business financial environment

8/8/2019 Business Financial Environment

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Business financial Environment

I Semester

PGDBA - MSRIM


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Definitions of the word 'financeMoney- troublesome to acquire, troublesome to protect, troublesome if lost, troublesome if

spent, money is nothing but trouble , from beginning to end Panchtantra 200 BC

"The science of the management of money and other

assets.

"The management of money, banking, investments, and

credit.

"finances Monetary resources; funds, especially those of a

government or corporate body

The supplying of funds or capital."

Finance as a function (i.e. verb) "To provide or raise the funds or capital for ( financed a new car)

"To supply funds to - financing a daughter through law school.


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Financial market

The place where people and

organisations wanting to borrow money are

brought together with those having surplus

funds is called a financial market Brigham,Eugene F


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Financial marketA Financial Market can be defined as the

market in which financial assets are created

or transferred. As against a real transaction

that involves exchange of money for real

goods or services, a financial transaction

involves creation or transfer of a financialasset


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Functions of financial system

Provision of liquidity

Mobilisation of savings

Link between savers and investors

Provides payment mechanism for the exchange ofgoods and services

Mechanism for transfer of resources acrossgeographical boundaries

Promotes process of capital formationLowers cost of transactions and increases returns

Information on market, economy etc,


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Financial systemThe objective of financial system is tosupply funds to various sectors and

activities of the economy in ways thatpromote the fullest possible utilization ofresources without destabilizing

consequence of price level changes orunnecessary interference with individualdesires


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Constituents of a financial system


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Financial Assets or Financial Instruments

Financial Assets or Financial Instruments

represents a claim to the payment of a sum

of money sometime in the future and /or

periodic payment in the form of interest or

dividend.


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Financial assets

Marketable assetsShares

Government securities

Bonds

M.F UnitsUTI units

Bearer Debentures

Non-Marketable assetsBank Deposits

PF

LIC SchemesP.O Certificates

Cash Asset, Debt asset, Stock Asset


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Money Market- The money market is a wholesale debt market

for low-risk, highly-liquid, short-term instrument.

Funds are available in this market for periodsranging from a single day up to a year.

This market is dominated mostly by government,

banks and financial institutions.


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Capital MarketThe capital market is designed to finance

the long-term investments. The transactions

taking place in this market will be for

periods over a year.


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Forex Market -The Forex market deals with the multi-

currency requirements, which are met by

the exchange of currencies. Depending on

the exchange rate that is applicable, the

transfer of funds takes place in this

market. This is one of the most developedand integrated market across the globe.


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Credit MarketCredit market is a place where banks, FIs

and NBFCs purvey short, medium and long-

term loans to corporate and individuals


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FINANCIALINTERMEDIATION

Having designed the instrument, the issuer should

then ensure that these financial assets reach the

ultimate investor in order to garner the requisite

amount. When the borrower of funds approachesthe financial market to raise funds, mere issue of

securities will not suffice. Adequate information

of the issue, issuer and the security should be

passed on to take place. There should be a properchannel within the financial system to ensure such

transfer. To serve this purpose, Financial

intermediaries came into existence


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Financial intermediation in the organized sector isconducted by a wide-range of institutions functioningunder the overall surveillance of the Reserve Bank ofIndia.

In the initial stages, the role of the intermediary was mostly

related to ensure transfer of funds from the lender to theborrower.

This service was offered by banks, FIs, brokers, anddealers.


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However, as the financial system widened along with the

developments taking place in the financial markets, the scope of its

operations also widened.

Some of the important intermediaries operating ink the financialmarkets include;

investment bankers, underwriters, stock exchanges, registrars,

depositories, custodians, portfolio managers, mutual funds, financial

advertisers financial consultants, primary dealers, satellite dealers, self

regulatory organizations, etc.

Though the markets are different, there may be a few intermediaries

offering their services in move than one market e.g.

underwriter. However, the services offered by them vary from one

market to another.


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Financial intermediaries in India

Organized

sector

Un-Organized

sector

Money lenders

Indigenous bankers

Pawn Brokers

Traders and Land lords

Capital marketintermediaries

Development Banks

Insurance companies

UTI

Govt. PF, NSC

Industrial ReconstructionBank of India

Exim Bank

NBFC

Hire Purchase

Leasing

Investment cosFinance Cos

Money marketintermediaries

RBI

Commercial BanksCo-operative banks

P.O SB

Government

Treasury Bills


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Intermediary Market Role

Stock Exchange Capital Market Secondary Market tosecurities

Investment Bankers Capital Market,

Credit Market

Corporate advisory

services, Issue ofsecurities

Underwriters Capital Market,Money Market

Subscribe to un-subscribedportion of securities

Registrars,Depositories,

Custodians

Capital Market Issue securities to theinvestors on behalf of the

company and handle sharetransfer activity

Primary DealersSatellite Dealers

Money Market Market making ingovernment securities

Forex Dealers Forex Market Ensure exchange ink

currencies

FINANCIAL INTERMEDIATION


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FINANCIALINSTRUMENTSMoney Market Instruments

The money market can be defined as a market forshort-term money and financial assets that are nearsubstitutes for money. The term short-term meansgenerally a period up to one year and near substitutesto money is used to denote any financial asset which

can be quickly converted into money with minimumtransaction cost.

Some of the important money market instruments 1. Call/Notice Money

2. Treasury Bills

3. Term Money4. Certificate ofDeposit5. Commercial Papers

NEXT


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Call/

Notice Money

Call/Notice money is the money borrowed or lent on

demand for a very short period. When money is borrowed

or lent for a day, it is known as Call (Overnight) Money.

Intervening holidays and/or Sunday are excluded for this

purpose. Thus money, borrowed on a day and repaid on the

next working day, (irrespective of the number of

intervening holidays) is "Call Money". When money is

borrowed or lent for more than a day and up to 14 days, itis "Notice Money". No collateral security is required to

cover these transactions.


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Treasury Bills

Treasury Bills are short term (up to one year)borrowing instruments of the union government. Itis an IOU of the Government. It is a promise bythe Government to pay a stated sum after expiry of

the stated period from the date of issue(14/91/182/364 days i.e. less than one year). Theyare issued at a discount to the face value, and onmaturity the face value is paid to the holder. The

rate of discount and the corresponding issue priceare determined at each auction.


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Term Money

Inter-bank market for deposits of maturity

beyond 14 days is referred to as the term

money market. The entry restrictions are the

same as those for Call/Notice Money exceptthat, as per existing regulations, the

specified entities are not allowed to lend

beyond 14 days.


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Certificate ofDeposit

Certificates of Deposit (CDs) is a negotiablemoney market instrument and issued in

dematerialised form or as a Usance Promissory

Note, for funds deposited at a bank or other

eligible financial institution for a specified timeperiod. Guidelines for issue of CDs are presently

governed by various directives issued by the

Reserve Bank of India, as amended from time to

time.


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Issue of

Certificate ofDeposit

CDs can be issued by

scheduled commercial banks excluding Regional RuralBanks (RRBs) and Local Area Banks (LABs); and

select all-India Financial Institutions that have beenpermitted by RBI to raise short-term resources within theumbrella limit fixed by RBI.

Banks have the freedom to issue CDs depending on their

requirements. An FI may issue CDs within the overall umbrella limit fixed by

RBI, i.e., issue of CD together with other instruments viz., termmoney, term deposits, commercial papers and inter-corporatedeposits should not exceed 100 per cent of its net owned funds,

as per the latest audited balance sheet.


