A BRIEF OVERVIEW OF

THE INDIAN FINANCIAL

MARKET
 ROADMAP
• INTRODUCTION TO INDIAN FINANCIAL SYSTEM, STRUCTURE ,
REGULATION,FUNCTIONS
• MEANING OF MONEY MARKET, TYPES OF INSTRUMENTS,
INSTITUIONS,PARTICIPANTS, REGULATORS .
• CONCEPT OF PRIMARY CAPITAL MARKET & SECONDARY CAPITAL MARKET.
• MEANING OF EQUITY/SHARE MARKET, TYPES OF INSTRUMENTS,
PARTICIPANTS, REGULATORS.
• MEANING OF BOND MARKET, TYPES OF INSTRUMENTS, PARTICIPANTS,
REGULATORS.
• MEANING OF DERIVATIVE MARKETS,TYPES OF INSTRUMENTS(ELEMENTARY
IDEAS & PROBLEMS)
• MEANING OF COMODITY MARKET, TYPES OF COMMODITIES (ELEMENTARY
IDEAS & PROBLEMS) , PARTICIPANTS.
 INTRODUCTION TO INDIAN FINANCIAL SYSTEM

Meaning of Financial System:

• The word financial system is formed of two words namely ‘finance’ and ‘system’.
• Finance refers to the monetary wealth of a state, an institution, or a person. Whereas,
system implies a set of complex and inter-related factors which work together to achieve
a common goal.
• Therefore, a financial system is a set of complex and closely related institutions,
agents, practices, markets and so on in an economy.
• In simple terms, financial system is the orderly mechanism and structure that could
help to allocate and mobilize financial resources of an economy from the surplus units
to the deficit units.
• An efficient financial system plays a crucial role in allocating scarce capital resources
to productive use.
THE STRUCTURE OF THE FINANCIAL SYSTEM
THE STRUCTURE OF INDIAN FINANCIAL SYSTEM
CONCEPT OF FINANCIAL SYSTEM
IN SIMPLE WORDS IT REFERS TO THE NET WORK OF FINANCIAL INSTITUTIONS.
These like LIC, Joint Stock Co. are the institutions dealing in variety of financial instruments. These are
institutions engaged in money transmission and lending and borrowing of funds.
FUNCTIONS
 to pool together the savings of a large number of individuals in turn to make simple loans
 The resource pool of large number of savers is either provided to individual to remove their fund at short notice
or to hold such requirements as a base foe long term lending.
 To reconcile the different requirements of savers and borrowers as it provides to the savers safe and risk free
repository for their money with some degree of liquidity and longer term investment income as well as current
income to the borrowers in general.
 Providing funds of varying amount to the borrowers to finance their current medium and long term
commitments.
Financial instruments of any nation are pivotal elements of the financial system. They assume various forms like
commercial banks, insurance companies, mutual funds and financial markets like money market, stock exchange
etc.
In India the financial system refers to the system of demand and supply of funds of all individuals, institutions,
companies and of the governments at different levels. The following four types of finance are supplied by Indian
Financial System:
 Industrial finance  Agricultural Finance  Development finance  Investment finance
Financial intermediation theory
• Financial intermediation theory refers to the economic concept that
explains the role of financial intermediaries in the process of
channeling funds from surplus units (those with excess funds) to
deficit units (those in need of funds).
• These intermediaries act as middlemen between borrowers and
lenders, facilitating the flow of funds in the economy.
• The theory helps us understand the functions and significance of
financial institutions, such as banks, credit unions, investment firms,
and insurance companies.
Key components and principles of financial intermediation theory include:
1. Information Asymmetry: One of the central tenets of financial
intermediation theory is the existence of information asymmetry between
lenders and borrowers. Borrowers typically have more information about
their projects and financial conditions than lenders do.
2.Risk Transformation: Financial intermediaries help in transforming and
diversifying risks. They collect funds from various savers and invest them in a
diversified portfolio of assets, spreading the risk across different
investments. By doing so, they reduce the overall risk to individual savers.
3. Liquidity Transformation: Another critical function of financial
intermediaries is transforming the maturities of assets and liabilities. For
instance, banks accept short-term deposits and, in turn, provide long-term
loans to borrowers. This transformation allows individuals and businesses to
access funds on-demand while still providing long-term financing to those
who need it.
4.Economies of Scale
5.Intermediation Costs
6.Financial Stability
7.Regulatory Framework
STRUCTURE OF INDIAN FINANCIAL SYSTEM
REGULATIONS
The regulators in the Indian Financial Market ensure that the market participants behave in a responsible manner so that the
financial system continues to work as an important source of finance and credit for corporate, government, and the public at
large.
1. Securities and Exchange Board of India (SEBI)-established under the SEBI Act of 1992, as a response to prevent
malpractices in the capital markets that were negatively impacting people’s confidence in the market. Its primary objective
is to protect the interest of the investors, prevent malpractices, and ensure the proper and fair functioning of the markets.
Protective functions: To protect the interests of the investors and other market participants. It includes – preventing insider
trading, spreading investor education and awareness, checking for price rigging, etc.
Regulatory functions: These are performed to ensure the proper functioning of various activities in the markets. It includes –
formulating and implementing a code of conduct and guidelines for all types of market participants, conducting an audit of
the exchanges, registration of intermediaries like brokers, and investment bankers, and levying fees, and fines against
misconduct.
Development functions: These are performed to promote the growth and development of the capital markets. It includes –
Imparting training to various intermediaries, conducting research, promoting self-regulation of organizations, facilitating
innovation, etc.
2. Reserve Bank Of India (RBI)-The primary purpose of RBI is to conduct the monetary policy and regulate and supervise
the financial sector, most importantly the commercial banks and non-banking financial companies.
1. It issues the license for opening banks and authorizes bank branches.
2. It formulates, implements, and reviews prudential norms like the Basel framework.
3. It maintains and regulates the reserves of the banking sector by stipulating reserve requirement ratios.
4. It inspects the financial accounts of the banks and keeps track of the overall stress in the banking sector.
5. It oversees the liquidation, amalgamation, or reconstruction of financial companies.
6. It regulates the payment and settlement systems and infrastructure.
7. It prints, issues, and circulates the currency throughout the country.
3. Insurance Regulatory and Development Authority of India (IRDAI)-Its purpose is to protect the interests of the
insurance policyholders and to develop and regulates the insurance industry. It issues advisories regularly to
insurance companies regarding the changes in rules and regulations.

1. Granting, renewing, canceling, or modifying the registration of insurance companies.

2. Levying charges and fees as per the IRDA Act.
3. Conducting investigation, inspection, audit, etc. of insurance
companies and other organizations in the insurance industry.
4.Specifying the code of conduct and providing qualifications
and training to intermediaries, insurance agents, etc.
5.Regulating and controlling the insurance premium rates, terms
and conditions, and other benefits offered by insurers.
6.Provides a grievance redressal forum and protects the interests
of the policyholder.
4. Pension Funds Regulatory and Development Authority (PFRDA)
• The Pension Fund Regulatory and Development Authority (PFRDA) is a statutory body, which was established under the
PFRDA Act, 2013. It is the sole regulator of the pension industry in India.
• Its major objectives are – to provide income security to the old aged by regulating and developing pension funds and to
protect the interest of subscribers to pension schemes.
• Some functions of PFRDA are:
1. Conducting inquiries and investigations on intermediaries and other participants.
2. Increasing public awareness and training intermediaries about retirement savings, pension schemes, etc.
3. Settlements of disputes between intermediaries and subscribers of pension funds.
4. Registering and regulating intermediaries.
5. Protecting the interest of pension fund users.
6. Stipulating guidelines for investment of pension funds.
7. Formulating a code of conduct, standards of practice, terms,
and norms for the pension industry.
Ministry of Corporate Affairs (MCA)
The Ministry of Corporate Affairs (MCA) is a ministry within the government of India. It regulates the corporate sector
and is primarily concerned with the administration of the Companies Act, of 1956, 2013, and other legislations.
The objective of MCA is to protect the interest of all stakeholders, maintain a competitive and fair environment and
facilitate the growth and development of companies.
 MONEY MARKET
Concept and Meaning
• Money market refers to the market where money and highly liquid
marketable securities are bought and sold that have a maturity period of
one or less than one year.
• Highly liquid marketable securities are those short term financial assets
which can be converted into cash very easily.
• It meets the requirements of the short- term requirements of borrowers
and provides short-term returns to lenders.
• Financial institutions with surplus funds for short-term use invest in the
various instruments of the money market, while financial institutions
facing a short-term fund shortage can borrow from the money market.
• The money market in India is regulated by the RBI. Therefore, money
market is the market for short-term funds normally ranging from overnight
funds to a year.
Features of Money Market The general features of money market are
as follows:
• It is a market for short-term funds or financial assets called near
substitutes for money;
• Normally, transactions in the money market take place through
phone i.e. oral communication or mail;
• There is no formal location of the market like the stock exchange;
• Transactions are made without the intermediation of brokers;
• The main intermediaries are the Central Bank (RBI), Commercial
Banks, Non-banking financial institutions, etc
•Functions of Money Market
• Expansion of Trade and Industry- Money market helps in financing the short term working
capital requirements of trade and industry which thereby assists in the expansion of trade and
industry in the national as well as international markets.
• Helps in transactions of Capital Market- Money market and capital market are closely related to
each other. The money market helps in directly performing different transactions of capital market.
• Liquidity of the capital market is maintained by the money market which supplies liquid resources
and assists in execution of various transactions of the capital market.
• Efficient functioning of Central Bank- The efficient functioning of a central bank always requires
a developed money market. This is because it supports the effective implementation of the
monetary policy of the RBI. The RBI also introduces fresh money into the economy with the help
of the money market.
• Assists in the formulation of Monetary Policy- Since the organized sector of the money market is
under the control of the central bank , therefore the money market has a special role in the proper
formulation and implementation of financial policies of the central bank
Money Market Instruments

• Call or Notice Money Market:

• Call money or notice money is a market where amount is borrowed or lent
on demand for a very short period (i.e. 1 day to 14 days). The call money is
a part of the money market where day to day surplus funds, mostly of
banks are traded. Moreover, the call money market is the most liquid of all
short-term money market segments.
• The money that is borrowed on a day and repaid on the next working day
(irrespective of the number of intervening holidays) is called as ‘call
money’, but when money is borrowed or lent for more than one day and up
to 14 days is called as ‘notice money’.
• This money is lent mainly to even out the short-term mismatches of assets
and liabilities and to meet CRR requirements of banks.
• There is no need for collateral security to cover these transactions.
 Treasury Bills:
• Treasury bill is a promissory note issued by central govt. under discount for a specified
period, which promises to pay the specified amount mentioned therein to the holder of
the instrument on the due date. Normally the period is one year or less.
Following are the important features of treasury bill:
i. It is an unsecured instrument but since it is issued by the govt., the risk of default is
negligible.
ii. In India treasury bills are of three types:
a. Ordinary or ‘on –tap issue treasury bills’
b. Ad hoc treasury bill.
iii. Ordinary or on-tap treasury bills are issued to the public and other financial
institutions for meeting short term financial needs of the central govt. These bills are
freely marketable.
iv. Ad hoc treasury bills are always issued in favour of the RBI and these are not sold
through tender or auction.
TBs are classified into three categories-14 DAY TB , 91 day treasury bill, 182 day treasury
bill and 364 day treasury bill.
Following are the important features of treasury bill money market:
• i. It is an unsecured instrument but since it is issued by the govt., the risk of
default is negligible.
• ii. In India treasury bills are of three types:
• a. Ordinary or ‘on –tap issue treasury bills’
• b. Ad hoc treasury bill.
• c. Auctioned treasury bills
• iii. Ordinary or on-tap treasury bills are issued to the public and other
financial institutions for meeting short term
• financial needs of the central govt. These bills are freely marketable.
• iv. Ad hoc treasury bills are always issued in favour of the RBI and these are
not sold through tender or auction.
• v. Auctioned TBs are classified into three categories-91 day treasury bill,
182 day treasury bill and 364 day treasury bill.
vi. While 91 day treasury bill are issued at a fixed discount rate of 4%,
but there is no fixed rate for 364 day treasury bills. Here it is important
to note that the discount rate on these bills are quoted in auctions for
cut off rate by the participants and accepted by the authorities .
vii. The participants in this market are RBI and SBI and other
commercial banks, state govt, financial institutions like LIC, GIC,UTI, IDBI
NABARD, ICICI etc. Corporate customer and the public
viii. It is issued by the RBI on behalf of the govt.
Treasury bill yield rate = [{(FV-IP)/IP}*364/MP]*100
Where; FV= Face value of T.B
IP= Issue price or purchase price of T.B
MP= Maturity period of TB (i.e. 91 days, 182 days or 364 days)
Q1. A 91 day T.B was issued at a fixed price of ₹97.52. The face value of it was
₹100. Calculate the yield rate.
Sol: Yield rate= [{(FV-IP)/IP}*364/MP]*100
= [{100-97.52)/97.52}*364/91]*100
= 10.17%
Q2. On 30 October, 2017 a cooperative bank purchased 91 day T.B maturing on 24
December,2017 was issued. The rate quoted by the seller is 99.25 per ₹100 face
value. Calculate the yield % of the T.B.
Sol: Yield rate= [{(100-99.25)/99.25}*364/54]*100
= 5.093%
OR Yield Rate= [{(100-99.25)/99.25}*364/91]*100 = 3.023%
Working Note: In the 1 st case maturity period has been calculated by counting the
no. of days from 30 October till 24 December.
Therefore, no. of days to maturity is calculated as follows: November= 30days,
December= 24days Total= 54 days
 • Certificate of Deposit:
Certificate of deposit are unsecured, negotiable, short-term instruments
in bearer form, issued by commercial banks and development financial
institutions. Certificate of deposit were introduced in June, 1989 by the
RBI. Certificate of deposit can be issued by 1) Scheduled commercial
banks, excluding regional rural banks and local area banks, 2) Select
All-India financial institutions that have been permitted by the RBI to
raise short term resources.
Following are the important features of certificate of deposit:
• CDs can be issued by Scheduled Commercial Banks (excluding Regional
Rural Banks) and specified All-India Financial Institutions;
• CDs are to be issued at a discount to the face value
• It can be issued to individuals; association; companies, and trust funds;
• CDs are freely transferable by endorsement and delivery after an initial
lock-in period of 15 days;
• They may be sold after an initial lock-in period of 15 days to Scheduled
Commercial Banks; specified All-India Financial Institutions; or to the DFHI;
• Since October 1997, the minimum size of issue of CDs to a single investor
is ₹5 lacs. Thereafter they can be issued in multiples of ₹1 lac; • The
maturity period—of CDs issued by banks—may range from 3 to 12 months.
Those issued by specified financial institutions may range from 1 to 3 years.
The proportionate rate of interest of certificate of deposit would be
calculated as follows: I= (100*R*number of days to maturity)/365*100
Where; I= rate of interest R= discounted value
 • Q1. P ltd. has to make payment of ₹20 lakhs on 16 April 2021. It has
surplus money on 15 Jan,2021 and the company has decided to invest in
certificate of deposit of a leading nationalised bank @8% p.a. How much
money is required to be invested now?
Sol:
No. of days to maturity is 91 days.
If we invest ₹1 @8% for 91 days, so after 91 days we will get
= 1+1*8/100*91/365 = ₹1.0199452.
Hence, amount to be invested now to get ₹20 lakhs after 91 days = ₹20
lakhs/1.019945= ₹1960890
Computation of yield on certificate of deposit
ERR= [{1+ QDR/(100*n/m)}n/m -1]*100
Where; ERR= Effective rate of interest QDR= Quoted discount rate n= Total
period in a year i.e. 12 months or 365 days m= maturity period in months or
days
Commercial Paper
The unsecured short-term promissory notes with fixed maturity period issued
by reputed corporate bodies with a view to collect funds are called
commercial papers. Following are the features of commercial paper:
• These are short-term money market instruments with a fixed maturity.
• It can be issued directly by a company to investors, or through commercial
banks, or merchant banks.
• The minimum amount to be invested by a single investor shall be ₹5 lakhs
and thereafter its multiples.
• It can be issued at a discount to its face value and is freely transferable by
endorsement and delivery.
• Cps can be issued for a minimum maturity period of 7 days and a maximum
period of upto 1 year from the date of issue. There will be no grace period on
maturity.
• In order to issue a commercial paper the net worth of the company should
not be less than ₹4 crores and it should have a valid credit rating certificate
from an approved credit rating agency
 • Bill of Exchange
A bill of exchange is defined as an instrument in writing containing an
unconditional order, signed by the maker, directing a certain person to
pay a certain sum of money only to, or to the order of a certain person
or to the bearer of the instrument. A bill of exchange is drawn by the
seller on the buyer to pay the amount due after a certain specified date
whenever goods are sold on credit. Bill of exchange has three parties
namely;
1. Drawer- The person who draws the bill is known as drawer.
2. Drawee- The person on whom the bill is drawn is called drawee.
3. Payee- One who receives the money of bill is known as payee.
Following are the important features of bill of exchange:
• Bill of exchange has three parties to it namely, drawer, drawee and
payee. But in some cases the drawer and payee may the same person.
• The bill of exchange must be in writing.
• The order must be unconditional.
• The amount of bill of exchange must be definite.
• The bill of exchange must be signed by both the maker and the
acceptor (drawee) of the bill.
• The amount mentioned in the bill is payable either on demand or on
the expiry of a fixed period.
• The bill of exchange must be properly stamped according to the
Indian Stamp Act, and a proper stamp value is to be affixed on it other
wise the bill is not legitimate
Institutions of the Money Market:
• Central Bank:
The central bank of the country is the pivot around which the
entire money market revolves. It acts as the guardian of the
money market and increases or decreases the supply of money
and credit in the interest of stability of the economy.

• Commercial Banks:
Commercial banks also deal in short-term loans which they lend
to business and trade. They discount bills of exchange and
treasury bills, and lend against promissory notes and through
advances and overdrafts.
 • Non-bank Financial Intermediaries:
Besides the commercial banks, there are non-bank financial
intermediaries which lend short-term funds to borrowers in the
money market. Such financial intermediaries are savings banks,
investment houses, insurance companies, provident funds, and
other financial corporations.

• Discount Houses and Bill Brokers:

In developed money markets, private companies operate discount
houses. The primary function of discount houses is to discount bills
on behalf of other. They, in turn, form the commercial banks and
acceptance houses.
Acceptance Houses:
They act as agents between exporters and importers and between
lender and borrower traders. They accept bills drawn on merchants
whose financial standing is not known in order to make the bills
negotiable in the London Money Market. By accepting a trade bill
they guarantee the payment of bill at maturity.

Money market mutual funds (MMF) invest in short-term debt

instruments, cash, and cash equivalents that are rated high quality. It
is for this reason that money market mutual funds are considered
safe or investment with minimal to low risk. As these funds invest in
high-quality instruments, they offer a predictable risk-free return rate.
 • What is The Clearing Corporation of India Ltd.
The Clearing Corporation of India Limited (CCIL) is a professional
clearing and settlement organization in India. It was established in
2001 as a not-for-profit company and is headquartered in Mumbai.
CCIL provides clearing, settlement, and risk management services
for a variety of financial instruments, including foreign exchange,
money market, and government securities.
It also offers services related to the trade of commodities, such as
agricultural and industrial products. CCIL works closely with
regulatory authorities and market participants to ensure the smooth
functioning and stability of the financial markets in India.
Primary dealers
Primary dealers are registered entities with the RBI who have the
license to purchase and sell government securities. They are entities
who buys government securities directly from the RBI (the RBI issues
government securities on behalf of the government), aiming to resell
them to other buyers. In this way, the Primary Dealers create a market
for government securities.

Repurchase agreement
A repurchase agreement (repo) is a form of short-term borrowing for
dealers in government securities. In the case of a repo, a dealer sells
government securities to investors, usually on an overnight basis, and
buys them back the following day at a slightly higher price.
Participants in the Money Market:
Central Government:
The Central Government is an issuer of Government of India
Securities (G-Secs) and Treasury Bills (T-bills). These
instruments are issued to finance the government as well as for
managing the Government’s cash flow.

