indian banking and money market

7/28/2019 Indian Banking and Money Market

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Banking sector in IndiaNon-Banking Financial Companies

broadly fall into three categories, viz., (i) NBFCs accepting deposits from public; (ii) NBFCs notaccepting/holding public deposits; (iii) core investment companies (those acquiring shares /securities of their group/ holding/ subsidiary companies to extent of not less than 90 % oftotal assets and which do not accept public deposit).

Scheduled Banks of India

Banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act,

1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laiddown vide section 42 (6) (a) of the Act. The banks included in this schedule list should fulfiltwo conditions.

The paid capital and collected funds of bank should not be less than Rs. 5 Lakh

Any activity of the bank will not adversely affect the interests of depositors.

Every Scheduled bank enjoys the following facilities.

Such bank becomes eligible for debts/loans on bank rate from the RBI.

Such banks automatically acquire the membership of clearing house.National Housing Bank (NHB)

Wholly-owned subsidiary of RBI to act as an apex level institution for housing. Primaryobjectives are:

To promote a sound, healthy, viable and cost effective housing finance system to alsegments of the population and to integrate the housing finance system with the overallfinancial system.

To augment resources for the sector and channelise them for housing.

To make housing credit more affordable.

To regulate the activities of housing finance companies.

To encourage augmentation of supply of buildable land and also building materials forhousing and to upgrade the housing stock in the country.

National Bank for Agriculture and Rural Development (NABARD)

The majority stake is held by the Reserve Bank.

Apex Development Bank with a mandate for facilitating credit flow for promotion anddevelopment of agriculture, small-scale industries, cottage and village industries, handicraftsand other rural crafts.

It also has the mandate to support all other allied economic activities in rural areas, promoteintegrated and sustainable rural development and secure prosperity of rural areas.

Minimum Reserve System

RBI is required to maintain a Gold and Foreign Exchange Reserves of 200 Crore of which atleast 115 Crore should be Gold.

CASA Deposits: Current Account Saving Account Deposits As an aggregate the CASA deposits are low interest deposits for the Banks compared to other

types of the deposits. So banks tend to increase the CASA deposits and for this they offervarious services such as salary accounts to companies, and encouraging merchants to opencurrent accounts, and use their cash-management facilities.

Bank with High CASA ratio (CASA deposits as % of total deposits) are in a more comfortableposition than the Banks with low CASA ratios, which are more dependent on term deposits fortheir funding, and are vulnerable to interest rate shocks in the economy, plus lower spreadthey earn.

Deposit Insurance

Idea behind the Deposit Insurance is to boost the faith of the public in the banking system,and provides protection against the loss of deposits to a significant extent. In India, the bankdeposits are covered under the insurance scheme provided by Deposit Insurance and CreditGuarantee Corporation (DICGC). DGCIC is a wholly owned subsidiary of the Reserve Bank ofIndia.


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All commercial banks including branches of foreign banks functioning in India, local areabanks and regional rural banks are insured by the DICGC.

All State, Central and Primary cooperative banks, also called urban cooperative banksfunctioning in States / Union Territories are covered under the Deposit Insurance System.

At present all co-operative banks other than those from Meghalaya, ChandigarhLakshadweep and Dadra and Nagar Haveli are covered under the deposit insurance system ofDICGC.

Primary agriculture cooperative societies (PACS), which are village level cooperatives and

disburse short term credits are NOT insured by the DICGC. So around 95000 PACS in thecountry are out of coverage of the DICGC.

The DICGC insures all deposit accounts including savings, fixed, current, recurring, except:1. Deposits of the Foreign Governments2. Deposits of the Central and State Governments.

Maximum amount per depositor insured is ` 1 Lakh including Principal and Interest.

Insurance cost is borne by the bank which is insured. The DGCIC charges 10 paise per 100 asinsurance premium.

Bill of exchange

3 parties in the bill of Exchange. BOE is a written negotiable Instrument which contains anunconditional order

Parties are Drawer, Drawee and Payee. A minor can be a Drawer but not a Drawee becausehe can not incur liability.

Promissory Note

Paper with a writing which as a promise. But it does not mean that we write I owe you and itbecomes a PN.

PN is always in writing, has an unconditional undertaking called promise.

When a person issues a promissory note, he/ she would have to stamp it as per the IndianStamp Act and normally a revenue stamp is affixed on the PN signed by the promissory.

The PN can be Demand Promissory Note or Usance Promissory Note. Demand PromissoryNote has to be paid immediately on demand and Usance Promissory Note has to be paid aftercertain time period.

Is a currency Note a promissory note?

Currency notes are money and they dont fulfil the conditions of the PN. The currency isexcluded from NI act and governed by Indian Currency Act. So Currency notes are notpromissory Notes.

Inland Bill & Foreign Bill

A bill that is drawn in India and paid in India or out of India to a person, who is in India,whether Indian or Foreigner, is Inland Bill. Simply, a bill drawn in India and paid in India is aInland Bill.

A bill which is NOT drawn in India but is payable in India to a person, who is in India and isIndian or a foreigner is a Foreign Bill.

Hundi:

Hundi is the Desi version of a Bill of Exchange. They are used conventionally, not stamped

and a vernacular language is written on them. They are still in use and are governed by localpractices only.Cheque

A cheque is a bill of exchange in which one party (Drawee) is a Bank. So a Drawer (accountHolder) draws Cheque on (Drawee bank) in the name of a Payee. The Drawer has to write theamount in both in figures and words.

Bearer Cheque: Payable to the bearer. Sometimes Self is written, that is also a bearer cheque payable to

the account holder.


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Cheque Truncation:

NI act was amended in 2002 and after that Cheque also means a Cheque in electronic form.clearing of checks on basis of electronic checks is called Cheque Truncation.