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Commercial Papers

CP is a note in evidence of the debtobligation of the issuer. On issuingcommercial paper the debt obligation istransformed into an instrument. CP is thus

an unsecured promissory note privatelyplaced with investors at a discount rate toface value determined by market forces. CPis freely negotiable by endorsement and

delivery.


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Issue ofCommercial Papers

A company shall be eligible to issue CP provided a. the tangible net worth of the company, as per the latest

audited balance sheet, is not less than Rs. 4 crore;

b. the working capital (fund-based) limit of the company

from the banking system is not less than Rs.4 crore and

c. the borrowal account of the company is classified as a

Standard Asset by the financing bank/s.

The minimum maturity period of CP is 7 days. The

minimum credit rating shall be P-2 of CRISIL or such

equivalent rating by other agencies.


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Capital Market Instruments

The capital market generally consists of the

following long term period i.e., more than

one year period, financial instruments;

Primary issues market/ new issues market When companies issue shares for the purpose of collecting

capital

Secondary market / stock market /

exchanges Shares, bonds that have already been issued are traded


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In the equity segment Equity shares, preference

shares, convertible preference shares, non-

convertible preference shares etc In the debt segment debentures, zero coupon

bonds, deep discount bonds etc.


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- Indirect instruments

Mutual fund units

Security receipts -SRs

SRs are securities issued by an ARC (Asset ReconstructionCompanies) to institutional investors, acknowledging theirunfettered rights to the assets. The value of these receipts,which are like units of an MF, will hinge on the pricing of thebad loans.

Pass through certificates This represents an interest in a pool of mortgages in the United

States. Payments received on the underlying pool are passedthrough to the investor by the firm servicing the mortgagepayments.


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- Derivatives

Forward Contracts

Futures

options


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Hybrid Instruments

Hybrid instruments have both the features of

equity and debenture.

Convertible debentures With options, redeemable at premium, debt equity swap of

debentures etc.

non-convertible debentures

Secured premium notes (with Detachable warrants) Redeemable after a lock in period- options for redemption after

lock in period, warrant for shares

Warrants


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Regulatory bodiesRBI

SEBI


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Historical perspective

Bank ofHindustan, set up in 1870, was the earliest Indian Bank

Banking in India on modern lines started with the establishment ofthree presidency banks under Presidency Bank's act 1876 i.e. Bank

of Calcutta, Bank of Bombay and Bank of Madras.

In 1921, all presidency banks were amalgamated to form the

Imperial Bank of India. Imperial bank carried out limited central

banking functions also prior to establishment of RBI. It engaged in

all types of commercial banking business except dealing in foreign

exchange.

Reserve Bank of India Act was passed in 1934 & Reserve Bank of

India (RBI) was constituted as an apex bank without major

government ownership.

Banking Regulations Act was passed in 1949. This regulation

brought

Reserve Bank of India under government control. Under the act, RBI got

wide ranging powers for supervision & control of banks. The Act also vested

licensing powers & the authority to conduct inspections in RBI.


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RBI -H

istory1935 to 1948

1950 to 1960

1960 to 1971

1968 to 1985

1985 to 19911991 to 2000

2000 onwards


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RBI

The Reserve Bank of India Act, 1934 wascommenced on April 1, 1935. The Act, 1934 (II of1934) provides the statutory basis of thefunctioning of the Bank.

The Bank was constituted for the need offollowing:

To regulate the issue of banknotes

To maintain reserves with a view to securingmonetary stability and

To operate the credit and currency system of thecountry to its advantage.


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Functions of

Reserve Bank ofIndiaThe Reserve Bank of India Act of 1934 entrust all

the important functions of a central bank theReserve Bank of India

Monetary functions

Bank of issue

Banker to Government

Bankers' Bank and Lender of the Last Resort

Controller of credit

Custodian of Foreign ReservesNon monetary functions

Supervisory functions

Promotional functions


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Bank ofIssue(MONOPOLY OF

NOTE ISSUE)Under Section 22 of the Reserve Bank of India Act, the

Bank has the sole right to issue bank notes of all

denominations. The distribution of one rupee notes and

coins and small coins all over the country is undertaken by

the Reserve Bank as agent of the Government.

Systems of note issue

Gold reserve, proportional reserve, fiduciary (fixed),

Minimum reserve system)

Early notes


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Banker to Government

Government banker,Agent and adviser.

The Reserve Bank is agent of Central Government and of all StateGovernments in India excepting that of Jammu and Kashmir.

The Reserve Bank has the obligation to transact Government

business to keep the cash balances as deposits free of interest,

to receive and to make payments on behalf of the Government

to carry out their exchange remittances and other banking operations

Manage public debt

The Reserve Bank of India helps the Government - both the Union and theStates to float new loans and

Ways and means advances

Ways and means to the Governments for 90 days


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Bankers' Bank and Lender of the

Last Resort

Bankers bank

Every scheduled bank was required to maintain withthe Reserve Bank a cash balance equivalent to 5% of itsdemand liabilities and 2 per cent of its time liabilities inIndia.

Custodian of cash reserves

By an amendment of 1962, the distinction betweendemand and time liabilities was abolished and banks

have been asked to keep cash reserves equal to 3 percent of their aggregate deposit liabilities.

The minimum cash requirements can be changed by theReserve Bank of India.


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Bankers' Bank and Lender of the

Last ResortLender of last resort

The scheduled banks can borrow from the ReserveBank of India on the basis of eligible securities or getfinancial accommodation in times of need or stringency

by rediscounting bills of exchange.

Since commercial banks can always expect theReserve Bank of India to come to their help in

times of banking crisis the Reserve Bank becomesnot only the banker's bank but also the lender ofthe last resort.


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Credit controllerReserve Bank of India has the following powers:(a) It holds the cash reserves of all the scheduledbanks.(b) It controls the credit operations of banksthrough quantitative and qualitative controls.(c) It controls the banking system through thesystem of licensing, inspection and calling for

information.(d) It acts as the lender of the last resort byproviding rediscount facilities to scheduled banks.


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Credit controllerQuantitative BANK RATE POLICY

6 percent

OPEN MARKET

OPERATION

VARIABLE CASH

RESERVE RATIO

7%

Qualitative Since 1956, selective controls

of credit are increasingly being

used by the Reserve Bank.

Reserve Bank of India can ask

any particular bank or the

whole banking system not to

lend to particular groups or

persons on the basis of certain

types of securities

Moral suasion, direct action,

consumer credit, Publicity


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Custodian of Foreign Reserves

Maintaining the rate of exchange of the rupee

The rate of exchange fixed was Re. 1 = sh. 6d.

Since 1935 the Bank was able to maintain the exchange ratefixed at lsh.6d.

After India became a member of the International MonetaryFund in 1946, the Reserve Bank has the responsibility ofmaintaining fixed exchange rates with all other membercountries of the I.M.F

The Reserve Bank has to act as the custodian of India'sreserve of international currencies.

The RBI has the responsibility of administering theexchange controls of the country.


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Supervisory functions

RBI wide powers of supervision and control overcommercial and co-operative banks

Relating to licensing and establishments

Branch expansion

Liquidity of their assets

Management and methods of working

Amalgamation, reconstruction

Liquidation.

The RBI is authorised to carry out periodicalinspections of the banks and to call for returns andnecessary information from them.