State Government:
The State Governments issue securities termed as State
Development Loans (SDLs), which are medium to long-term
maturity bonds floated to enable State Governments to fund their
budget deficits.
 • Public Sector Undertakings:
Public Sector Undertakings (PSUs) issue bonds which are
medium to long-term coupon bearing debt securities. PSU Bonds
can be of two types: taxable and tax-free bonds. These bonds are
issued to finance the working capital requirements and long-term
projects of public sector undertakings. PSUs can also issue
Commercial Paper to finance their working capital requirements.
Scheduled Commercial Banks (SCBs):
Banks issue Certificate of Deposit (CDs) which are unsecured,
negotiable instruments. These are usually issued at a discount to
face value. They are issued in periods when bank deposits
volumes are low and banks perceive that they can get funds at low
interest rates. Their period of issue ranges from 7 days to 1 year.
• Private Sector Companies:
• Private Sector Companies issue commercial papers (CPs) and
corporate debentures. CPs are short-term, negotiable, discounted
debt instruments. They are issued in the form of unsecured
promissory notes. They are issued when corporations want to raise
their short-term capital directly from the market instead of borrowing
from banks.
• General Insurance Companies:
• General insurance companies (GICs) have to maintain certain funds
which have to be invested in approved investments. They participate
in the G-Sec, Bond and short term money market as lenders. It is seen
that generally they do not access funds from these markets.
 Capital Markets
Concept and Definition
• Capital Market is the market where long-term capital is raised for industry, trade
and commerce and long-term securities are transacted.
• Long-term means a period for more than one year.
• Thus it can be said that in the capital market borrowing and lending of long term
funds take place.
• In the capital market, capital is raised against the issue of securities. Therefore,
another name of the capital market is the securities market.
• The term securities as per the Securities Control Act, 1956 includes shares, stock,
bonds, debentures or other marketable securities of similar nature.
• The main objective behind raising money from the capital market is to purchase
fixed capital assets.
• In India, the capital market is controlled by the Securities and Exchange Board of
India (SEBI)
 Features of Capital Market

Capital market is usually constructed to mean a market dealing with long-term funds, debt or
equity.
• Capital market helps to build a direct relationship between investors and issuers. Issuers in
the
capital market mostly include corporate bodies.
• Corporate bodies require huge amount of funds from long term sources. Long term sources
are
meant for own capital and long term debt. Thus capital market provides an opportunity to
raise
these long term funds.
• A wide network of different instruments involving shares, debentures, bonds, etc. and the
different
participants who help in raising this fund is one of the most vital features of the capital
market.
• Capital market may sometimes act as a mirror of performance in the sense that public
sentiments
and reactions regards the performance of the companies are reflected here.
 Primary Capital Market

Primary capital market is a market which is involved in raising fresh capital for
both new and existing companies. In other words it can be said that the primary
capital market is a market for transaction of new issues.
• In a primary capital market securities are issued for the first time to the public,
thus enabling the corporation to raise capital for long term purposes.
• In the primary capital market equity shares, preference shares, debentures ,etc.
are issued for raising fresh capital by companies.
• Securities are issued directly to the public through the primary capital market
or the new issue market.
 Functions of Primary Capital Market
• Transfer of resources from those with idle resources to those who
have a productive need for them is most efficiently achieved through
the primary market;
• New issues of securities like shares, debentures, etc. are sold in the
primary market and subsequent trading in these securities occur in the
secondary market;
• In the primary market securities are issued by the company directly to
investors;
• The primary market performs the most crucial function of facilitating
capital formation in the economy.
• It is the medium through which primary issues are used by companies
for the purpose of setting up new business concerns or for expanding
or modernizing the existing business.
Meaning and Concept of Secondary Capital Market (Share Market)
• The secondary capital market is a market where the sale and purchase
of existing securities is made between the buyers and sellers.
• The shareholders can sell their holdings at the time of need to the
secondary capital market.
• As per section 4 of the Securities Contract Act, 1956,stock exchange
means “An association, organization or body of individuals whether
incorporated or not, established for the purpose of assisting and
controlling the business of buying, selling and dealing in securities.”
• To sum up, share market is a market where existing shares can be
transferred at fair price without any delay.
• In short it can be said that it is an open market for transaction of
securities.
• New issues are never sold or purchased in secondary market. For this
reason the share market is also called secondary market
 Features of secondary capital market:
• Stock Exchange is basically a marketplace for dealing in shares and
securities. It is here that buyers and sellers transact business through stock
brokers in the purchase and sale of corporate and Government securities;
• Stock Exchange is often referred to as a stock - or share-or secondary
market;
• A stock exchange is an organized market for purchase and sale of
second-hand, listed and permitted corporate and Government securities;
• Securities traded here are called second hand securities, because they are
"brand new” when issued through the primary market. Thereafter they are
listed and traded on the stock exchanges by the original allottees;
• Securities which are issued in the primary market are subsequently listed in
the stock exchanges to enable buyers and sellers to effect their transactions;
• Share market acts as a link between savings and investment. Share market
helps the investors to know how part of their savings should they invest
 Functions of share market:

i. Channelization of savings and investment- Share market provides a link between savings
and investment. The share market provides all sorts of infrastructural facilities for ensuring a
smooth and systematic channelization of savings of the investors.
ii. Capital Formation- Having an easy offloading facilities of their shares and in the process
gaining in a handsome way, induces people to save and invest their money in capital market.
This helps in capital formation.
iii. Liquidity and continuous market- Share market provides a continuous market for the
securities. This marketability feature of the share market brings liquidity.
iv. Facilitates collateral lending- Since share market provides a continuous market and easy
liquidity, therefore the listed securities of the share market are preferred as collateral
security for extending secured loans by various institutions.
v. Valuation of securities- In share market prices of securities are determined by the
interaction between demand and supply. The price of a security is a reflection of so many
well thought calculation and is a good indicator of the market’s sentiment about the future.
That is why share market is also called as a barometer of the country.
vi. Investor interest protection- Stock exchanges are well regulated. There are strict bylaws,
rules and regulations all these have been designed to facilitate a smooth and continuous
transaction in the market and to safeguard the interests of the investors
 EQUITY MARKET
• An equity market is a market in which shares are issued and
traded, either through exchanges or over-the-counter markets.
Also known as the stock market, it is one of the most vital areas
of a market economy because it gives companies access to
capital and investors a slice of ownership in a company with the
potential to realize gains based on its future performance.
• An equity share, normally known as ordinary share is a part
ownership where each member is a fractional owner and initiates the
maximum entrepreneurial liability related with a trading concern.
These types of shareholders in any organization possess the right to
vote.
 Features of Equity Shares Capital:
• Equity share capital remains with the company.
• It is given back only when the company is closed
• Equity Shareholders possess voting rights and select the company’s
management.
• The dividend rate on the equity capital relies upon the obtain ability
of the surfeit capital. However, there is no fixed rate of dividend on
the equity capital.
Types of Equity Shares

• Ordinary Shares
These represent long-term debt, and a company issues ordinary equity
shares to pay for the long-term expenses of the business. An individual
investor with a certain percentage of equity shares controls the
company's operations. Buying these shares gives you ownership of the
company.
• Preference Shares
• Unlike ordinary equity shares, owners of this category of shares have
no voting or ownership rights. However, when you invest in preference
shares, there is a cumulative dividend payment guarantee before the
distribution of profits among ordinary shareholders.
• There are two sub-categories of preference shares:
• Participating Preference Shares: As an owner of this category of
equity shares, you will enjoy a share of the profits, including bonus
shares
• Non-Participating Preference Shares: You don't get a share of profits
or bonus shares in this category
• Bonus Shares
• Bonus shares are additional equity shares issued to existing
shareholders to distribute profits. These shares are issued free
of cost, and the market capitalization or the total number of
shares x market price remains the same. For example, if a
company decides to issue bonus shares in the ratio of 2:1, then if
you hold 1000 shares, you are eligible for a bonus of 500 shares.
The total number of shares goes up, and the market price per
share goes down since there is no corresponding rise in the
market price.
• Rights Shares
• Unlike bonus shares, right shares are offered to a company's
existing shareholders at a discounted rate. This is a
limited-period offer, and rights shares are issued to help the
company meet its expenses.
• After knowing what equity shares are and their different types,
• Authorized Share Capital- This amount is the highest
amount an organization can issue. This amount can be
changed time as per the companies recommendation and
with the help of few formalities.
• Issued Share Capital- This is the approved capital which an
organization gives to the investors.
• Subscribed Share Capital- This is a portion of the issued
capital which an investor accepts and agrees upon.
• Paid Up Capital- This is a section of the subscribed capital,
that the investors give. Paid-up capital is the money that an
organization really invests in the company’s operation.
• Right Share- These are those type of share that an
organization issue to their existing stockholders. This type of
share is issued by the company to preserve the proprietary
rights of old investors.
 BONDS

• A Bond is a fixed income instrument that represents a

loan made by an investor to a borrower.” In simpler
words, bond acts as a contract between the investor
and the borrower. Mostly companies and government
issue bonds and investors buy those bonds as a savings
and security option.
• These bonds have a maturity date and when once that
is attained, the issuing company needs to pay back the
amount to the investor along with a part of the profit.
This kind of dealing with bonds between the issuer and
the investor is done by brokers
 Types of Bonds
• Fixed-rate bonds-Fixed-rate bonds pay consistent interest amounts
until maturity. The bondholders earn predictable and guaranteed
returns regardless of the prevailing market conditions.
• Floating-rate bond-Floating-rate bonds do not pay fixed returns
each period. Instead, the interest rates vary, depending on the set
benchmark, during the tenure.
• Zero-coupon bonds-As the name implies, these bonds do not pay
periodic coupons during their tenure. Though, these bonds are
issued at a discount and repayable at the par value. The difference
is the yield for investors.
• Perpetual bonds-Perpetual bonds are those debt securities which
do not have a maturity. In this type of bond, the issuer does not
repay the principal amount to the bondholders. Though, they keep
paying steady coupon payments to the bondholders till perpetuity.
Inflation-Indexed Bond is a bond that is issued by the Sovereign, providing the
investor with a constant return ignoring the level of inflation. It was first
introduced by RBI with the motive to discourage investors from physical gold.
The main aim of this bond is to protect against inflation and the security of
capital.
Municipal bonds- are debt securities issued by states, cities, counties
and other governmental entities to fund day-to-day obligations and to
finance capital projects such as building schools, highways or sewer
systems.
By purchasing municipal bonds, you are in effect lending money to the
bond issuer in exchange for a promise of regular interest payments,
usually semi-annually, and the return of the original investment, or
“principal.”
A municipal bond’s maturity date (the date when the issuer of the bond
repays the principal) may be years in the future. Short-term bonds mature
in one to three years, while long-term bonds won’t mature for more than
a decade.
 A deep discount bond is a bond that is trading at a substantial
discount from its face value. One reason for the deep discount is that
the stated interest rate on the bond is well below the current market
rate. Another possible reason is that the issuer has quite a low credit
rating, so that investors demand a high effective interest rate in order
to hold the issuer’s bonds. The prices of deep discount bonds tend to
fluctuate more widely than the prices of bonds that trade closer to
their face values.
• Bond market participants are similar to participants in most
financial markets and are essentially either buyers (debt
issuer) of funds or sellers (institution) of funds and often
both.
Participants include:
• Institutional investors
• Governments
• Traders
• Individuals
 DERIVATIVES
Derivatives are one of the most complex of instruments. The word
'derivative' comes from the verb 'to derive.' It indicates that it has no
independent value.
A derivative is a contract whose value is derived from the value of another
asset, known as the underlying, which could be a share, a stock market
index, an interest rate, a commodity, or a currency.
The underlying is the identification tag for a derivative contract. When the
price of this underlying changes the value of the derivative also changes.
Without an underlying, derivatives do not have any meaning. For
example, the value of a gold futures contract derives from the value of the
underlying asset, i.e., gold.
 What are Derivatives?

•Financial derivatives are those assets or financial instruments whose

value is determined from the value of some underlying assets.
• The underlying assets may be equity, commodity or currency.
• The derivatives are the most modern financial instruments used for
mitigating the portfolio risk.
• The individual or firm who wishes to mitigate risk can deal with others
who are willing to accept the risk for a price.
• A common place where such transactions take place is called the
derivative market.
 Types of Financial Derivatives
• Futures
Futures are a type of derivatives contract where the buyer and seller
enter into an agreement to fix the quantity and price of the asset. The
agreement has the quantity, price and date of the transaction
mentioned. Upon entering into the contract, the buyer and seller are
obligated to fulfil their duty regardless of the asset’s current market
price. Futures contracts are popular for hedging risk and speculation.
However, the main purpose is to fix the price of the asset against
volatility.
• Options
• Options also derive their value from the underlying asset. The option
holder is not obligated to buy or sell the asset on expiry. Following
are the two types of options:
• Call Option: The buyer of a call option has the right, but not the
obligation, to purchase the asset at the stated price on the specified
date.
• Put Option: A put option holder has the right but not the
obligation to sell the underlying asset at a specific price on a
specific date

• Forwards-Forward contracts are similar to futures contracts.

The contract holder is under the obligation to fulfil the
contract. However, these contracts are not standardized and
do not trade on the exchange. Forward contracts are over the
counter contracts. As a result, these are customized contracts
to suit the requirements of the buyers and sellers (parties to
the contract).
• Swaps-Swaps are derivative contracts that help two parties
to exchange their financial obligations. Corporates use swap
contracts to minimize and hedge their uncertainty risk of
certain projects. There are four types of swaps. Namely,
 Participants in a Derivative Market

• Hedgers: The main focus for hedgers is protection. Often known as

risk-averse traders. Hedgers like to protect themselves from possible
price fluctuations in the future. Hedgers are active in the commodities
market where the price fluctuations are rapid. Futures and options
trading can offer them the much-needed price stability in such
instances.
• Speculators: Speculators are risk-takers who wish to earn good
profits. They constantly monitor the markets, the news, and any other
information that could affect their trading. As a result, speculators
place an educated wager on the underlying asset’s price. In simple
terms, speculators seek to purchase an asset at a lower price in the
short term while betting on bigger returns in the long run.
• Arbitrageurs: Arbitrageurs take advantage of the price difference of
the same asset across different exchanges. Arbitrageurs buy
securities at a low cost in one market and sell them at a higher price in
a different market.
• Margin Traders: Brokers in the derivatives market require a deposit/
margin amount from investors. Margin amount is a minimum amount
that investors have to deposit with the broker to trade in the
derivatives market. As a result, the trader can maintain a sizable
outstanding position.
In-The-Money Call Option
An In-the-money call option is described as a call option whose strike price is less
than the spot price of the underlying assets.

At-The-Money Call Option

An At-the-money call option is described as a call option whose strike price
is approximately equal to spot price of the underlying assets (i.e. Strike
price=Spot price).

Out-The-Money Call Option

An Out-the-money call option is described as a call option whose strike price
is higher than the spot price of the underlying assets(i.e. Strike price> Spot
price).Thus, an Out-the-money call option’s entire premium consists of Time
value/Extrinsic value and it doesn’t have any Intrinsic value
 What is a Commodity?
A commodity is a group of assets or goods that are important in everyday life, such
as food, energy or metals. A commodity is alternate and exchangeable by nature.
It can be categorized as every kind of movable good that can be bought and sold,
except for actionable claims and money.
There are two main types of commodities:
a. Soft commodities – agricultural products such as corn, wheat, coffee, cocoa,
sugar and soybean; and livestock.
b. Hard commodities b– natural resources that need to be mined or processed
such as crude oil, gold, silver and rubber.
In the global markets, there are five categories of commodities in which trading
takes place:
Energy (e.g., crude oil, heating oil, natural gas and gasoline).
Metals (e.g., precious metals such as gold, silver, platinum and palladium; base
metals such as aluminium, copper, lead, nickel, tin and zinc; and industrial metals
such as steel).
Livestock and meat (e.g., lean hogs, pork bellies, live cattle and feeder cattle).
Agricultural (e.g., corn, soybean, wheat, rice, cocoa, coffee, cotton
Bullion refers to physical gold and silver of high purity that is often kept
in the form of bars, ingots, or coins. Bullion can sometimes be
considered legal tender, and is often held as reserves by central banks
or held by institutional investors.
Commodities Market
• A commodity market is an organised market where various types of commodities (such as gold, silver,
copper, zinc, lead and other metals, crude, some Agri-products and many more) are traded complying with
the rules and regulations of the regulator.
• The regulatory body was erstwhile Forward Markets Commission (FMC) which was set up in 1953. As of
September 2015 FMC was merged with the Securities and Exchange Board of India, SEBI.
• In this market, various types of derivative transactions for commodities, such as, forward contract, future
contract, option contract, etc. are executed by the traders, hedgers, speculators and arbitrageurs.
• Some exchange traded funds (ETFs) have been brought under the periphery of commodity trading.
• Commodity market facilitates the hedgers to hedge against risk pertaining to the price fluctuations of
commodities.
• It protects them to restrain their loss due to unpredictable price fluctuations in future.
• Manufacturers, traders, importers and exporters are involved in the commodity market to mitigate risk due
to unforeseen price fluctuations.
• They use various derivative techniques in the commodity market as a risk management mechanism.
• Hedging in this market helps reducing or controlling risk.
• Speculators in this market involve in speculative trades in order to earn wind-fall gains from the price
fluctuations of commodities.
• Commodity market is basically meant for hedgers to manage the risk of price volatility of commodities in
the global market
 Main participants of the commodity market
i. Hedgers: Hedging is an investment strategy used for minimizing a risk and
hedgers are the practitioners of this strategy. Generally, hedgers are producers
or consumers who want to transfer the price-risk on to the market.
Commodities derivatives market provide them an effective hedging
mechanism against adverse price movements. They protect themselves from
risk associated with the price of commodity by using derivatives. For example,
an airline company faces the risk is price rise of fuel. So they will go for a long
position (buy an oil futures contract) to hedge, just to cover the amount of
fuel they expect to buy.
ii. Speculators: Speculators are sophisticated leading players in commodities
futures market. They are basically risk takers and are never associated with
any commodity. They generally bet against the price movement in the hope of
making gains. They undertake speculative position with respect to anticipating
future price movements with a small margin and square-off anytime during
trading hours. They do either by going long or going short positions. Buying a
futures contract in anticipation of price increase is known as 'going long".
Selling a futures contract in anticipation of a price decrease is known as 'going
short
• iii. Arbitrageurs: Arbitrageurs are investors who earn from
discrepancy in prices between the two exchanges or between
different maturities of the same commodity. A simple example of
arbitraging is simultaneously buying a gold at lower price from one
exchange and selling it on another exchange for higher price. So they
make profit from price difference.
• iv. Investors: Investors are participants having a longer term view as
compared to speculators when they enter into trade in the
commodities market. Ex. Farmers, producers, consumers etc.
 OVERVIEW OF
INDIAN PRIMARY
SHARE MARKET
 ROADMAP
❑ ORGANISATION OF PRIMARY MARKET
❑ A STUDY OF PUBLIC ANNOUNCEMENT
❑ VARIANTS OF ISSUE: IPO, FPO, OFS, PRIVATE PLACEMENT, PREFERENTIAL ISSUE,
QIP BY QIB
❑ ISSUE MECHANISM: BOOK-BUILDING PROCESS AND DETERMINATION OF CUT
OFF PRICE
❑ SERVICES RENDERED BY MERCHANT BANK
❑ FUNCTIONS AND RESPONSIBILITIES OF BOOK RUNNER LEAD MANAGER
 ORGANISATION OF PRIMARY MARKET
• FOR A TRANSACTION TAKING PLACE IN THIS MARKET, THERE ARE THREE ENTITIES
INVOLVED. IT WOULD INCLUDE A COMPANY, INVESTORS, AND AN UNDERWRITER. A
COMPANY ISSUES SECURITY IN A PRIMARY MARKET AS AN INITIAL PUBLIC
OFFERING(IPO), AND THE SALE PRICE OF SUCH A NEW ISSUE IS DETERMINED BY A
CONCERNED UNDERWRITER, WHICH MAY OR MAY NOT BE A FINANCIAL
INSTITUTION.
• THE ENTITY WHICH ISSUES SECURITIES MAY BE LOOKING TO EXPAND ITS
OPERATIONS, FUND OTHER BUSINESS TARGETS OR INCREASE ITS PHYSICAL PRESENCE
AMONG OTHERS. PRIMARY MARKET EXAMPLE OF SECURITIES ISSUED INCLUDE NOTES,
BILLS, GOVERNMENT BONDS OR CORPORATE BONDS AS WELL AS STOCKS OF
COMPANIES.
 A STUDY OF PUBLIC ANNOUNCEMENT
• SEBI REGULATION, 2011 PROVIDES THAT WHENEVER ACQUIRER ACQUIRES
THE SHARES OR VOTING RIGHTS OF THE TARGET COMPANY IN EXCESS OF
THE LIMITS PRESCRIBED UNDER REGULATIONS 3 AND 4, ACQUIRER IS
REQUIRED TO GIVE A PUBLIC ANNOUNCEMENT OF AN OPEN OFFER TO THE
SHAREHOLDER OF THE TARGET COMPANY. DURING THE PROCESS OF MAKING
THE PUBLIC ANNOUNCEMENT OF AN OPEN OFFER, THE ACQUIRER IS
REQUIRED TO GIVE PUBLIC ANNOUNCEMENT AND PUBLISH DETAILED PUBLIC
STATEMENT. THE REGULATIONS HAVE PRESCRIBED THE SEPARATE TIMELINE
FOR PUBLIC ANNOUNCEMENT AS WELL AS FOR DETAILED PUBLIC STATEMENT.
HTTPS://WWW.GOOGLE.CO.IN/URL?SA=T&RCT=J&Q=&ESRC=S&SOURCE=WEB&CD
=&VED=2AHUKEWIVRRGMUPIAAXVHTLYBHZCLBYI4HHAWEGQIDBAB&URL=HTTPS%3A
%2F%2FWWW.ICSI.EDU%2FWEBMODULES%2FPUBLICATIONS%2FCAPITALMARKETAN
DSECURITESLAW.PDF&USG=AOVVAW3S7ABEPU9ZUEKJWBPEON8O&OPI=89978449
 VARIANTS OF ISSUE: IPO & FPO
(PUBLIC ISSUE)
• PUBLIC ISSUE:
WHEN A COMPANY RAISES FUNDS BY SELLING (ISSUING) ITS SHARES (OR DEBENTURE /
BONDS) TO THE PUBLIC THROUGH ISSUE OF OFFER DOCUMENT (PROSPECTUS), IT IS
CALLED A PUBLIC ISSUE.
1) INITIAL PUBLIC OFFER: WHEN A (UNLISTED) COMPANY MAKES A PUBLIC ISSUE FOR
THE FIRST TIME AND GETS ITS SHARES LISTED ON STOCK EXCHANGE, THE PUBLIC ISSUE
IS CALLED AS INITIAL PUBLIC OFFER (IPO).
2) FURTHER PUBLIC OFFER: WHEN A LISTED COMPANY MAKES ANOTHER PUBLIC ISSUE
TO RAISE CAPITAL, IT IS CALLED FURTHER PUBLIC / FOLLOW-ON OFFER (FPO).
 VARIANTS OF ISSUE: OFFER FOR SALE
• INSTITUTIONAL INVESTORS LIKE VENTURE FUNDS, PRIVATE EQUITY FUNDS ETC.,
INVEST IN UNLISTED COMPANY WHEN IT IS VERY SMALL OR AT AN EARLY STAGE.
SUBSEQUENTLY, WHEN THE COMPANY BECOMES LARGE, THESE INVESTORS SELL
THEIR SHARES TO THE PUBLIC, THROUGH ISSUE OF OFFER DOCUMENT AND THE
COMPANY’S SHARES ARE LISTED IN STOCK EXCHANGE. THIS IS CALLED AS OFFER
FOR SALE. THE PROCEEDS OF THIS ISSUE GO THE EXISTING INVESTORS AND NOT
TO THE COMPANY.
 VARIANTS OF ISSUE: PRIVATE PLACEMENT
• A PRIVATE PLACEMENT IS A SALE OF STOCK SHARES OR BONDS TO PRE-SELECTED
INVESTORS AND INSTITUTIONS RATHER THAN PUBLICLY ON THE OPEN MARKET. IT IS
AN ALTERNATIVE TO AN INITIAL PUBLIC OFFERING (IPO) FOR A COMPANY SEEKING
TO RAISE CAPITAL FOR EXPANSION.
• INVESTORS INVITED TO PARTICIPATE IN PRIVATE PLACEMENT PROGRAMS INCLUDE
WEALTHY INDIVIDUAL INVESTORS, BANKS AND OTHER FINANCIAL
INSTITUTIONS, MUTUAL FUNDS, INSURANCE COMPANIES, AND PENSION FUNDS.
• PRIVATE PLACEMENTS HAVE BECOME A COMMON WAY FOR STARTUPS TO RAISE
FINANCING, PARTICULARLY THOSE IN THE INTERNET AND FINANCIAL TECHNOLOGY
SECTORS. THEY ALLOW THESE COMPANIES TO GROW AND DEVELOP WHILE
AVOIDING THE FULL GLARE OF PUBLIC SCRUTINY THAT ACCOMPANIES AN IPO.
 VARIANTS OF ISSUE: PREFERENTIAL ISSUE
• A PREFERENTIAL ISSUE IS AN ISSUE OF SHARES OR OF CONVERTIBLE SECURITIES BY
LISTED COMPANIES TO A SELECT GROUP OF PERSONS UNDER SECTION 81 OF THE
COMPANIES ACT, 1956 WHICH IS NEITHER A RIGHTS ISSUE NOR A PUBLIC ISSUE.
THIS IS A FASTER WAY FOR A COMPANY TO RAISE EQUITY CAPITAL. THE ISSUER
COMPANY HAS TO COMPLY WITH THE COMPANIES ACT AND THE REQUIREMENTS
CONTAINED IN CHAPTER PERTAINING TO PREFERENTIAL ALLOTMENT IN SEBI (DIP)
GUIDELINES WHICH INTER-ALIA INCLUDE PRICING, DISCLOSURES IN NOTICE ETC.
 VARIANTS OF ISSUE: QIP BY QIB
• A QUALIFIED INSTITUTIONAL PLACEMENT (QIP) IS, A WAY FOR LISTED COMPANIES TO
RAISE CAPITAL WITHOUT HAVING TO SUBMIT LEGAL PAPERWORK TO MARKET
REGULATORS. IT IS COMMON IN INDIA AND OTHER SOUTHEAST ASIAN
COUNTRIES. THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) CREATED THE RULE
TO AVOID THE DEPENDENCE OF COMPANIES ON FOREIGN CAPITAL RESOURCES.
• THE SEBI LIMITS COMPANIES TO ONLY RAISING MONEY THROUGH ISSUING SECURITIES.
THE PRIMARY REASON FOR DEVELOPING QIPS WAS TO KEEP INDIA FROM DEPENDING
TOO MUCH ON FOREIGN CAPITAL TO FUND ITS ECONOMIC GROWTH.
• THE ONLY PARTIES ELIGIBLE TO PURCHASE QIPS ARE QUALIFIED INSTITUTIONAL
BUYERS(QIBS), WHICH ARE ACCREDITED INVESTORS, AS DEFINED BY WHATEVER
SECURITIES AND EXCHANGE GOVERNING BODY PRESIDE OVER IT. THIS LIMITATION IS DUE
TO THE PERCEPTION THAT QIBS ARE INSTITUTIONS WITH EXPERTISE AND FINANCIAL
POWER THAT ALLOWS THEM TO EVALUATE AND PARTICIPATE IN CAPITAL MARKETS, AT
THAT LEVEL, WITHOUT THE LEGAL ASSURANCES OF A FOLLOW-ON PUBLIC OFFER (FPO).
 ISSUE MECHANISM: BOOK-BUILDING PROCESS AND
DETERMINATION OF CUT OFF PRICE

