2007 exam paper ipu

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END TERM EXAMINATION

THIRD SEMESTER [MBA] DECEMBER 2007

PAPER CODE: - MS219 SUBJECT: Financial Markets and Institutions

Q1. Write Short Note on:-1. Book Building

2. Under writing of Capital Issues.

3. Repo

4. Consortium Lending

5. Open Market Operations

6. CRR & SLR

a) Book Building

The process of determining the price at which an Initial Public Offering will be offered. The

book is filled with the prices that investors indicate they are willing to pay per share, and

when the book is closed, theissue price is determined by an underwriter by analyzing these

values.

Book Building is essentially a process used by companies raising capital through Public

Offerings- both IPO or FPO to aid price and demand discovery.

A company can use the process of book building to fine tune its process of issue. When a

company employs book building mechanism it does not pre-determine the issue price(in case of

equity shares) or interest rate (in case of debentures) and invite subscription to the issue. Instead

it starts with an indicative price band which is determined through consultative process with its

merchant banker ans asks its merchant banker to invite bids from prospective investors at

different prices or different rates.

Advantage:-

The greatest advantage of the book-building process is that this allows for price and

demand discovery.

Secondly, the cost of issue is much less than the other traditional methods of raising

capital.

In India, there are two options for book building process.
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1) 25% of the issue has to be sold at fixed price & 75% is through book building.

2) To split 25% of offer to the public(small investors) into a fixed price portion of 10% & a

reservation in the book built portion amounting to 15% of the issue size. The rest of the

book built portion is open to any investor.

Steps involved in Book Building Process


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B. Under writing of Capital Issues.

Underwriting refers to the process that a large financial service provider (bank, insurer,

investment house) uses to assess the eligibility of a customer to receive their products (equitycapital, insurance, mortgage, or credit).

The name derives from the Lloyd's of London insurance market.

Underwriting of capital issues has become very popular due to the development of the capital

market and special financial institutions. The lead taken by public financial institutions has

encouraged banks, insurance companies and stock brokers to underwrite on a regular basis.

The various types of underwriters differ in their approach and attitude towards underwriting:-

Development banks like IFCI, ICICI and IDBI:- they follow an entirely objective

approach. They stress upon the long-term viability of the enterprise rather than immediate

profitability of the capital issue. They attempt to encourage public response to new issues

of securities.

Institutional investors like LIC and AXIS:- their underwriting policy is governed by their

investment policy.

Financial and development corporations:- they also follow an objective policy while

underwriting capital issues.

Investment and insurance companies and stock-brokers:- they put primary emphasis on

the short term prospects of the issuing company as they cannot afford to block large

amount of money for long periods of time.

c. Repo

A repo or Repurchase Agreement is an instrument of money market.

A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is the sale

of securities together with an agreement for the seller to buy back the securities at a later date.

The repurchase price should be greater than the original sale price, the difference effectively

representing interest, sometimes called the repo rate. The party that originally buys the securities
http://business.gov.in/outerwin.php?id=http://www.ifciltd.com/http://business.gov.in/outerwin.php?id=http://www.icicibank.com/http://business.gov.in/outerwin.php?id=http://www.idbibank.com/http://business.gov.in/outerwin.php?id=http://www.licindia.com/http://business.gov.in/outerwin.php?id=http://www.utibank.com/http://business.gov.in/outerwin.php?id=http://www.ifciltd.com/http://business.gov.in/outerwin.php?id=http://www.icicibank.com/http://business.gov.in/outerwin.php?id=http://www.idbibank.com/http://business.gov.in/outerwin.php?id=http://www.licindia.com/http://business.gov.in/outerwin.php?id=http://www.utibank.com/


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effectively acts as a lender. The original seller is effectively acting as a borrower, using their

security as collateral for a secured cash loan at a fixed rate of interest.

A repo is equivalent to a spot sale combined with a forward contract. The spot sale results in

transfer of money to the borrower in exchange for legal transfer of the security to the lender,

while the forward contract ensures repayment of the loan to the lender and return of the collateral

of the borrower. The difference between the forward price and the spot price is effectively the

interest on the loan, while the settlement date of the forward contract is the maturity date of the

loan.

A repo is economically similar to a secured loan, with the buyer (effectively the lender or

investor) receiving securities as collateral to protect him against default by the seller.

Types of Repo

There are three types of repo maturities:

Overnight- Overnight refers to a one-day maturity transaction

Term- Term refers to a repo with a specified end date

Open repo- Open simply has no end date

Although repos are typically short-term, it is not unusual to see repos with a maturity as long as

two years.

In India, RBI uses repo and reverse repo techniques to increase or decrease the liquidity in the

market. To increase liquidity, RBI buys government securities from banks under REPO; to

decrease liquidity, RBI sells the government securities to banks. The repo rate in India in 2012

is 8% and the reverse repo rate is 7%. The repo rate is always 1% higher than the reverse repo

rate.

d. Consortium Lending

A consortium is an association of two or more individuals, companies, organizations orgovernments (or any combination of these entities) with the objective of participating in acommon activity or pooling their resources for achieving a common goal.

Consortium is a Latin word, meaning 'partnership, association or society' and derives fromconsors 'partner', itself from con- 'together' and sores 'fate', meaning owner of means or comrade.