Electronic image is generated and it is used for clearing, thus at that point Physical Movementof Cheque is stopped. system of cheque clearing and settlement between banks based onelectronic data/ images or both without physical exchange of instrument. results in fasterclearance, (T+0) in local and T+1 in intercity clearing.

Demand Drafts

Demand draft is discussed in section 85(A) of the NI Act. A Demand draft is an order to paymoney drawn at one office of a Bank upon another office of the same bank for a sum ofmoney payable to order on demand.

A Demand Draft can NOT be paid t a bearer

A DD is negotiable and its features are similar to bill of exchange and NOT a Check.

If a Bank fails to honour the Draft, the Bank is liable and not the person.

Cheque has been defined in Negotiable Instruments Act 1881 section 6. A cheque is a bill ofexchange drawn on a specified bank and not expressed to be payable otherwise than ondemand.

A DD has been defined by Negotiable Instruments Act 1881 in section 85. A DD is an order topay money drawn by one office of a bank upon another office of the same bank bank for asum of money payable to order on demand.

Commercial paper

Unsecured promissory note with a fixed maturity of 1 to 15 days. money-market securityissued (sold) by corporations (listed company with working capital R 5 crore) to get money tomeet short term debt obligations, and is only backed by an issuing bank or corporation'spromise to pay face amount on maturity date specified on note. Since it is not backed bycollateral, only firms with excellent credit ratings from a recognized rating agency will be able

to sell their commercial paper at a reasonable price. usually sold at a discount from facevalue, and carries higher interest repayment rates than bonds.

Commercial bill

Issued by PVT firms, pourpose being to reimburse the seller firm while buyer firm delayspayment.

Commercial deposit

Certificate used to have borrowing mechanism from a particular bank of financial institutionto other bank of FI

Takeout Financing

CTS- 2010From January 1, 2013, cheques which do not conform toCTS-2010 standards would not be entertained by banks.CTS-2010 is a set of benchmarks towards achievingstandardization of cheques issued by banks all over India.

These include provision of mandatory minimum securityfeatures on cheque forms such as quality of paper,watermark, banks logo in invisible ink, void pantograph

and standardization of field placements on cheques.Indian Banks Association (IBA) and National PaymentsCorporation of India (NPCI) are coordinating with banks onimplementation. Benchmark prescriptions known as CTS-2010 standard are to be implemented by December 31,2012. Benefits: Operational efficiency, Homogeneity insecurity features, No fear of loss of instruments in transit.Limitations of existing clearing system in terms ofgeography or jurisdiction can be removed. Shorterclearing cycle


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Infrastructure projects have a very long gestation period. These projects involve a heavyinvestment and the repayment period for the loans taken on these projects is very long,generally 8 to 10 years.

In India, Banks cannot go beyond an exposure limit, which refers to limits for arrangementsfor providing funds or credit including loans and advances, debt and equity securities, loansubstitute securities, and financial leases. This exposure limit is fixed by the Reserve Bank ofIndia.

In Take out Financing, there are three parties:

1. Project Company 2. Lending Company (which may be a commercial bank as well as FI (Financial Institution)

3. A taking over institution (Which may be a leading Bank, Consortium of banks or FinancialInstitution) In India IIFCL is a Taking Over institution.

Job of third party mentioned above (IIFCL or other FI) is to enter into an agreement whichmakes a provision that Lending Company will transfer part/ whole of outstanding to takingover institution on a predetermined basis. This means that loan provided by leading bank /consortium of banks to project company are taken over after a certain period by taking overinstitution. This saves lending firm from a possibility of default and Asset Liability Mismatch orALM considerations in Takeout Financing.

In this context, the Indian Infrastructure Finance Company Ltd (It was established in 1956)was set up as a special purpose vehicle for providing long term financial assistance to the

infrastructure projects.Take out Financing Scheme was launched in India in 2010 with following objectives :

a) Boost the availability of longer tenure debt finance for infrastructure projects.b) To address sectoral / group / entity exposure issues and asset-liability mismatch concerns of

Lenders, who are providing debt financing to infrastructure projects.c) To expand sources of finance for infrastructure projects by facilitating participation of new

entities i.e. medium / small sized banks, insurance companies and pension funds.Bancassurance or Bank Insurance Model

Refers to distribution of insurance and related financial products by Banks whose mainbusiness is NOT insurance. So, simply Bancassurance, i.e., banc + assurance, refers to banksselling insurance products. Bancassurance term first appeared in France in 1980, to definethe sale of insurance products through banks distribution channels.

Benefits:1. This is a referral business in which the banks tend to leverage the existing clientele.2. Insurance companies get the benefit because they can have distribution relationships

with multiple insurers.Narrow Banking Bank places its funds under risk free assets and maturity of liabilities matches the assets and

there is No possibility of Asset Liability Mismatch. Narrow in sense of engagement of fundsand not in activity. So, simply, Narrow Banking involves mobilizing the large part of thedeposits in Risk Free assets such as Government Securities.

Non Performing Assets (NPA) Any Loan on which principal or instalment of the interest is over due for more than 3 months

(90 Days) after end of a quarter is a NPA. However, this is not true for farm loans. In context with the farm loans, the following conditions apply:

a) For short duration crop agriculture loans such as paddy, Jowar, Bajra etc. if the loan(installment / interest) is NOT paid for 2 crop seasons (means Kharif, and next Rabi in theabove question) , it would be termed as a NPA.

b) For Long Duration Crops, the above would be 1 Crop season from the due date. Any loan which comes under the above category is placed in accounts as Non Performing

Asset.


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However, once loan does not get repaid for 12 months, it is called Substandard Asset. Fornext 12 months, it would be called Doubtful asset and after 2 years, it would be calledUncertain. All these are categories of the NPAs.