• HTTPS://INVESTOR.SEBI.GOV.IN/PDF/REFERENCE-MATERIAL/PRIMARYMARKETS.PDF

• PAGE NO. 7
 ISSUE MECHANISM: ASBA

• HTTPS://INVESTOR.SEBI.GOV.IN/PDF/REFERENCE-MATERIAL/PRIMARYMARKETS.PDF

• PAGE NO. 10 & 11

 SERVICES RENDERED BY MERCHANT BANK
• MERCHANT BANKING IS A SET OF SELECT BANKING AND
FINANCIAL SERVICES OFFERED BY MERCHANT BANKS TO LARGE
CORPORATIONS, INSTITUTIONAL INVESTORS, AND HIGH NET
WORTH INDIVIDUALS (HNIS). SOME OF THE MOST COMMON
MERCHANT BANKING SERVICES INCLUDE, FUNDRAISING,
FINANCIAL ADVISORY, LENDING, UNDERWRITING, CORPORATE
PORTFOLIO MANAGEMENT, INTERNATIONAL TRADE ADVISORY,
MERGERS AND ACQUISITIONS, AND ASSET SALE AND
MANAGEMENT ADVISORY. TYPICALLY, MERCHANT BANKS
AVOID RETAIL BANKING AND DEPOSITORY SERVICES, WHICH
MEANS THEIR SERVICES ARE MOSTLY LIMITED TO LARGE
COMPANIES, AND MULTINATIONAL BUSINESSES.
SERVICES OFFERED BY MERCHANT BANKS
• MARKETING AND UNDERWRITING OF NEW ISSUES
• MERGER AND ACQUISITIONS
• CORPORATE FINANCE MANAGEMENT AND ADVISORY
• PROJECT FINANCING AND MANAGEMENT
• MANAGEMENT OF CUSTOMER SECURITY
• PORTFOLIO SERVICES
• INVESTMENT BANKING
• TRADE FINANCE AND ADVISORY
• VENTURE CAPITAL FUNDRAISING AND ADVISORY
• MANAGEMENT OF ASSETS
 FUNCTIONS AND RESPONSIBILITIES OF
BOOK RUNNER LEAD MANAGER
• BOOKRUNNER REFERS TO THE PRIMARY UNDERWRITER OR LEAD COORDINATOR IN THE ISSUANCE OF NEW EQUITY,
DEBT, OR SECURITIES INSTRUMENTS. THE BOOK RUNNER IS THE LEAD UNDERWRITING FIRM THAT RUNS OR IS IN
CHARGE OF THE BOOKS IN INVESTMENT BANKING. BOOK RUNNERS MAY ALSO COORDINATE WITH OTHERS IN
ORDER TO MITIGATE THEIR RISK SUCH AS THOSE THAT REPRESENT COMPANIES IN LARGE, LEVERAGED
BUYOUTS (LBOS).
• A BOOK RUNNER PERFORMS THE SAME DUTIES AS AN UNDERWRITER WHILE ALSO COORDINATING THE EFFORTS OF
MULTIPLE INVOLVED PARTIES AND INFORMATION SOURCES. IN THIS REGARD, THE BOOK RUNNER FUNCTIONS AS A
CENTRAL POINT FOR ALL INFORMATION REGARDING THE POTENTIAL OFFERING OR ISSUE. THIS PIVOTAL POSITION
MAY ALLOW THE BOOK RUNNER AND HIS ASSOCIATED FIRM TO KNOW NEW INFORMATION BEFORE IT IS WIDELY
KNOWN.
• ONE RESPONSIBILITY OF THE BOOK RUNNER IS TO CREATE A BOOK CONTAINING A WORKING LIST. THIS IS USEFUL
IN TRACKING INFORMATION ABOUT PARTIES INTERESTED IN PARTICIPATING IN THE NEW OFFERING OR ISSUE. THIS
INFORMATION IS USED TO HELP DETERMINE AN OPENING PRICE FOR AN INITIAL PUBLIC OFFERING AS WELL AS TO
GAIN INSIGHT INTO THE LEVEL OF INTEREST EXPRESSED BY POTENTIAL INVESTORS.
• BEING THE LEAD UNDERWRITER FOR A STOCK OFFERING, ESPECIALLY AN IPO, CAN BRING A LARGE PAYDAY IF THE
MARKET SHOWS A HIGH DEMAND FOR THE SHARES. THE STOCK ISSUER WILL OFTEN ALLOW THE LEAD
UNDERWRITER TO CREATE AN OVER-ALLOTMENT OF SHARES IF DEMAND IS HIGH WHICH CAN BRING IN EVEN MORE
MONEY TO THE UNDERWRITING FIRM. THIS IS CALLED A GREENSHOE OPTION.
 UNIT III

OVERVIEW OF INDIAN
SECONDARY SHARE MARKET
 ROADMAP
• BRIEF IDEA ABOUT THE STOCK MARKET
• CONCEPT OF EXCHANGE TRADED MARKET
• THE PROCESS OF SHARE TRADING:CUSTOMERS,CUSTODIANS,DEPOSITORS,CLEARING AND SETTLEMENT
PROCESS
• UNDERSTANDING OF STOCK INDICES
• REMATERIALIZATION AND DEMATERIALIZATION PROCESS
• MEANING OF FINANCIAL INTERMEDIATION
• SERVICES RENDERED BY INVESTMENT BANKS
• CONCEPT OF FINANCIAL ASSETS
• AN OVERVIEW OF CRYPTOCURRENCY
• AN INSIGHT INTO THE MUTUAL FUND
• ORGANISATION OF MUTUAL FUND
• UNDERSTANDING THE CONCEPT OF NET ASSET VALUE
 BRIEF IDEA ABOUT THE STOCK MARKET
• A SECONDARY MARKET IS A MARKETPLACE WHERE ALREADY ISSUED FINANCIAL SECURITIES –
BOTH SHARES AND DEBT – CAN BE BOUGHT AND SOLD BY THE INVESTORS. SO, IT IS A
FINANCIAL MARKET WHERE INVESTORS BUY SECURITIES FROM OTHER INVESTORS AND NOT
FROM THE ISSUING COMPANY.
• THIS MARKET PROVIDES LIQUIDITY AND HELPS TO ENSURE THAT SECURITIES
ARE PRICED EFFICIENTLY AND THAT INVESTORS RECEIVE FAIR VALUE FOR
THEIR INVESTMENTS.
• THERE ARE TWO MAIN TYPES OF SECONDARY MARKETS: EXCHANGE-TRADED
MARKETS AND OVER-THE-COUNTER (OTC) MARKETS.
• IN THE SECONDARY MARKET, INVESTORS CAN BUY AND SELL SECURITIES
BASED ON THE PRICES DETERMINED BY SUPPLY AND DEMAND; IF THERE IS
HIGH DEMAND FOR A SECURITY, ITS PRICE INCREASES, AND IF THERE IS LOW
DEMAND, ITS PRICE DECREASES.
• THIS DYNAMIC PRICING MECHANISM HELPS TO ENSURE THAT SECURITIES ARE
PRICED EFFICIENTLY AND THAT INVESTORS RECEIVE FAIR VALUE FOR THEIR
INVESTMENTS.
FUNCTIONS OF THE SECONDARY MARKET
• THE SECONDARY MARKET IS WHERE THE MAJOR CHUNK OF STOCK TRADING HAPPENS. THIS
BASICALLY FUNCTIONS AS A PLATFORM THAT GIVES THE OPPORTUNITY TO THE MASSES TO INVEST
IN COMPANY STOCKS.

• THE SECONDARY MARKET ALSO FUNCTIONS AS AN ENABLER OF ACTIVE, CONTINUOUS TRADING

THAT HELPS KEEP ASSETS LIQUID AND PRICE VARIATIONS IN CHECK. THAT BEING SO, THE SECONDARY
MARKET ALSO SERVES AS A MEDIUM FOR INVESTORS TO GENERATE QUICK CASH BY SELLING OFF
THE SHARES THEY OWN.

• IN HELPING DISCOVER PRICES OF SHARES BASED ON DEMAND AND SUPPLY, THE SECONDARY
MARKET FUNCTIONS AS A MEDIUM OF PRICE DETERMINATION.

• THE SECONDARY MARKET ALSO FUNCTIONS AS AN ORGANIZED PLACE WHERE INVESTORS CAN
INVEST THEIR MONEY IN MARKET SECURITIES WITH SOME SORT OF REGULATORY SAFETY NET IN
PLACE. THE SECONDARY MARKET, IN A WAY, REFLECTS THE STATE OF THE ECONOMY OF A NATION.
 DETAILS OF STOCK EXCHANGES
(ROLES, OBJECTIVES)

• HTTPS://WWW.SEBI.GOV.IN/STOCK-EXCHANGES.HTML (GENERAL DETAILS)

• BOMBAY STOCK EXCHANE

HTTPS://WWW.BSEINDIA.COM/

• NATIONAL STOCK EXCHANGE

HTTPS://WWW.NSEINDIA.COM/NATIONAL-STOCK-EXCHANGE/ABOUT-NSE-COMPANY
CONCEPT OF EXCHANGE TRADED MARKET
• EXCHANGE-TRADED MARKETS ARE THE MARKETPLACES WHERE ALL THE
TRANSACTIONS PASS THROUGH A CENTRAL SOURCE.
• IT IS THE INTERMEDIARY OR THE PLATFORM OR THE CONDUIT THAT CONNECTS
THE BUYER AND SELLER. AND ALL THE MARKET TRANSACTIONS ARE
NECESSARILY ROUTED THROUGH IT.
• THOUGH IT IS AN INTERMEDIARY OR A CONDUIT, OR AN EXCHANGE HOLDS AND
YIELDS IMMENSE POWER AND CONTROL OVER THE TRADE AND ITS
CONSTITUENTS.
• IT ALSO MEANS THAT THE EXCHANGE TAKES UP ALL THE RESPONSIBILITY TO
ENSURE THE PARTIES HONOR THE CONTRACTUAL OBLIGATIONS.
• NYSE (NEW YORK STOCK EXCHANGE) AND NASDAQ ARE GOOD EXAMPLES OF
EXCHANGE-TRADED MARKETS.
FEATURES OF EXCHANGE TRADED MARKET

• THESE MARKETS TRADE IN AN ORGANIZED MANNER AND HAVE A CENTRALIZED EXCHANGE.

• USUALLY, IN A TRANSACTION, THERE ARE TWO PARTIES. IN THESE MARKETS, THE COUNTER
PARTY OR THE SECOND PARTY IN ALL THE TRADES IS THE EXCHANGE THAT PLAYS THE ROLE
OF AN INTERMEDIARY.
• THESE MARKETS FACE HEAVY REGULATIONS AND THUS, FEATURE LESS COUNTER PARTY RISK.
• SINCE THERE IS LESS COMPETITION AMONG THE INTERMEDIARIES, THE TRANSACTION COST
IN THESE MARKETS IS COMPARATIVELY HIGHER.
• SUCH MARKETS ARE GENERALLY USED BY WELL-ESTABLISHED FIRMS.
• THESE MARKETS WORK FOR SPECIFIC HOURS IN THE DAY. IN CONTRAST, THE OTC MARKETS
ARE AVAILABLE 24*7.
• ALL THE CONTRACTS REMAIN STANDARD ONES, AND THE TRANSPARENCY ALSO IS
RELATIVELY HIGHER THAN IN ANY OTHER MARKET
 THE PROCESS OF SHARE TRADING

HTTPS://INVESTOR.SEBI.GOV.IN/PDF/REFERENCE-MATERIAL/PPT/PPT-
6%20HOW%20TO%20BUY%20AND%20SELL%20SHARES%20IN%20STOCK%20EXCHANGES.PDF
• CUSTOMER
AN INDIVIDUAL OR ENTITY THAT PARTICIPATES IN BUYING AND SELLING SHARES
OR STOCKS OF PUBLICLY-TRADED COMPANIES. SHARE TRADING, ALSO KNOWN
AS STOCK TRADING OR EQUITY TRADING, INVOLVES THE EXCHANGE OF
OWNERSHIP IN COMPANIES THROUGH SHARES, WHICH REPRESENT A PORTION
OF OWNERSHIP IN THE COMPANY.
CUSTODIAN
A CUSTODIAN IS A FINANCIAL INSTITUTION OR A SPECIALIZED ENTITY
RESPONSIBLE FOR SAFEGUARDING AND HOLDING THE ASSETS OF INVESTORS,
INCLUDING SHARES, ON THEIR BEHALF. CUSTODIANS PLAY A CRUCIAL ROLE IN
ENSURING THE SAFEKEEPING AND PROPER MANAGEMENT OF SECURITIES,
SUCH AS STOCKS AND BONDS, AND THEY ACT AS AN INTERMEDIARY BETWEEN
THE INVESTOR AND THE STOCK EXCHANGE OR OTHER FINANCIAL MARKETS.
RETAIL INDIVIDUAL INVESTOR - RII REFERS TO INDIVIDUAL INVESTORS WHO
PARTICIPATE IN THE FINANCIAL MARKETS BY BUYING AND SELLING SECURITIES, SUCH
AS STOCKS, BONDS, MUTUAL FUNDS, AND OTHER FINANCIAL INSTRUMENTS, FOR
THEIR PERSONAL INVESTMENT PURPOSES. THESE INVESTORS ARE COMMONLY
REFERRED TO AS RETAIL INVESTORS BECAUSE THEY TYPICALLY INVEST SMALLER
AMOUNTS COMPARED TO INSTITUTIONAL INVESTORS LIKE MUTUAL FUNDS, HEDGE
FUNDS, OR PENSION FUNDS.
NON-INSTITUTIONAL INVESTORS- NII REFERS TO A CATEGORY OF INVESTORS WHO
PARTICIPATE IN THE FINANCIAL MARKETS BUT ARE NOT CLASSIFIED AS INSTITUTIONAL
INVESTORS. NON-INSTITUTIONAL INVESTORS TYPICALLY INCLUDE INDIVIDUAL
INVESTORS, HIGH NET WORTH INDIVIDUALS (HNIS), AND OTHER ENTITIES THAT ARE
NOT INSTITUTIONAL IN NATURE, SUCH AS TRUSTS, PARTNERSHIPS, OR
UNINCORPORATED BODIES.
• DEPOSITORIES
DEPOSITORIES ARE FINANCIAL INSTITUTIONS OR ORGANIZATIONS THAT
FACILITATE THE ELECTRONIC HOLDING, TRANSFER, AND SETTLEMENT
OF SECURITIES, INCLUDING SHARES, ON BEHALF OF INVESTORS.
DEPOSITORIES PLAY A VITAL ROLE IN THE MODERN SECURITIES
MARKET, PROVIDING A SECURE AND EFFICIENT SYSTEM FOR HOLDING
AND MANAGING SHARES IN DEMATERIALIZED (ELECTRONIC) FORM.
THIS SYSTEM IS COMMONLY KNOWN AS THE "DEMATERIALIZATION" OF
SHARES.
• DEPOSITORY PARTICIPANTS (DPS) ARE INTERMEDIARIES OR ENTITIES
THAT ACT AS AGENTS OF THE DEPOSITORIES TO OFFER DEPOSITORY
SERVICES TO INVESTORS. IN THE CONTEXT OF SHARE TRADING,
DEPOSITORIES PARTICIPANTS ARE AUTHORIZED ENTITIES THAT
FACILITATE THE OPENING AND MAINTENANCE OF DEMATERIALIZED
• IN COUNTRIES LIKE INDIA, WHERE THE MAJORITY OF SECURITIES TRADING IS CONDUCTED
IN DEMATERIALIZED FORM, DEPOSITORY PARTICIPANTS PLAY A CRUCIAL ROLE IN THE
SECURITIES MARKET. THEY ARE REGISTERED WITH THE CENTRAL SECURITIES DEPOSITORIES,
SUCH AS THE NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL) OR CENTRAL DEPOSITORY
SERVICES (INDIA) LIMITED (CDSL), TO PROVIDE DEPOSITORY SERVICES TO INVESTORS.
• NSDL AND CDSL ARE THE TWO MAIN DEPOSITORY ORGANIZATIONS IN INDIA THAT
PROVIDE DEMATERIALIZATION AND OTHER DEPOSITORY SERVICES FOR SECURITIES,
INCLUDING SHARES AND OTHER FINANCIAL INSTRUMENTS. THEY PLAY A CRUCIAL ROLE IN
THE INDIAN SECURITIES MARKET, ENABLING INVESTORS TO HOLD AND TRADE SECURITIES IN
ELECTRONIC FORM (DEMAT) RATHER THAN IN PHYSICAL CERTIFICATES. BOTH NSDL AND
CDSL ARE REGULATED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI), THE
COUNTRY'S SECURITIES MARKET REGULATOR.
NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL):
NSDL WAS ESTABLISHED IN 1996 AND IS THE FIRST AND OLDEST DEPOSITORY IN INDIA.
• IT IS A JOINT VENTURE BETWEEN THE INDUSTRIAL DEVELOPMENT BANK OF INDIA (IDBI) AND THE NATIONAL STOCK EXCHANGE
OF INDIA LTD (NSE).
• NSDL OFFERS A WIDE RANGE OF DEPOSITORY SERVICES, INCLUDING DEMATERIALIZATION OF SECURITIES, SETTLEMENT OF
TRADES, HOLDING AND TRANSFER OF SECURITIES, AND OTHER VALUE-ADDED SERVICES.
• IT HAS PLAYED A SIGNIFICANT ROLE IN MODERNIZING INDIA'S SECURITIES MARKET BY PROMOTING PAPERLESS TRADING AND
SAFEKEEPING OF SECURITIES.
• NSDL HAS A VAST NETWORK OF DEPOSITORY PARTICIPANTS (DPS) THAT PROVIDE DEPOSITORY SERVICES TO INVESTORS ACROSS
THE COUNTRY.
CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED (CDSL):
CDSL WAS ESTABLISHED IN 1999 AND IS A NEWER DEPOSITORY IN INDIA, PROVIDING SIMILAR SERVICES AS NSDL.
• IT IS PROMOTED BY LEADING INDIAN BANKS AND FINANCIAL INSTITUTIONS, INCLUDING THE BOMBAY STOCK EXCHANGE (BSE).
• CDSL QUICKLY GAINED PROMINENCE IN THE DEPOSITORY SPACE AND HAS BECOME A SIGNIFICANT PLAYER IN THE INDIAN
SECURITIES MARKET.
• IT OPERATES A SECURE AND EFFICIENT DEPOSITORY SYSTEM THAT CATERS TO THE NEEDS OF INVESTORS AND MARKET
PARTICIPANTS.
• CDSL ALSO HAS A WIDESPREAD NETWORK OF DEPOSITORY PARTICIPANTS (DPS) THAT OFFER DEPOSITORY SERVICES TO
INVESTORS ACROSS THE COUNTRY.
KEY FUNCTIONS AND BENEFITS OF
DEPOSITORIES
• DEMATERIALIZATION: DEPOSITORIES ENABLE THE
CONVERSION OF PHYSICAL SHARE CERTIFICATES INTO
ELECTRONIC FORM. THIS PROCESS IS KNOWN AS
DEMATERIALIZATION, WHERE THE PHYSICAL
CERTIFICATES ARE DESTROYED, AND THE EQUIVALENT
NUMBER OF SHARES ARE CREDITED TO THE INVESTOR'S
DEMAT ACCOUNT.
• HOLDING SECURITIES: ONCE SHARES ARE
DEMATERIALIZED, THEY ARE HELD IN THE INVESTOR'S
• TRANSFER OF SECURITIES: INVESTORS CAN EASILY TRANSFER SHARES FROM ONE DEMAT
ACCOUNT TO ANOTHER THROUGH ELECTRONIC MEANS. THIS SIMPLIFIES THE PROCESS OF BUYING
AND SELLING SHARES AND FACILITATES FASTER SETTLEMENT OF TRADES.

• SETTLEMENT OF TRADES: WHEN INVESTORS BUY OR SELL SHARES, THE TRANSFER OF OWNERSHIP
IS FACILITATED THROUGH THE DEPOSITORY SYSTEM, ENSURING SMOOTH AND EFFICIENT
SETTLEMENT OF TRADES.

• CORPORATE ACTIONS: DEPOSITORIES HANDLE VARIOUS CORPORATE ACTIONS, SUCH AS

DIVIDENDS, BONUS ISSUES, RIGHTS ISSUES, AND MERGERS, ON BEHALF OF INVESTORS. THEY
ENSURE THAT SHAREHOLDERS RECEIVE THEIR ENTITLEMENTS AND MAKE NECESSARY ADJUSTMENTS
TO THEIR DEMAT ACCOUNTS.

• REDUCTION OF PAPERWORK: BY ELIMINATING THE NEED FOR PHYSICAL SHARE CERTIFICATES AND
ASSOCIATED PAPERWORK, DEPOSITORIES SIGNIFICANTLY REDUCE ADMINISTRATIVE BURDENS AND
OPERATIONAL COSTS FOR INVESTORS AND COMPANIES ALIKE.
 CLEARING AND SETTLEMENT PROCESS

• THE PROCESS OF BUYING OR SELLING STOCKS ONLINE HAS BEEN MADE SMOOTH AND
SEAMLESS. THE AMOUNT IS DEBITED FROM YOUR ACCOUNT AND YOU RECEIVE THE
SHARES IN YOUR DEMAT ACCOUNT. SAME WAY, FOR SALE TRANSACTIONS, SHARES ARE
DEBITED FROM YOUR DEMAT ACCOUNT WHILE THE SELLING PRICE IS CREDITED TO YOUR
BANKING ACCOUNT.
• TO ENSURE SMOOTH OPERATIONS AND MINIMAL RISK, REGULATORS HAVE
DESIGNED A TRADING CYCLE, AS WELL AS, A CLEARING AND SETTLEMENT
PROCESS.
• IT IS TO BE NOTED THAT ACCORDING TO A RECENT SEBI ANNOUNCEMENT, ALL
F&O EQUITIES AND REMAINING STOCKS IN THE T+2 SETTLEMENT CYCLE WILL
SWITCH TO THE T+1 SETTLEMENT CYCLE STARTING ON JANUARY 27, 2023. ALL
EQUITIES WILL NOW GRADUALLY TRANSITION TO A T+1 CYCLE.
CLEARING AND SETTLEMENT PROCESS WHEN YOU BUY A
SHARE

T-DAY
TRADE DAY, OFTEN KNOWN AS T-DAY, IS THE DAY THAT YOU BUY A STOCK.