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Consortium Lending is that type of lending in which two or more banks come together to financethe big projects requiring huge amount of money. Consortium lending is usually done by banksto distribute the risks among the group of banks; it is also used by smaller banks to use as anopportunity to be a part of the big project financing and to gain expertise in this area. Big banksby resorting to consortium lending not only save their prospective customers but also build good

relations with other banks.e. Open market operations

An open market operation (also known as OMO) is an activity by a central bank to buy or sell

government bonds on the open market. A central bank uses them as the primary means of

implementing monetary policy. The usual aim of open market operations is to control the short

term interest rate and the supply of base money in an economy, and thus indirectly control the

total money supply. This involves meeting the demand of base money at the target interest rate

by buying and selling government securities, or other financial instruments. Monetary targets,

such as inflation, interest rates, or exchange rates, are used to guide this implementation.

Process of open market operations:

Since most money now exists in the form of electronic records rather than in the form of paper,

open market operations are conducted simply by electronically increasing or decreasing

(crediting or debiting) the amount of base money that a bank has in its reserve account at the

central bank. Thus, the process does not literally require new currency. However, this will

increase the central bank's requirement to print currency when the member bank demands

banknotes, in exchange for a decrease in its electronic balance.

When there is an increased demand for base money, the central bank must act if it wishes to

maintain the short-term interest rate. It does this by increasing the supply of base money. The

central bank goes to the open market to buy a financial asset, such as government bonds, foreign

currency, gold, or seemingly nonvolatile (until the 2008 financial fallout) MBS's (Mortgage

Backed Securities). To pay for these assets, bank reserves in the form of new base money (for

example newly printed cash) are transferred to the seller's bank and the seller's account is

credited. Thus, the total amount of base money in the economy is increased. Conversely, if thecentral bank sells these assets in the open market, the amount of base money held by the buyer's

bank is decreased, effectively destroying base money.

f. CRR AND SLR


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CRR: CASH RESERVE RATIO

Cash reserve Ratio (CRR) is the amount of Cash(liquid cash like gold) that the banks have to

keep with RBI. This Ratio is basically to secure solvency of the bank and to drain out the

excessive money from the banks. If RBI decides to increase the percent of this, the available

amount with the banks comes down and if RBI reduce the CRR then available amount with

Banks increased and they are able to lend more.

SLR (STATUTORY LIQUIDITY RATIO)

Statutory Liquidity Ratio refers to the amount that the commercial banks require to maintain in

the form of cash, or gold or govt. approved securities before providing credit to the customers.

Here by approved securities we mean, bond and shares of different companies. Statutory

Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control

the expansion of bank credit. It is determined as percentage of total demand and percentage of

time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to

pay to the customers on there anytime demand. it is used by bankers and indicates the minimum

percentage of deposits that the bank has to maintain in form of gold ,cash or other approved

securities. Thus, we can say that it is ratio of cash and some other approved liabilities

(deposits).It regulates the credit growth in India.

DIFFERENCE BETWEEN SLR AND CRR

Both CRR and SLR are instruments in the hands of RBI to regulate money supply in the hands of

banks that they can pump in economy

SLR restricts the banks leverage in pumping more money into the economy. On the other hand,

CRR, or cash reserve ratio, is the portion of deposits that the banks have to maintain with the

Central Bank to reduce liquidity in economy. Thus CRR controls liquidity in economy while

SLR regulates credit growth in the country

The other difference is that to meet SLR, banks can use cash, gold or approved securities

whereas with CRR it has to be only cash. CRR is maintained in cash form with central bank,

whereas SLR is money deposited in govt. securities.CRR is used to control inflation.

Q2) What is money market? Discuss briefly the different types of instruments that are dealt in

money market.


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Money Market is the part of financial market where instruments with high liquidity and very

short-term maturities are traded. These are the markets where securities having less than 1 year

are traded.It's the place where large financial institutions, dealers and government participate and

meet out their short-term cash needs. They usually borrow and lend money with the help of

instruments or securities to generate liquidity. Due to highly liquid nature of securities and their

short-term maturities, money market is treated as safe place.

Money Market Instruments:

Investment in money market is done through money market instruments. Money market

instrument meets short term requirements of the borrowers and provides liquidity to the lenders.

The most common money market instruments are as follows:

1. Treasury Bills

2. Certificate of Deposits

3. Commercial Papers

4. Call Money Market

5. Bankers Acceptance

6. Repurchase Agreements

1. Treasury Bills (T-Bills):

Treasury Bills, one of the safest money market instruments, are short term borrowing

instruments of the Central Government of the Country issued through the Central Bank (RBI inIndia).These were first issued in India in 1917. These are issued to raise funds for meeting

expenditure needs and also provide outlet for parking temporary surplus funds by investors.

FEATURES

They are zero risk instruments, and hence the returns are not so attractive. It is available

both in primary market as well as secondary market.

It is a promise to pay a said sum after a specified period. T-bills are short-term securities

that mature in one year or less from their issue date.

The Central Government issues T- Bills at a price less than their face value (par value) i.e.

they are issued at discount.

They are issued with a promise to pay full face value on maturity.


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At present, the Government of India issues three types of treasury bills through auctions,

namely, 91-day, 182-day and 364-day.

Treasury bills are available for a minimum amount of Rs.25K and in its multiples.

Investors: Treasury bills can be purchased by any one (including individuals) except State govt.

These are issued by RBI and sold through fortnightly or monthly auctions at varying discount

rate depending upon the bids.

Denomination: Minimum amount of face value Rs.1 lac and in multiples thereof. There is no

specific amount/limit on the extent to which these can be issued or purchased.

Maturity: 91 days and 364 days.

Rate of interest: Market determined, based on demand for and supply of funds in the money

market.

Other features

These are highly liquid and safe investment giving attractive yield.

Approved assets for SLR purposes and DFHI is the market maker in these instruments and

provide (daily) two way quotes to assure liquidity.

RBI sells treasury bills on auction basis (to bidders quoting above the cut-off

price fixed by RBI) every fortnight by calling bids from banks, State Govt. and

other specified bodies.