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Promotional functionsThe Reserve Bank was asked to promote banking

habit

Extend banking facilities to rural and semi-urbanareas

Establish and promote new specialised financingagencies

. Accordingly setting up of the IFCI, SFC, DepositInsurance Corporation in 1962, the Unit Trust of Indiain 1964, the Industrial Development Bank of India also

in 1964, the Agricultural Refinance Corporation ofIndia in 1963 and the Industrial ReconstructionCorporation of India in 1972.

These institutions were set up directly or indirectly by the ReserveBank to promote saving habit and to mobilise savings, and to provideindustrial finance as well as agricultural finance.


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Monetary & non monetary

The monetary functions also known as the central banking

functions of the RBI

control and regulation of money and credit

issue of currency

control of bank credit

control of foreign exchange operations banker to the Government and to the money market.

Monetary functions of the RBI are significant as they control and regulate the

volume of money and credit in the country.

The monetary policy of a country determines the supply of money in the

economy and the rate of interest thus charged by banks. The policy

also contains an economic overview and presents future forecasts thatare of crucial significance to all of us.


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Non-monetary functions of the RBI

The supervisory function of the RBI may be regarded as a non-

monetary function (though many consider this a monetary function).The promotion of sound banking in India is an important goal of theRBI,

the RBI has been given wide and drastic powers, under the BankingRegulation Act of 1949 - these powers relate to licensing of banks,branch expansion, liquidity of their assets, management and methods

of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has

greatly improved. Commercial banks have developed into financiallyand operationally sound and viable units.

The RBI's powers of supervision have now been extended to non-banking financial intermediaries.

Since independence, particularly after its nationalisation 1949, the RBI has

followed the promotional functions vigorously and has been responsible forstrong financial support to industrial and agricultural development in thecountry


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SEBISECURITIES EXCHANGE BOARD OF INDIA

Defence rules of India

Capital Issues (control) Act 1947

Controller of Capital Issues set up under the act

To Further the growth of companies

To avoid undue congestion or over crowding of

public issues in a particular period

To ensure that investment takes place in conformity

with objectives of five year plan

To ensure orderly growth of capital markets with

adequate protection to investors


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Companies Act and Securities control

(regulation) Act 1956

TO better control and regulate the companies

and capital market

Provisions relating to issue of prospectus

Disclosure of accounting policies and financialinformation

Listing of securities


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In spite of Companies Act and Securitiescontrol (regulation) Act 1956

Manipulation of security prices Price rigging

Insider trading

Delay in settlement (delivery of shares)

Delay in listing and commencement of tradingin shares


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Other issues

Lack of diversity in financial Instruments

Disclosure of financial information

Preponderance of speculative trading-

(dominance of speculative Trading)

Poor liquidity Lack of control over brokers


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SECURITIES EXCHANGE BOARD OF INDIA

Set up on April 12

th

1988

SECURITIES EXCHANGE BOARD OF INDIA ACT

1992

was passed in giving statutory powers to -SEBI

SEBI, established in 1988 and became a

fully autonomous body by the year 1992

with defined responsibilities to cover bothdevelopment & regulation of the market.


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Objectives

To protect the interest of investors so that there is a

steady flow of savings into the capital market To regulate the securities market and ensure fair

practices by the issue of securities so that they can raise

resources at minimum cost.

To promote efficient services by the brokers, merchant

bankers and other intermediaries so that they become

competitive and professional


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A Board by the name of the Securities and

Exchange Board ofIndia (SEBI) was

constituted under the SEBIAct toadminister its provisions in 1992 with one

chairman and five members


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SEBI FUNCTIONS

Regulatory functions

Regulation of stock exchange and self regulatoryorganisations

Registration and regulation of stock brokers, sub-brokers, registrar to all issue, Merchant bankers,

Underwriters, Portfolio managers and such otherintermediaries who are associated with securitiesmarket

Registration and regulation of all collective investmentschemes including mutual funds.

Prohibition of fraudulent and unfair trade practicesrelating to securities market

Prohibition of Insider trading.

Regulating substantial acquisition of shares and to takeover of companies


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SEBI FUNCTIONS

Developmental functions Promoting investor education

Conducting research and published information

useful to all market participants

Promotion of fair practices. Code of conduct

for self-regulatory organisations

Promoting self-regulatory organisations.


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SEBI POWERS

SEBI is vested with Powers to Call periodical returns from recognised stock

exchanges

Call any information or explanation from

recognised stock exchanges or their members Direct enquiries to be made in relation to affairs

of stock exchanges or their members

Grant approval to bye-laws of recognised stock

exchanges Make or amend bye-laws of recognised stock

exchanges


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SEBI POWERS

Compel listing of securities by publiccompanies

Control and regulate stock exchanges Grant registration to market intermediaries

Levy fees or other charges to carry out thepurpose of regulation

Declare the applicability of Section 17 of theSecurities contract (regulation) Act in any stateor area to grant licence to dealers in securities

k / A li h


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Tasks / Accomplishments

The Securities and Exchange Board of India, set up in 1988under an administrative arrangement, given statutory powers

with the enactment of the SEBI Act, 1992Capital Issues(Control) Act, 1947 repealed and the Office ofController of Capital Issues abolished; control over price andpremium of shares removed. Companies now free to raisefunds from securities markets after filing letter of offer withSEBI

SEBI introduces regulations for primary and secondarymarket intermediaries, bringing them within the regulatoryframeworkNew reforms by SEBI in the primary market include improveddisclosure standards, introduction of prudential norms andsimplification of issue procedures. Companies required todisclose all material facts and specific risk factors associated

with their projects while making public issues.Disclosure norms further strengthened by introducing cashflow statements


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Tasks / AccomplishmentsListing agreements of stock exchanges amended to require listedcompanies to furnish annual statement to the stock exchanges

showing variations between financial projections and projectedutilisation of funds in the offer document and at actuals, to enableshareholders to make comparisons between performance andpromisesNew issue procedures introduced - partial book building forinstitutional investors - aimed at reducing costs of issueSEBI introduces a code of advertisement for public issues for

ensuring fair and truthful disclosuresThe power to regulate stock exchanges delegated to SEBI by thegovernmentSEBI reconstitutes the governing boards of the stock exchanges,introduces capital adequacy norms for brokers and issues rules formaking the client/broker relationship more transparent, in particular,segregating client and broker accounts

Over the Counter Exchange of India (OTC) set up with computerisedon line screen based nation-wide electronic trading and rollingsettlement


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National Stock Exchange of India (NSE) set up as a stock exchangewith computerised on line screen based nationwide electronictradingThe Stock Exchange, Mumbai (BSE) introduces on line screenbased tradingCapital adequacy requirement for brokers introducedSystem of mark to market margins introduced on the stockexchanges"Revised carry forward" system introduced in place of "badla"National Securities Clearing Corporation Limited set up by the NSESEBI frames regulations for mutual funds. Private mutual funds

permitted and several such funds have already been set up. Allmutual funds allowed to apply for firm allotment in public issues -also aimed at reducing issue costs


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SEBI introduces regulations governing substantial acquisition of shares andtake-overs and lays down the conditions under which disclosures andmandatory public offers are to be made to the shareholdersIndian companies permitted to access international capital markets throughEuroissues