THE CONTRACT NOTE FOR THE TRANSACTION AND THE COSTS ARE GIVEN TO YOU BY
THE BROKER ON THIS DAY. THE CONTRACT NOTE RESEMBLES A STOCK PURCHASE BILL.
YOUR BANK ACCOUNT HAS BEEN DEBITED, BUT THE SHARES HAVE NOT YET BEEN
CREDITED TO YOUR DEMAT ACCOUNT.
TRADE DAY + 1
THE DAY AFTER YOUR BUY IS DAY TWO. IT IS OFTEN REFERRED TO AS T + 1 DAY OR TRADE
DAY + 1. ON THIS DAY, YOUR BROKER'S FEES, AND THE AMOUNT FOR THE ACQUIRED
SHARES ARE PAID TO THE STOCK EXCHANGE. ADDITIONALLY, THE SHARES ARE CREDITED
TO THE BROKER'S ACCOUNT AND DEBITED FROM THE SELLER'S DEMAT ACCOUNT ON THIS
DAY.

YOUR DEMAT ACCOUNT IS SUBSEQUENTLY CREDITED BY THE BROKER WITH THOSE

SHARES. THE SELLER'S BANK ACCOUNT IS CREDITED WITH THE FUNDS THAT WERE
DEDUCTED FROM YOURS TO ACQUIRE THE SHARES.

DUE TO THE T+1 SETTLEMENT CYCLE, TRADE-RELATED SETTLEMENTS MUST BE MADE A DAY,
OR 24 HOURS, AFTER A TRANSACTION IS COMPLETED. ACCORDING TO T+1, FOR
INSTANCE, IF A CONSUMER PURCHASED SHARES ON WEDNESDAY, THEY WOULD BE
DEPOSITED TO THEIR DEMAT ACCOUNT ON THURSDAY.
 ROLLING SETTLEMENT CYCLE
A ROLLING SETTLEMENT IS A METHOD OF SETTLING ASSET TRADES ON
CONTINUOUS DAYS DEPENDING ON THE PARTICULAR DATE ON WHICH THE
ORIGINAL TRADE WAS PLACED. THE TRADES THAT HAVE BEEN COMPLETED
TODAY WILL HAVE A SETTLEMENT DATE ONE WORKING DAY LATER THAN
TRADES THAT WERE COMPLETED YESTERDAY.

THIS IS NOT ON THE SAME LINES WITH ACCOUNT SETTLEMENT, IN WHICH

ALL TRADES ARE COMPLETELY EXECUTED AT ONE TIME IN A SET PERIOD OF
DAYS. THIS IS DONE IRRESPECTIVE OF WHEN THE TRADES WERE
COMPLETED. TRADE SETTLEMENT REFERS TO THE TIME AT WHICH THE
SECURITY WAS DELIVERED AFTER THE COMPLETION OF THE TRADE.
• PRESUME, TRADER A PURCHASED 100 SHARES ON JANUARY 1. SO, FOLLOWING
THE T+2 SETTLEMENT SYSTEM, THE SETTLEMENT DAY FALLS ON JANUARY 3, ON
WHICH TRADER A WILL HAVE TO PAY IN TOTAL, AND THE SHARES WILL GET
CREDITED TO HIS ACCOUNT. ON THE OTHER HAND, THE SELLER WHO MADE THE
TRANSACTION WILL DELIVER THE STOCKS TO THE FIRST TRADER ON JANUARY 3.
SO, ON THE SECOND DAY FROM THE DAY OF TRADE, EQUITIES WILL BE DEBITED
FROM THE SELLER’S ACCOUNT AND CREDITED TO THE BUYER’S DEMAT.

• IT IS IMPORTANT TO NOTE THAT SETTLEMENTS DON’T HAPPEN ON INTERVENING

HOLIDAYS, INCLUDING BANK HOLIDAYS, EXCHANGE HOLIDAYS, AND SATURDAYS
AND SUNDAYS, WHICH ARE WEEKLY HOLIDAYS IN THE BOURSES.
 WHY IS THE ROLLING SETTLEMENT SYSTEM BETTER THAN
ACCOUNT SETTLEMENT?
• ROLLING SETTLEMENT CARRIES LESS RISK THAN THE EARLIER METHOD OF ACCOUNT SETTLEMENT
SYSTEM WHEN ALL TRADES WERE SETTLED ON A FIXED DATE.

• OBVIOUSLY, IN THE ACCOUNT SETTLEMENT METHOD, THE VOLUME OF TRADES ON A SINGLE DAY
SETTLED WERE LARGE, AUTOMATICALLY INCREASING THE NUMBER OF PAY-IN AND PAY-OUT AND
ADDING TO THE ALREADY COMPLEX SYSTEM.

• CONVERSELY, IN THE ROLLING SETTLEMENT METHOD, TRADES CONDUCTED ON A DAY ARE SETTLED
SEPARATELY THAN TRANSACTIONS OCCURRING THE NEXT DAY, EVENTUALLY REDUCING
SETTLEMENT RISKS TO A GREAT EXTENT.

• FINALLY, THE CURRENT SYSTEM IS RESPONSIBLE FOR MAKING THE DELIVERY OF SECURITIES TO THE
BUYER AND REMITTANCE TO THE SELLER MORE PROMPT, IMPROVING THE OVERALL OPERATIONAL
EFFICIENCY OF THE STOCK MARKET.
 STOCK INDICES
• A STOCK MARKET INDEX IS A STATISTICAL TOOL THAT REFLECTS THE CHANGES IN THE FINANCIAL
MARKETS. THE INDICES ARE INDICATORS THAT REFLECT THE PERFORMANCE OF A CERTAIN
SEGMENT OF THE MARKET OR THE MARKET AS A WHOLE.

• A STOCK MARKET INDEX IS CREATED BY SELECTING CERTAIN STOCKS OF SIMILAR COMPANIES OR

THOSE THAT MEET A SET OF PREDETERMINED CRITERIA. THESE SHARES ARE ALREADY LISTED AND
TRADED ON THE EXCHANGE. SHARE MARKET INDICES CAN BE CREATED BASED ON A VARIETY OF
SELECTION CRITERIA, SUCH AS INDUSTRY, SEGMENT, OR MARKET CAPITALIZATION, AMONG
OTHERS.

• EACH SHARE MARKET INDEX MEASURES THE PRICE MOVEMENT AND THE PERFORMANCE OF THE
SHARES THAT CONSTITUTE THAT INDEX. THIS ESSENTIALLY MEANS THAT THE PERFORMANCE OF
ANY STOCK MARKET INDEX IS DIRECTLY PROPORTIONAL TO THE PERFORMANCE OF THE
UNDERLYING STOCKS THAT MAKE UP THE INDEX. IN SIMPLER TERMS, IF THE PRICES OF THE STOCKS
IN AN INDEX GOES UP, THAT INDEX, AS A WHOLE, ALSO GOES UP.
 TYPES OF STOCK INDICES
• BENCHMARK INDICES SUCH AS BSE SENSEX AND NSE NIFTY
• BROADER INDICES SUCH AS NIFTY 50 AND BSE 100
• INDICES CREATED BASED ON THE MARKET CAPITALIZATION OF
COMPANIES, SUCH AS BSE MIDCAP AND BSE SMALLCAP
• SECTOR-SPECIFIC INDICES LIKE NIFTY FMCG, NIFTY BANK INDEX, CNX
IT, AND S&P BSE OIL AND GAS
 A CLOSER LOOK AT THE TWO BENCHMARK INDICES IN THE
INDIAN STOCK MARKET
• INDIA’S STOCK MARKETS HAVE TWO BENCHMARK INDICES - BSE SENSEX AND NSE NIFTY
• SENSEX IS A PORTMANTEAU OF TWO TERMS- SENSITIVE AND INDEX AND WAS COINED BY DEEPAK MOHONI, A
STOCK MARKET EXPERT.
• SENSEX WAS MEANT TO DENOTE THE MOST POPULAR MARKET INDEX OF 30 COMPANIES LISTED UNDER THE
BOMBAY STOCK EXCHANGE.
• THE COMPONENT COMPANIES LISTED IN THIS INDEX TODAY ARE SOME OF THE BIGGEST COMPANIES IN THIS
COUNTRY WITH THE MOST ACTIVELY TRADED STOCKS.
• COMPANIES INCLUDED UNDER IT ARE SELECTED BY S&P BSE INDEX COMMITTEE BASED ON THE FOLLOWING FIVE
CRITERIA –
• COMPANIES HAVE TO BE LISTED UNDER THE BOMBAY STOCK EXCHANGE IN INDIA.
• IT MUST CONSIST OF LARGE OR MEGA-CAP STOCKS.
• IT HAS TO BE RELATIVELY LIQUID.
• IT MUST GENERATE EARNINGS FROM CORE ACTIVITIES.
• COMPANIES MUST CONTRIBUTE TO KEEP THE SECTOR BALANCED WITH THE COUNTRY’S EQUITY MARKET
• NIFTY IS A MARKET INDEX INTRODUCED BY THE NATIONAL STOCK EXCHANGE. IT IS A
BLENDED WORD – NATIONAL STOCK EXCHANGE AND FIFTY COINED BY NSE ON 21ST
APRIL 1996. NIFTY 50 IS A BENCHMARK BASED INDEX AND ALSO THE FLAGSHIP OF NSE,
WHICH SHOWCASES THE TOP 50 EQUITY STOCKS TRADED IN THE STOCK EXCHANGE
OUT OF A TOTAL OF 1600 STOCKS.
• NIFTY 50 FOLLOWS THE TRENDS AND PATTERNS OF BLUE-CHIP COMPANIES, I.E. THE
MOST LIQUID AND LARGEST INDIAN SECURITIES.
• NIFTY CONTAINS A HOST OF INDICES – NIFTY 50, NIFTY IT, NIFTY BANK, AND NIFTY
NEXT 50; AND IS A PART OF THE FUTURES AND OPTIONS (F&O) SEGMENT OF NSE
WHICH DEALS IN DERIVATIVES.
REMATERIALISATION
HTTPS://NSDL.CO.IN/SERVICES/REMAT.PHP

DEMATERIALISATION
HTTPS://NSDL.CO.IN/SERVICES/DEMAT.PHP
 SERVICES RENDERED BY INVESTMENT BANK
VENTURE FINANCING
• INVESTMENT BANKS CAN PROVIDE VENTURE FINANCING SERVICES TO STARTUPS AND EARLY-STAGE
COMPANIES LOOKING TO RAISE CAPITAL FOR GROWTH AND EXPANSION. THESE SERVICES ARE TYPICALLY
OFFERED THROUGH THE INVESTMENT BANK'S VENTURE CAPITAL OR PRIVATE EQUITY DIVISIONS. HERE ARE
SOME WAYS IN WHICH INVESTMENT BANKS CAN ASSIST WITH VENTURE FINANCING:
• FUNDRAISING AND CAPITAL RAISING: INVESTMENT BANKS HELP STARTUPS AND EARLY-STAGE COMPANIES
RAISE CAPITAL BY CONNECTING THEM WITH POTENTIAL INVESTORS. THEY HAVE A NETWORK OF
INSTITUTIONAL INVESTORS, VENTURE CAPITAL FIRMS, HIGH-NET-WORTH INDIVIDUALS, AND FAMILY OFFICES
THAT THEY CAN TAP INTO TO SECURE FUNDING FOR THEIR CLIENTS.
• VALUATION AND DUE DILIGENCE: INVESTMENT BANKS CONDUCT THOROUGH VALUATIONS OF THE STARTUP
TO DETERMINE ITS WORTH AND GROWTH POTENTIAL. THEY ALSO PERFORM DUE DILIGENCE TO ASSESS THE
COMPANY'S FINANCIALS, BUSINESS MODEL, MARKET POTENTIAL, AND MANAGEMENT TEAM TO PROVIDE
VALUABLE INSIGHTS TO INVESTORS.
• DEAL STRUCTURING: INVESTMENT BANKS ASSIST IN STRUCTURING THE INVESTMENT DEAL TO ENSURE THAT
IT ALIGNS WITH THE INTERESTS OF BOTH THE STARTUP AND THE INVESTORS. THIS INVOLVES DETERMINING
THE INVESTMENT AMOUNT, EQUITY STAKE, PREFERRED TERMS, AND OTHER ASPECTS OF THE INVESTMENT
AGREEMENT.
• NEGOTIATION AND TERM SHEET PREPARATION: INVESTMENT BANKS HELP IN NEGOTIATING WITH
POTENTIAL INVESTORS AND PREPARING THE TERM SHEET, WHICH OUTLINES THE KEY TERMS AND
CONDITIONS OF THE INVESTMENT DEAL. THEY WORK TO STRIKE A BALANCE BETWEEN THE INTERESTS OF
THE COMPANY AND THE EXPECTATIONS OF THE INVESTORS.
• EXIT STRATEGIES: INVESTMENT BANKS ADVISE STARTUPS ON EXIT STRATEGIES, SUCH AS IPOS, MERGERS,
ACQUISITIONS, OR SECONDARY SALES OF SHARES TO PROVIDE LIQUIDITY TO EARLY INVESTORS.
• BUSINESS DEVELOPMENT AND STRATEGIC PARTNERSHIPS: INVESTMENT BANKS CAN LEVERAGE THEIR
EXTENSIVE NETWORK TO HELP STARTUPS FORGE STRATEGIC PARTNERSHIPS AND COLLABORATIONS WITH
OTHER COMPANIES, WHICH CAN ENHANCE THE STARTUP'S GROWTH PROSPECTS.
• MARKET INTELLIGENCE: INVESTMENT BANKS PROVIDE MARKET INTELLIGENCE AND INDUSTRY INSIGHTS
TO HELP STARTUPS UNDERSTAND MARKET TRENDS, COMPETITIVE LANDSCAPE, AND POTENTIAL GROWTH
OPPORTUNITIES.
• POST-INVESTMENT SUPPORT: INVESTMENT BANKS MAY CONTINUE TO PROVIDE SUPPORT AND GUIDANCE
TO THE STARTUP EVEN AFTER THE INVESTMENT HAS BEEN SECURED. THIS SUPPORT MAY INCLUDE ACCESS
TO ADDITIONAL CAPITAL, INTRODUCTIONS TO POTENTIAL CUSTOMERS, AND STRATEGIC ADVICE.
• MERGERS AND ACQUISITIONS (M&A) ADVISORY: INVESTMENT BANKS PROVIDE
ADVICE AND ASSISTANCE IN MERGERS, ACQUISITIONS, DIVESTITURES, AND
OTHER CORPORATE RESTRUCTURING TRANSACTIONS. THEY HELP CLIENTS
IDENTIFY POTENTIAL TARGETS OR BUYERS, CONDUCT VALUATIONS, NEGOTIATE
DEALS, AND FACILITATE THE TRANSACTION PROCESS.
IN ADDITION TO PROVIDING ADVISORY SERVICES, INVESTMENT BANKS ALSO OFFER A WIDE
RANGE OF NON-ADVISORY OR TRANSACTIONAL SERVICES.
1.UNDERWRITING: INVESTMENT BANKS ACT AS UNDERWRITERS FOR VARIOUS TYPES OF SECURITIES
OFFERINGS, INCLUDING INITIAL PUBLIC OFFERINGS (IPOS), FOLLOW-ON OFFERINGS, AND BOND
ISSUANCES. THEY COMMIT TO PURCHASING THE SECURITIES FROM THE ISSUER AT A SET PRICE AND
THEN RESELL THEM TO INVESTORS, THEREBY HELPING COMPANIES AND GOVERNMENTS RAISE
CAPITAL.

2.TRADING AND SALES: INVESTMENT BANKS HAVE TRADING DESKS THAT ENGAGE IN BUYING AND
SELLING FINANCIAL INSTRUMENTS ON BEHALF OF CLIENTS, AS WELL AS PROPRIETARY TRADING
FOR THE BANK'S OWN ACCOUNT. THE SALES TEAMS WORK CLOSELY WITH CLIENTS TO
UNDERSTAND THEIR NEEDS AND PROVIDE THEM WITH SUITABLE INVESTMENT OPPORTUNITIES
3.MARKET MAKING: INVESTMENT BANKS ACT AS MARKET MAKERS FOR CERTAIN FINANCIAL
INSTRUMENTS, SUCH AS EQUITIES, BONDS, AND DERIVATIVES. AS MARKET MAKERS, THEY
PROVIDE LIQUIDITY BY QUOTING BID AND ASK PRICES AND ARE WILLING TO BUY OR SELL THESE
INSTRUMENTS AT THOSE PRICES.

4.EQUITY RESEARCH: INVESTMENT BANKS CONDUCT IN-DEPTH RESEARCH ON PUBLICLY TRADED

COMPANIES AND THEIR STOCKS. EQUITY RESEARCH REPORTS PROVIDE VALUABLE INSIGHTS INTO
A COMPANY'S FINANCIAL PERFORMANCE, INDUSTRY OUTLOOK, AND INVESTMENT
RECOMMENDATIONS.

5. DEBT CAPITAL MARKETS: INVESTMENT BANKS FACILITATE THE ISSUANCE OF DEBT SECURITIES,
SUCH AS CORPORATE BONDS AND GOVERNMENT BONDS, BY ACTING AS INTERMEDIARIES
BETWEEN ISSUERS AND INVESTORS.
6. STRUCTURED FINANCE: INVESTMENT BANKS CREATE AND TRADE STRUCTURED FINANCIAL
PRODUCTS, SUCH AS COLLATERALIZED DEBT OBLIGATIONS (CDOS), MORTGAGE-BACKED
SECURITIES (MBS), AND ASSET-BACKED SECURITIES (ABS). THESE PRODUCTS PACKAGE
VARIOUS ASSETS INTO TRADABLE SECURITIES.
7. INITIAL PUBLIC OFFERINGS (IPO) SERVICES: INVESTMENT BANKS ASSIST COMPANIES IN THE
PROCESS OF GOING PUBLIC THROUGH AN IPO. THEY HELP WITH PREPARATION, MARKETING,
AND EXECUTION OF THE IPO, ENSURING REGULATORY COMPLIANCE AND INVESTOR
INTEREST.
8. CLEARING AND SETTLEMENT: INVESTMENT BANKS FACILITATE THE CLEARING AND
SETTLEMENT OF TRADES MADE ON VARIOUS EXCHANGES AND MARKETS. THIS INVOLVES
ENSURING THE TIMELY AND ACCURATE TRANSFER OF ASSETS AND FUNDS BETWEEN PARTIES
INVOLVED IN A TRANSACTION.
9.CUSTODY SERVICES: INVESTMENT BANKS OFFER CUSTODY SERVICES TO SAFEGUARD AND
ADMINISTER FINANCIAL ASSETS ON BEHALF OF THEIR CLIENTS
• FINANCIAL ASSETS
• FINANCIAL ASSETS REFER TO INTANGIBLE RESOURCES OR INSTRUMENTS THAT REPRESENT A CLAIM TO FUTURE CASH
FLOWS OR BENEFITS FOR THE HOLDER. THESE ASSETS ARE COMMONLY BOUGHT, SOLD, AND TRADED IN FINANCIAL
MARKETS AND PLAY A CRUCIAL ROLE IN THE GLOBAL ECONOMY. THEY ARE DISTINCT FROM PHYSICAL ASSETS LIKE
REAL ESTATE OR MACHINERY, AS FINANCIAL ASSETS HAVE NO TANGIBLE FORM AND ARE ONLY REPRESENTED AS
LEGAL CONTRACTS OR ELECTRONIC RECORDS.
• FINANCIAL ASSETS CAN TAKE VARIOUS FORMS, INCLUDING:
• EQUITIES/STOCKS: THESE REPRESENT OWNERSHIP IN A COMPANY AND ENTITLE THE HOLDER TO A PORTION OF THE
COMPANY'S PROFITS (DIVIDENDS) AND POTENTIAL CAPITAL APPRECIATION.
• BONDS: BONDS ARE DEBT INSTRUMENTS ISSUED BY GOVERNMENTS, CORPORATIONS, OR OTHER ENTITIES TO RAISE
CAPITAL. WHEN YOU BUY A BOND, YOU ARE ESSENTIALLY LENDING MONEY TO THE ISSUER, AND THEY PROMISE TO
PAY YOU INTEREST PERIODICALLY AND RETURN THE PRINCIPAL AMOUNT AT MATURITY.
• CASH AND CASH EQUIVALENTS: THIS CATEGORY INCLUDES PHYSICAL CASH, AS WELL AS HIGHLY LIQUID AND
SHORT-TERM INSTRUMENTS LIKE TREASURY BILLS, CERTIFICATES OF DEPOSIT (CDS), AND MONEY MARKET FUNDS.
• MUTUAL FUNDS: THESE ARE INVESTMENT VEHICLES THAT POOL MONEY FROM MULTIPLE INVESTORS TO INVEST IN A
DIVERSIFIED PORTFOLIO OF STOCKS, BONDS, OR OTHER ASSETS.
• EXCHANGE-TRADED FUNDS (ETFS): SIMILAR TO MUTUAL FUNDS, ETFS POOL INVESTORS' MONEY
AND INVEST IN A COLLECTION OF SECURITIES, BUT THEY TRADE ON STOCK EXCHANGES LIKE
INDIVIDUAL STOCKS.
• DERIVATIVES: FINANCIAL CONTRACTS WHOSE VALUE IS DERIVED FROM AN UNDERLYING ASSET
OR BENCHMARK. EXAMPLES INCLUDE OPTIONS, FUTURES, AND SWAPS.
• FOREIGN EXCHANGE (FOREX): CURRENCIES TRADED IN THE FOREIGN EXCHANGE MARKET,
REPRESENTING OWNERSHIP OF A COUNTRY'S CURRENCY.
• REAL ESTATE INVESTMENT TRUSTS (REITS): COMPANIES THAT OWN, OPERATE, OR FINANCE
INCOME-GENERATING REAL ESTATE AND DISTRIBUTE MOST OF THEIR EARNINGS TO
SHAREHOLDERS AS DIVIDENDS.
• COMMODITIES: THESE ARE RAW MATERIALS OR PRIMARY AGRICULTURAL PRODUCTS LIKE GOLD,
OIL, WHEAT, ETC., TRADED IN COMMODITY MARKETS.
• CRYPTOCURRENCIES: DIGITAL OR VIRTUAL CURRENCIES LIKE BITCOIN, ETHEREUM, ETC., THAT
UTILIZE CRYPTOGRAPHIC TECHNOLOGY FOR SECURE TRANSACTIONS.
 DIFFERENCE BETWEEN FINANCIAL ASSETS AND TRADITIONAL ASSETS
• NATURE AND FORM:
FINANCIAL ASSETS: FINANCIAL ASSETS ARE INTANGIBLE INSTRUMENTS OR CONTRACTUAL RIGHTS
THAT REPRESENT A CLAIM TO FUTURE CASH FLOWS OR ECONOMIC BENEFITS. THEY EXIST ONLY IN
ELECTRONIC OR PAPER FORM AND DO NOT HAVE ANY PHYSICAL PRESENCE. EXAMPLES INCLUDE
STOCKS, BONDS, MUTUAL FUNDS, DERIVATIVES, ETC.
TRADITIONAL ASSETS: TRADITIONAL ASSETS, ON THE OTHER HAND, ARE TANGIBLE PHYSICAL ITEMS OR
PROPERTIES THAT HAVE INHERENT VALUE. THESE ASSETS CAN BE SEEN, TOUCHED, AND USED DIRECTLY.
EXAMPLES INCLUDE REAL ESTATE PROPERTIES, MACHINERY, EQUIPMENT, PRECIOUS METALS (LIKE GOLD
AND SILVER), ART, AND COMMODITIES.
• LIQUIDITY:
FINANCIAL ASSETS: FINANCIAL ASSETS ARE GENERALLY MORE LIQUID THAN TRADITIONAL ASSETS.
THEY CAN BE EASILY BOUGHT OR SOLD IN FINANCIAL MARKETS, FACILITATING QUICK TRANSACTIONS
AND PROVIDING IMMEDIATE ACCESS TO FUNDS.
TRADITIONAL ASSETS: TRADITIONAL ASSETS, ESPECIALLY REAL ESTATE AND CERTAIN PHYSICAL
PROPERTIES, MAY TAKE MORE TIME TO SELL AND CONVERT INTO CASH DUE TO THEIR ILLIQUID
NATURE.
• RISK AND RETURN:
FINANCIAL ASSETS: FINANCIAL ASSETS USUALLY OFFER HIGHER LIQUIDITY, AND THEIR VALUE IS
OFTEN INFLUENCED BY MARKET DYNAMICS, ECONOMIC CONDITIONS, AND INVESTOR SENTIMENT.
THEY TYPICALLY HAVE HIGHER POTENTIAL FOR RETURNS BUT COME WITH VARYING DEGREES OF
RISK.
TRADITIONAL ASSETS: TRADITIONAL ASSETS, LIKE REAL ESTATE AND PHYSICAL PROPERTIES, CAN
OFFER MORE STABLE AND PREDICTABLE RETURNS OVER THE LONG TERM. HOWEVER, THEIR VALUE
MAY BE INFLUENCED BY LOCAL MARKET CONDITIONS AND OTHER FACTORS.
• REGULATION:
FINANCIAL ASSETS: FINANCIAL ASSETS ARE TYPICALLY SUBJECT TO SPECIFIC REGULATIONS AND
OVERSIGHT BY FINANCIAL AUTHORITIES TO ENSURE TRANSPARENCY, FAIRNESS, AND INVESTOR
PROTECTION IN FINANCIAL MARKETS.
TRADITIONAL ASSETS: TRADITIONAL ASSETS MAY ALSO BE SUBJECT TO REGULATIONS, BUT THE
EXTENT AND SCOPE OF REGULATIONS MAY VARY DEPENDING ON THE ASSET TYPE AND LOCAL
LAW
• DIVERSIFICATION:
FINANCIAL ASSETS: FINANCIAL ASSETS PROVIDE A WIDE RANGE OF OPTIONS FOR DIVERSIFYING
INVESTMENT PORTFOLIOS, ALLOWING INVESTORS TO SPREAD RISK ACROSS VARIOUS ASSETS
AND ASSET CLASSES.
TRADITIONAL ASSETS: TRADITIONAL ASSETS CAN ALSO CONTRIBUTE TO DIVERSIFICATION, BUT
THE OPTIONS ARE MORE LIMITED COMPARED TO FINANCIAL ASSETS.
• VOLATILITY:
FINANCIAL ASSETS: FINANCIAL ASSETS, ESPECIALLY THOSE TRADED IN THE STOCK AND
COMMODITY MARKETS, CAN BE SUBJECT TO SIGNIFICANT PRICE VOLATILITY DUE TO MARKET
DYNAMICS AND EXTERNAL FACTORS.
TRADITIONAL ASSETS: TRADITIONAL ASSETS, ESPECIALLY STABLE ONES LIKE REAL ESTATE, TEND
TO HAVE LOWER PRICE VOLATILITY.
 AN OVERVIEW OF CRYPTOCURRENCY