2. Certificate of Deposit (CDs):

Certificate of Deposits are negotiable money market instruments issued in dematerialized form.

In India this scheme was introduced in July 1989, to enable the banking system to mobilize bulk

deposits from the market, which they can have at competitive rates of interest.

FEATURES:

CDs are the short term deposits made with Indian banks and Indian Development

Financial Institutions.

CDs have initial lock-in period of 15 days.

They are issued at discount to face value.

All Scheduled commercial banks (except RBI) and All India Financial Institutions are

eligible to issue CDs within their `Umbrella limit.


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Transfer Endorsement & delivery: Any timeAmount: Min: Rs.1 lac, beyond which in multiple of Rs.1 lacLoan: Against collateral of CD not permitted.

Investors

Individuals (other than minors)

Corporations

Companies

trusts

funds

association

Maturity

CDs issued by banks should not be less than 15 days and not more than 1 year.

Financial Institutions can issue CDs for a period of not less than 1 year and

not more than 3 years.

3. Commercial Papers (CP):

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a

promissory note. It was introduced in India in 1990.

FEATURES

Short term

Corporates, primary dealers (PDs) and the All-India Financial Institutions (FIs) are

eligible to issue CP.

Resolution is required to be passed by Board of Directors.

The issue has to be completed within two weeks of opening.

CP can be issued in denominations of Rs. 500000 or its multiples.

CP can be issued for maturities between a minimum 15 days and maximum 1 year.

A corporate would be eligible to issue CP provided

The tangible net worth of the company, as per the latest audited balance sheet, is not less

than Rs. 4 crore


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Company has been sanctioned working capital limit by bank/s or all-India financial

institution/s; and

The borrowal account of the company is classified as a Standard Asset by the financing

bank/s/ institution/s.

What is the limit up to which a CP can be issued?

The aggregate amount of CP from an issuer shall be within the limit as approved by its

Board of Directors or the quantum indicated by the Credit Rating Agency for the

specified rating, whichever is lower.

As regards FIs, they can issue CP within the overall umbrella limit prescribed in the

Master Circular on Resource Raising Norms for FIs, issued by DBOD and updated from

time-to-time.

Investors

Individuals

banking companies

other corporate bodies (registered or

incorporated in India)

unincorporated bodies

Non-Resident Indians (NRIs)

Foreign Institutional Investors (FIIs)etc


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Mode of Redemption:

Initially the investor in CP is required to pay only the discounted value of the CP by

means of a crossed account payee cheque to the account of the issuer through IPA. On

maturity of CP,

When the CP is held in physical form, the holder of the CP shall present the

instrument for payment to the issuer through the IPA.

When the CP is held in Demat form, the holder of the CP will have to get it

redeemed through the depository and receive payment from the IPA.

4. Call Money Market :

The call money market refers to the market for extremely short period loans; say one day

to fourteen days. These loans are repayable on demand at the option of either the lender

or the borrower. As stated earlier, these loans are given to brokers and dealers in stock

exchange. Similarly, banks with surplus lend to other banks with deficit funds in the

call money market. Thus, it provides an equilibrating mechanism for evening out short

term surpluses and deficits. Moreover, commercial bank can quickly borrow from the call

market to meet their statutory liquidity requirements. They can also maximize their

profits easily by investing their surplus funds in the call market during the period when

call rates are high and volatile.

Operations in Call Market

Borrowers and lenders in a call market contact each other over telephone. Hence,

it is basically over-the-telephone market.

After negotiations over the phone, the borrowers and lenders arrive at a deal

specifying the amount of loan and the rate of interest. After the deal is over, the lender issues FBL cheque in favour of the borrower.

The borrower in turn issues call money borrowing receipt.

When the loan is repaid with interest, the lender returns the lender the duly

discharges receipt.


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Instead of negotiating the deal directly, it can be routed through the Discount and

Finance House of India (DFHI), the borrowers and lenders inform the DFHI about

their fund requirement and availability at a specified rate of interest.

Once the deal is confirmed, the Deal settlement advice is lender and receives RBI

cheque for the money borrowed.

The reverse is taking place in the case of landings by the DFHI. The duly

discharged call deposit receipt is surrendered at the time of settlement.

Call loans can be renewed on the back of the deposit receipt by the

borrower.

Call loan market transitions and participants

In India, call loans are given for the following purposes:1. To commercial banks to meet large payments, large remittances to maintain

liquidity with the RBI and so on.

2. To the stock brokers and speculators to deal in stock exchanges and bullion

markets.

3. To the bill market for meeting matures bills.

4. To the Discount and Finance House of India and the Securities Trading

Corporation of India to activate the call market.

5. To individuals of very high status for trade purposes to save interest on O.D or

cash credit.

The participants in this market can be classified into categories viz.

1. Those permitted to act as both lenders and borrowers of call loans.

2. Those permitted to act only as lenders in the market.

The first category includes all commercial banks. Co-operative banks,DFHI and STCI. In

the second category LIC, UTI, GIC, IDBI, NABARD, specified mutual funds etc., are

included. They can only lend and they cannot borrow in the call market.


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5. Bankers Acceptance:

It is a short term credit investment created by a non-financial firm and guaranteed

by a bank to make payment. It is simply a bill of exchange drawn by a person and

accepted by a bank.

It is a buyers promise to pay to the seller a certain specified amount at certain

date. The same is guaranteed by the banker of the buyer in exchange for a claim on

the goods as collateral.

The person drawing the bill must have a good credit rating otherwise the Bankers

Acceptance will not be tradable.

The most common term for these instruments is 90 days. However, they can vary

from 30 days to180 days.