Most important implication of the NPA on banking system is that a bank can neither credit theincome nor debit to loss, unless either recovered or identified as loss. If a borrower hasmultiple accounts, all accounts would be considered NPA if one account becomes NPA.

NPAs can be resold as well. The purchasers are called Asset Reconstruction Companiessuch as Asset Reconstruction Company (India) (ARCIL). A bank can sell NPA from its

books to asset reconstruction companies such only if it has remained NPA for at least twoyears. These sales are only on Cash Basis and the purchasing bank/ company would have tokeep the accounts for at least 15 months before it sells to other bank. Once the NPA ispurchased, it is classified as Standard for a period of 90 days.

Priority Sector Lending: currently 40% Includes Agriculture Finance, Small Enterprises, Retail Trade, Micro Credit, Education Loans

and housing loans. Foreign banks have been given a target of 32% of the Net Bank Credit to priority sector,

however, there is no lower limit fixed for agriculture. Target Credit to women beneficiaries is 5%.Self Help Groups

Group which represents a financial intermediation, but financial intermediation is not only

primary. Idea is to combine the access to low-cost financial services with a process of selfmanagement and development.

Usually formed and supported by NGOs or Government agencies. SHGs may or may NOT beregistered. Number of members is 10-25. But, for irrigation projects there is no upper ceiling.One person from one family can become a member. These members save the amount andthis amount is used as loans.

Regional Rural Banks

Came into existence on Gandhi Jayanti in 1975 with the formation of a Prathama GrameenBank. The rural banks had the legislative backing of the Regional Rural Banks Act 1976 . Thisact allowed the government to set up banks from time to time wherever it considerednecessary. The RRBs were owned by three entities with their respective shares as follows:

a) Central government 50%b) State government 15%c) Sponsor bank 35%

As of November 2012, the number of RRBs has been reduced to 71. The government plans toreduce this number to 64 by March 2013 and to 48 over a longer period.

Financial Inclusion

Delivery of financial services (Not only Banking) at an affordable cost to the vast sections ofthe disadvantaged and low profile groups of the society. It helps the vulnerable groups suchas low income groups, weaker sections, etc., to increase incomes, acquire capital, managerisk and work their way out of poverty through secure savings, appropriately priced credit andinsurance products, and payment services.

Financial Inclusion includes:

Regular financial Intermediation such as banking which includes no frills accounts for sending,receiving money.

Saving Products which are suitable to the pattern of cash flow of the poor household.

Availability of Money transfer facilities, of small loans and overdrafts for productive, personal& other uses.

Summary of the Rangarajan Committee Report on Financial Inclusion: GoI should launch a National Mission on Financial Inclusion (NaMFI).


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GoI should launch a National Rural Financial Inclusion Plan (NRFIP) with target toprovide access to comprehensive financial services, including credit, to at least 50% offinancially excluded households; say 55.77 million by 2012 through rural/semi-urbanbranches of Commercial Banks and Regional Rural Banks.

Two funds should be launched with NABARD the Financial Inclusion Promotion &Development Fund and the Financial Inclusion Technology Fundwith an initial corpusof Rs. 500 crore each to be contributed in equal proportion by GoI / RBI / NABARD. Thisrecommendation has already been accepted by GoI.

The BC models riding on appropriate technology can deliver this outreach and should formthe core of the strategy. Ultimately, banks should endeavour to have a BC touch point in eachof the 6, 00,000 villages in the country.

NABARD Act should be amended to enable it to provide micro finance services to the urbanpoor.

The Joint Liability Groups (JLGs), an upgradation of SHG model, could be an effective way ofFinancial Inclusion.

Recommended linking of micro credit with micro-insurance, which is the key element in thefinancial services package for people at the bottom of the pyramid.

Two funds namely Financial Inclusion Fund (FIF) (to meet the costs of developmental andpromotional interventions towards financial inclusion) and Financial Inclusion TechnologyFund (FITF)(to meet the costs of technology adoption) each having initial corpus of ` 500

crore have been constituted by the GOI and placed with NABARD .Indian Money Market

Money market refers to market for short-term borrowing and lending generally not extendingperiod of 12 months.

RBI is apex organization in Indian money market. In April 1988, the RBI set up the Discountand Finance House of India (DFHI) to perform the function of stabilizing the money market.

Commercial banks are the most important lenders in the money market. The Indian moneymarket is divided into organized and unorganized sectors. Unregulated non-bank financialintermediaries such as chit funds and nidhis, indigenous bankers and money lenders operatein the unorganized sector of the Indian money market.

Chit fund is a fund collected by periodical subscriptions made by its members. Collection is

provided to a particular member either on basis of bids or by draw. Before starting the secondround of distribution, each member is assured of becoming the beneficiary.

Kerala and Tamil Nadu account for major share of chit fund business. In principle, Nidhis aresimilar to chit fund. Each member makes a contribution to form a deposit. The member canavail loan facility from this deposit at relatively lower rate of interest.

WAYS & MEANS ADVANCES

These are temporary advances (overdrafts) extended by RBI to the govt. Section 17(5) of RBIAct allows RBI to make WMA both to the Central and State Govt.

Objective - to bridge interval between expenditure and receipts. They are not a source offinance but are meant to provide support, for purely temporary difficulties that arise onaccount of mismatch/shortfall in revenue or other receipts for meeting govt. liabilities. Theyhave to be periodically adjusted to enable use of such financing for future mis-matches.

Start - On March 26, 1997, GOI and RBI signed an agreement putting ad hoc T-bills system toend w.e.f April 1, 1997.

Interest rate: interest rate on WMA is at or around bank rate (with small adjustment fordifferent kinds of WMA for State Govt.) and overdrawing if any carries 2% higher interest.