Foreign Direct Investment allowed in stock broking, asset managementcompanies, merchant banking and other non- bank finance companiesForeign Institutional Investors (FIIs) allowed to access to Indian capitalmarkets on registration with SEBIGuidelines for Offshore Venture Capital Funds announced by the governmentSEBI strengthens surveillance mechanisms in SEBI and directs all stockexchanges to have separate surveillance departmentsSEBI strengthens enforcement of its regulations. Begins the process of

prosecuting companies for mis-statements, issues show cause notices tomerchant bankers, ensures refunds of application money in several issues onaccount of mis-statements in the prospectus


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SEBI GUIDELINESPRIMARY MARKET

New company - < 12 months commercial production &no audited results = only at par

New co set up by existing company

Five year track record, consistent profitability & 50% equity inthe new company = can freely price its issue at premium

Private and closely held company

three year track record & consistent profitability = can freelyprice its issue at premium

Existing listed companies

Can raise fresh capital by freely pricing expanded capitalprovided Promoters contribution 50% on first 100 crores of capital

Promoters contribution 40% on the next200 crores of capital

Promoters contribution 30% on the next2300 crores of capital

15% on the balance issue amount


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SEBI GUIDELINES

PRIMARY MARKET cntd

Reservations under public subscription for variouscategories of persons

Permanent employees 10%

Indian mutual funds 20%

FII 15% DFI 20%

Shareholders of group companies 10%

Composite issue

Rights issue & public issue Differential price allowed

Difference in price needs to be justified

Lock in period

Promoters contribution 5 years (allotment//commencementof roduction whichever is late

SEBI GUIDELINES


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SEBI GUIDELINESPRIMARY MARKET

Guidelines for public issue Prospectus, risk factors, management, past history,

Justification for premium, collection centers 30,collection agents can not collect in cash, Quantum

of issue can not exceed amount mentioned in theprospectus, min of 50 shares of Rs 100, Minsubscription of 90% if not money to be returned,underwriting mandatory, listing of companies issue

3 crores to 5 crores, adequate disclosures onredemption etc for assesment of investment binvestor, Capital issue should be fully paid within120 days


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SEBI GUIDELINESSecondary Market

STOCK EXCHANGE

BOD reconstituted to include, public representatives, non members,government representative

Capital Adequacy norms laid down for members of all stock exchangesdepending on TO of trade and other factors

Uniform working hours

Information of transactions to SEBI within 24 hours Introducing the system of market making in less liquid scrips in phased

manner in all stock exchanges

Brokers

Compulsory registration

Capital adequacy

Accountability and transparence in broker client relationship (transactionprice and brokerage to be mentioned separately)

Can not underwrite more than 5% of the public issue

FII

Both primary and secondary market, no restriction on volume ofinvestment, max 5% of capital of a company, disinvestments only through

stock exchanges, Tax concessions

SEBI GUIDELINES


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SEBI GUIDELINES

Bonus issue

Rights issue

Debentures

Issue of debentures

Protection of debenture holders

Protection of interest of debenture holders

UnderwritersInvestor protection New issues

Prohibition of unfair trade practices

Regulation of insider trading

Investor education Grievance cell

Stock invest

New measures

Book Building

Buy back of shares


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India's oldest and first stock exchange: Mumbai (Bombay) StockExchange. Established in 1875. More than 6,000 stocks listed.Total number of stock exchanges in India: 22They are in: Ahmedabad, Bangalore, Calcutta, Chennai, Delhi

etc.There is also a National Stock Exchange (NSE) which is locatedin Mumbai.There is also an Over The Counter Exchange of India (OTCEI)which allows listing of small and medium sized companies.The regulatory agency which oversees the functioning of stock

markets is the Securities and Exchange Board of India (SEBI),which is also located in Bombay. SEBI's website location is athttp://www.sebi.com but you need a password to access it.


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National Securities Depository Limited (NSDL) andCentral Depository Services Limited (CDSL).National Stock Exchange (NSE) in India. In 1992 theGovernment of India authorized IDBI for establishing this

exchange.National Stock Exchange (NSE), over the Counter Exchange ofIndia Ltd, (OTCEI) and Inter-connected Stock Exchange of Indialimited (ISE) have nationwide trading facilities.Inter-connected Stock Exchange of India Ltd.(ISE) has beenpromoted by 14 Regional Stock Exchanges to provide cost-effective trading linkage/connectivity to all members of the

participating Exchanges, with the objective of widening themarket for the securities listed on these Exchanges.


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The Stock exchanges are the simple organizations having alimited number of members dealing with the stocks and bonds.

This is the list upon the listed stock exchanges in India. Here we

have placed it in alphabetical basis.Ahmedabad StockExchange Association Ltd.Bangalore StockExchangeBhubaneshwar Stock Exchange Association.CalcuttaStock ExchangeCochin Stock Exchnage Ltd.Coimbatore StockExchangeDelhi Stock Exchange AssociationGuwahati StockExchange Ltd.Hyderabad Stock Exchange Ltd.Jaipur StockExchange LtdKanara Stock Exchange LtdLudhiana Stock

Exchange AssociationLtdMadras Stock ExchangeMadhyaPradesh Stock Exchange Ltd.Mangalore Stock Exchange

LimitedMeerut Stock Exchange Ltd.Mumbai StockExchangeNational Stock Exchange IndiaOTC Exchange ofIndiaPune Stock Exchange Ltd.Uttar pradesh Stock Exchange

AssociationVado dara Stock Exchange Ltd.


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Banking

Bank meaning

Evolution of banking functions

Definition: Section 5 (2)

Accepting for the purpose of lending or

investments .

Classification of banks


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Indian banking system

ClassificationPrimary activities of

banking

Phases of Indian banking

Universal banking

Commercial merchantbanking

Co-operative banking

Narasimhans committee

recommendation

Types of banking

Pure banking//deposit banking Investment banking

Mixed banking/universal banking

Systems of banking

Unit banking

Branch banking

Group banking, holding companybanking,correspondent banking

Types of banks

Central bank

Commercial banks

Cooperative banks

LDB

RRB

Industrial banks,EXIM banks


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Classification

Primary activitiesof bankingPhases of Indian banking

Universal banking




recommendation

Primary functions Accepting deposits

Current, savings, FD andrecurring deposit, {hybriddeposits/flexi deposit /sweeping deposit}

Lending of loans

OD, Cash credit, loans ondifferent securities,discounting of bills

Secondary functions Agency functions

Collection of cheques,drafts, coupons,remittances

General utility functions

Trustee, safe deposit, safecustody, purchase and sale

of security, merchantbanking


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Classification

Primary activities ofbanking

Phases of IndianbankingUniversal banking



Narasimhans committeerecommendation

Nationalisation

Social control of banks Act 1968, feb 1969

673 D // 3021 positions

19th July 1969

14 banks

Objectives To control the heights of the

economy and to meetprogressively and serve better theneeds of the development of theeconomy in conformity nationalpolicy and objectives

The removal of control by few

Provision of adequate credit foragriculture and small industry andexports

Give professional bent to bankmanagement

14 b k i li d


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14 banks nationalized1. Central bank of India

limited

2. bank of India limited

3. Punjab national banklimited

4. Bank of Baroda limited

5. The united commercialbank limited

6. Canara bank limited

7. United bank of Indialimited

8. Deena bank limited9. Syndicate bank limited

10. The union bank of Indialimited

11. Allahabad bank limited

12. Indian bank limited13. Bank of Maharashtra

limited

14. Indian overseas banklimited

II phase April 19801. Andhra bank

2. The corporation bank

3. New bank of India

4. Punjab and sindh bank

5. Oriental bank ofCommerce

6. Vijaya bank


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Classification






Nationalisation Channalisation of funds

Deposit mobilisation

Branch expansion

Priority sector lending

Diversification of loan

portfolio Sound banking norms

Lead bank scheme

Service area approach

LPG Liberalisation Privatisation

Globalisation


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Classification






Liberalisation Deregulation interest rate

Recovery of debts due tobanks and financialinstitutions act 1993 Debt recovery tribunal

Capital adequacy norms Basel I & II

Belgium, Canada, France,Germany, Italy, Japan,Luxembourg, theNetherlands, Spain,Sweden, Switzerland, the

United Kingdom and theUnited States.