For corporations, it acts as a negotiable time draft for financing imports, exports

and other transactions in goods and is highly useful when the credit worthiness of

the foreign trade party is unknown.

The seller need not hold it until maturity and can sell off the same in secondary

market at discount from the face value to liquidate its receivables.

6. Repurchase Agreements:

Repurchase transactions, called Repo or Reverse Repo are transactions or shortterm loans in which two parties agree to sell and repurchase the same security.

They are usually used for overnight borrowing. Repo/Reverse Repo transactionscan be done only between the parties approved by RBI and in RBI approvedsecurities viz. GOI and State Government Securities, T-Bills, PSU Bonds, FIBonds, Corporate Bonds etc.

Under repurchase agreement the seller sells specified securities with an agreementto repurchase the same at a mutually decided future date and price. Similarly, the

buyer purchases the securities with an agreement to resell the same to the seller onan agreed date at a predetermined price.

Such a transaction is called a Repo when viewed from the perspective of the seller

of the securities and Reverse Repo when viewed from the perspective of the buyer

of the securities. Thus, whether a given agreement is termed as a Repo or Reverse

Repo depends on which party initiated the transaction.


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The lender or buyer in a Repo is entitled to receive compensation for use of funds

provided to the counterparty.

Effectively the seller of the security borrows money for a period of time (Repo

period) at a particular rate of interest mutually agreed with the buyer of the

security who has lent the funds to the seller.

The rate of interest agreed upon is called the Repo rate. The Repo rate is

negotiated by the counterparties independently of the coupon rate or rates of the

underlying securities and is influenced by overall money market conditions.

Q3). How far SEBI has been successful in protecting the interest of investors.Discuss the

important Pre-issue and Post-issue obligations imposed by SEBI.

The Primary function of Securities and Exchange Board of India under the SEBI Act,

1992 is the protection of the investors interest and the healthy development of Indian

financial markets. No doubt, it is very difficult and herculean task for the regulators to

prevent the scams in the markets considering the great difficulty in regulating and

monitoring each and every segment of the financial markets and the same is true for the

Indian regulator also. The redressal of investors grievances, after the scam, is the most

challenging task before the regulators all over the world and the Indian regulator is not an

exception. One of the weapons in the hand of the regulators is the collection and

distribution of disgorged money to the aggrieved investors. SEBI had issued guidelines

for the protection of the investors through the Securities and Exchange Board of India

(Disclosure and Investor Protection) Guidelines, 2000. These Guidelines have been

issued by the Securities and Exchange Board of India under Section 11 of the Securities

and Exchange Board of India Act, 1992.

PRE- ISSUE OBLIGATIONS

A) The lead merchant banker shall exercise due diligence.

B) The lead merchant banker shall pay requisite fee in accordance with regulation

24A of Securities and Exchange Board of India (Merchant Bankers)


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Rules and Regulations, 1992 along with draft offer document filed

with the Board.

C) Documents required to be submitted along with the Offer Document by

the Lead Manager

D ) The Lead Managers who are responsible for conducting due diligence

exercise with respect to contents of the offer document, as per inter-se allocation of

responsibilities shall sign due diligence certificate.

E) Undertaking

F) List of Promoters Group and other Details

G) Appointment of Intermediaries

H) Underwriting

I) Offer Document to be Made Public

J) Pre Issue Advertisement

K) Dispatch of Issue Materi

al

L) No Complaints Certificate

M) Mandatory Collection Centres

N) Authorised Collection Agents

POST ISSUE OBLIGATIONS

A) Post - Issue Monitoring Reports.

B) Redressal of Investor Grievances

C) Co-ordination with Intermediaries

D) Underwriters

E) Bankers to an issue

F) Post-issue Advertisements


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G) Basis of Allotment

Conclusion

The enactment of the SEBI Act within the context of other statutes such as theCompanies Act and Depositories Act has provided a strong regulatory framework for the

Indian market. Subsequently much of the growth of the Indian market can be attributed to

the robust processes for issuance, pricing, allotment and listing of securities enabled by

SEBI. Strengthening SEBI's power in the investigative, administrative and legal aspects

of enforcement would enable it to speedily address legal challenges such as those faced

during dematerialization or disclosure requirements. In the future, SEBI should adopt

more transparency to gain higher public confidence.

Q4) What do you mean by Financial Institutions? Why are they needed? Discuss therole of financial institution in the economic development.Institution which collects funds from the public and places them in financial assets, suchas deposits, loans, and bonds, rather than tangible property are the financial institutions.

An establishment that focuses on dealing with financial transactions, such as investments,loans and deposits. Conventionally, financial institutions are composed of organizationssuch as banks, trust companies, insurance companies and investment dealers. Almost

everyone has deal with a financial institution on a regular basis. Everything fromdepositing money to taking out loans and exchange currencies must be done throughfinancial institutions.Since all people depend on the services provided by financialinstitutions, it is imperative that they are regulated highly by the federal government. Forexample, if a financial institution were to enter into bankruptcy as a result ofcontroversial practices, this will no doubt cause wide-spread panic as people start toquestion the safety of their finances. Also, this loss of confidence can inflict furthernegative externalities upon the economy.

In financial economics, a financial institution is an institution that provides financialservices for its clients or members. Probably the most important financial serviceprovided by financial institutions is acting as financial intermediaries. Most financialinstitutions are regulated by the government.

Broadly speaking, there are three major types of financial institutions:

1. Depositary Institutions : Deposit-taking institutions that accept and managedeposits and make loans, including banks, building societies, credit unions, trustcompanies, and mortgage loan companies


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2. Contractual Institutions : Insurance companies and pension funds; and3. Investment Institutes: [Investment Banks - Underwriting], [Security Firms

-Broker].