Duration 10 consecutive working days for Central Govt. and 14 days for State Govt.

Amount ceiling Limits on WMA are fixed at the beginning of a fiscal year by RBI. For 2005-06, Central Govt. limit is Rs.10000 cr for Apr-Sept and Rs.6000 cr for Oct-Mar.

Minimum balances: minimum balance required to be maintained by Govt. on Fridays and atclose of Govt.s or RBIs financial year shouldnt be less than Rs.100 cr and on any other


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working day not less than Rs.10 cr. Further when 75% of WMA is utilised, the RBI mayconsider fresh flotation of market loans depending on the market conditions.

Organised Indian Money MarketCall Money Market

Deals in one-day loans, also known as call loans or call money. Such loans may or may not berenewed the next day.

Main participants, both on lending and borrowing site, are banks. Deficit and surplus banksare brought together by brokers. This market is very sensitive as cash position of different

banks and keeps on changing drastically. Thus, it acts as possibly the best available indicatorof the liquidity position of the organized money marked. During 1980s, Indian Banks Association (IBA) had put a ceiling of 10% on call money rate.

However, with establishment of Discount and Finance House of India (DFHI) in 1988, DFHI wasallowed operate both on the lender and borrower sides and was exempted from the ceilingrate set by IBA.

In May 1989, ceiling on call money rate was withdrawn altogether. These measures weretaken to correct the imbalance between supply and demand for funds in the call moneymarket.

The Treasury Bill Market

T-bills are short term liability of Central Government i.e. if government needs fundstemporarily (for not more than one year), it may get it by issuing Treasury bill.

T-bills are of two types - ad hoc and ordinary. Ad hoc treasury bills are issued for providinginvestment outlets to state Governments, semi government departments etc. They are notsold to general public and are not marketable.

The ordinary treasury bills are freely marketable and can be sold to the public or banks.

T-bills market in India is not well developed. Very low T-bills rate had kept interest cost of T-bills debt to government very low. Thus government was often tempted to raise funds in thismanner. RBI, on the other hand, had to purchase all the ad hoc bills and rediscount all theordinary bills. This process had led to large scale "monetization of government debt", thusexpanding money supply in the economy and causing inflation.

Keeping in mind above harmful effect, since April 1997, wide ranging changes have beenmade in respect of T-bills. The system of ad hoc treasury bills was totally discontinued since

1977. In its place, ways and means advances were introduce to finance Central Governmenttemporary deficits. Some other types of treasury bills introduced by the Government in recent years are as

follows:(i) 182-days Treasury Bills which are sold through fortnightly auctions. They carry attractive

rates of interest and are safe. Thus, they are popular with commercial banks.(ii) 364-days Treasury Bills were introduced in 1992 and are sold through fortnightly auctions.The Repo Market

Repo market has been widened by RBI gradually, by allowing repo transactions in algovernment securities and treasury bills of all maturities.

At present, State Government securities, PSEs' bonds and private corporate securities havebeen made eligible for repos to broaden the repo market.

Commercial Bill Market CB is issued by firms engaged in business to reimburse the seller while the buyer delays

payment. The seller becomes the drawer of the bill while the buyer becomes the drawee. Drawer may carry bill to particular bank with this account and receive payment due to him

after deduction of some charges like interest on remaining life of bill. The interest ratecharged is known as discount rate on bills.

These bills are very important device for providing short-term finance to trade and industryThis is provided by selling the bill by one bank to another.

At time of selling bill, seller endorses bill in favour of buying bank. Thus, buying bank isprotected against risk of default. In addition, since drawee of bill generally manages torecover the cost of goods from their sale, the bill acquires a self-liquidating character.


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Indian Commercial Bill market is not a well-developed one. Even the initiatives made by RBIthrough the new bill market scheme in 1970, have not been very successful mainly due todominance of cash credit system of credit delivery where the onus of cash management restswith banks.

The Certificate of Deposits (C.D) Market

CD is certificate issued by a bank other bank or institutions who deposit funds on a short termbasis. They are similar to the term deposits in nature except the fact that CDs are tradable inshort term money market.

This instrument was introduced by RBI in 1989 to widen the range of money marketinstruments. Initially only commercial bank were allowed to issue CDs, but since 1993 six financia

institutions - Industrial Development Bank of India, Industrial Finance Corporation of India,Industrial Credit and Investment Corporation of India, Indian Reconstruction Bank of India,Small Industries Development Bank of India and Export-Import Bank of India were allowed toissue CDs.

The Commercial Paper (CP) Market

CP is an instrument to raise short-term funds by corporate sector. It was introduced in India in1990.

CPs can be issued by a listed company which has a working capital of not less-than Rs.5crore. Its maturity ranges from three months to six months and they are issued in multiples ofRS.25 lakh. In accordance with RBI guidelines, to issue a CP, a company will have to obtain P2rating from CRISIL or A2 rating from ICRA every six months.

Money Market Mutual Funds (MMMF)

It is a kind of mutual funds in short-term where individual investor can invest mutually to getshort-term returns. It was introduced by the RBI in 1992.

Since November 1995, banks, public financial institutions and private sector institutions werealso allowed to set up MMFs. Since Apri11996, MMMFs are allowed to issue units to corporateenterprises and others.

During 1996-97, scheme of MMMFs was made more flexible by bringing it on par with all othermutual funds by allowing investment by Corporates and others. Later lock-in period was alsodecreased from 45 days to 15 days. In 1997-98, MMMFs were permitted to make investmentsin rated corporate bonds and debentures with residual maturity of up to one year. SinceMarch 2000, the MMFs have been brought under the purview of the SEBI regulations. Banksare now allowed to set up MMMFs only as a separate entity in the form of trust.