HTTPS://WWW.FORBES.COM/ADVISOR/IN/INVESTING/CRYPTOCURRENCY/WHAT-IS-
CRYPTOCURRENCY-AND-HOW-DOES-IT-WORK/
 DIFFERENCES BETWEEN CRYPTOCURRENCY AND BANK
ISSUED MONEY
• CENTRALIZED VS. DECENTRALIZED:
BANK-ISSUED MONEY: BANK-ISSUED MONEY, ALSO KNOWN AS FIAT CURRENCY, IS CENTRALIZED
AND REGULATED BY A COUNTRY'S CENTRAL BANK OR MONETARY AUTHORITY. IT IS CONTROLLED BY
GOVERNMENTS AND FINANCIAL INSTITUTIONS.
CRYPTOCURRENCY: CRYPTOCURRENCY IS DECENTRALIZED AND OPERATES ON A PEER-TO-PEER
NETWORK USING BLOCKCHAIN TECHNOLOGY. IT IS NOT CONTROLLED BY ANY CENTRAL AUTHORITY
OR GOVERNMENT.
• PHYSICAL VS. DIGITAL:
BANK-ISSUED MONEY: BANK-ISSUED MONEY EXISTS IN BOTH PHYSICAL FORM (COINS AND
BANKNOTES) AND DIGITAL FORM (ELECTRONIC BANK BALANCES AND TRANSACTIONS).
CRYPTOCURRENCY: CRYPTOCURRENCIES ARE ENTIRELY DIGITAL AND DO NOT HAVE A PHYSICAL
REPRESENTATION.
• LEGAL TENDER:
BANK-ISSUED MONEY: BANK-ISSUED MONEY IS TYPICALLY RECOGNIZED AS LEGAL TENDER
WITHIN THE COUNTRY OF ISSUANCE, AND PEOPLE ARE REQUIRED BY LAW TO ACCEPT IT FOR
TRANSACTIONS.
CRYPTOCURRENCY: CRYPTOCURRENCIES ARE NOT UNIVERSALLY RECOGNIZED AS LEGAL
TENDER AND MAY NOT BE ACCEPTED AS PAYMENT IN ALL PLACES OR JURISDICTIONS.
• TRANSACTION PROCESSING:
BANK-ISSUED MONEY: TRANSACTIONS INVOLVING BANK-ISSUED MONEY ARE PROCESSED AND
VERIFIED BY CENTRALIZED FINANCIAL INSTITUTIONS LIKE BANKS, WHICH ACT AS
INTERMEDIARIES.
CRYPTOCURRENCY: CRYPTOCURRENCY TRANSACTIONS ARE VERIFIED AND RECORDED ON A
DECENTRALIZED PUBLIC LEDGER CALLED THE BLOCKCHAIN, MAINTAINED BY A NETWORK OF
NODES (COMPUTERS) PARTICIPATING IN THE NETWORK.
• SUPPLY CONTROL:
BANK-ISSUED MONEY: THE SUPPLY OF BANK-ISSUED MONEY IS CONTROLLED BY CENTRAL
BANKS AND GOVERNMENTS, WHICH CAN PRINT MORE MONEY OR TAKE MEASURES TO
INFLUENCE THE MONEY SUPPLY.
CRYPTOCURRENCY: MOST CRYPTOCURRENCIES HAVE A PREDETERMINED AND LIMITED SUPPLY,
WHICH IS DETERMINED BY THE UNDERLYING PROTOCOL OR ALGORITHM. FOR EXAMPLE,
BITCOIN HAS A CAPPED SUPPLY OF 21 MILLION COINS.

• VALUE STABILITY:
BANK-ISSUED MONEY: THE VALUE OF BANK-ISSUED MONEY CAN FLUCTUATE BASED ON
INFLATION, ECONOMIC CONDITIONS, AND GOVERNMENT POLICIES.
CRYPTOCURRENCY: CRYPTOCURRENCIES CAN EXPERIENCE SIGNIFICANT PRICE VOLATILITY DUE
TO MARKET DEMAND, SPECULATION, AND OTHER FACTORS.
• IDENTITY AND PRIVACY:
BANK-ISSUED MONEY: TRADITIONAL BANKING TRANSACTIONS OFTEN REQUIRE PERSONAL
IDENTIFICATION AND INVOLVE SHARING SENSITIVE INFORMATION WITH FINANCIAL
INSTITUTIONS.
CRYPTOCURRENCY: CRYPTOCURRENCY TRANSACTIONS CAN BE PSEUDONYMOUS, PROVIDING
A DEGREE OF PRIVACY AND ANONYMITY. HOWEVER, BLOCKCHAIN ANALYSIS TECHNIQUES
CAN SOMETIMES DEANONYMIZE USERS.

• CROSS-BORDER TRANSACTIONS:
BANK-ISSUED MONEY: CROSS-BORDER TRANSACTIONS WITH BANK-ISSUED MONEY CAN
INVOLVE INTERMEDIARY BANKS, CURRENCY CONVERSION FEES, AND LONGER SETTLEMENT
TIMES.
CRYPTOCURRENCY: CRYPTOCURRENCY TRANSACTIONS CAN BE CONDUCTED DIRECTLY
BETWEEN PARTIES ACROSS BORDERS, POTENTIALLY OFFERING FASTER AND LOWER-COST
CROSS-BORDER TRANSACTIONS.
 DIFFERENCE BETWEEN CBDC AND CRYPTOCURRENCY
• CENTRAL BANK DIGITAL CURRENCY (CBDC) AND CRYPTOCURRENCIES ARE BOTH DIGITAL FORMS OF
MONEY, BUT THEY DIFFER SIGNIFICANTLY IN THEIR UNDERLYING CHARACTERISTICS AND PURPOSES.
• ISSUING AUTHORITY:
CBDC: CBDC IS ISSUED AND REGULATED BY A COUNTRY'S CENTRAL BANK OR MONETARY AUTHORITY.
IT IS A DIGITAL REPRESENTATION OF THE NATIONAL CURRENCY (FIAT) AND IS FULLY BACKED BY THE
CENTRAL BANK'S RESERVES.
CRYPTOCURRENCY: CRYPTOCURRENCIES ARE DECENTRALIZED AND TYPICALLY NOT ISSUED OR
REGULATED BY ANY CENTRAL AUTHORITY. THEY OPERATE ON A PEER-TO-PEER NETWORK WITHOUT THE
NEED FOR INTERMEDIARIES LIKE BANKS.
• LEGAL TENDER:
CBDC: CBDC IS USUALLY RECOGNIZED AS LEGAL TENDER WITHIN THE ISSUING COUNTRY, JUST LIKE
PHYSICAL CASH AND TRADITIONAL BANK-ISSUED MONEY.
CRYPTOCURRENCY: CRYPTOCURRENCIES ARE NOT UNIVERSALLY RECOGNIZED AS LEGAL TENDER AND
MAY NOT BE ACCEPTED AS A VALID FORM OF PAYMENT IN ALL PLACES OR JURISDICTIONS.
• UNDERLYING TECHNOLOGY:
CBDC: CBDC IS BUILT ON CENTRALIZED AND PERMISSIONED SYSTEMS, WHERE THE CENTRAL
BANK HAS FULL CONTROL OVER THE ISSUANCE, DISTRIBUTION, AND VALIDATION OF
TRANSACTIONS.
CRYPTOCURRENCY: CRYPTOCURRENCIES ARE BASED ON DECENTRALIZED AND
PERMISSIONLESS BLOCKCHAIN TECHNOLOGY, WHERE TRANSACTIONS ARE VALIDATED AND
RECORDED ON A DISTRIBUTED PUBLIC LEDGER BY A NETWORK OF INDEPENDENT NODES.
• MONETARY POLICY:
CBDC: CBDC ALLOWS THE CENTRAL BANK TO HAVE DIRECT CONTROL OVER THE MONEY
SUPPLY AND IMPLEMENT MONETARY POLICIES LIKE INTEREST RATES AND QUANTITATIVE
EASING.
CRYPTOCURRENCY: CRYPTOCURRENCIES TYPICALLY HAVE A FIXED SUPPLY AND ARE NOT
SUBJECT TO DIRECT MONETARY POLICIES, ALTHOUGH MARKET DEMAND AND ADOPTION CAN
AFFECT THEIR VALUE
• ANONYMITY AND PRIVACY:
CBDC: CBDC TRANSACTIONS CAN BE DESIGNED WITH VARYING LEVELS OF PRIVACY, DEPENDING ON
THE CENTRAL BANK'S POLICIES AND REGULATORY REQUIREMENTS. IT MAY OFFER SOME DEGREE OF
PRIVACY, BUT IDENTITY AND TRANSACTION INFORMATION ARE TYPICALLY KNOWN TO THE CENTRAL
AUTHORITY.
CRYPTOCURRENCY: CRYPTOCURRENCIES CAN PROVIDE A HIGHER LEVEL OF PSEUDONYMITY AND
PRIVACY, AS TRANSACTION INFORMATION IS RECORDED ON THE BLOCKCHAIN WITHOUT REVEALING
PERSONAL DETAILS. HOWEVER, SOME CRYPTOCURRENCIES ARE MORE PRIVACY-ORIENTED THAN
OTHERS.
• CROSS-BORDER TRANSACTIONS:
CBDC: CBDC CAN POTENTIALLY FACILITATE FASTER AND MORE EFFICIENT CROSS-BORDER
TRANSACTIONS WHEN CENTRAL BANKS ESTABLISH INTEROPERABILITY AGREEMENTS.
CRYPTOCURRENCY: CRYPTOCURRENCIES CAN ALREADY BE USED FOR CROSS-BORDER TRANSACTIONS
WITHOUT THE NEED FOR INTERMEDIARIES, OFFERING POTENTIAL ADVANTAGES IN TERMS OF SPEED
AND COST
 MUTUAL FUNDS
INTRODUCTION
• ASSOCIATION OF MUTUAL FUNDS IN INDIA (AMFI) DEFINED A MUTUAL FUND AS “A TRUST THAT POOLS THE
SAVINGS OF A NUMBER OF INVESTORS WHO SHARE COMMON FINANCIAL GOAL. ANYBODY WITH A AN
INVESTIBLE FUND CAN INVEST IN MUTUAL FUND. THESE INVESTORS BUY UNITS OF A PARTICULAR MUTUAL
FUND SCHEME THAT HAS A DEFINED INVESTMENT OBJECTIVE AND STRATEGY.”
• IN SIMPLE TERMS, A MUTUAL FUND IS ESSENTIALLY A COMMON POOL OF MONEY IN WHICH INVESTORS
PUT IN THEIR CONTRIBUTION. THIS COLLECTIVE AMOUNT IS THEN INVESTED ACCORDING TO THE
INVESTMENT OBJECTIVE OF THE FUND.
• THE MONEY COULD BE INVESTED IN STOCKS, BONDS, MONEY MARKET INSTRUMENTS, GOLD, REAL ESTATE
AND OTHER SIMILAR ASSETS. THESE FUNDS ARE OPERATED BY MONEY MANAGERS OR FUND MANAGERS,
WHO BY INVESTING IN LINE WITH THE SPECIFIED INVESTMENT OBJECTIVE ATTEMPT TO CREATE GROWTH
OR APPRECIATION OF THE AMOUNT FOR INVESTORS.
• MUTUAL FUNDS ARE AN EXCELLENT INVESTMENT OPTION FOR INDIVIDUAL INVESTORS TO GET EXPOSURE
TO AN EXPERT MANAGED PORTFOLIO. ALSO, YOU CAN DIVERSIFY YOUR PORTFOLIO BY INVESTING IN
MUTUAL FUNDS AS THE ASSET ALLOCATION WOULD COVER SEVERAL INSTRUMENTS.
HOW DOES A MUTUAL FUND OPERATE?
• MUTUAL FUND IS A PROFESSIONALLY-MANAGED TRUST THAT POOLS IN MONEY FROM VARIOUS
INDIVIDUALS TO INVEST IN SECURITIES LIKE STOCKS, BONDS, SHORT-TERM MONEY MARKET
INSTRUMENTS AND COMMODITIES. THE MUTUAL FUND IS MANAGED BY PROFESSIONAL FUND
MANAGERS, WHO BUY AND SELL SECURITIES BASED ON THOROUGH MARKET STUDY AND
UNDERSTANDING.
• EVERY SCHEME LAUNCHED BY THE MUTUAL FUND HAS AN INVESTMENT OBJECTIVE COMPRISING: LONG-
TERM CAPITAL GROWTH, REGULAR MONTHLY INCOME OR STEADY RETURNS AND MORE. THE FUNDS
ARE, THUS, INVESTED AS PER THE STATED OBJECTIVE, RISK PROFILE AND TIME HORIZON. FOR
INSTANCE, AN EQUITY FUND WILL INVEST IN SHARES FOR LONG-TERM CAPITAL GROWTH, WHILE A DEBT
MUTUAL FUND WILL INVEST IN GOVERNMENT SECURITIES AND CORPORATE BONDS WITH AN AIM TO
DELIVER STEADY RETURNS OR LESS VOLATILE RETURNS.
• IN INDIA, A MUTUAL FUND IS SET UP IN THE FORM OF A TRUST THAT HAS A SPONSOR, TRUSTEES, ASSET
MANAGEMENT COMPANY(AMC) AS PER THE STIPULATED LEGAL STRUCTURE UNDER SEBI (MUTUAL
FUNDS) REGULATIONS, 1996. UNDER THIS STRUCTURE, AN ASSET MANAGEMENT COMPANY (AMC) IS IN
CHARGE OF MANAGING THE INVESTMENTS AND OTHER DAY-TO-DAY ACTIVITIES OF THE MUTUAL FUND.
 TYPES OF MUTUAL FUNDS
• EQUITY FUNDS: ALSO KNOWN AS STOCK FUNDS, THESE FUNDS PRIMARILY INVEST IN STOCKS OF
DIFFERENT COMPANIES. THEY AIM TO GENERATE LONG-TERM CAPITAL APPRECIATION BY
PARTICIPATING IN THE GROWTH OF THE COMPANIES' VALUE.

• BOND FUNDS: THESE FUNDS INVEST PRIMARILY IN FIXED-INCOME SECURITIES LIKE GOVERNMENT
BONDS, CORPORATE BONDS, AND OTHER DEBT INSTRUMENTS. THEY AIM TO PROVIDE REGULAR
INCOME AND CAN BE RELATIVELY LESS RISKY COMPARED TO EQUITY FUNDS.

• MONEY MARKET FUNDS: THESE FUNDS INVEST IN SHORT-TERM, LOW-RISK INSTRUMENTS LIKE
TREASURY BILLS, CERTIFICATES OF DEPOSIT (CDS), AND COMMERCIAL PAPER. THEY AIM TO PROVIDE
STABILITY AND PRESERVE CAPITAL, MAKING THEM SUITABLE FOR INVESTORS SEEKING LOW-RISK
INVESTMENTS.
• BALANCED FUNDS: ALSO KNOWN AS HYBRID FUNDS, THESE INVEST IN A MIX OF BOTH
STOCKS AND BONDS. THE ALLOCATION BETWEEN EQUITIES AND FIXED-INCOME SECURITIES
MAY VARY DEPENDING ON THE FUND'S INVESTMENT OBJECTIVE.

• INDEX FUNDS: THESE FUNDS AIM TO REPLICATE THE PERFORMANCE OF A SPECIFIC MARKET
INDEX, SUCH AS THE S&P 500. THEY INVEST IN THE SAME SECURITIES AS THE UNDERLYING
INDEX AND ATTEMPT TO MATCH ITS RETURNS.

• SECTOR-SPECIFIC FUNDS: THESE FUNDS CONCENTRATE THEIR INVESTMENTS IN SPECIFIC

SECTORS OF THE ECONOMY, SUCH AS TECHNOLOGY, HEALTHCARE, ENERGY, OR REAL
ESTATE. THEY OFFER EXPOSURE TO PARTICULAR INDUSTRIES OR THEMES.
• INTERNATIONAL FUNDS: THESE FUNDS INVEST IN SECURITIES OF COMPANIES LOCATED OUTSIDE THE
INVESTOR'S HOME COUNTRY. THEY OFFER DIVERSIFICATION ACROSS DIFFERENT MARKETS AND ECONOMIES.

• SPECIALTY FUNDS: THESE FUNDS FOCUS ON SPECIFIC INVESTMENT STRATEGIES, LIKE SOCIALLY RESPONSIBLE
INVESTING (SRI) FUNDS, WHICH CONSIDER ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG) CRITERIA, OR
FUNDS THAT FOCUS ON COMMODITIES, PRECIOUS METALS, OR REAL ESTATE.

• TARGET-DATE FUNDS: THESE FUNDS ARE DESIGNED TO CATER TO INVESTORS WITH A SPECIFIC TARGET
RETIREMENT DATE IN MIND. THE ASSET ALLOCATION BECOMES MORE CONSERVATIVE AS THE TARGET DATE
APPROACHES.

• FUND-OF-FUNDS: THESE FUNDS INVEST IN OTHER MUTUAL FUNDS RATHER THAN INDIVIDUAL SECURITIES. THEY
PROVIDE INVESTORS WITH A DIVERSIFIED PORTFOLIO THROUGH A SINGLE INVESTMENT.
ADVANTAGES OF MUTUAL FUNDS
DIVERSIFICATION: MUTUAL FUNDS POOL MONEY FROM MULTIPLE INVESTORS AND INVEST IN
A DIVERSIFIED PORTFOLIO OF SECURITIES. THIS DIVERSIFICATION HELPS SPREAD THE RISK
ACROSS VARIOUS ASSETS, REDUCING THE IMPACT OF A SINGLE SECURITY'S POOR
PERFORMANCE ON THE OVERALL FUND.

PROFESSIONAL MANAGEMENT: MUTUAL FUNDS ARE MANAGED BY PROFESSIONAL FUND

MANAGERS WHO HAVE EXPERTISE IN ANALYZING THE FINANCIAL MARKETS AND SELECTING
APPROPRIATE INVESTMENTS. THIS ALLOWS INVESTORS TO BENEFIT FROM THE KNOWLEDGE
AND EXPERIENCE OF SKILLED PROFESSIONALS.

ACCESSIBILITY: MUTUAL FUNDS ARE EASILY ACCESSIBLE TO INDIVIDUAL INVESTORS WITH

RELATIVELY SMALL AMOUNTS OF MONEY. THEY OFFER AN AFFORDABLE WAY TO ACCESS A
DIVERSIFIED PORTFOLIO OF ASSETS THAT MIGHT OTHERWISE REQUIRE A SIGNIFICANT
AMOUNT OF CAPITAL.
• LIQUIDITY: MUTUAL FUND UNITS CAN BE BOUGHT AND SOLD ON ANY BUSINESS DAY AT THE
FUND'S NET ASSET VALUE (NAV). THIS LIQUIDITY FEATURE ALLOWS INVESTORS TO CONVERT
THEIR INVESTMENTS INTO CASH RELATIVELY QUICKLY, MAKING THEM MORE FLEXIBLE THAN
CERTAIN OTHER INVESTMENTS LIKE REAL ESTATE.

• VARIETY OF INVESTMENT OPTIONS: MUTUAL FUNDS COME IN VARIOUS TYPES AND

INVESTMENT STRATEGIES, CATERING TO DIFFERENT RISK PROFILES AND FINANCIAL GOALS.
INVESTORS CAN CHOOSE FUNDS BASED ON THEIR OBJECTIVES, SUCH AS GROWTH, INCOME,
OR A BLEND OF BOTH.

