helps them raise funds. If such a company has already issued a large number of loans
to its customers and wants to further add to the number, then the practice of securitization can come to
its rescue.
Venture capital
Venture capital is an activity by which investors support entrepreneurial talent with finance and
business skills to exploit market opportunities and thus obtain long-term capital gains.
Venture Capitalists generally:
• Finance new and rapidly growing companies.
• Purchase equity securities.
• Assist in the development of new products or services.
• Add value to the company through active participation.
Features of Venture Capital
"Venture Capital combines the qualities of a banker, stock market investor and entrepreneur in one."
The main features of venture capital can be summarised as follows:
1. High Degrees of Risk: Venture capital represents financial investment in a highly risky project with
the objective of earning a high rate of return
2. Equity Participation: Venture capital financing is, invariably, an actual or potential equity

35. 3. Long-term Investment: Venture capital financing is a long term investment. It generally takes a
long period to encase the investment in securities made by the venture capitalists.
4. Participation in Management: In addition to providing capital, venture capital funds take an active
interest in the management of the assisted firms. Thus, the approach of venture capital firms is different
from that of a traditional lender or banker.
5. Achieve Social Objectives: It is different from the development capital provided by several central
and state level government bodies in that the profit objective is the motive behind the financing. But
venture capital projects generate employment, and balanced regional growth indirectly due to setting
up of successful new business.
6. Investment is Liquid: A venture capital is not subject to repayment on demand as with an overdraft
or following a loan repayment schedule. The investment is realised only when the company is sold or
achieves a stock market listing. It is lost when the company goes into liquidation.
mutual fund
Mutual fund is a pool of money provided by individual investors, companies, and other organizations.
A fund manager is hired to invest the cash the investors have contributed, and the fund manager's goal
depends on the type of fund; a fixed-income fund manager,
Mutual funds are divided along four lines: closed-end and open-ended funds; the latter is subdivided
into load and no load.
• Benefits of mutual funds
• Simplicity: Mutual Funds Are Easy to Understand
• Accessibility: Mutual Funds Are Easy to Buy
• Diversity: Mutual Funds Have Broad Market Exposure
• Variety: Mutual Funds Come in Many Different Categories and Types
• Affordability: Mutual Funds Have Low Minimums
• Professional Management: Mutual Funds Have a Team of Professionals Researching and
Analyzing Investments So Investor Don't Have To
Types of Mutual Funds based on structure
• Open-Ended Funds
• Close-Ended Funds
• Interval Funds
Types of Mutual Funds based on asset class
• Equity Funds
• Debt Funds
• Money Market Funds

36. • Balanced or Hybrid Funds
Types of Mutual Funds based on investment objective
• Growth funds
• Income fund
• Liquid fund
• Tax-Saving Funds
• Capital Protection Funds
• Fixed Maturity Funds
Types of Mutual Funds based on specialty
• Sector Funds
• Index fund
• Fund of funds
• Emerging market funds
• International funds
Types of Mutual Funds based on risk
• Low risk
• Medium risk
• High risk
DEPOSITORY
• A “Depository” is a provider of facility for holding securities .
• It is a kind of bank for securities like shares, debentures, bonds, etc.
DEPOSITORY IN INDIA
a) National Securities Depository Ltd. – NSDL
b) Central Depository Services Ltd. - CDSL
DEPOSITORY PARTICIPANT
a) Agent of the depository
b) Intermediary between the depository and the investors.
c) Registered with SEBI.
d) Organization – holds securities for TRADING.
e) Shares, Debentures, Mutual Funds, Derivatives and Commodities.
HOW DO DEPOSITORY OPERATE

37. Interacts with its investors.
Through its agents, called Depository Participants normally known as DPs.
By opening Demat A/C WITH DPS
Agreement to be made between the parties.
SERVICES PROVIDED BY THE DEPOSITORY
a) Dematerialization ( demat) - converting physical certificates to electronic form
b) Dematerialization ( remat) is reverse of demat
c) Transfer of securities, change of ownership.
BENEFITS OF D EPOSITORY
a) Immediate transfer of shares
b) No stamp duty on such transfers
c) Reduced transaction cost
d) Transparency
e) Elimination of risks - associated in dealing with Physical certificates - loss / theft / forgery /etc.
Depository Depository
Participants
National Securities
Depository
Limited(NSDL)
Central Securities
Depository
Limited(CSDL)
You – the
customer
ICICI Direct
Sharekhan
HDFC Sec
Tradejini, IL&FS