Need of Financial institutions

On a more practical level, financial institutions interact with the environment in a numberof ways:

as investors- supplying the investment needed to achieve sustainable

development.

as innovators- developing new financial products to encourage sustainable

development - e.g. inenergy efficiency.

as valuers - pricing risks and estimating returns, for companies, projects

and others.

as powerful stakeholder - as shareholders and lenders they can exercise

considerable influenceover the management of companies.

as polluters- while not dirty industries, financial institutions do consume

considerableresources.

as victims of environmental change e.g. from climate change.

Role of financial institution in the economic development.Financial institutions play an extremely important role in economic development.Financial institutions cater to important needs of society such as taking care of smallsavings at reasonable rates. Everyday working men and women have the option of puttingtheir savings into a number of alternatives such as Government small saving schemes,deposits into a saving account provided by their bank, recurring, deposits, time depositsand also the alternative option of investing in mutual funds or stocks.Financial institutions also undertake modern functions that could not have been done 20years or so ago. The relatively new invention of Internet banking allows customers toaccess their saving and current accounts, manage their money and even make payments

without ever having to set foot in the banks building. This and ATMs have completelyrevolutionised the way that people can access their money. Online payments can also bemade which saves the customers time and energy. In the modern day economy whenpeople with hectic lifestyles dont have the time to stand in payment queues all day,financial institutions can only be commended for providing this convenient way ofpayment.Financial institutions must also offer an extremely efficient service by developingthemselves to make the best use of the credit in their systems. A decent financial


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institution must make sure that they cater to the all the needs of investors by making highamounts of capital for the big and expensive projects that are being undertaken by theindustrial and service sectors. Although it is not just the big people that the financialinstitutions need to be backing. The small companies and independent businesses mustalso have credit backing them if they are to expand and grow for the good of the

countrys economy. This makes the subject of credit availability by financial institutionsan extremely important issue.

Q5) Examine the structure of commercial banking system in india. state recent

trends and changes and spell out their immediate impact.

Commercial banks are very important segment of the money market. They play a very

important role in the economy by mobilizing savings from various sectors, which is the

foundation for the growth and development of economy .With the growth and

development of the economy the commercial banks grow along

Main constituents of the organized sector are commercial banks .

These may be scheduled or non scheduled banks.

In the present scenario there is only one bank in the non scheduled banks while all

the other banks come under scheduled category .

Out of the scheduled banks the public banks hold an important place

Bank Nationalization:

After the independence the major historical event in banking sector was the

nationalization of 14 major banks on 19th July 1969. The nationalization was deemed as a

major step in achieving the socialistic pattern of society. In 1980 six more banks were

nationalized taking the total nationalized banks to twenty.

Structure of schedule commercial banks: The composition of the board of directors of

a scheduled commercial bank shall consist of whole time chairman. Section 10A of the

Banking Regulation Act, 1949 provides that not less than fifty-one per cent, of the total

number of members of the Board of directors of a banking company shall consist of

persons, who shall have special knowledge or practical experience in respect of one or

more of the matters including accountancy, agriculture and rural economy, banking, co-

operation, economics, finance, law, small-scale industry, or any other matter the special

knowledge of, and practical experience in, which would, in the opinion of the Reserve

Bank, be useful to the banking company. Out of the aforesaid number of directors, not


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less than two shall be persons having special knowledge or practical experience in respect

of agriculture and rural economy, co-operation or small-scale industry.

Besides the above the board of the scheduled bank shall consist of the directors

representing workmen and officer employees. The Reserve Bank of India and the Central

Government also has right to appoint their nominees into the board of the banks.

Recent trends & impact: Banks are extremely useful and indispensable in the modern

community. The banks create the purchasing power in the form of bank notes, cheques

bills, drafts etc, transfers funds bring borrows and lenders together, encourage the habit of

saving among people.

The banks have played substantial role in the growth of Indian economy. From the

meager start in 1860 the banks have come to long way. At present in India there are 20

nationalized banks, State bank of India and its seven Associate banks, 21 old private

sector banks and 8 new private sector banks. Besides them there are more than 30 foreign

banks either operating themselves or having their branches in India. The statistical table

hereunder shows the financial position of the banks as on 31.03.2005.

The banks in India are operating through 55530 branches. All the banks together had the

net worth of Rs. 149385 crores as on 31 st March, 2005. The banks also had the deposit

base of Rs. 1836985 crores and the advances of Rs. 1151113 crores taking the total

business to Rs. 2988098 crores. During the year 2004-05 the banks had earned the

interest income of Rs. 154761 crores. The average net NPA ratio of the banks was also

less 3.84% in year 2005.

Future is bright: The Information Technology (IT) is becoming an important component

of the banking sector. The customers have become more demanding and they need value

added services from the banks. The foreign banks have raised the expectations of the

customers causing the bank to invest strongly on IT. The Indian banks have started to

meet the expectations of the people by opening both onsite and offsite ATMs. Banks

have also started telebanking, anytime/anywhere banking, mobile banking and Internet

banking to give the facilities to the customers. Banks have also following the RBI

sponsored technology programmes like mail messaging, Electronic fund transfers (EFT),

Structured Financial Messaging System (SFMS), (Real Time Gross Settlement (RTGS),


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Centralized Fund Management System (CFMS) and Negotiated Dealing System / Public

Debt Office (NDS/PDO).

Conclusive Remarks: Banking Sector in India is likely to undergo a major change. This

change will be in the form of mergers and acquisitions and takeovers. The State Bank of

India may merge all its associate banks with itself to make a one bank. The banks based

in South India may look for a bank in North India to have presence in North. Similarly

banks in North may look for banks in South to increase its area of operations.