Financial market

Market in which people and entities can trade financial securities, commodities, and otherfungible items of value at low transaction costs and at prices that reflect supply and demand.Securities include stocks and bonds, and commodities include precious metals or agriculturalgoods.

In finance, financial markets facilitate:The raising of capital (in the capital markets)The transfer of risk (in the derivatives markets)Price discovery

Global transactions with integration of financiamarkets

The transfer of liquidity (in the money markets)International trade (in the currency markets)

Types of financial markets

Capital markets which consist of:1. Stock markets: provide financing through issuance of shares or common stock, and

enable subsequent trading.2. Bond markets: provide financing through the issuance of bonds, and enable the

subsequent trading thereof.


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Commodity markets, which facilitate the trading of commodities.

Money markets: provide short term debt financing and investment.

Derivatives markets: provide instruments for the management of financial risk.

Futures markets: provide standardized forward contracts for trading products at somefuture date.

Insurance markets: facilitate the redistribution of various risks.

Foreign exchange markets: facilitate the trading of foreign exchange.

Difference between Money Markets and Capital Markets Money markets are used for raising of short term finance, sometimes for loans that are

expected to be paid back as early as overnight. Whereas Capital markets are used for raisingof long term finance, such as the purchase of shares, or for loans that are not expected to befully paid back for at least a year.

Funds borrowed from money markets are typically used for general operating expenses, tocover brief periods of illiquidity. When a company borrows from the primary capital markets,often the purpose is to invest in additional physical capital goods, which will be used to helpincrease its income. It can take many months or years before the investment generatessufficient return to pay back its cost, and hence the finance is long term.

Major stock exchanges of India

National Stock Exchange (NSE): located at Mumbai, India. It is the 11th largest stockexchange in the world by market capitalization and largest in India by daily turnover andnumber of trades, for both equities and derivative trading. NSE has a market capitalization ofaround US$1 trillion and over 1,652 listings as of July 2012.1. S&P CNX Nifty: also called the Nifty 50 or simply Nifty. NSE's key index known as NSE

NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by marketcapitalisation. benchmark index for Indian equity market. Nifty is owned and managed byIndia Index Services and Products Ltd. (IISL), which is a joint venture between NSE andCRISIL.

2. CNX Nifty Junior: is an index for companies on the National Stock Exchange of India. Itrepresents the next rung of liquid securities after S&P CNX Nifty. It consists of 50companies representing approximately 10% of the traded value of all stocks on the

National Stock Exchange of India. Bombay Stock Exchange: BSE, (located on Dalal Street, Mumbai, Maharashtra, India. It is

the 10th largest stock exchange in the world by market capitalization. BSE is a corporatizedand demutualised entity, with a broad shareholder-base which includes two leading globalexchanges, Deutsche Bourse and Singapore Exchange as strategic partners.

It also has a platform for trading in equities of small-and-medium enterprises (SME). Around5000 companies are listed on BSE making it world's No. 1 exchange in terms of listedmembers. The companies listed on BSE Ltd command a total market capitalization of USD

Trillion 1.2 as of October 31, 2012. BSEs popular equity index - SENSEX - is India's most widely tracked stock market

benchmark index. Traded internationally on EUREX as well as leading exchanges of BRCSnations (Brazil, Russia, China and South Africa).

OTC Exchange Of India (OTCEI) also known as Over-the-Counter Exchange of India basedin Mumbai, Maharashtra. It is the first exchange for small companies. It is the first screenbased nationwide stock exchange in India.

Inter-connected Stock Exchange Ltd. (ISE): started its operation in 1998 in VashiMumbai. National-level stock exchange, providing trading, clearing, settlement, riskmanagement and surveillance support to its trading members.

Securities and Exchange Board of India (frequently abbreviated SEBI)

Regulator for the securities market in India. It was established on 12 April 1992 through theSEBI Act, 1992. In 1995, SEBI was given additional statutory power by GOI through an


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amendment to SEBI Act 1992. In April, 1998 SEBI was constituted as regulator of capitalmarkets in India under a resolution of GOI.

Managed by its members, consisting of: a) chairman who is nominated by GOI. b) Twomembers, i.e. Officers from Union Finance Ministry. c) One member from RBI. d) Theremaining 5 members are nominated by Union GOI, out of them at least 3 shall be whole-timemembers.

SEBI is credited for quick movement towards making the markets electronic and paperless byintroducing T+5 rolling cycle from July 2001 and T+3 in April 2002 and further to T+2 in April

2003. The rolling cycle of T+2 means, Settlement is done in 2 days after Trade date. In a 'demat account, shares and securities are held electronically instead of investor taking

physical possession of certificates. A demat account is opened by the investor whileregistering with an investment broker (or sub-broker).

Forward Markets Commission (FMC)

Chief regulator of forwards and futures markets in India. As of March 2009, it regulated Rs 52trillion worth of commodity trades in India. It is headquartered in Mumbai and unusually for afinancial regulatory agency is overseen by the Ministry of Consumer Affairs, Food andPublic Distribution (India).

Functions of the Forward Markets Commission are as follows:1. To advise Central Government in respect of recognition or the withdrawal of recognition from

any association or in respect of any other matter arising out of the administration of the

Forward Contracts (Regulation) Act 1952.2. To keep forward markets under observation and to take such action in relation to them, as it

may consider necessary, in exercise of the powers assigned to it by or under the Act.3. To collect and whenever Commission thinks it necessary, to publish information regarding

trading conditions in respect of goods to which any of provisions of act is made applicable,including information regarding supply, demand and prices, and to submit to GOI, periodicalreports on working of forward markets relating to such goods;

4. To make recommendations generally with a view to improving the organization and workingof forward markets;

5. To undertake the inspection of the accounts and other documents of any recognizedassociation or registered association or any member of such association whenever itconsiders it necessary.