Investment Portfolio


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Classification






Liberalisation(till 1993 - DBODwv,DBS)dept of banking supervision

1997 DBS&DNBS

Annual financialinspection (CAMELS)

Capital adequacy,Asset

quality,Management,Earnings, andLiquidity

Systems and control

New private sector banks 100 cr /cap, 25 or 20%

promoters

Priority sector lending RBI norms &instructions


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Classification






Liberalisation

Local area banks

Aug 1996, 5 cr, 3 distr, 5 bks

set.

Securitisation and

reconstruction of financial

assets and enforcement ofsecurity interest ordinance

2002

Take over of assets

Asset Reconstruction

companies (ARC)


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Classification






Prudential norms were

introduced for incomerecognition, asset classification,

provisioning for delinquent

loans and for capital adequacy.

In order to reach the stipulated

capital adequacy norms,

substantial capital were

provided by the Government to

PSBs


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Classification






Government pre-emption of

banks' resources throughstatutory liquidity ratio (SLR)

and cash reserve ratio (CRR)

brought down in steps. Interest

rates on the deposits and

lending sides almost entirely

were deregulated.


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Classification






New private sector banks

allowed to promote andencourage competition. PSBs

were encouraged to approach

the public for raising resources.

Recovery of debts due to banks

and the Financial InstitutionsAct, 1993 was passed, and

special recovery tribunals set up

to facilitate quicker recovery of

loan arrears


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Classification






Bank lending norms liberalised

and a loan system to ensurebetter control over credit

introduced. Banks asked to set

up asset liability management

(ALM) systems. RBI guidelines

issued for risk management

systems in banks encompassing

credit, market and operational

risks.


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Classification






A credit information bureau

being established to identifybad risks. Derivative products

such as forward rate agreements

(FRAs) and interest rate swaps

(IRSs) introduced.


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Classification



Universal bankingCommercial merchant

banking



recommendation

Germany

II world war

IndianHistory


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Classification



Universal banking




recommendation

Concept

Universal Banking includes notonly services related to savingsand loans but also investments.

In practice the term 'universalbanks' refers to those banks thatoffer a wide range of financial

services, beyond commercialbanking and investment banking,insurance etc.

Universal banking is acombination of commercialbanking, investment banking andvarious other activities includinginsurance.

If specialised banking is the oneend universal banking is theother.This is most common inEuropean countries.

di b ki


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Classification



Universal banking




recommendation

ADVANTAGESSOFUNIVERSALBANKING

It results in greater economicefficiency in the form of lowercost, higher output and betterproducts.

DIS-ADVANTAGESSOFUNIVERSALBANKING

Larger the banks, the greater theeffects of their failure on thesystem.

There is the fear that suchinstitutions, by virtue of theirsheer size, would gain monopolypower in the market

combining commercial andinvestment banking can gives riseto conflict of interests .

RBI guidelines for conversion ofFI into universal bank

I di b ki


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Classification



Universal banking

Commercialmerchant bankingCo-operative banking


recommendation

Characteristics

Structure

Operations

Recent trends

I di b ki


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Classification



Universal banking


Co-operativebanking


unlike commercial banks these co-

operative banks do not lend on thebasis of a prime lending rate. Theyalso have various tax sops because oftheir holding pattern and lendingstructure and hence have loweroverheads. This enables them to give

a marginally higher percentage onsavings deposits. Many of thesecooperative banks diversified intospecialized areas (catering to the vastretail audience) like car finance,housing loans, truck finance etc. inorder to keep pace with their publicsector and private counterparts, the co-operative banks too have investedheavily in information technology tooffer high-end computerized bankingservices to its clients.

I di b ki t


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Classification



Universal banking


Co-operativebanking


History:

Nearly a 100 years ago RBI in 1951 (All India Rural Credit

Survey Committee)

Collaborator

Provider of finance to the state govtfor contribution to capital

National Agricultural credit (Longterm operations )fund

National Agricultural credit(stabilization)fund

National Cooperative DevelopmentCorporation 1962-63

NABARD 1982 to take over ruralcredit from RBI

Establishment of Cooperatives

State cooperative banks (as)Apexbanks

Central cooperative banks ( at districtlevel)

Primary credit societies


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Areas of financing

Cooperative banks in

India finance rural

areas under:

Farming

Cattle

Milk

Hatchery

Personal finance

Performance

50% of agricultural credit byCooperatives 40% bynationalised banks 10% byRRB, LDB and others

52896 cr dep, 62276 loans

1994 Primary CooperativeBanks deregulated

Minimum Lending Rate of12%

Cooperative banks in Indiafinance urban areas under: Industries

Self-employment

Small scale units

Home finance

Consumer finance

Personal finance

Narasimhans committee - 1998


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Narasimhans committee 1998

Advisory Group on Transparency in Monetary and FinancialPolicies was set up with Shri M. Narasimham as Chairman and ShriS.S. Tarapore as member, with the following terms of reference

i. To study present status of applicability and relevance andcompliance in India of the relevant standards and codes.

ii. To review the feasibility of compliance and the time frame withinwhich this can be achieved given the prevailing legal and

institutional practices in India.

iii. To compare the levels of adherence in India, vis-a-vis,industrialised countries and also emerging economies particularlyto understand Indias position and prioritise actions on some ofthe more important codes and standards.

iv. To chalk out a course of action for achieving the best practices

I di b ki t


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Classification



Universal banking



Narasimhans

committeerecommendation

The Report of the

Narasimham Committee-II, which was submitted tothe Government in 1998made a number ofrecommendations

coveringInstitutional

supervisory

legislative and

banking policies aspects.

Indian banking s stem


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Classification



Universal banking



Narasimhans

committeerecommendation

These recommendations relate

to capital adequacy

Asset quality

Non-performing asset

directed credit

prudential norms disclosure requirement

system and methods in banksstructural issues

Rural and small industrial credit

Regulation and supervision,legal and legislative framework.

Most of the recommendations have been acceptedand implemented by RBI. Consideration and

examination in respect of some remainingrecommendations is going on

B k t


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Banker customer

Who is a banker? Dealer in debt, his own and other peoples Institutions which carry on operations of giving and

receiving credit Japan Dr. Herbert.L.Hart

A banker is one who in the ordinary course of hisbusiness honours cheques drawn upon him by personsfro and for whom he receives money on current account

Sir. John Paget No person or body corporate or otherwise be a banker

who does not Take deposit accounts Take current accounts issue and pay cheques and Collect cheques crossed and un crossed for his customers

Sec 5(b) the banking regulation act


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Banker

One which transacts thebusiness of banking inIndia

Accepting for thepurpose of lending orinvestment deposits ofmoney from the public ,

repayable on demandor otherwise , withdrawable by cheque order orotherwise


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Case 1

In Mathews vs. Brown and Co. (1894)


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Pronouncements

Mathews cashed the cheques from the bankers, Brownand Co., and asked them to keep the proceeds in sundrydeposit account till he needed them; he had no account

of his own. Is Mathews a customer ?It was held that in order to constitute a person as acustomer of a bank he should have some sort of anaccount with the bank, but that the initial transaction didnot set up the relation of a banker and customer and that

there has to be some measure of continuity and custom.