Consolidation will be the key to the banking sector in future.

Q6) What is need of setting up a mutual funds ? have they been successful inmopping savings ? what are problems of mutual funds india ?

MUTUAL FUNDS-An investment vehicle that is made up of a pool of funds collectedfrom many investors for the purpose of investing in securities such as stocks, bonds,money market instruments and similar assets. Mutual funds are operated by moneymanagers, who invest the fund's capital and attempt to produce capital gains and incomefor the fund's investors. A mutual fund's portfolio is structured and maintained to matchthe investment objectives stated in its prospectus.Need For Settling Up Mutal Fund :

l. With the emphasis on increase in domestic savings and improvement in deployment of

investment through markets, the need and scope for mutual fund operation has increasedtremendously. A Financial Service in Capital resources by reducing the dependence on

outside funds. This calls for a market based institution which can tap the vast potential of

domestic savings and chanalise them for profitable investments. Mutual funds are not

only best suited for the purpose but also capable of meeting this challenge.

2. An ordinary investor who applies for share in a public issue of any company is not

assured of any firm allotment. But mutual funds who subscribe to the capital issue made

by companies get firm allotment of shares.

3. Mutual fund latter sell these shares in the same market and to the Promoters of the

company at a much higher price. Hence, mutual fund creates the investors confidence.

4. As mutual funds are managed by professionals, they are considered to have a better

knowledge of market behaviours. Besides, they bring a certain competence to their job.

They also maximise gains by proper selection and timing of investment.


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5. Another important thing is that the dividends and capital gains are reinvested

automatically in mutual funds and hence are not fritted away. The automatic reinvestment

feature of a mutual fund is a form of forcedsaving and can make a big difference in the

long run.

6. The mutual fund operation provides a reasonable protection to investors.Besides,

presently all Schemes of mutual funds provide tax relief under Section 80 L of the

Income Tax Act and in addition, some schemes provide tax relief under Section 88 of the

Income Tax Act lead to the growth of importance of mutual fund in the minds of the

investors.

7. As mutual funds creates awareness among urban and rural middle class people about

the benefits of investment in capital market, through profitable and safe avenues, mutual

fund could be able to make up a large amount of the surplus funds available with these

people.

8. The mutual fund attracts foreign capital flow in the country and secure profitable

investment avenues abroad for domestic savings through the opening of off shore funds

in various foreign investors. Lastly another notable thing is that mutual funds are

controlled and regulated by S E B I and hence are considered safe. Due to all these

benefits the importance of mutual fund has been increasing.

MERITS OF MUTUAL FUNDS

Professional expertise: Investing requires skill. It requires a constant study of the

dynamics of the markets and of the various industries and companies within it. Anybody

who has surplus capital to be parked as investments is an investor, but to be a successful

investor, you need to have someone managing your money professionally.

Diversification: There is an old saying: Don't put all your eggs in one basket. There is a

mathematical and financial basis to this. If you invest most of your savings in a single

security (typically happens if you have ESOPs (employees stock options) from your

company, or one investment becomes very large in your portfolio due to tremendous

gains) or a single type of security (like real estate or equity become disproportionately

large due to large gains in the same), you are exposed to any risk that attaches to those

investments.

Low cost of asset management: Since mutual funds collect money from millions of

investors, they achieve economies of scale. The cost of running a mutual fund is divided


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between a larger pool of money and hence mutual funds are able to offer you a lower cost

alternative of managing your funds.

Equity funds in India typically charge you around 2.25% of your initial money and

around 1.5% to 2% of your money invested every year as charges. Investing in debt funds

costs even less. If you had to invest smaller sums of money on your own, you would have

to invest significantly more for the professional benefits and diversification.

Liquidity: Mutual funds are typically very liquid investments. Unless they have a pre-

specified lock-in, your money will be available to you anytime you want. Typically funds

take a couple of days for returning your money to you. Since they are very well

integrated with the banking system, most funds can send money directly to your banking

account.

Ease of process: If you have a bank account and a PAN card, you are ready to invest in a

mutual fund: it is as simple as that! You need to fill in the application form, attach yourPAN (typically for transactions of greater than Rs 50,000) and sign your cheque and you

investment in a fund is made.

In the top 8-10 cities, mutual funds have many distributors and collection points, which

make it easy for them to collect and you to send your application to.

Well regulated: India mutual funds are regulated by the Securities and Exchange Board

of India, which helps provide comfort to the investors. Sebi forces transparency on the

mutual funds, which helps the investor make an informed choice. Sebi requires the

mutual funds to disclose their portfolios at least six monthly, which helps you keep trackwhether the fund is investing in line with its objectives or not.

PROBLEMS OF MUTUAL FUNDS IN INDIA

All the problems of mutual fund industry have been classified in the following categories1. Problems related to structureThe problems related to structure under SEBI (Mutual Funds) Regulations,1996 arepertaining to regulations 2 (q), 7, 16 (5) , 24 (3) , 21 (b) , 24 (2) , 32, 33,43, & 44. AMFIhas taken a lead & made representations to the SEBI & the Central Govt. to amend theregulations. The problems related to the Indian Trusts Act ,1882 are pertaining toindividual/collective liability. The post SEBI mutual funds have opted for trusteecompany structure. The liability of the trustees is more onerous under the board oftrustees structure as compared to the trustee company structure. The Indian Trusts Actdoes not permit perpetual succession. The companies Act, 1956 permits perpetualsuccession but it cant protect the interest of the investors due to the privilege of limitedliability.2. Problems related to the investors


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The success of a mutual fund depends upon the confidence of the investors. UTI hasestablished a marketing network of branches, chief representatives, collection centers andfranchise offices through out the country. The marketing network of UTI is its uniquestrength as compared to other mutual funds. UTI could mobilize Rs.75159 Cr. ofinvestible funds through its 87 schemes due to its well established marketing network.