Some international indexes

New York Stock Exchange (NYSE): sometimes known as the "Big Board", is a stockexchange located at Wall Street, Lower Manhattan, New York City, New York, US. It is theworld's largest stock exchange by market capitalization of its listed companies at US$14.242trillion as of Dec 2011. NYSE is operated by NYSE Euronext, which was formed by the NYSE's2007 merger with the fully electronic stock exchange Euronext.

NASDAQ Stock Market: also known as simply the NASDAQ, is an American stock exchange."NASDAQ" originally stood for National Association of Securities Dealers AutomatedQuotations. It is the second-largest stock exchange by market capitalization in the world,after the New York Stock Exchange.

FTSE 100 Index: also called FTSE 100, FTSE, or, informally, the "footsie", is a share index of100 companies listed on London Stock Exchange with highest market capitalization. It is oneof most widely used stock indices and is seen as a gauge of business prosperity. Maintainedby FTSE Group, a subsidiary of the London Stock Exchange Group.

FTSE 100 companies represent about 81% of the entire market capitalisation of the LondonStock Exchange. Even though the FTSE All-Share Index is more comprehensive, the FTSE 100is by far the most widely used UK stock market indicator. Other related indices are the FTSE250 Index (which includes the next largest 250 companies after the FTSE 100), the FTSE 350Index (which is the aggregation of the FTSE 100 and 250), FTSE SmallCap Index and FTSEFledgling Index. The FTSE All-Share aggregates the FTSE 100, FTSE 250 and FTSE SmallCap.

Dow Jones Industrial Average: also called the Industrial Average, the Dow Jones, the Dow30, or simply the Dow, is a stock market index. Shows how 30 large publicly owned


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companies based in the United States have traded during a standard trading session in thestock market.

Nikkei 225: more commonly called Nikkei, is a stock market index for the Tokyo StockExchange (TSE). It is a price-weighted index (the unit is yen), and the components arereviewed once a year. Currently, the Nikkei is the most widely quoted average of Japaneseequities.

Hang Seng Index: is a free-float-adjusted market capitalization-weighted stock marketindex in Hong Kong. It is used to record and monitor daily changes of the largest companies

of the Hong Kong stock market and is the main indicator of the overall market performance inHong Kong. These 48 constituent companies represent about 60% of capitalisation of theHong Kong Stock Exchange.

MDAX is a stock index which lists German companies. The index is calculated by DeutscheBrse. It includes the 50 Prime Standard shares from sectors excluding technology that rankimmediately below the companies included in the DAX index. The company size is based onterms oforder book volume and market capitalization. The index is based on pricesgenerated in the electronic trading system Xetra.

Some instrumentsCommon stock

Form of corporate equity ownership, a type of security. Called "common" to distinguish it frompreferred stock. If both types of stock exist, common stock holders cannot be paid dividends

until all preferred stock dividends (including payments in arrears) are paid in full. In the event of bankruptcy, common stock investors receive any remaining funds after

bondholders, creditors (including employees), and preferred stock holders are paid. Carries with it the right to vote on certain matters, such as electing the board of directors.

However, a company can have both a "voting" and "non-voting" class of common stock.Preferred stock(also called preferred shares, preference shares) An equity security with properties of both an equity and a debt instrument, and is generally

considered a hybrid instrument. Are senior (i.e. higher ranking) to common stock, butsubordinate to bonds in terms of claim (or rights to their share of the assets of the company).Similar to bonds, preferred stocks are rated by credit-rating companies.

Usually carries no voting rights, but may carry a dividend and may have priority over commonstock in the payment of dividends and upon liquidation. Terms of the preferred stock arestated in a "Certificate of Designation".

Bond (bond has guaranteed payment while debenture doesnt)

Instrument of indebtedness of the bond issuer to the holders. It is a debt security, underwhich the issuer owes the holders a debt and, depending on the terms of the bond, isobliged to pay them interest (the coupon) and/or to repay the principal at a later date,termed the maturity.

Debenture

Document that either creates a debt or acknowledges it and it is a debt without collateralTerm is used for a medium- to long-term debt instrument used by large companies to borrowmoney. In some countries the term is used interchangeably with bond, loan stock or note.Interest rate is higher than bonds.

Inflation-indexed bonds (also known as inflation-linked bonds or colloquially aslinkers)

Bonds where principal is indexed to inflation. They are thus designed to cut out the inflationrisk of an investment.

Inflation-linked market primarily consists of sovereign bonds, with privately issued inflation-linked bonds constituting a small portion of the market.

Pay a periodic coupon that is equal to the product of the inflation index and the nominalcoupon rate. The relationship between coupon payments, breakeven inflation and reainterest rates is given by the Fisher equation. A rise in coupon payments is a result of anincrease in inflation expectations, real rates, or both.

Forward contract
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Non-standardized contract between two parties to buy or sell an asset at a specified futuretime at a price agreed upon today. This is in contrast to a spot contract, which is anagreement to buy or sell an asset today.

Not traded on an exchange and thus does not have the interim partial payments due tomarking to market.

Futures contract: (futures) Standardized contract between two parties to buy or sell a specified asset of standardized

quantity and quality for a price agreed upon today (futures price or strike price) with delivery

and payment occurring at a specified future date, delivery date. Negotiated at a futuresexchange, which acts as an intermediary between the two parties. Futures price will generally change daily, the difference in the prior agreed-upon price and

the daily futures price is settled daily also (variation margin). On the delivery date, the amount exchanged is not the specified price on the contract but the

spot value (since any gain or loss has already been previously settled by marking to market). Seller delivers the underlying asset to the buyer, or, if it is a cash-settled futures contract,

then cash is transferred from the futures trader who sustained a loss to the one who made aprofit.