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Case - 2

In Great Western Railway vs. London

and county banking Co. Ltd. (1901)

Pronouncements


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Pronouncements

Lord Brampton was of the view that for a person to bea customer It is not necessary to say that keeping ofan ordinary banking account is essential constitute acustomer of a bank and he said that "the habitual

receipt of cheques for collection from a person havingno account with a bank and payment over of theproceeds after clearance, would constitute such a partya customer On the other hand, Lord Davey with whomthe otherLaw Lords agreed said It is true that there is

no definition of customer in the Act But it is a wellknown expression , and I think that there must be somesort of account, either a deposit or a current account,or similar relation to make a man a customer of a

banker.


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Case 3

In Importers Co. Ltd. vs. Westminster Bank

Ltd. (1927)


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Pronouncements

The Court of Appeal held that the defendant bank

could claim the statutory protection of a bankcollecting a cheque for customer when it did so as

agent of a German bank whose own customer hasmisappropriated the cheque and forged anendorsement on it before paying into his account incircumstances which would have precluded the

German bank from relying on the statutory protectionitself.

C 4


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Case - 4

In Lad broke & Co. vs. Todd (1914)

Pronouncements


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Pronouncements

A thief of a cheque payable to one jobson forged thepayee's endorsement on the cheque and opened anaccount in that name with the stolen cheque. Thecheque was specially cleared at.the request of thethief,. and he drew out the proceeds the next day. The

fraud was discovered soon afterwards. It was held thatthe banker had acted in good faith, but was guilty ofnegligence in not obtaining Introduction or referencewhen opening the account, and that therefore he hadput him self outside the protection of Section 82 of the.

Bills of Exchange Act, 1882. The judge was of theopinion that the relation of banker and customer beganas soon as the cheque was handed in to the bankerfor collection and the bank was prepared to or agreedto open an account for him and not when it was paid.


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Case - 5

In Commissioners of Taxation vs. English

Scottish and Australian Bank Ltd (1920)

Pronouncements


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PronouncementsA man had opened a current account in a false name,

paid 20 in bank notes into it and one day later paid in astolen cheque, which the bank collected and credited hisaccount . It was held that the bank collected the chequefor a customer so as to be entitled to the statutoryprotection given to collecting banks. Lord Dunedon said

in his judgment: the word customer signifies arelationship in which duration is not of essence. A personwhose money has been accepted by the bank on thefooting that they undertake to honour cheques up to the

amount standing to his credit is, in the view of their lordships a customer of the bank in the sense of thestatute irrespective of whether his connection is of shortor long . The contrast is not between an habitu and anewcomer, but between a person for


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whom the bank performs a casual service, such as,

for instance, cashing a cheque for a person introducedy one of their customers, and a person who has anaccount of his own at the, bank".


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Case - 6

In Central Bank ofIndia vs. Gopi Nath Nair

and Others (1970)

Pronouncements


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Pronouncements

It was held by K.K. Mathew of the Kerala High Court

as follows: The term customer is sot defined in theAct. Broadly speaking, a customer is a person whohas the habit of resorting to the same place or personto do business, So far as banking transactions areconcerned, he is a person whose money has beenaccepted on the footing that the banker will honourdrawings up to the amount standing to his credit,

irrespective of his connection being of short of longstanding.


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Case - 7

In Robinson vs. Midland Bank Ltd. (1925)

Pronouncements


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Pronouncements

An account was opened in the plaintiffs name withthe defendant bank by a conspirator in a blackmailplot, who paid in a cheque obtained from the blackmailvictim in return for a promise, not to reveal his

indiscretion with the plaintiffs wife. It was held by theCourt of Appeal that since the conspirator actedwithout the plaintiffs authority and used the plaintiffsname fictitiously merely in order to carry out theconspiracy, there was no contract between the plaintiff

and the defendant bank and he could not thereforeclaim the proceeds of the cheque after it has beencollected.


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Case - 8

In McEvoy vs. Belfast Banking Co. Ltd.

(1935)

Pronouncements


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Pronouncements

A father directed his bank to transfer a deposit accountin his name into the joint names of himself and his son.It was held by a majority of the House ofLords that theson did not thereby become a customer of the bank andentered into no contractual relationship with it. LordAtkin9 in a minority opinion, considered that the fathercould be considered to have acted as though the sonhad authorised him to effect the transfer, and when theson later discovered what had happened, he could

have acquired the status of a customer and contractualrights against the bank by ratifying the transfer.


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Case - 9

In Stoney Supplies (Coventry) Ltd. Vs.

Midland Bank Ltd. (1965)

Pronouncements


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Pronouncements

Fox was an undischarged bankrupt and opened anaccount with Midland Bank Ltd., in the name of Stoney.Stan ton Supplies Ltd. without the knowledge or authority of directors. He forget the signatures of theChairman and the Secretary to open the account and

obtained cheque book. He siphoned off the moneycoming to the company and eventually when theliquidator looked into the affairs, he found Fox had runaway with 900 belonging to the company. It was held

by both the Trial and Appeal Courts that although anaccount had been opened ID the name of thecompany, it was not a customer as the circumstancesand the facts of the case did not create any contractualrelationship.


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Case 10

In Woods vs. Martin Bank Ltd. (1959)

Pronouncements


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Pronouncements

Woods had money but no business. He sought andgot Martin Banks manager's advice on 9th May, 1950,for investing, money in a private company. Later heopened an account on 1st June and invested further inthe same company. Ultimately he lost 5,000 frominvestments made before 1st June. and 11,000 fromsubsequest investments. He sued the bank for themanagers fraud or negligence. The manager hasknown that the private company was in difficulties andits account was overdrawn and regional office was

pressing for payment. It was held that if a bankmanager gives investment advice to a man whointends to become a customer of the bank and whoshortly afterwards does so, the manager and the bankas his


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employer owe the intending customer the samecontractual duty to advise him carefully as if he were

already a customer. The Court exonerated themanager from fraud charges but held him grosslynegligent. It further held that although Woods had noaccount he was a customer from the date he had

sought investment advice and authorised proceed ofhis other shares to be deposited in the bank.

C 11


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Case 11

In Hedley Byrne & Co. Ltd. vs. HeI1er and

Partners Ltd. (1964)

Pronouncements


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Pronouncements

The House of lords held that the bank is liable to paydamages to a third person at whose request it suppliesa reference as to the creditworthiness of one of itscustomers if the bank fails to exercise due care to

ensure that the reference is accurate and inconsequence of its inaccuracy the third party suffersloss.

C 12


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Case 12

In Savory (E.B) and Co. vs. Lloyds Bank Ltd.