All other mutual funds could not establish such a marketing network and cant competewith UTI in mobilizing public savings from rural and semi-urban areas. All the problemsrelated to the investors are, lack of awareness and poor after sales service to theinvestors. The investors believed, so far , that the mutual funds promoted by UTI, LIC,and nationalized banks are guaranteed by the Central Govt.

3. Problems related to working

The inventible funds of the mutual funds increase when sales are more than theredemptions and decrease when the redemptions are more than sales creating theproblems of maintaining liquidity The investors prefer to invest in equity funds duringboom period and shift their investments to debt funds during the recession period. The

most profitable and high income & appreciation potential stocks during the boom periodor at the time of investing funds in such stocks may become illiquid over a period oftime .The investors cant take decisions of investment due to unavailability of trackrecords of working. Unless the track records of working of mutual funds is availablecovering the several stock market booms and crashes, the investors cant judge whichschemes or mutual funds are better alternatives for investments.

Q7)): Discuss the functions and operations of Unit Trust of India. Also highlight UTIs

reform package.

Unit Trust of India is a public sector financial institution. The UTI was created with the

aim of mobilising savings of the small investors and reinvesting these funds into different

investment outlets. Unit Trust of India is managed by a competent Board of Trustees.

UTI Chairman is appointed by the Central Government. UTI consists of an Executive

Trustee and four other members who look after for savings of the investors. These

members are appointed by the Industrial Development Bank of India, Reserve Bank of

India, Life Insurance Corporation of India and sometimes by commercial banks. UTI is

offering an attractive return and growth to the investors while minimising the risk

elements for individual investors.

Functions of UTI:

The main functions of UTI are as follows:

To encourage savings of lower and middle-class people;

To sell units to investors in different parts of the country;

To convert the small savings into industrial finance;


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To give smaller players an opportunity to share the benefits and fruits of

industrialization in the country;

To provide liquidity to units;

To offer an attractive return and growth to be individual investors and small

savers; To minimise the risk for small investors;

To finance housing projects, leasing, and hire purchase financing.

Operations:

Unit Trust of India began its operations with an amount of five crores of rupees that was

jointly subscribed by Industrial Development Bank of India (IDBI), Life Insurance

Corporation of India (LIC), State Bank of India (SBI), commercial Banks and other

financial institutions. Rs. 5crore was given to UTI as the initial amount of the capital. The

Unit capital varies from year to year and depends on the subscription of the investors.

The UTI has made good progress during the last 35 years. Bulk of the resources

mobilised by the UTI have been deployed in the corporate sector. The UTI gives

preference to the securities of new companies as to investments. The UTI invests its

funds in government securities.

The UTI Asset Management Company has its registered office at Mumbai. It has over 70

schemes in domestic MF space and has the largest investor base of over 9 million in thewhole industry. It is present in over 450 districts of the country and has 100 branches

called UTI Financial Centres or UFCs. About 50% of the total IFAs in the industry work

for UTI in distributing its products. India Posts, PSU Banks and all the large Private and

Foreign Banks have started distributing UTI products. The total average Assets Under

Management (AUM) for the month of June 2008 was Rs. 530 billion and it ranked fourth.

In terms of equity AUM it ranked second and in terms of Equity and Balanced Schemes

AUM put together it ranked first in the industry. This measure indicates its revenue-

earning capacity and its financial strength.

Besides running domestic MF Schemes, UTI AMC is also a registered portfolio manager

under the SEBI (Portfolio Managers) Regulations. It runs different portfolios for its HNI

and Institutional clients. It is also running a Sharia Compliant portfolio for its Off-shore


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clients. UTI tied up with Shinsei Bank of Japan to run a large size India-centric portfolio

for Japanese investors.

For its international operations UTI has set up its 100% subsidiary, UTI International

Limited, registered in Guernsey, Channel Islands. It has branches in London, Dubai and

Bahrain. It has set up a Joint Venture with Shinsei Bank in Singapore. The JV has got its

license and has started its operations.

In the area of alternate assets, UTI has a 100% subsidiary called UTI Ventures at

Bangalore. This company runs two successful funds with large international investors

being active participants. UTI has also launched a Private Equity Infrastructure Fund

along with HSH Nord Bank of Germany and Shinsei Bank of Japan.

UTIs reform package:

UTI maintained its pre-eminent place till 2001, when a massive decline in the market

indices and negative investor sentiments after Ketan Parekh scam created doubts about

the capacity of UTI to meet its obligations to the investors. This was further compounded

by two factors: its flagship and largest scheme US 64 was sold and re-purchased not at

intrinsic NAV but at artificial price and its Assured Return Schemes had promised returns

as high as 18% over a period going up to two decades.

Fearing a run on the institution and possible impact on the whole market, the Government

came out with a rescue (reform) package and change of management in 2001.

Subsequently, the UTI Act was repealed and the institution was bifurcated into two parts.

UTI Mutual Fund was created as a SEBI registered fund like any other mutual fund.

The assets and liabilities of schemes, where Government had to come out with a bail-out

package, were taken over directly by the Government in a new entity called Specified

Undertaking of UTI, SUUTI. SUUTI holds over 27% stake Axis Bank. In order to

distance Government from running a mutual fund, the ownership was transferred to four

institutions viz. SBI, LIC, BOB and PNB, each owning 25%.