Option

Contract which gives the owner the right, but not the obligation, to buy or sell an underlyingasset or instrument at a specified strike price on or before a specified date.

Call: An option which conveys the right to buy something at a specific price; it moves in thesame direction as the underlying asset, rather than opposite, as does the put.

Put: an option which conveys the right to sell something at a specific price.

Value of an option is commonly decomposed into two parts: The first of these is the "intrinsicvalue," which is defined as the difference between the market value of the underlying and thestrike price of the given option. The second part depends on a set of other factors which,through a multi-variable, non-linear interrelationship, reflect the discounted expected value ofthat difference at expiration.

Swap

derivative in which counterparties exchange cash flows of one party's financial instrument forthose of the other party's financial instrument.

Two counterparties agree to exchange one stream of cash flows against another streamThese streams are called legs of swap. Swap agreement defines dates when the cash flowsare to be paid and the way they are calculated.

Cash flows are calculated over a notional principal amount. Contrary to a future, a forward oran option, the notional amount is usually not exchanged between counterparties.Consequently, swaps can be in cash or collateral.

Credit default swap (CDS)

Financial swap agreement that the seller of the CDS will compensate the buyer in the event ofa loan default or other credit event. The buyer of the CDS makes a series of payments (theCDS "fee" or "spread") to the seller and, in exchange, receives a payoff if the loan defaults.

In the event of default the buyer of the CDS receives compensation (usually the face value ofthe loan), and the seller of the CDS takes possession of the defaulted loan.

However, anyone can purchase a CDS, even buyers who do not hold the loan instrument andwho have no direct insurable interest in the loan (these are called "naked" CDSs).

Credit event that triggers the payoff can be a company undergoing restructuring, bankruptcyor even just having its credit rating downgraded.

CDS contracts have been compared with insurance, because the buyer pays a premium and,in return, receive a sum of money if one of the events specified in the contract occur. Unlikean actual insurance contract the buyer is allowed to profit from the contract and may alsocover an asset to which the buyer has no direct exposure.

Participatory Notes commonly known as P-Notes or PNs


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Instruments issued by registered foreign institutional investors (FII) to overseas investors,who wish to invest in Indian stock markets without registering themselves with marketregulator, SEBI.

However, they are not used within the country. They are used outside India for makinginvestments in shares listed in the Indian stock market. That is why they are also calledoffshore derivative instruments. For example, Indian-based brokerages buy India-basedsecurities and then issue participatory notes to foreign investors. Any dividends or capitalgains collected from the underlying securities go back to the investors.

Anonymity: entity investing in P-notes is not required to register with SEBI, whereas all FIIshave to compulsorily get registered. It enables large hedge funds to carry out their operationswithout disclosing their identity.

Tax Saving: Some of the entities route their investment through participatory notes to takeadvantage of the tax laws of certain preferred countries.

Money Laundering: PNs are becoming a favourite with a host of Indian money laundererswho use them to first take funds out of country through hawala and then get it back usingPNs.

Govt. of India's white paper on black money identified P-notes as one of the routes throughwhich black money transferred outside India comes back through a process called round-tripping.

Round-tripping

Defined by The Wall Street Journal, as a form of barter that involves a company selling "anunused asset to another company while at the same time agreeing to buy back the same orsimilar assets at about the same price."

Market-manipulation practice used to misrepresent number of transactions occurring on anygiven day. Round-trip trading artificially inflates volume and revenues, but in reality adds noprofit. Enron was a company that engaged in round-trip trading, by doing so, was able toincrease revenues (and expenses) without changing its net income.

Miscellaneous termsBonus share

Free share of stock given to current shareholders in a company, based upon the number ofshares that the shareholder already owns. While the issue of bonus shares increases the total

number of shares issued and owned, it does not change the value of the company. Althoughthe total number of issued shares increases, the ratio of number of shares held by eachshareholder remains constant.

Stock split or stock divide

Increases the number of shares in a public company. The price is adjusted such that thebefore and after market capitalization of the company remains the same and dilution doesnot occur. Options and warrants are included.

Stock repurchases (or share buyback)

Reacquisition by a company of its own stock. Corporation can repurchase its own stock bydistributing cash to existing shareholders in exchange for a fraction of the company'soutstanding equity; that is, cash is exchanged for a reduction in the number of sharesoutstanding. The company either retires the repurchased shares or keeps them as treasury

stock, available for re-issuance. An alternative to dividends. When a company repurchases its own shares, it reduces number

of shares held by public. Reduction of float, or publicly traded shares, means that even ifprofits remain same, earnings per share increase. Repurchasing shares when a company'sshare price is undervalued benefits non-selling shareholders (frequently insiders) and extractsvalue from shareholders who sell.

Selective buy-back is one in which identical offers are not made to every shareholder, forexample, if offers are made to only some of the shareholders in the company.

Private placement (or non-public offering)


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Funding round of securities which are sold not through a public offering, but rather through aprivate offering, mostly to a small number of chosen investors. "Private placement" usuallyrefers to non-public offering of shares in a public company.

Warrant

Security that entitles holder to buy underlying stock of issuing company at a fixed exerciseprice until expiry date.

Warrants and options are similar in that they allow holder special rights to buy securities.Both are discretionary and have expiration dates. Warrants are frequently attached to bonds

or preferred stock as a sweetener, allowing the issuer to pay lower interest rates or dividends.They can be used to enhance the yield of the bond, and make them more attractive topotential buyers.

Rights issue

Issue of rights to buy additional securities in a company made to company's existing securityholders. When rights are for equity securities, such as shares, in a public company, it is a wayto raise capital under a seasoned equity offering. Sometimes carried out as a shelf offering.With issued rights, existing security-holders have privilege to buy a specified number of newsecurities from firm at a specified price within a specified time. In a public company, a rightsissue is a form of public offering.