(1932)

Pronouncements


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Pronouncements

The bank collected bearer cheques drawn by theStockbrokers, E.B. Savory & Co.; for customers whothey knew or should have known were employees (orwives of employees) of the stock-brokers. The chequeswere paid in at branches other than the customer's own

branches, and the bank's system then in force wassuch that the collecting branch did not know who werethe drawers of the cheques. Lawrence L.J. was notsatisfied that the parties for whose accounts cheques

were collected. were customers of the bank for thepurposes of Section 82 of the Bills of Exchange Act,1882 as their accounts were at branches of the bankother than which actually collected the cheques

C 13


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Case - 13

In Auchteroni & Co. vs. Midland Bank Ltd.

(1928)

Pronouncements


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The defendant bank was instructed by its customer topay a bill of exchange which the customer hadaccepted in favour of the plaintiff, and when the billwas presented by the plaintiffs clerk for payment over

the counter at the defendant bank after beingendorsed by the plaintiff, the bank paid the clerk incash, although the bill was for a substantial amount(867); the clerk then absconded with the cash andthe plaintiff sued the defendant bank for damages. The

evidence showed that it was normal for bills for substantial amounts to be presented by another bankfor settlement between the banks, and not for paymentin cash. Wright, J. held that although the defendantbank may have


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acted negligently, it could at most only be guilty of a

breach of contract with its own customer, theacceptor of the bill; it did not follow that the bank wasalso liable to the plaintiff as payees of the bill, and sothey could not recover the value of bill from it asdamages.


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customer

Who is a customer?

Duration theory - Sir. John Paget To constitute a customer, there must be a regular course

or habit of dealing in the nature of regular bankingbusiness.

Mathews vs. Williams, Brown & Co., 1894

Ladbroke vs. Todd - 1914 The relation of a banker and customer begins as soon as

the first cheque is paid in and accepted for collection andnot merely when it is paid


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customer

Commissioner of taxation vs. English , Scottishand Australian bank - 1920 The word customer signifies a relationship in which

duration is not of the essence.A person whosemoney has bee accepted by the bank on the footing thatthe bank undertakes to honour cheques up to the amountstanding to his credit, is, in the view of the lordship, acustomer of the bank in the sense of the statuteirrespective of whether his connection being of short or

long standing

Central bank of India vs. Gopinathan Nair - 1970


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Banker customer

Single transaction

Frequency anticipated

Dealing to be banking naturePosition regarding deposit account (FD)

G l l ti


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General relation

between banker and customer

Not merely depository / trustee

Debtor and creditor

Foley vs. hill 1848 Superadded obligation to honour

customers balances


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Banker customer


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Banker customer


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Retail banking

Retail banking is typical mass-market bankingwhere individual customers use local branches oflarger commercial banks for their financial

requirements.Services offered include:

savings and checking accounts,

mortgages,

personal loans, debit cards, credit cards,

Consumer credit

Private banking for high net worth


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Private banking for high net- worth

individuals

High net worth individuals

Income / net worth

Services

Premier Banking

Personal Investment services

Trust services

Investment planning

Financial treasury

Cash management

Guarantees


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Bank assurance

Banking and insurance services

Conflict of interest

Combination products Leverage on the existing customer base

Innovative insurance products


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Leasing

Is an arrangement between two parties

whereby the lessor (leasing company)

arranges to buy capital equipment for use ofthe lessee (user) for an agreed period of

time in return for payment of rent.

Leasing


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g

Definition:Lease is a form of contract transferring the use oroccupancy of land, space, structure or equipmentin consideration of a payment, usually in the form

of rent. Lessor (leasing company - remains the

owner)

Lessee: (the user may be an individual ororganizations)

Rentals are predetermines and are payable at fixedintervals of time according to mutual convenience


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Types of lease

Financial lease

Operating lease

Leverage lease

Sale and lease back

Cross border lease


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Financial lease

Capital lease, net lease, long term lease, close lease

Irrevocable , non cancelable agreement for use and agrees to pay the

rentals for the entire lease period. (economic life of the equipment)

Can be with purchase option Rate of lease fixed on the basis of kind of lease, period of lease,

periodicity of rent payment, rate of depreciation and other tax

benefits.

The leasing co will ask for collaterals / guarantees

Lessee will bear the maintenance cost and bear the risk of

obsolescenceHandling warranty claims

Value is very high ( aircraft ships, heavy machinery ets)

i l


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Operating lease

Service lease, short term lease, true lease

Lease is for a limited period

Can be terminated giving notice period Lessor will bear the maintenance cost and bear

the risk of obsolescence

Handling warranty claims

Value of the equipment is low (computers

office equipment)

l


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Leverage lease

Leverage lease

Three parties lessor , lessee and lender

Position of Lessee is the same as in financial or

operating lease Lessor finances some portion of the value of equipment

and the balance is borrowed from a lender on specificterms for payment of principal and interest (includingassignment of rentals) mortgage

Lessor gets the advantage of 100% depreciation bearingonly Partial cost of the equipment - interest can beclaimed as a charge on profits)

S l d l b k


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Sale and lease back

A person who has an asset sells it to the

lessor and takes the asset back on lease

Net lease - Lessee pays all maintenancecharges, insurance, property taxes etc.

May allow repurchase after the lease period.

Cross border lease


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Cross border lease

International leasing

Aircraft

Domiciles in different countriesLaws of different countries

Contents of a lease agreement


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g

Description of lessor lessee and equipment

Amount, time and place of lease rental payment

Time and place of equipment delivery

Lessees Responsibility for taking possession of leasedequipment

Lessees right to enjoy the benefits of warranties providedby the equipment manufacturer

Insurance of the equipment

Options for renewal

Options for purchase

Return of the equipment

Arbitration procedure in case of dispute etc.


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lease

Lease as a concept involves a contract where bythe ownership, financing and risk taking of anyequipment or asset are separated and shared by

two or more parties. Thus, the lessor may financeand lessee may accept the risk through the use of itwhile a third party may own it. Alternatively thelessor may finance and own it while the lessee

enjoys the use of it and bears the risk. There arevarious combinations in which the abovecharacteristics are shared by the lessor and lessee

Factoring


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Is a method of financing whereby a

company sells its trade debts at a discountto a financial institution.

factoring is a service involving the purchase

by a financial organization called a factor, ofreceivables owed to manufacturers and

distributors by their customers, with the factor

assuming full credit and collection

responsibility Robert. W. Johnson

OperationF t i t


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Factoring arrangement Between factor(financer) and client (who sells goods)

Purchase of invoice

Client sells goods and prepares the invoice

Goods are sent to the customers (without raising abill of exchange)

The debt due to the client is assigned to the factorby the client

The client hands over the invoice to the factoralong with delivery challans, R/R, L/R

The factor makes immediate payment to the clientusually up to 80% of invoice value the balance20% on realization of the amount

TermsAssignment of debt in favour of the factor


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Assignment of debt in favour of the factor

Selling limits for the clientConditions With recourse / without recourse

Terms of payments to the the factor

Interest to the factor on the account wherecredit has been sanctioned

OD facility and rate of interest to be charges

by the factor

F ti f f t


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Functions of a factor

Purchase and collection of debts

Sales ledger management

Credit investigation and undertaking ofcredit risk

Provision of finance against debts

Rendering consultancy services

Types of factoring

Full service factoring (without recourse factoring)-


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Full service factoring (without recourse factoring)( performs all tasks including takes credit risk also

With recourse factoring Does not take takes credit risk

- Re-factoring charges for collection of over due accounts

Maturity factoring Pays the client only on maturity and collection of money due

Bulk factoring Disclosed factoring, Notified factoring

Sales ledger administration, credit control, collection work etc has to bedone by the client himself

Factor simply collects the debts on behalf of the client

Invoice factoring Factor provides finance against invoices without undertaking any otherfunction (All other functions are performed by the client)

Types of factoring

Agency factoring ( client and factor share work )


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Agency factoring ( client and factor share work ) Factor provides finance against invoices and takes the credit risk

Sales ledger administration, credit control, collection work etc has to bedone by the client

International factoring

Suppliers guarantee factoring Factor guarantees the supplier of goods against invoices raised

by the supplier upon another supplierLimited factoring

Does not take up all invoices

Buyer based factoring(selected buyer based factoring) Buyer approaches and gets finance for the seller (a reputed buyer

may be able to do this) without recourse to the seller

Seller based factoring (selected seller based factoring) Seller,Instead of discounting his bills, the bills are sold to the

factor

Micro finance


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Microfinance is a term for the practice of

providing financial services, such as micro credit,micro savings or micro insurance to poor people.