Certain reforms like improving the salary from PSU levels and effecting a VRS were

carried out. UTI lost its market dominance rapidly and by end of 2005, when the new

share-holders actually paid the consideration money to Government, its market share had

come down to close to 10%.


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A new board was constituted and a new management inducted. Systematic study of its

problems role and functions was carried out with the help of a reputed international

consultant. Fresh talent was recruited from the private market; organizational structure

was changed to focus on newly emerging investor and distributor groups and massive

changes in investor services and funds management were carried out.

As a result of these reforms, once again UTI has emerged as a serious player in theindustry. Some of the funds have won famous awards, including the Best Infra Fundglobally from Lipper. UTI has been able to benchmark its employee compensation to thebest in the market, and has also introduced

Q8) Distinguish between banking and non banking financial institutions? Discuss theguidelines that the RBI has issued with regards to entry of NBFCs into insurance sector.DIFFERENCE BETWEEN BANKING AND NON BANKING INSTITUTION

A bank interacts directly with customers while an NBFI interacts with banks and

governments

A bank indulges in a number of activities relating tofinance with a range of customers, While an NBFI is mainly concerned with theterm loan needs of large enterprises

A bank deals with both internal and internationalcustomers While, An NBFI is mainly concerned with thefinances of foreign companies

A bank's man interest is to help in business

transactions and savings/ investment activities while anNBFI's main interest is in the stabilization of the currency

GUIDELINES REGARDING THE ENTRY OF NBFC INTO INSURANCESECTOR

The new norm clarified that in case more than one company (irrespective of doing

financial activity or not) in an NBFC group wishes to take a stake in the insurance

company, the contribution by all companies in the same group shall be counted

for the limit of 50 per cent prescribed for the NBFC in an insurance JV.

According to the previous guideline issued by RBI on the matter, the maximum

equity contribution an NBFC can hold in a joint venture company is 50 per centof the paid-up capital of the insurance company.

Further, the new guideline says that a subsidiary or company in the same group of

an NBFC or of another NBFC engaged in the business of a non-banking financial

institution or banking business shall not be allowed to join the insurance company

on risk participation basis


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Q9) What do you meant by insider trading? Discuss briefly various SEBI guidelines oninsider trading?

Ans. "Insider trading" is a term that most investors have heard and usually associate with

illegal conduct. But the term actually includes both legal and illegal conduct. The legalversion is when corporate insidersofficers, directors, and employeesbuy and sellstock in their own companies. When corporate insiders trade in their own securities, theymust report their trades to the SEC(Securities and Exchange Commission).

Illegal insider trading refers generally to buying or selling a security, in breach of afiduciary duty or other relationship of trust and confidence, while in possession ofmaterial, nonpublic information about the security. Insider trading violations may alsoinclude "tipping" such information, securities trading by the person "tipped," andsecurities trading by those who misappropriate such information.

Examples of insider trading cases that have been brought by the SEC are cases against:

Corporate officers, directors, and employees who traded the corporation's

securities after learning of significant, confidential corporate developments; Friends, business associates, family members, and other "tippees" of such

officers, directors, and employees, who traded the securities after receiving suchinformation;

Employees of law, banking, brokerage and printing firms who were given such

information to provide services to the corporation whose securities they traded; Government employees who learned of such information because of their

employment by the government; and

Other persons who misappropriated, and took advantage of, confidentialinformation from their employers.

A company insider is someone who has access to the important information about acompany that affects its stock price or might influence investors decisions. This is calledmaterial information.

The company executives obviously have material information. The Vice President ofSales, for example, knows how much the company has sold and whether it will meet theestimates it has provided to investors. Others within the company also have material

information. The accountant who prepares the sales forecast spreadsheet and theadministrative assistant who types up the press release also are insiders.

A public company, if it is smart, limits the number of people who have access to materialinformation and, therefore, are considered insiders. This is done for a couple of reasons.

First, they want to limit the likelihood that anyone will "leak" the information.


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Second, being an insider means being subject to severe limits on when you can trade inthe company stock, usually only the middle month of each quarter.

The company's senior management are insiders. So are some of the financial analysts.The top sales people usually also are insiders, although a regional sales manager who

only sees his or her own region's results may not be one. The individuals in InvestorRelations and/or Public Relations who prepare the public announcements also areinsiders.

If the company is developing a new product that could be a big seller, the key people inthe Research & Development team would also be considered insiders, provided theinformation they have is material, as defined above.

Other individuals who are not employees, but with whom the company needs to sharematerial information, are also insiders. This list could include brokers, bankers, lawyers,etc.

Because insider trading undermines investor confidence in the fairness and integrity ofthe securities markets, the SEC has treated the detection and prosecution of insidertrading violations as one of its enforcement priorities.

The SEC adopted new Rules 10b5-1 and 10b5-2 to resolve two insiders trading issueswhere the courts have disagreed.

Rule 10b5-1 provides that a person trades on the basis of material nonpublic

information if a trader is "aware" of the material nonpublic information whenmaking the purchase or sale. The rule also sets forth several affirmative defenses

or exceptions to liability. The rule permits persons to trade in certain specifiedcircumstances where it is clear that the information they are aware of is not afactor in the decision to trade, such as pursuant to a pre-existing plan, contract, orinstruction that was made in good faith.

Rule 10b5-2 clarifies how the misappropriation theory applies to

certain non-business relationships. This rule provides that a person

receiving confidential information under circumstances specified in the

rule would owe a duty of trust or confidence and thus could be liable

under the misappropriation theory.

Submitted To Submitted By:

Ms.Meenakshi Kaushik Ms. Nidhi SharmaHoD, MBA Assistant ProfessorRDIAS RDIAS


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