• TRANSPARENCY: MUTUAL FUNDS ARE REQUIRED TO DISCLOSE THEIR HOLDINGS PERIODICALLY,

ENABLING INVESTORS TO KNOW EXACTLY WHAT SECURITIES THE FUND IS INVESTED IN. THIS
TRANSPARENCY HELPS INVESTORS MAKE INFORMED DECISIONS ABOUT THEIR INVESTMENTS.
• AFFORDABILITY: DUE TO ECONOMIES OF SCALE, MUTUAL FUNDS CAN ACHIEVE COST
EFFICIENCIES IN TRADING AND ADMINISTRATION. THIS MEANS INVESTORS BENEFIT FROM
LOWER TRANSACTION COSTS COMPARED TO BUYING INDIVIDUAL SECURITIES.
• AUTOMATIC REINVESTMENT: MANY MUTUAL FUNDS OFFER DIVIDEND REINVESTMENT
PLANS (DRIPS), WHERE DIVIDENDS AND CAPITAL GAINS ARE AUTOMATICALLY REINVESTED
TO PURCHASE ADDITIONAL FUND UNITS. THIS HELPS COMPOUND RETURNS OVER TIME.
• REGULATED AND SUPERVISED: MUTUAL FUNDS ARE REGULATED BY GOVERNMENT
AGENCIES (E.G., SECURITIES AND EXCHANGE COMMISSION IN THE U.S.) AND ARE SUBJECT
TO STRICT RULES AND REGULATIONS. THIS OVERSIGHT HELPS PROTECT INVESTORS'
INTERESTS.
• TAX EFFICIENCY: MUTUAL FUNDS ARE STRUCTURED IN A WAY THAT ALLOWS THEM TO BE
RELATIVELY TAX-EFFICIENT COMPARED TO DIRECT STOCK INVESTMENTS. CAPITAL GAINS
TAXES ARE GENERALLY ONLY INCURRED WHEN INVESTORS SELL THEIR MUTUAL FUND
UNITS.
 WHAT IS THE ORGANIZATION STRUCTURE OF MUTUAL FUNDS IN INDIA?

SEBI (Securities and Exchange Board of India) is the regulatory body that
manages all mutual funds in India. It has mandated a three-tiered structure
for any fund house in India. These tiers are as follows –

Sponsor
Trustee
Asset Management Company (AMC)
1. SPONSOR (OR GUARANTOR)

• IN SIMPLE TERMS, A FUND SPONSOR OR GUARANTOR IS ANYONE WHO STARTS A MUTUAL FUND. THIS COULD BE AN
INDIVIDUAL OR AN INDIVIDUAL PARTNERED WITH ANOTHER ENTITY (ASSOCIATE COMPANY). THE PRIMARY ROLES OF A
FUND SPONSOR INCLUDE –
• SETTING UP A MUTUAL FUND
• APPROACHING THE SEBI FOR PERMISSIONS
• PROMOTING THE ASSOCIATE COMPANY HANDLING THE FUND
• RECRUIT PEOPLE TO ENSURE THE FUND HOUSE FUNCTIONS EFFICIENTLY (APPOINTING THE AMC, CUSTODIAN, TRANSFER
AGENT, AUDITOR, AND REGISTRAR)
• WONDERING ABOUT THE ELIGIBILITY REQUIREMENTS TO BECOME A SPONSOR? WELL, HERE ARE THE MAIN CRITERIA
SPECIFIED BY THE SEBI. KEEP IN MIND THAT THESE CRITERIA ALSO APPLY TO ENTITIES FUNCTIONING AS SPONSORS.
• THE SPONSOR MUST HAVE AT LEAST FIVE YEARS OF HANDS-ON EXPERIENCE IN THE FINANCIAL SERVICES AND
PRODUCTS BUSINESS, WITH A NET POSITIVE TOTAL WORTH.
• THE SPONSOR’S NET WORTH IN THE PREVIOUS YEAR SHOULD BE MORE THAN THE WEALTH CONTRIBUTED TO SETTING
UP THE FUND HOUSE.
• THE SPONSOR SHOULD BE ABLE TO PUT IN AT LEAST 40% OF THEIR NET WORTH WHILE SETTING UP THE FUND HOUSE.
• THE SPONSOR SHOULD HAVE GOOD RETURNS IN THE PAST THREE TO FIVE YEARS BEFORE SETTING UP THE FUND HOUSE.
2. TRUSTEES
• AFTER THE SPONSOR CREATES THE TRUST THROUGH A TRUST DEED, THE AMC APPOINTS THE BOARD OF TRUSTEES TO
KEEP TRACK OF THE ACTIVITIES OF THE FUND HOUSE AND PRESERVE THE INVESTOR’S FAITH IN IT. A TRUSTEE FROM THE
BOARD OF TRUSTEES COULD BE A MEMBER OF THE BOARD OF DIRECTORS, A BANK, OR A COMPANY APPROVED BY THE
SECURITIES AND EXCHANGE BOARD OF INDIA.
• MOST FUND HOUSES APPOINT A MINIMUM OF FOUR TRUSTEES TO HANDLE OPERATIONS, OR THEY SELECT A TRUSTEE
COMPANY WITH NO LESS THAN FOUR DIRECTORS TO RUN THE FUND. OF THESE, TWO-THIRDS WILL HAVE TO BE
INDEPENDENT. ADDITIONALLY, THE AMC CANNOT APPOINT TRUSTEES FROM THE SAME GROUP. THIS ENSURES THERE IS
NO PARTIALITY INVOLVED DURING THE APPOINTMENT.
• THE PRIMARY FUNCTIONS OF THE TRUSTEES INCLUDE:
• ENSURING THE FUND HOUSE UNDERTAKINGS ARE COMPLIANT WITH SEBI GUIDELINES
• ENSURING PROPER SELECTION OF OTHER FUND MEMBERS (AMC, CEO, FUND MANAGERS, CIO, REGISTRAR, ETC.) BASED
ON THEIR SKILLS
• VALIDATING SCHEMES PUBLISHED BY THE FUND HOUSE
• ENSURING COMPANY WORTH IS AS PER RULES
• REPORTING TO THE SECURITIES AND EXCHANGE BOARD OF INDIA TWO TIMES A YEAR
• ENSURING FUND HOUSE IS FOLLOWING COMPLIANCES
• APPOINTING DISTRIBUTORS AND BROKERS
• AND THAT’S NOT ALL. SINCE THE TRUSTEES ARE DIRECTLY RESPONSIBLE FOR UPHOLDING THE TRUST
OF INVESTORS, THEIR FUNCTIONS ALSO INCLUDE THE FOLLOWING-

• REQUESTING INFORMATION ABOUT FUND OPERATIONS, WHETHER SIP INVESTMENTS, EQUITY

FUNDS, OR OTHER FUND TYPES AS REQUIRED.
• PUNISHING AND INITIATING STRICT ACTION IF THE AMC BOARD MEMBERS DO NOT COMPLY WITH
SECURITIES AND EXCHANGE BOARD OF INDIA REGULATIONS OR WHEN THE INTERESTS OF THE
INVESTORS ARE NOT PROTECTED.
• DISMISSING THE AMC IN CASE OF PROLONGED NON-COMPLIANCE WITH POLICIES, ETC.
• NOW THAT WE KNOW ABOUT THE MIDDLE TIER OF THE 3-TIER MUTUAL FUND STRUCTURE, IT’S TIME
TO UNCOVER THE FINAL TIER- AMCS OR ASSET MANAGEMENT COMPANIES. LET’S GET INTO IT.
3. ASSET MANAGEMENT COMPANIES (AMCS)
• THE ASSET MANAGEMENT COMPANY (AMC) OR THE FUND MANAGEMENT FIRM IS ALSO THE FUNCTIONING
INVESTMENT MANAGER OF THE TRUST. BUT BEFORE THAT, IT NEEDS TO GET REGISTERED WITH THE GOVERNMENT
OF INDIA.
• AT PRESENT, THERE ARE THREE KINDS OF AMCS IN INDIA:
• PRIVATE COMPANIES
• A PUBLIC LIMITED CO. ASSOCIATED WHOLLY OWNED SUBSIDY
• JOINT VENTURES.
• HERE ARE THE ROLES OF AMCS:
• LAUNCH AND INITIATE MUTUAL FUND SCHEMES
• GENERATE FUNDS WITH TRUSTEES AND FOUNDERS AND MONITOR THEIR DEVELOPMENT.
• MANAGE FUNDS AND SOLICIT ASSOCIATE SERVICES WITH BANKERS, BROKERS, LAWYERS, REGISTRARS, ETC.,
• IN ADDITION, THE GOVERNMENT’S SUPERVISORY BODY HAS MANDATED A FEW EXTRA RULES TO ENSURE
BUSINESSES AND ROLES OF AMC EMPLOYEES DO NOT CLASH. THESE INCLUDE:
• AMCS CANNOT TAKE DECISIONS REGARDING FUND HOUSE FUNCTIONS ON THEIR OWN. IN MOST CASES, THEY
CAN PROVIDE SERVICES LIKE PORTFOLIO MANAGEMENT, ASSET MANAGEMENT, ETC.
• THE AMC CANNOT NOMINATE A TRUSTEE ON ANY MUTUAL FUND HOUSE THEY ARE A PART OF.
 WHAT IS NAV?
• NET ASSET VALUE REPRESENTS THE MARKET VALUE PER SHARE FOR A PARTICULAR MUTUAL
FUND. IT IS CALCULATED BY DEDUCTING THE LIABILITIES FROM TOTAL ASSET VALUE DIVIDED
BY THE NUMBER OF SHARES. ONE NEEDS TO GATHER THE MARKET VALUE OF A PORTFOLIO
AND DIVIDE IT BY THE TOTAL CURRENT FUND UNIT NUMBER TO DETERMINE THE PRICE OF
EACH FUND UNIT.

• MOST OF THE TIME, THE UNIT COST OF MUTUAL FUNDS BEGIN WITH RS. 10 AND INCREASE
AS THE ASSET UNDER THE FUNDS GROW. GOING BY THIS RULE, THE MORE POPULAR A
MUTUAL FUND IS, THE HIGHER IS ITS NAV.

• THE NET VALUE OF AN ASSET IS MOST COMMONLY USED IN CASE OF OPEN-END FUNDS.
WITH THESE INVESTMENTS, THE INTEREST AND SHARES DO NOT GET TRADED BETWEEN
SHAREHOLDERS. NAV HELPS DETERMINE WHICH INVESTMENT ONE MIGHT CHOOSE TO
WITHDRAW OR KEEP IN THEIR INVESTMENT PORTFOLIO BY PROVIDING A REFERENCE VALUE.
 NET ASSET VALUE (NAV)
• THE NET ASSET VALUE (NAV) OF A MUTUAL FUND SIGNIFIES THE PRICE AT WHICH THE UNITS OF THAT
MUTUAL FUND ARE BOUGHT OR SOLD. IT REPRESENTS MARKET VALUE OF SUCH FUNDS AFTER
SUBTRACTING THE LIABILITIES. THE NAV PER UNIT IS DERIVED AFTER DIVIDING THE NET ASSET VALUE
OF THE FUND BY THE TOTAL NUMBER OF ITS OUTSTANDING UNITS.

• IT IS SIGNIFICANT NOTE THAT THE NAV IS ARRIVED AT AFTER DEDUCTION OF THE EXPENSE RATIO OF
A MUTUAL FUND. THE EXPENSE RATIO IS THE TOTAL AMOUNT OF ANNUAL EXPENSES INCURRED BY A
MUTUAL FUND. ANNUAL EXPENSES INCLUDE THE MANAGEMENT FEE AND OPERATING EXPENSES (I.E.
THE REGISTRAR AND TRANSFER AGENT FEE, MARKETING AND DISTRIBUTION FEE, AUDIT FEE AND
CUSTODIAN FEE).

• NAV IS AN INDICATOR OF THE MARKET VALUE OF THE MUTUAL FUND'S UNITS THAT HELPS TRACK
THE PERFORMANCE OF THE MUTUAL FUND WHERE MONEY HAS INVESTED IN. THE PERCENTAGE
INCREASE IN FUND'S NAV OVER TIME IS THE ACTUAL INCREASE IN THE VALUE OF INVESTMENT IN
SUCH FUND. AS A RESULT, AN INVESTOR GAINS APPROPRIATE INFORMATION ABOUT THE
INVESTMENT IN STUDYING THE NAV MOVEMENTS OF A FUND OVER A PERIOD OF TIME.
• AS PER THE SEBI'S REGULATIONS, THE NAV OF THE SCHEME SHALL BE CALCULATED ON DAILY BASIS AND
PUBLISHED AT LEAST
ONCE A WEEK AND IN TWO DAILY NEWSPAPERS HAVING CIRCULATION ALL OVER INDIA.
THE FORMULA FOR CALCULATING NAV:
NET ASSET VALUE (NAV) = (ASSETS - DEBTS)/(NUMBER OF OUTSTANDING UNITS)
WHERE,
ASSETS = [MARKET VALUE OF THE FUND'S INVESTMENTS + RECEIVABLES + ACCRUED INCOME]
DEBTS = [LIABILITIES + ACCRUED EXPENSES]

• LOAD FUNDS – IT CHARGES ENTRY OR EXIT LOAD EVERY TIME WHEN THE INVESTOR BUYS OR SELLS THE
UNITS OF FUNDS. THESE CHARGES ARE UTILIZED FOR DISTRIBUTION, SALES AND MARKETING EXPENSES. A
LOAD FUND IS A MUTUAL FUND THAT COMES WITH A SALES CHARGE OR COMMISSION. THE FUND
INVESTOR PAYS THE LOAD, WHICH GOES TO COMPENSATE A SALES INTERMEDIARY, SUCH AS A BROKER,
FINANCIAL PLANNER OR INVESTMENT ADVISOR, FOR HIS TIME AND EXPERTISE IN SELECTING AN
APPROPRIATE FUND FOR THE INVESTOR. THE LOAD IS EITHER PAID UP FRONT AT THE TIME OF PURCHASE
(FRONT-END LOAD), WHEN THE SHARES ARE SOLD (BACK-END LOAD), OR AS LONG AS THE FUND IS HELD BY
THE INVESTOR (LEVEL-LOAD).

• NO LOAD FUNDS- IT DOES NOT CHARGE EITHER ENTRY OR EXIT LOAD ON PURCHASE OR SALE OF THEIR
UNITS.
 Banks and Financial
Institutions:Sectoral Overview
1.1.1 Understanding the Sector
Evolution of Structured
Banking in India

Battle of Plassey
June 23rd, 1757

Nawab of Bengal
Vs
British East India Company
Learning Outcomes
Nationalisation
of Banks
1.1.3 Financial Sector Reforms in India:
Narasimha Committee
Recommendations (I & II)
 Narasimham Committee on Financial Reforms-Narasimham committee was formed
to overcome the serious issue of the BOP. The committee helped to reform the
financial sectors of India by improving the banking sectors and strengthening
them.

 Narasimham Committee I and II became the backbone of our country’s economic

and financial sector. Mr M Narasimham was the thirteenth governor of RBI. The
committee was set to analyze all the factors related to the financial sectors and
give recommendations for its improvement. The Narasimham committee not only
recommended but also talked about implementing the recommendations and their
long term outcomes. During that period, the finance sector of India was on the
edge of deterioration when the committee was formed. It mainly focused on
improving and strengthening the banking sectors to improve the financial sectors
of India.
Narasimhan committee I

 In India, financial sector reform is a part of a broad structural adjustment programme launched to
deal with the serious balance of payments or BOP. BOP is the accounting of a country’s international
transaction for a particular period. Any transaction that causes the inflow of money to a country is a
credit to its BOP account, while when there is an outflow of money, it is debited to its BOP account.
Although BOP triggered the reform immediately, it also helped reform the repressed financial sectors
in many ways.
 The first committee was set in 1991 under the chairmanship of Maidavolu Narasimham, the thirteenth
governor of the Reserve Bank of India or RBI. The first Narasimham committee focused mainly on the
growth of the banking sector. The major recommendation of the Narasimham Committee was:
 Deregulation of the interest rates
 The setting of asset reconstruction funds
 Holding out to 8% capital adequacy ratio
 Full disclosure of banking accounts and proper classification of the assets
 Introducing a quasi-autonomous body under RBI for the supervision of financial institutions
 There is a need of 4-tier hierarchy for the Indian banking system, with rural bank development
supporting agricultural activities at the bottom and 3-4 major public sector banks at the top.
Narasimham committee II

 The Narasimham committee II was held in 1998 under P. Chidambaram as finance minister
headed by Maidavolu Narasimham. This committee is also known as the banking sector
committee, and the major task was the implementation of suggestions and reforms for
strengthening the sector. The major recommendations of the committee were:
 Narrow banking, which allowed the banks to invest their funds in short-term and risk-free
assets
 To increase the capital adequacy ratio
 Reducing the NPA’s to 3% by 2002
 Reforming the role of RBI, the committee felt that RBI should not have ownership in any
bank.
 Government should review its ownership of the bank as it hampers its autonomy and causes
mismanagement.
 Stronger banking system by merging public sector banks to improve international trade
1.1.4 Types of Banks and Financial
Institutions (FIs):
Types of Banks-Retail and Commercial Banks
 Retail and commercial banks permit the opening of deposit accounts and
access to a vast array of financial services for the saving and borrowing of
money. Commercial banks service businesses, whereas retail banks serve
people.
 Online banks and online banking platforms may not have a physical presence,
but they provide similar financial services to traditional banks.
Types of Financial Institutions

 Banks-A bank is a regulated financial entity that accepts deposits and makes loans. There are several bank
kinds, including retail, commercial, and investment banks. In the majority of nations, the national
government or central bank regulates banks.
 Credit Unions-Credit unions, unlike banks, reinvest money earned by charging interest to keep expenses
down and benefit their consumers. Typically, these depositories target a certain community or group of
individuals and require membership. They provide standard banking services such as checking and savings
accounts, credit cards, and lending programmes.
 Insurance Companies-Financial protection is provided through a variety of insurance products offered by
insurance firms. For instance, insurance firms frequently sell life, health, and house insurance. They place
the funds from insurance premiums into a pool to finance policy coverage.
 Brokerage Firms-Brokers facilitate the purchase and sale of securities such as stocks, mutual funds, and
bonds. When individuals choose to purchase or sell shares, they utilise brokerage firms to arrange the
transaction. Some businesses also provide financial guidance and serve as advisors.
 Savings and Loan Associations-These depository institutions, often known as “thrift institutions” and less
widespread, primarily offer house loans and savings accounts. However, others provide additional sorts of
loans and account possibilities, making them resemble retail banks at times.
 Investment Banks-Investment banks provide capital and financial advice to firms, governments, and other
organisations. They assist with funding through assets such as bonds and stocks, as opposed to handling
consumer deposits. In addition, they provide counsel on company strategy and issues such as acquisitions.
1.1.4.1. Commercial Banks - introduction, its
role in project finance and working
capital finance
 Commercial Banks are profit-seeking financial institutions. They receive
deposits from customers at a lower rate of interest and offer business loans at
a higher interest rate. They serve individuals, small-scale businesses, and
medium-sized businesses.

 Commercial banks augment their profits by offering additional investment

products and banking services—current account deposits, savings accounts,
fixed deposits, cash credit, advances, overdrafts, locker facilities, and
investments. Due to competition, they need to innovate continuously,
adapting to automation, data analytics, digitization, artificial intelligence,
faster transactions, and quicker responses to market changes.
 COMMERCIAL BANKING: PROJECT FINANCE
Commercial banks have always had an active role in project finance transactions. In fact, project finance is
generally thought to have begun in the 1930s when a Dallas bank made a non-recourse loan to develop an oil
and gas property. It "came of age" in the 1970s and '80s with the successful financing of North Sea oil and gas
projects, Australia's Northwest Shelf gas project, independent non-utility power generation in the United
States, and similar substantial projects.
Beyond their traditional role in project finance transactions, commercial banks are developing new roles in
providing advisory services; construction financing; intermediation to permanent long-term fixed-rate
financing; commodity, currency, and interest rate risk management; foreign tax absorption; and working
capital financing for projects throughout the world. Looked at separately, the development of these roles is a
response to increasing competition both among commercial banks and between commercial banks and other
institutional lenders and intermediaries to meet an explosion of worldwide project finance needs.
Commercial Bank’s Role In Project Finance
Working Capital Financing By Commercial Banks
 COMMERCIAL BANKING: WORKING CAPITAL FINANCE

One of the most important functions of banks is to finance working capital requirement of firms. Working capital advances
forms major part of advance portfolio of banks. In determining working capital requirements of a firm, the bank takes into
account its sales and production plans and desirable level of current assets. The amount approved by the bank for the firm’s
working capital requirement is called credit limit. Thus, it is maximum fund which a firm can obtain from the bank. In the
case of firms with seasonal businesses, the bank may approve separate limits for ‘peak season’ and ‘non-peak season’.
The various other form of working capital financing are:
 CASH CREDIT
 BANK OVERDRAFT
 BILL FINANCING
 WORKING CAPITAL LOANS
 LETTER OF CREDIT
1.1.4.2. Development Financial Institutions –
An overview and role in the Indian economy.

 Development Financial Institutions-Development financial institutions provide

long-term credit for capital-intensive investments spread over a long period
and low yielding rates of return, such as urban infrastructure, mining and
heavy industry, and irrigation systems.
 They act as critical intermediaries for channelling long-term finance required
for infrastructure and realising higher economic growth.
 In India, after the 1991 reforms, major DFIs were converted into commercial
banks. However, after these there were few institutions in the country which
could take care of industrial or infrastructure development.
 Therefore, in order to plug the infrastructure deficit, the government has
taken a positive step by making a proposal to re-establish the DFIs in India.
 IDBI, SIDBI, ICICI, IFCI, IRBI, and IDFC. LICI GICI UTI.
 DFI: Background & Present Status
 Development banks are different from commercial banks, which mobilize short- to medium-term deposits and
lend for similar maturities to avoid a maturity mismatch.
 In India, the first DFI was operationalized in 1948 with the setting up of the Industrial Finance Corporation
(IFC).
 DFIs in India like Industrial Development Bank of India (IDBI), Industrial Credit and Investment Corporation of
India (ICICI) and IFCI did play a significant role in aiding industrial development in the past with the best of
the resources made available to them.
 However, after 1991 reforms, the concessional funding they were getting from Reserve Bank of India (RBI) and
the government was no longer available in the subsequent years.
 As a consequence, IDBI and ICICI had to convert themselves into universal banks.
 While these DFIs disappeared, a new set of institutions like IDFC (1997), IIFCL (2006) and more recently,
National Investment and Infrastructure Fund (NIIF) (2015) emerged to focus on funding infrastructure.
 In budget 2021, with the initial capital base of ₹20,000 crore as committed by the government, the new DFI,
assuming a leverage of around 7 times, can lend up to ₹1.4 trillion.
 Need for DFI
 Infrastructure Building: Inadequate and inefficient infrastructure leads to high transaction costs, which in
turn stunts an economy’s growth potential.
 Therefore, DFIs makes sense as the Centre government envisages mobilizing nearly ₹100 lakh crore for the
ambitious National Infrastructure Pipeline.
 International Precedent: Irrespective of the level of development, countries across the world have set up
development banks to finance key infrastructure and manufacturing projects.
 For instance, the European Investment Bank (EIB) acts like a DFI for Europe.
 Lack of Finance for Infrastructure: Although India has a long-term debt market for the government securities
and corporate bonds cut, it is still out of reach of retail investors and unable to meet the large
infrastructure financing needs.
 Economic Crisis Triggered By Covid-19 Pandemic: The Covid-19 pandemic has exacerbated inequality, the
poverty gap, unemployment, and the economy’s slowing down.
 Thus, infrastructure building through DFIs can help in quick economic recovery.
 DFI: ROLE IN AN INDIAN ECONOMY

In India, the role of DFIs is to support long term infrastructures of industry and agriculture. The DFIs were set up under the
full control of both Central and State Governments. These institutions were used by the government for spurring economic
growth and aid social development. The DFIs provide finance to all those entities which are not adequately served by the
banks and capital markets like households, SMEs, and private corporations. The DFIs role of industrialization and the
developmental finance till the onset of liberalization cannot be denied. They were crucial to realize the larger
developmental goals as prescribed by the Five Year Plans. At present the line between the role of DFIs and commercial
banks have blurred due to overlapping of their functions. Nowadays, the commercial banks are actively involved in
developmental financing similar to that of the DFIs, especially after the merger of ICICI and IDBI within the banking
system. So, nowadays the commercial banks are often called as the universal banks as it provides all types of financial
services.
 The Way Forward
 Mobilizing Capital For DFI: To lend for the long term, DFI requires correspondingly long-term sources of
finance.
 In this context, the government may allow equity investment by institutions having a long term horizon
like insurance companies, pension funds to augment the capital.
 Further, DFI can be adequately capitalized by the sovereign-backed funds, alternative routes such as
capital gains/tax-free bond issues, external borrowings, and loans from multilateral agencies.
 Administration of DFI: The ownership and organisation structure are critical and require greater clarity as
this would have bearing on the functioning, flexibility, governance of the institution and its long-term
sustainability.
 Functionality of DFI: It is critical to hire experts with a good understanding of infrastructure, policies,
financing and risk management to work with the institution by offering market-driven lending packages.
 Reaching Out Retail Investors: The government needs to set up institutions and network platforms to reach
retail investors and incentivise and structure the bonds/instruments so that they are attracted to invest
long-term in those instruments.
 Periodic Review of DFI: Periodic reviews are necessary to ensure that the DFI remains relevant by taking
into account changing priorities of the economy and making consequential adjustments in the role.
 For a developing country like India, it is desirable that the new DFI remains viable and sustainable to be
able to cater to the long-term development financing requirements.
1.1.4.3. Microfinance Institutions – Concept, features,
key benefits, organisation of groups in rendering services

 Microfinance is a way in which loans, credit, insurance, access to savings accounts, and money
transfers are provided to small business owners and entrepreneurs in the underdeveloped parts of
India.