Most transactions involve small amounts ofmoney

Small credit/ small savingsUsually operate through SHG/NGO

Self employment schemes /tiny industries /cottageindustries

By helping them to accumulate usably large sums ofmoney, this expands their choices and reduces the risksthey face.

Micro financeI I di i fi t it t t id 1970 h


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In India, micro finance traces its roots to mid 1970s whensome prominent Indian NGO like Myrada & Pradan startedusing the SelfHelp Group (SHG) model.

It is a community driven and managed micro financemodel where the NGO plays the role of a facilitator, forinstance providing capacity building services to the groupsand building relationships with banks.Better client outreach.

less dependent on donor funds

passes the actual service charge to the clients while retaining a margin for itsown growth.

These models have proven to be robust revenue models.

Slowly a distinct trend of shifting from non profit, grant-supportedorganizations to for profit institutions

(non-banking financial corporations) became visible in Indian micro financesector

Micro finance


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Today, micro finance plays a major role inthe development of many African, Asian,and Latin American nations. Its impact is

substantial enough to have warrantedacknowledgment by the United Nationswho declared 2005 "The international yearof micro finance", reminding people that

millions worldwide benefit from microfinance activities

Mutual funds


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A fund established in the form of atrust by a sponsor, to raise monies bytrustees through the sale of units to thepublic, under one or more schemes, for

investing in securities in accordance withthese regulations

- Securities and Exchange Board of India

(Mutual Funds) regulation 1993

Foreign and colonial government trust of London 1868USA and Europe, far east and Latin America 1930s

UTI 1964 (Unit scheme 1964)

HISTORY OF MUTUAL FUNDS

The concept of mutual funds is a new feather in the cap of Indiancapital Market but not to international capital markets


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capital Market but not to international capital markets.

The formal origin of mutual funds can be traced to.

Belgium where Society Generale de Belgique, was establishedin 1822 as an investment company to finance investments innational industries with high risks.

In 1868 the Foreign and Colonial Government Trust wasestablished in England to spread risks for investors over a largenumber of securities.

In 1920s the concept of mutual funds spread in U.S.A and theMassachusetts Investor Trust, was launched in 1924.

The 1929 stock market crash added to the flourish of securitiesregulation that took place in 1930s, which created the Securitiesand Exchange Commission (SEC).

In 1932 the Canadian Investment Fund was first mutual fund inCanada to issue its share to general public. Two other fundsorganized in 1930s were Commonwealth InternationalCorporation Limited and Corporate Investors Limited.

Since then the concept of mutual funds has been growing all aroundthe world


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Third Phase (1993-2003): A new era began in the Indian Mutual Fund industry withthe entry of private sector funds in 1993, giving Indian investors a wider choice of fundfamilies.


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Kothari Pioneer mutual fund was the first private sector fund in association with aforeign fund.

Private international players like Morgan Stanley, Jardine Fleming, JP Morgan,George Soros and Capital International entered the Indian market.

The assets under the management by the end of January 31st 2005 increased to$34927mn from $23,260mn in march 1995.

At the end of 2003 there were 33 mutual funds with total assets worth Rs. 1,21,805

crores.The UTI with Rs. 44,541 crores of assets under management, was way ahead of

other mutual funds.

Fourth Phase (Since February 2003): In February 2003, following the repeal of theUnit Trust Of India Act, 1963, UTI was bifurcated into two separate entities.

One is the specified undertaking of the Unit Trust Of India representing the assets of

US 64 scheme and certain other schemes.

The second is the UTI Mutual Fund Ltd. Sponsored by SBI, PNB, BOB and LIC. It isregistered with SEBI and functions under the Mutual Fund Regulations.

With recent mergers taking place among different private sectors funds, the mutualfund industry has entered its current phase of consolidation and growth.

CONCEPT OF MUTUAL FUNDS


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Returns

Financial Market

Mutual Funds

Small Investors

Earnings &Appreciation

Investments

Professional FundManagement

Pooling Savings

With the emergence of the capital market at the centre stage of the Indian FinancialSystem, the Indian Capital market witnessed a significant institutional developmentin the form of a diversified structure of mutual funds and the size of investors hasalso increased rapidly.

The concept of Mutual funds was conceived to mobilise savings from people andinvest them in a mix of corporate and government securities. The mutual fundoperators actively manage this portfolio of securities and earn income through

dividend, interest and capital gains, which is eventually passed on to mutual fundshareholders. Therefore Mutual funds are the financial intermediaries as shown inthe diagram.

It pools the savings, particularly of therelatively small investors, and investsthem in a well diversified portfolio of sound investment.

Mutual funds issue securities (known asunits) to the investors (known as unitholders) in accordance with the quantumof of money invested by them.

Types of fund


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On the basis of operation and execution Open ended

Close ended

On the basis of yield and investment pattern

Income fund Growth fund

Balanced fund

Specialised fund

Money market mutual fund Taxation fund

Open ended


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Size of the fund and duration of the fund is not predetermined

Offers completer flexibility with regard to oneinvestment or disinvestment

These units are not publicly traded (fund is ready torepurchase)

Investor is offered instant liquidity

The main objective of the fund is income generation

Prices are linked to net asset value

Fund managers are careful with investments as theyhave to meet redemption demands

Close endedSize of the fund and duration of the fund are pre


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Size of the fund and duration of the fund are predetermined

The period and target amount of the fund is definite andfixed before hand

The door is closed once the period is over /target isreached

These units are publicly traded through stock exchanges No repurchase facility

Redeemed only on maturity: value dependant on valueof assets realised per unit

Main objective is capital appreciation (marketcondition favourable / unfavourable)

Prices are quoted at a discount of up to 40% on NAV

Yield and investment pattern based funds

Income fund


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Income fund Aims at generating and distributing regular income to the members on a

periodical basis. Aims at average returns higher than bank deposits

Investor is assures of regular income at periodic intervals

Objective is to declare regular dividends rather than capital appreciation

The pattern of investments is oriented towards high and fixed income yieldingsecurities like debentures bonds

Best suited for old and retires people who may not have regular income

Growth fund Aims at long term gains

Aims at capital appreciation.

Investor is not assured of regular income at periodic intervals

Objective is to meet investors need for capital appreciation

May declare dividend, but the principal objective is only capital appreciation

The pattern of investments is oriented towards high growth equity capital

Best suited for salaried and business

Yield and investment pattern based funds

Balanced fund Income cum growth fund


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Aims at generating income as well as capital appreciation.

business financial environment

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