Rights shares should be within the limits of the authorized capital. If not so, then theauthorized capital must be increased first suitably. The issue of Rights Shares is to be made

after two years from the formation of the company or after one year from the first allotmentof shares.

Efficient-market hypothesis (EMH)

Asserts that financial markets are "informationally efficient". In consequence of this, onecannot consistently achieve returns in excess of average market returns on a risk-adjustedbasis, given the information available at the time the investment is made.

Weak-form efficiency

Future prices cannot be predicted by analyzing prices from the past. Excess returns cannot beearned in the long run by using investment strategies based on historical share prices orother historical data. Technical analysis techniques will not be able to consistently produceexcess returns, though some forms of fundamental analysis may still provide excess returns.Share prices exhibit no serial dependencies, meaning that there are no "patterns" to assetprices. This implies that future price movements are determined entirely by information notcontained in the price series. Hence, prices must follow a random walk.

Semi-strong-form efficiency

Implies that share prices adjust to publicly available new information very rapidly and in anunbiased fashion, such that no excess returns can be earned by trading on that information.Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysistechniques will be able to reliably produce excess returns.

Strong-form efficiency

Share prices reflect all information, public and private, and no one can earn excess returns. Ifthere are legal barriers to private information becoming public, as with insider trading laws,strong-form efficiency is impossible, except in the case where the laws are universally

ignored.Rational expectations Hypothesis in economics which states that agents' predictions of future value of economically

relevant variables are not systematically wrong in that all errors are random. Equivalentlythis is to say that agents' expectations equal true statistical expected values. An alternativeformulation is that rational expectations are model-consistent expectations, in that agentsinside model assume model's predictions are valid. Rational expectations assumption is usedin many contemporary macroeconomic models, game theory and applications of rationachoice theory.

Properties of all kinds of shares of a public company:
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movable property, They are transferable in the manner prescribed in the Articles ofAssociation

They are treated as Goods under the Sale of Goods Act , 1930.

A member who holds the shares of a companydoes not implythat the member owns any ofthe companys assets. This is because assets would be still possessed by the company whichis a legal person in itself.

However, if the company is wound up, after selling its assets, the shareholder has the right toparticipate in the assets after the debts have been paid. This means that it is the right to

what assets remain after liquidation.At the same time, the shareholder is also liable forthe amount, if any unpaid on the shares held by him.

Authorized / Registered / Nominal Capital: Maximum Capital which the company canraise in its life time.This is mentioned in the Memorandum of the Association of the Company.

Issued Capital: part of the Authorised Capital issued to the public for Subscription. The actof creating new issued shares is called issuance, allocation or allotment.

Subscribed Capital : part of issued Capital which has been taken off by the public i.e. thecapital for which applications are received from the public.

Shares Outstanding: once the shares have been issued and purchased by investors and areheld by them.

Treasury shares: unsubscribed capital, which are shares held by corporation itself and have

no exercisable rights. Called up Capital : part of subscribed capital which the company has actually called uponthe shareholders to pay. The Uncalled Capital may be converted, by passing a specialresolution, into Reserve Capital; Reserve Capital can be called up only in case of winding upof the company, to meet the liabilities arising then.

Paid-up Capital: part of called-up capital which is actually paid by the shareholders. Theremaining part indicates the default in payment of calls by some shareholders, known asCalls in Arrears.

Capital Reserves are those reserves which are created out of the Capital Profits. CapitaProfits are those profits which are not earned in the normal course of the business.

Market Capitalization : market value of a quoted company, calculated by multiplying itscurrent share price (market price) by the number of shares in issue.

Differential Voting Rights (DVR): A DVR share is like an ordinary equity share, but itprovides fewer voting rights to the shareholder. The objective of issuing DVR shares is for

prevention of a hostile takeover and dilution of voting rights. It also helps strategic investorswho do not want control, but are looking at a reasonably big investment in a company.However, the issue of such shares cannot exceed 25 per cent of the total issued share capital

Public Provident Fund:

maturity of 15 years and interest payable at 8.25 % per annum (2011-12, it was 9.5 per centpaid in 2010-11) compounded annually. A PPF account can be opened through a nationalizedbank at anytime during the year and is open all through the year for depositing money. Taxbenefits can be availed for the amount invested and interest accrued is tax-free. A withdrawais permissible every year from the seventh financial year of the date of opening of theaccount and the amount of withdrawal will be limited to 50% of the balance at credit at theend of the 4th year immediately preceding the year in which the amount is withdrawn or atthe end of the preceding year whichever is lower the amount of loan if any.

Private Company: A private company is the one which has a minimum paid up share capital of`100000 or such higher capital as prescribed by the Companies Act. Its Article of associationmentions that the company Restricts the right to transfer its shares

Limits the number of its members from 2 to 50

Cannot go for invitation from public to subscription to any of its shares

Cannot accept deposits from persons other than its members, directors and relatives.


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Public Company: A public company means a company which is not a private company andhas minimum of 7 shareholders/subscribers. It has to have a minimum paid-up share capitalof ` 5 Lakh.

Private Company Public Company

Minimum Paid-up Capital

Minimum Number of Members

Maximum Number of

Members Transerferability of shares

Issue of Prospectus

Number of Director

Commencement of Business

Statutory meeting

Quorum

Managerial remuneration

1 lac

2

50

Complete restriction

Prohibited At least 2

Immediately afterincorporation

No obligation

2

No restriction

5 lac

7

No restriction

No restriction

Free At least 3

After commencement obusiness certificate isobtained

Obligatory

5

Cannot exceed 11% of netprofits

indian banking and money market

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