 The beneficiaries of microfinance are those who do not have access to these traditional financial
resources. Interest rates on microloans are generally higher than that on traditional personal loan.
Features

 Some of the significant features of microfinance are as follows:

 The borrowers are generally from low income backgrounds

 Loans availed under microfinance are usually of small amount, i.e., micro
loans
 The loan tenure is short
 Microfinance loans do not require any collateral
 These loans are usually repaid at higher frequencies
 The purpose of most microfinance loans is income generation
 Benefits of Microfinance
 Providing immediate funds-The microfinance setup helps to provide an additional level of resilient
behaviour in the economy at large. It helps the households to work efficiently and effectively at large.
It also helps these households to alleviate poverty. It allows the businessmen to run their companies
and upscale their businesses at the same time. It provides the opportunity for the firm to get
immediate resources for keeping their business on. It also helps in capital accumulation that leads to
more access to funds when needed.
 Access to credit-Since the credit amount is smaller when the economically weaker sections take up
loans, the large banks do not partake in providing them. In addition, large banks do not provide loans
to people with little or no assets. Microfinancing comes to the rescue here, as they are based on the
ideology that small credit amounts can be a step towards ending the cycle of poverty. Women usually
do not have proper documents for identification or certificates of land or house ownership, thereby
hindering their access to formal financial institutions.
 Better rates for Loan Repayment-Statistically, women are less likely to default on repayment of
loans, and hence microfinance institutions tend to target women borrowers. They are the safer
investment options for lenders and also help empower women. 55% percentile of women show traits of
honesty and integrity while the numbers are at 48% in the case of men. Microfinance institutions
recognise this and hence target women as credit borrowers, thus having a total repayment rate of
more than 98% even though there are many overdue accounts at a microfinance institute at any given
time period.Provides for those who go unnoticed-Primarily women, people with disabilities,
unemployed persons, and people who need to meet the basic necessities are the ones who receive
microfinance products from the microfinance institutions.It has been observed that companies with
female board of directors perform better in obtaining up to 66% returns on invested capital and 42%
better returns on sales than companies with only a male board of directors.Women hold significant
business leadership roles and also develop others in entrepreneurial roles, even in developed
 An opportunity to receive education-Children of economically weaker families either are not
enrolled in school or miss their school days, as these families are mostly of agricultural background
and require their children to work in order to earn and help the family financially. Microfinance
products can come to the rescue of these children by providing funds to meet the financial needs of
the family, thereby allowing the children to complete their education.Suppose a girl child receives
eight years of formal education. In that case, the chances of her getting married young reduce by four
times, the chances of teen pregnancy decrease, and their chances of finishing school increase, and
hence, they are more likely to obtain a fair-paying job or higher education.
 Possibility of future investments increases-Poverty is a perpetual cycle. Scarcity of money results in
a lack of food and water, leading to a lack of sanitary living conditions and malnutrition and illness,
leading to people not working and, hence, a lack of money.Microfinance aims to break this cycle by
making more money available. Availability of funds means the basic needs are met. Hence,
investments can improve sanitation, build better wells, and better health care, making people
productive and not perpetually ill. Children can complete their education, and also, since the chances
of survival increase, the average family size reduces. All of these add up to the possibility of future
investments as the people can now meet their basic needs.
 Creation of Real Jobs-Entrepreneurs, when they borrow credit from microfinance institutions to start
their businesses, they create employment opportunities for others. An increase in employment
benefits the local economy as more money circulates through local businesses and services.
 Significant Economic Gains-The gains from partaking in microfinance programs entail access to better
nutrition, higher consumption, and also consumption smoothing. Here the economic gains are not
monetary but are from stability.The happiness gained from microcredits is reflected in the fact that
the repayment rates are high. Hence, at the core level, microfinance almost always leaves a positive
Groups Organised by Microfinance Institutions in India
 There are several types of groups organised by microfinance institutions for offering credit, insurance, and
financial training to the rural population in India:
 1. Joint Liability Group (JLG)-This is usually an informal group that consists of 4-10 individuals who seek
loans against mutual guarantee. The loans are usually taken for agricultural purposes or associated
activities. Farmers, rural workers, and tenants fall into this category of borrowers. Each individual in a JLG
is equally responsible for the loan repayment in a timely manner. This institution does not need any
financial administration, as it is simple in nature.
 2. Self Help Group (SHG)-A Self Help Group is a group of individuals with similar socio-economic
backgrounds. These small entrepreneurs come together for a short duration and create a common fund for
their business needs. These groups are classified as non-profit organisations. The group takes care of the
debt recovery. There is no requirement of a collateral in this kind of group lending. The interest rates are
generally low as well. Several banks have had tie-ups with SHGs with a vision to improve financial inclusion
in the rural parts of the country.
 The NABARD SHG linkage programme is noteworthy in this regard, as several Self Help Groups are able to
borrow money from banks if they are able to present a track record of diligent repayments.
 3. Grameen Model Bank-The Grameen Model was the brainchild of Nobel Laureate Prof. Muhammad Yunus in
Bangladesh in the 1970s. It has inspired the creation of Regional Rural Banks (RRBs) in India. The primary
motive of this system is the end-to-end development of the rural economy. However, in India, SHGs have
been more successful as MFIs when compared to Grameen Banks.
4. Rural Cooperatives-Rural Cooperatives were established in India at the time of Indian
independence. The resources of poor people were pooled in and financial services were
provided from this fund. However, this system had complex monitoring structures and were
beneficial only to the creditworthy borrowers in rural India. Hence, this system did not find the
success that it sought initially.

How MFI decisions to offer either group or individual loans depend on loan size, refinancing
conditions and competitive pressure in the microfinance market. MFIs have been mostly
associated with group lending, but are increasingly offering individual loans. MFI clients lack
collateral and have no documented credit history. Hence, MFIs are unable to screen borrowers
and secure loans with collateral. However, they use different lending strategies and incentives
to monitor borrowers, such as:

Group lending strategies transfer monitoring to borrowers, where joint liability ensures strong
incentives to members to help their peers succeed;
Individual lending strategies retain the monitoring role with the MFI, where incentives to
borrowers include exemption from additional risk, gain in privacy and time saving.
Study results show that MFIs decide to offer individual loans when loan sizes are small,
refinancing costs are low and competition is intense. Finally, the analysis predicts that
individual loan contracts will become more common in the microfinance market given continued
capital market access and rising MFI competition.
1.1.4.4. Regional Rural Banks – Genesis of
Regional Rural Banks, structure, and
functions.
 Regional Rural Banks (RRBs) in India are the scheduled commercial banks that conduct banking
activities for the rural areas at the state level.
 The Regional Rural Banks or the RRB government-based banks operate at the regional level in
various states across the country.
 The RRBs are entrusted to cater to the needs of the rural people in the backward regions and bring
Financial Inclusion at the primary level.
 The main objective of the RRBs is to provide credit and other banking facilities to the small,
marginal farmers, agricultural laborers, small artisans, etc. in the rural areas for boosting the rural
economy.
 At present, there are 43 RRBs in the country and each of them is sponsored by the government of
India in collaboration with the state government and sponsor bank.
Structure and Organisation of the RRB:

 The authorised capital of an RRB is fixed at Rs. 1 crore and its issued capital
at Rs. 2 lakhs. Of the issued capital, 50 per cent is to be subscribed by the
Central Government, 15 per cent by the concerned State Government and the
rest 35 per cent by the sponsoring bank.

 The working and affairs of the RRB are directed and managed by a Board of
Directors consists of a Chairman, three directors to be nominated by the
Central Government, and not more than two directors to be nominated by the
State Government concerned, and not more than 3 directors to be nominated
by the sponsoring bank. The chairman is appointed by the Central
Government and his term of office does not exceed five years.
Functions of the RRBs in India

As the Regional Rural Bank is a scheduled commercial bank, it is primarily responsible for
accepting deposits and disbursing loans. The important functions of the RRBs are as below:

 Accepting deposits from members in current or savings accounts. They can also be
made in fixed or recurring deposits.
 Extending loans to the small and marginal farmers, craftsmen and artisans, medium and
small scale enterprises, housing, local traders, renewable energy, etc. that need
development and financial assistance.
 Disbursing wages is an important RRB function under the Mahatma Gandhi National
Rural Employment Guarantee Act (MGNREGA) and the Pradhan Mantri Gram Sadak
Yojana (PMGSY). It also disburses pensions under the poverty alleviation schemes.
Secondary functions
 Providing agency services and general utility services to the customers
 Assisting in foreign exchange, money wire transfer, bill payments, etc
 Utility services like the ATM, issuance of debit cards, locker facilities, UPI, etc.
 1.1.4.5. Life Insurance and non-life insurance companies-
Their role as financial institutions in the Indian economy

 Life Insurance can be defined as a contract between an insurance policy

holder and an insurance company, where the insurer promises to pay a sum of
money in exchange for a premium, upon the death of an insured person or
after a set period.
 Insurance turn accumulated capital into productive investments. Insurance
also enables mitigation of losses, financial stability and promotes trade and
commerce activities those results into sustainable economic growth and
development. Thus, insurance plays a crucial role in the sustainable growth of
an economy.
 Non-life insurance covers property, businesses and individuals andis also known as general insurance in India. In some
markets this type of insurance is known as Property and Casualty (P&C) insurance. Unlike life insurance which covers
lives for assured benefits, non-life insurance provides coverage for damages on indemnity basis. It protects insured
monetarily by providing money in the event of an accidental loss. Examplesof non-life insurance are Fire, Marine,
Motor, Health insurance, home, factory, shop, travel and liability insurance etc.
 In other words, you can say that other than life insurance products the types of insurance that provide cover are non-
life insurance products.

Described below are the types of general insurance products in common practice.

 Fire Insurance-Fire insurance covers damages caused by fire and allied perils. In addition there are number of add on
covers provided by different companies. Often businessmen losecroresof rupees due to damage to the property
caused by fire, riots, storms, floods and earthquake etc. So to avoid such losses, they can take a suitable policy
under this type of insurance. Home owners can also get their homes and contents covered under the fire policy.
 Marine Insurance-Marine insurance provides cover to goods in transit by sea/air/rail/road and also to ships from
perils of the sea voyage. Marine insurance is taken to cover damages caused to goods in voyages during import and
export. International trade is impossible without marine insurance. Apart from ships and goods marine insurance
covers ports, off-shore energy risks and marine liabilities also
 Motor Insurance-As per law in India, no person can drive a motor vehicle without proper insurance.In motor insurance, cover is provided
for the vehicle against accidental damages as well as third-party death, injury or property damages. The owner of the vehicle must have
third-party insurance or a comprehensive policy to drive a vehicle on the road. There are two types of motor policies:
 Liability Only Policy: This covers Third Party Liability for bodily injury and/ or death and Property Damage. Personal Accident Cover for
Owner Driver is also included. This policy is also known as ACT only policy.
 Package Policy (Comprehensive): This covers loss or damage to the vehicle insured in addition to the cover provided under 1 above.These
days a number of add on covers are also provided by different companies.
 Health Insurance-Health insurance also comes under general insurance. This type of insurance provides coverage for hospitalization needs
due to accidents or serious illnesses and include hospitalization expenses including pre and post hospitalization up to the sum insured.
 Householder Insurance-Householder insurance provides protection to the house and its belongings. In case of loss/damage to house in a
natural calamity, fire or theft of house items, the risk is covered by insurance.Most people do not get home insurance, but such policies are
very cheap and provide cover to domestic appliances and jewellery also.
 Travel Insurance-In this type of insurance as the name suggests, the policy provides coverage for baggage loss, accidents and medical
emergencies that occur during travel. It is available for inland travel as well as overseas travel. The travel insurance ends when the trip
covered ends.
 Portable equipment Insurance-It is a type of insurance that insurance companies have devised to provide protection to the technological
gadgets and personal equipment. Coverage for electronic devices is generally provided on all risk basis in such an insurance policy.
Insurance policies can be taken for almost every electronic product such as mobile phones, laptops, notebooks etc.
 Crop insurance has been designed for farmers, in which if the farmer’s crop is damaged due to weather related causes or natural calamity,
then the farmer gets a fixed scale of compensation from the insurance company. Agriculture in India is highly susceptible to risks like
droughts and floods. It is necessary to protect the farmers from natural calamities. For this purpose, the Government of India has
introduced many agricultural insurance schemes throughout the country.
 Liability Insurance-Business owners are exposed to a range of legal liabilities, any of which can subject their assets to substantial
claims.Liability insurance provides protection against claims resulting from injuries and damage to people and/or property. Examples of
liability insurance policies are Employers liability, Product liability, Directors and Officers liability etc.
 Insurance companies assist businesses in reducing risk and protecting their employees:-As with consumers, assisting
businesses in reducing risk can have a long-term positive impact on the economy. Insurance is like the backbone of the
economy. Businesses, like consumers, can endure financial hardship as a result of unforeseen obstacles.
When an unfortunate event strikes, insurance is one of the strongest
them deal financial tools businesses have at their disposal to help
with the
person's caresituation. Furthermore, when an employee is hurt on the job, company insurance helps to cover the costs of the
as well as any potential salary loss.
 Business insurance also aids in the expansion of a company:- At its most basic level, insurance provides a protective
safety net that allows organisations to engage in higher-risk, higher-return activities than they would otherwise. These
acts assist firms in operating successfully, resulting in more jobs and increased overall economic activity.
 Insurance companies provide financial security to customers:-Consumers have become so accustomed to the routine
that they are often unaware of the daily onslaught of risk and uncertainty. Unexpected problems can strike at any time,
whether a car accident, house fire, a flooded basement after a major storm, or a work injury.
By providing crucial financial protection, insurance can assist manage this uncertainty and potential loss. When a
calamity occurs, an insurance policy can help consumers get the money they need. Many people in these situations would be
financially pressured and possibly bankrupt if it weren't for insurance.
 Insurance companies help in the funding of economic development projects:-Insurance companies often invest the
premiums that are not utilised to pay claims and other operating expenses. These investments frequently finance
building construction and offer other critical assistance to economic development projects around the country through
stock, corporate and government bonds, and real estate mortgages.
 Insurance is about much more than the monthly premiums that individuals and businesses
must pay. The insurance business, as a whole, is an important thread in the fabric of a
healthy economy.
 Insurance has a favourable impact on the financial system's stability:-One of the most
important industries in the service sector is insurance. Insurance firms are an essential
component of the financial system. In addition, insurance corporations have a significant role in
the formation of state budgets. They are large taxpayers in the state. Taxes, as we all know,
make up a large portion of the state budget. As a result, the insurance industry plays a critical
role in maintaining the stability of the tax and financial systems.
 Insurance provides employment:-Unemployment is one of the most serious economic issues.
This is a problem that many countries are dealing with these days. In most emerging countries,
the number of unemployed individuals is rising. However, the insurance system aids in the
resolution of this economic issue by providing employment.
 Insurance contributes to an increase in GDP:-GDP is one of the most important macroeconomic
metrics. The volume of GDP is used to determine each country's level of development. People
can choose from a variety of insurance plans offered by insurance firms. These premiums are
used by insurance companies in the financial and investment operations of the economy. As a
result, this process boosts the economy's GDP.
LIFE INSURANCE COS IN INDIA
NON LIFE INSURANCE COS IN INDIA
1.1.5 Banker and customer relationship: General, special, and
legal
The General Relationship Between Banker And Customer
 Relationship As Debtor And Creditor-The customer when deposits his money into his bank account, becomes a creditor because he is
giving his money to the bank indirectly.This relationship gets opposite at the time when a bank customer takes the loan from the
bank, the bank becomes the creditor and the customer becomes a debtor. It means the debtor and creditor relationship works both
ways depending on the condition of the transfer of money.
 Relationship As Trustee And Beneficiary-The bank performs the relationship as a trustee with his customer when the bank customer
deposited his property or other assets. In this case, the bank holds the property of other documents of bank customers in exchange
for the loan provided by the bank. The person who is depositing the property or other document is known as the beneficiary.
 Relationship As Principal And Agent-In the banking industry, the relationship between a banker and a customer can be considered as a
principal-agent relationship. In this type of relationship, the customer (the principal) entrusts the bank or the banker (the agent) with
their money and other financial assets, and the bank or the banker acts on the customer’s behalf to manage and invest those assets.
 Relationship As Lesser And Lessee-Section 105 of the transfer of property act deals with the contract of lease. It is a transfer of a
right to enjoy the immovable property for a certain time with consideration. This happens in the relationship between banker and
customer when the bank provides a safe deposit locker to the customer of the bank to save his important property for a certain
period of time. The bank changes its customer who is taking the benefit of the locker for a certain period of time.The relationship
between a banker and a customer can also be understood in terms of a lesser and lessee relationship. In this context, the customer is
the lessee and the bank is the lesser.
 Relationship As Pledger And Pledgee-The banker performs the relationship of Pledger and Pledgee when the customer took the loan
from the bank and deposits some security to the banker. The customer becomes a pledger and the bank is pledgee. The security of
the customer will remain in the custody of the bank until the person repays the money from the loan taken by him from the bank.
 Relationship As Bailor And Bailee-The banker can perform the relationship of bailor and bailee with its customer. There are many
types of bailment under which the person delivers his goods to another party for a specific period of time and take the goods back
when the purpose of bailment has been done.
 Relationship As Advisor And Client-The relationship between banker and customer can be as
advisor and client in a case when the customer invests in securities. The bank gives advice to its
customer for investing. For example, if you are planning to take any kind of loan, but are not
sure which loan you should take. Here, the bank can advise you officially or unofficially to take
the right decision. In that case, the banker will be your advisor and you will be his client.
 Relationship As Mortgagor And Mortgagee-Section 58(a) of the Transfer of Property Act, of 1882
defines the mortgage as “A mortgage is the transfer of an interest in specific immovable
property for the purpose of securing the payment of money advanced by way of loan, etc.”When
the banker provides the credit facility to his customer against the security of immovable
property, the customer becomes a mortgagor and the bank is a mortgagee.
 Relationship As Indemnity Holder And Indemnifier-There are various types of indemnity given
under the Indian contract act. Indemnity is one of the types of contract in which one person
promise to save another party by paying his loss that occurred due to the person who is making
the contract or by the act of any other person.In the relationship between banker and customer,
the banker act as an indemnity holder if any wrong transaction is done while making the
payment by the customer.
 Relationship As Hypothecator And Hypothecatee-The relationship between banker and
customer converts into Hypothecator and Hypothecatee when the bank customer hypothecates
some movable or immovable property or any other assets into the bank to take the loan from
the bank. In this case, the bank customer is a hypothecator and the banker is Hypothecatee.
 Special Relationship Between Banker And Customer
 The duties and instruction to the banker come under a special Relationship between Banker
and Customer.
 Maintain Records-It is the duty of the banker to maintain every record of the transaction,
loan and investment done by the bank customer. These records must be clear, genuine and
authorized. The bank customer has the right to check his transaction details whenever he
needs them. In a case where the transaction details are needed, the banked has the duty to
provide the true details to its customer with the stamp and signature of the authorized
person. Any mistake in the records can bring the bank into trouble.
 Maintain Confidentiality-A banker is responsible for the safety of the documents, records or
any other property which is deposited by the bank customer in the bank. The information
must remain confidential. Though there are some conditions when the banker can disclose
these confidential documents saved in the bank account.
 Obligation To Honour Cheques-The bank is responsible to accept the Cheque of the customer
that is equivalent to the amount present in the account.
Legal relationship of Banker and
customer
 The relationship between banker and customer is a legal relationship that
starts after the formation of a contract. When a person opens a bank account
in the bank and banker gives his acceptance for the account, it binds the
banker and costumer in the contractual relationship. The person who holds
the bank account in the bank and uses its services is called a bank customer.
The contractual relationship between bank and customer creates more types
of banker and customer relationships.
1.1.6 Overview of Banking Regulation Act, 1949
(Emphasis on Section 5, 6, 8, 22, 23)
 Different types of banks, such as commercial banks, cooperative banks, rural banks, and private sector
banks exist in India. The Reserve Bank of India (RBI) is the governing body for regulating and supervising the
banks. Banking Regulation Act, 1949 is an Act that provides a framework for regulating the banks of India.
The Act came into force on 16th March 1949. This Act gives RBI the power to control the behaviour of banks.
This Act was passed as Banking Companies Act, 1949. It did not apply to Jammu and Kashmir until 1956. This
Act monitors the day-to-day operations of the bank. Under this Act, the RBI can licence banks,
put regulation over shareholding and voting rights of shareholders, look over the appointment of the boards
and management, and lay down the instructions for audits. RBI also plays a role in mergers and liquidation.
 The main features of the Act are mentioned below:

 Non-banking companies are forbidden to receive money deposits that are payable on demand.
 Non-banking risks are reduced by prohibiting trading by banking companies.
 Maintaining minimum capital standards.
 Regulation on the acquisition of shares of banking companies.
 Power of the Central Government to make schemes for the banks.
 Provisions regarding liquidation proceedings for banking companies.
Section - 5. Interpretation.
In this Act, unless there is anything repugnant in the subject or context, —
 (a) "approved securities" means-
 (i) securities in which a trustee may invest money under clause (a), clause (b), clause (bb), clause (c) or clause (d) of section 20 of the Indian
Trusts Act, 1882 (2 of 1882);
 (ii) such of the securities authorised by the Central Government under clause (f) of section 20 of the Indian Trusts Act, 1882 (2 of 1882), as may
be prescribed;
 (b) "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or
otherwise, and withdrawal by cheque, draft, order or otherwise;
 (c) "banking company" means any company which transacts the business of banking in India;
 Explanation. — Any company which is engaged in the manufacture of goods or carries on any trade and which accepts deposits of money from the
public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking
within the meaning of this clause;
 (ca) "banking policy" means any policy which is specified from time to time by the Reserve Bank in the interest of the banking system or in the
interest of monetary stability or sound economic growth, having due regard to the interests of the depositors, the volume of deposits and other
resources of the bank and the need for equitable allocation and the efficient use of these deposits and resources;
 (cc) "branch" or "branch office" , in relation to a banking company, means any branch or branch office, whether called a pay office or sub-pay
office or by any other name, at which deposits are received, cheques cashed or moneys lent, and for the purposes of section 35 includes any
place of business where any other form of business referred to in sub-section (1) of section 6 is transacted;
 (d) "company" means any company as defined in section 3 of the Companies Act, 1956 (1 of 1956); and includes a foreign company within the
meaning of section 591 of that Act;
 (da) "corresponding new bank" means a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer
of Undertakings) Act, 1970 (5 of 1970); or under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of
1980);
 (e) Omitted by Act 52 of 1953, Section 2.
 (f) "demand liabilities" means liabilities which must be met on demand, and "time liabilities" means liabilities
which are not demand liabilities;
 (ff) "Deposit Insurance Corporation" means the Deposit Insurance Corporation established under section 3 of the
Deposit Insurance Corporation Act, 1961 (47 of 1961);
 (ffa) "Development Bank" means the Industrial Development Bank of India established under section 3 of the
Industrial Development Bank of India Act, 1964 (18 of 1964);
 (ffb) "Exim Bank" means the Export-Import Bank of India established under section 3 of the Export-Import India
Act, 1981 (28 of 1981);
 (ffc) "Reconstruction Bank" means the Industrial Reconstruction Bank of India established under section 3 of the
Industrial Reconstruction Bank of India Act, 1984 (62 of 1984);
 (ffd) "National Housing Bank" means the National Housing Bank established under section 3 of the National
Housing Bank Act, 1987;
 (g) "gold" includes gold in the form of coin, whether legal tender or not, or in the form of bullion or ingot,
whether refined or not;
 (gg) "managing agent" includes. —
 (i) Secretaries and Treasurers;
 (ii) Where the managing agent is a company, and director of such company, and any member thereof who holds
substantial interest in such company;
 (iii) Where the managing agent is a firm, any partner of such firm;]
 (h) "managing director", in relation to a banking company, means a director who, by virtue of an agreement with the
banking company or of a resolution passed by the banking company in general meeting or by its Board of directors or, by
virtue of its memorandum or articles of association, is entrusted with the management of the whole, or substantially the
whole of the affairs of the company, and includes a director occupying the position of a managing director, by whatever
name called:
 Provided that the managing director shall exercise his powers subject to the superintendence, control and direction of the
Board of Directors;
 (ha) "National Bank" means the National Bank for Agriculture and Rural Development established under section 3 of the
National Bank for Agriculture and Rural Development Act, 1981;
 (i) Omitted by Act 33 of 1959, Section 2 w.e.f. 1-5-1982.
 (j) "prescribed" means prescribed by rules made under this Act;
 (ja) "regional rural bank" means a regional rural bank established under section 3 of the Regional Rural Banks Act, 1976 (21
of 1976);
 (k) Omitted by Act 33 of 1959, Section 2 w.e.f. 1-5-1982.
 (l) "Reserve Bank" means the Reserve Bank of India constituted under section 3 of the Reserve Bank of India Act, 1934 (2 of
1934);
 (m) Omitted by Act 33 of 1959, Section 2 w.e.f. 1-5-1982.
 (n) "secured loan or advance" means a loan or advance made on the security of assets the market value of which is not at
any time less than the amount of such loan or advance; and "unsecured loan or advance" means a loan or advance not so
secured;
 (ni) "Small Industries Bank" means the Small Industries Development Bank of India established under section 3 of the Small
Industries Development Bank of India, 1989;
 (nb) "Sponsor Bank" has the meaning assigned to it in the Regional Rural Banks Act, 1976 (21 of 1976);
 (nc) "State Bank of India" means the State Bank of India constituted under section 3 of the State Bank of India Act,
1955 (23 of 1955);
 (nd) "subsidiary bank" has the meaning assigned to it in the State Bank of India (Subsidiary Banks) Act, 1959;
 (ne) " substantial interest". —
 (i) in relation to a company, means the holding of a beneficial interest by an individual or his spouse or minor
child, whether singly or taken together, in the shares thereof, the amount paid up on which exceeds five lakhs of
rupees or ten percent of the paid-up capital of the company, whichever is less;
 (ii) in relation to a firm, means the beneficial interest held therein by an individual or his spouse o r minor child,
whether singly or taken together, which represents more than ten per cent of the total capital subscribed by all
the partners of the said firm;
 (o) all other words and expressions used herein but not defined and defined in the Companies Act, 1956 (1 of
1956), shall have the meanings respectively assigned to them in that Act.
 (2) Omitted by the A.O. 1950
 Section - 6 . Forms of business in which banking
companies may engage.
 Section 6. Forms of business in which banking companies may engage. —(1) In addition to the business of banking, a banking company
may engage in any one or more of the following forms of business, namely: —
 (a) the borrowing, raising, or taking up of money; the lending or advancing of money either upon or without security; the drawing,
making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange, hoondees, promissory notes, coupons,
drafts, bills of lading, railway receipts, warrants, debentures, certificates, scrips and other instruments and securities whether
transferable or negotiable or not; the granting and issuing of letters of credit, traveller's cheques and circular notes; the buying,
selling and dealing in bullion and specie; the buying and selling of foreign exchange including foreign bank notes; the acquiring,
holding, issuing on commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations,
securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on behalf of
constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips or valuables on deposit or for
safe custody or otherwise; the providing of safe deposit vaults; the collecting and transmitting of money and securities;
 (b) acting as agents for any Government or local authority or any other person or persons; the carrying on of agency business of any
description including the clearing and forwarding of goods, giving of receipts and discharges and otherwise acting as an attorney on
behalf of customers, but excluding the business of a managing agent or secretary and treasurer of a company;
 (c) contracting for public and private loans and negotiating and issuing the same;
 (d) the effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue, public or private, of
State, municipal or other loans or of shares, stock, debentures, or debenture stock of any company, corporation or association and
the lending of money for the purpose of any such issue;
 (e) carrying on and transacting every kind of guarantee and indemnity business;
 (f) managing, selling and realising any property which may come into the possession of the company in satisfaction or part
satisfaction of any of its claims;
 (h) undertaking and executing trusts;
 (i) undertaking the administration of estates as executor, trustee or otherwise;
 (j) establishing and supporting or aiding in the establishment and support of associations, institutions, funds,
trusts and conveniences calculated to benefit employees or ex-employees of the company or the dependents
or connections of such persons; granting pensions and allowances and making payments towards insurance;
subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any
public, general or useful object;
 (k) the acquisition, construction, maintenance and alteration of any building or works necessary or
convenient for the purposes of the company;
 (l) selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into
account or otherwise dealing with all or any part of the property and rights of the company;
 (m) acquiring and undertaking the whole or any part of the business of any person or company, when such
business is of a nature enumerated or described in this sub- section;
 (n) doing all such other things as are incidental or conducive to the promotion or advancement of the
business of the company;
 (o) any other form of business which the Central Government may, by notification in the Official Gazette,
specify as a form of business in which it is lawful for a banking company to engage.
 (2) No banking company shall engage in any form of business other than those referred to in sub-section (1).
Section-8. Prohibition of trading

 8. Prohibition of trading. — Notwithstanding anything contained in section 6 or in

any contract, no banking company shall directly or indirectly deal in the buying or
selling or bartering of goods, except in connection with the realisation of security
given to or held by it, or engage in any trade, or buy, sell or barter goods for
others otherwise than in connection with bills of exchange received for collection
or negotiation or with such of its business as is referred to in clause (i) of sub-
section (1) of section 6:
 Provided that this section shall not apply to any such business as is specified in
pursuance of clause (o) of sub-section (1) of section 6.
 Explanation. — For the purposes of this section, "goods" means every kind of
movable property, other than actionable claims, stocks, shares, money, bullion
and specie, and all instruments referred to in clause (a) of sub-section (1) of
section 6.
 22. Licensing of banking companies.
 22. Licensing of banking companies. —(1) Save as hereinafter provided, no company shall carry on banking business in India unless
it holds a licence issued in that behalf by the Reserve Bank and any such licence may be issued subject of such conditions as the
Reserve Bank may think fit to impose.
 (2) Every banking company in existence on the commencement of this Act, before the expiry of six months from such
commencement, and every other company before commencing banking business in India, shall apply in writing to the Reserve Bank
for a licence under this section:
 Provided that in the case of a banking company in existence on the commencement of this Act, nothing in sub-section (1) shall be
deemed to prohibit the company from carrying on banking business until it is granted a licence in pursuance of this section or is by
notice in writing informed by the Reserve Bank that a licence cannot be granted to it:
 Provided further that the Reserve Bank shall not give a notice as aforesaid to a banking company in existence on the
commencement of this Act before the expiry of the three years referred to in sub-section (1) of section 11 or of such further period
as the Reserve Bank may under that sub-section think fit to allow.
 (3) Before granting any licence under this section, the Reserve Banking may require to be satisfied by an inspection of the books of
the company or otherwise that the following conditions are fulfilled, namely : —
 (a) that the company is or will be in a position to pay its present or future depositors in full as their claims accrue;
 (b) that the affairs of the company are not being, or are not likely to be, conducted in a manner deterimental to the interests of
its present or future depositors;
 (c) that the general character of the proposed management of the company will not be prejudicial to the public interest or the
interest of its depositors;
 (d) that the company has adequate capital structure and earning prospects;
 (e) that the public interest will be served by the grant of a licence to the company to carry on banking business in India;
 (g) any other condition, the fulfilment of which would, in the opinion of the Reserve Bank, be necessary to
ensure that the carrying on of banking business in India by the company will not be prejudicial to the public
interest or the interests of the depositors.
 (3A) Before granting any licence under this section to a company incorporated outside India, the Reserve Bank
may require to be satisfied by an inspection of the books of the company or otherwise that the conditions
specified in sub-section (3) are fulfilled and that the carrying on of banking business by such company in India
will be in the public interest and that the Government or law of the country in which it is incorporated does not
discriminate in any way against banking companies registered in India and that the company complies with all
the provisions of this Act applicable to banking companies incorporated outside India.
 (4) The Reserve Bank may cancel a licence granted to a banking company under this section —
 (i) if the company ceases to carry on banking business in India; or
 (ii) if the company at any time fails to comply with any of the conditions imposed upon it under sub-section (1);
or
 (iii) if at any time, any of the conditions referred to in sub-section (3) and sub-section (3A) is not fulfilled:
 Provided that before cancelling a licence under clause (ii) or clause (iii) of this sub-section on the ground that
the banking company has failed to comply with or has failed to fulfil any of the conditions referred to therein,
the Reserve Bank, unless it is of opinion that the delay will be prejudicial to the interests of the company's
depositors or the public, shall grant to the company on such terms as it may specify, an opportunity of taking the
necessary steps for complying with or fulfilling such condition.
 (5) Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section
may, within thirty days from the date on which such decision is communicated to it, appeal to the Central
Government.
 (6) The decision of the Central Government where an appeal has been preferred to it under sub-section (5) or of
the Reserve Bank where no such appeal has been preferred shall be final.]
Section-23. Restrictions on opening of new, and
transfer of existing, places of business
 23. Restrictions on opening of new, and transfer of existing, places of business. — (1) Without obtaining the prior permission of the
Reserve Bank—
 (a) no banking company shall open a new place of business in India or change otherwise than within the same city, town or village,
the location of an existing place of business situated in India; and
 (b) no banking company incorporated in India shall open a new place of business outside India or change, otherwise than within the
same city, town or village in any country or area outside India, the location of an existing place of business situated in that country
or area:
 Provided that nothing in this sub-section shall apply to the opening for a period not exceeding one month of a temporary place of
business within a city, town or village or the environs thereof within which the banking company already has a place of business, for
the purpose of affording banking facilities to the public on the occasion of an exhibition, a conference or a mela or any other like
occasion.
 (2) Before granting any permission under this section, the Reserve Bank may require to be satisfied by an inspection under section
35 or otherwise as to the financial condition and history of the company, the general character of its management, the adequacy of
its capital structure and earning prospects and that public interest will be served by the opening or, as the case may be, change of
location, of the place of business.
 (3) The Reserve Bank may grant permission under sub-section (1) subject to such conditions as it may think fit to impose either
generally or with reference to any particular case.
 (4) Where, in the opinion of the Reserve Bank, a banking company has, at any time, failed to comply with any of the conditions
imposed on it under this section, the Reserve Bank may, by order in writing and after affording reasonable opportunity to the
banking company for showing cause against the action proposed to be taken against it, revoke any permission granted under this
 1.1.7 Important terms used in Banking and FIs: Bank
rate, base rate, call money, CASA, CRR, core banking,
cross-selling, Digital currency, EBLR, ECS,
IMPS, IFSC, MCLR, NEFT, LOU, Plastic money, PLR, RAFA,
RTGS, Repo, SLR, SWIFT
 Bank Rate-Bank Rate is the rate or discount at which RBI grants loans or advances to commercial banks. Hence, it is
also called Discount Rate. The money that commercial banks repay to RBI is the interest amount on the loans.
 Base Rate-The base rate is the minimum rate of interest that is set by a country's central bank for lending a loan.
This rate is usually taken as the standard interest rate by all the banks functioning in that country.In India, Unless
there is a government mandate, the RBI rule specifies that no bank may offer loans at an interest rate lower than
the base rate.
 Call Money-Call money is any kind of short-term, interest-earning loan that you have to pay back as soon as the
lender demands it. Call money helps banks earn a call loan rate on their surplus funds. It's generally used by
brokerages for short-term funding needs.
 CASA-Current account savings accounts (CASA) are a type of non-term deposit account. A CASA pays a lower interest
rate than term deposits, such as certificates of deposit, and is thus a cheaper source of income for the financial
institution.
 CRR-Cash Reserve Ratio (CRR) is the percentage of a bank's total deposits that it needs to maintain as liquid cash.
This is an RBI requirement, and the cash reserve is with the RBI. A bank does not earn interest on this liquid cash
maintained with the RBI and neither can it use this for investing and lending purposes.
 Core Banking-Core banking can be defined as a back-end system that processes banking transactions across the
various branches of a bank. The system essentially includes deposit, loan and credit processing.
 Cross-Selling-Cross-selling in banking occurs when a bank associate attempts to sell an existing customer
additional financial products. Examples of some products offered during the cross-selling process are debit cards,
certificates of deposit (CD), auto loans, or investment services.
 Digital Currency-Digital currency is a form of currency that is available only in digital or electronic form. It is also
called digital money, electronic money, electronic currency, or cybercash.There are three types of digital
currency: cryptocurrency, stablecoins and CBDCs. Cryptocurrency is a form of decentralized digital currency that
isn't pegged to any fiat currency. It uses cryptography to manage its ledger systems, and the market determines its
value.
 EBLR-EBLR stands for External Benchmarks Lending Rate are the lending rates set by the banks based on external
benchmarks such as repo rate, 91 days Treasury bill and 182 days Treasury bill. Every bank can choose any such
external benchmark and link its lending rates. This would ensure a transparent and effective way of setting
lending rates according to the macroeconomic scenario.
 ECS-Electronic Clearing Services (ECS) It is a mode of electronic funds transfer from one bank account to another
bank account using the services of a Clearing House.
 IMPS-Immediate Payment Service (IMPS) is an instant interbank electronic fund transfer service through mobile
phones. It is also being extended through other channels such as ATM, Internet Banking, etc.
 IFSC-The Indian Financial System Code is an 11-digit alpha-numeric code that is unique for bank branches that
offer online money transfer options. The code is used to identify the bank branch on the National Electronics
Funds Transfer (NEFT) network.
 MCLR-MCLR stands for Marginal Cost of Funds based Lending Rate. A bank determines its minimum interest rate by
considering factors such as its cost of funds, operating costs, and profit margin. Banks use MCLR to calculate the
interest rate on various loans, including home loans.
 NEFT-NATIONAL ELECTRONIC FUNDS TRANSFER (NEFT) is an electronic payment system developed by RBI to facilitate transfer
of funds by customers from one bank to another bank in India. It is a secured, economical, reliable and efficient system of
funds transfer between banks.
 LOU-Letter of Undertaking (LoU) can said to be a sort of guarantee that is issued by a banking entity to the concerned person
for attaining short term credit from the overseas branch of an Indian bank.
 Plastic Money-Plastic money is a convenient substitute for cash or the standard currency. Different forms of plastic money are
Credit cards, Debit cards, ATM cards, Prepaid Cash cards, Forex cards, etc. Plastic money is beneficial for customers for both
physical and virtual purchases of goods and services.
 PLR-PLR(Prime Lending Rate) is the rate at which commercial lenders lend money to their best customers.
 RAFA-Recurring Deposit Account Fixed Deposit Account. The RAFA ratio indicates how much money a bank has in recurring and
fixed deposits.
 RTGS-RTGS, which stands for "real-time gross settlement," is a way to move money and/or securities in real-time. With the
RTGS procedure, a central bank can keep making payments without adding up all of its debits and credits. Real-time gross
settlement payments can't be changed or taken back once made.
 REPO-Repo Rate full form or the term 'REPO' stands for 'Repurchasing Option' Rate. It is also known as the 'Repurchasing
Agreement'. People take loans from banks in times of financial crunch and pay interest for the same. Similarly, commercial
banks and financial institutions also face a shortage of funds.
 SLR-Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form
of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering
credit to customers. These are not reserved with the Reserve Bank of India (RBI), but with banks themselves.
 SWIFT-The Society for Worldwide Interbank Financial Telecommunications (SWIFT) system powers most international money
and security transfers. SWIFT is a vast messaging network used by financial institutions to quickly, accurately, and securely send
and receive information, such as money transfer instructions.
 1.1.8 Internet Banking, Cyber Security, and
application of AI in banks: Mobile banking
Internet banking, also known as online banking, e-banking or virtual banking, is an electronic payment system that enables customers of
a bank or other financial institution to conduct a range of financial transactions through the financial institution's website.Different types of
online financial transactions are:
 National Electronic Fund Transfer (NEFT)-National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-
to-one funds transfer. Under this Scheme, individuals, firms and corporates can electronically transfer funds from any bank branch to
any individual, firm or corporate having an account with any other bank branch in the country participating in the Scheme. Individuals,
firms or corporates maintaining accounts with a bank branch can transfer funds using NEFT. Even such individuals who do not have a
bank account (walk-in customers) can also deposit cash at the NEFT-enabled branches with instructions to transfer funds using NEFT.
However, such cash remittances will be restricted to a maximum of Rs.50,000/- per transaction. NEFT, thus, facilitates originators or
remitters to initiate funds transfer transactions even without having a bank account. Presently, NEFT operates in hourly batches - there
are twelve settlements from 8 am to 7 pm on week days (Monday through Friday) and six settlements from 8 am to 1 pm on Saturdays.
 Real Time Gross Settlement (RTGS)-RTGS is defined as the continuous (real-time) settlement of funds transfers individually on an order
by order basis (without netting). 'Real Time' means the processing of instructions at the time they are received rather than at some later
time; 'Gross Settlement' means the settlement of funds transfer instructions occurs individually (on an instruction by instruction basis).
Considering that the funds settlement takes place in the books of the Reserve Bank of India, the payments are final and irrevocable. The
RTGS system is primarily meant for large value transactions. The minimum amount to be remitted through RTGS is 2 lakh.
 Electronic Clearing System (ECS)-ECS is an alternative method for effecting payment transactions in respect of the utility-bill-payments
such as telephone bills, electricity bills, insurance premia, card payments and loan repayments, etc., which would obviate the need for
issuing and handling paper instruments and thereby facilitate improved customer service by banks / companies / corporations /
government departments, etc., collecting / receiving the payments.
 Immediate Payment Service (IMPS)-IMPS offers an instant, 24X7, interbank electronic fund transfer service through mobile phones.
IMPS is an emphatic tool to transfer money instantly within banks across India through mobile, internet and ATM which is not only safe
but also economical both in financial and non-financial perspectives.
 Cyber security
 Cyber security-Cyber security is the application of technologies, processes, and controls to protect systems, networks,
programs, devices and data from cyber attacks. It aims to reduce the risk of cyber attacks and protect against the
unauthorised exploitation of systems, networks, and technologies.
The 5 Types of Cybersecurity and What You Need to Know
 Critical infrastructure security-Critical infrastructure security is a term used to describe the security of systems and
networks that are essential to the functioning of a society or economy. These include energy, water, transportation,
communications, and finance. Critical Infrastructure Security is important because if these systems are compromised, it
can lead to chaos and disruption.
 Application security-Application security, or APPSEC, involves using software, hardware, techniques, best practices,
and procedures to protect computer applications from external security threats.
 Network security-There are many types of network security, but the three most common are firewalls, intrusion
detection systems (IDS), and antivirus software. Firewalls are designed to stop unauthorized access to your network.
They inspect all traffic coming in and out of your network and block anything that doesn't meet specific criteria.
 Cloud security-Another aspect of cybersecurity is ensuring that data and networks are secure in the cloud. While
critical infrastructure and network safeguards may be in place, when networks migrate to the cloud, there is another
risk to consider. Because most businesses are moving to the cloud, it has become a prime target for hackers who want
to steal sensitive information. Businesses need to be aware of the different types of cloud security and take the
necessary precautions to protect their data.
 Internet of Things (IoT) security-The term "Internet of Things" (IoT) describes a network of physical objects or devices
connected to the internet. These devices include home appliances, cars, and even medical implants.While the IoT
Application of AI in banks

 The integration of AI in the banking industry has brought about remarkable advancements and
possibilities. AI’s presence in banking has significantly enhanced operational efficiency, risk
management, customer experiences, and decision-making processes. AI-powered technologies,
such as machine learning algorithms and data analytics, have enabled banks to analyze vast
amounts of data in real-time, identifying patterns, trends, and anomalies that help mitigate
risks and make more informed decisions. Furthermore, AI-driven chatbots and virtual assistants
improve customer interactions by providing personalized assistance, addressing queries
promptly, and streamlining routine transactions. The application of AI in credit scoring has
improved accuracy and speed, allowing banks to make informed lending decisions and expand
access to financial services. Additionally, AI’s contribution to fraud detection and prevention has
been instrumental in safeguarding banks and customers from fraudulent activities. Looking
ahead, the future of AI in banking holds great promise. Continued advancements in AI
technology, coupled with ongoing collaborations between financial institutions and AI experts,
will drive further innovation and enable banks to deliver enhanced services, improve efficiency,
and stay competitive in an ever-evolving digital landscape.
Mobile banking
 Mobile banking refers to the use of a mobile device, such as a smartphone or tablet, to access and manage
one's banking accounts and conduct various financial transactions. Mobile banking apps offer a convenient
and secure way to manage one's finances on the go, without the need to visit a bank branch or ATM.
 Mobile banking is the act of making financial transactions on a mobile device (cell phone, tablet, etc.). This
activity can be as simple as a bank sending fraud or usage activity to a client’s cell phone or as complex as a
client paying bills or sending money abroad. Advantages to mobile banking include the ability to bank
anywhere and at any time. Disadvantages include security concerns and a limited range of capabilities when
compared to banking in person or on a computer.

 Understanding Mobile Banking-Mobile banking is very convenient in today’s digital age with many banks
offering impressive apps. The ability to deposit a check, to pay for merchandise, to transfer money to a
friend or to find an ATM instantly are reasons why people choose to use mobile banking. However,
establishing a secure connection before logging into a mobile banking app is important or else a client might
risk personal information being compromised.

 Mobile Banking and Cybersecurity-Cybersecurity has become increasingly important in many mobile banking
operations. Cybersecurity encompasses a wide range of measures taken to keep electronic information
private and avoid damage or theft. It is also used to make data is not misused, extending from personal
information to complex government systems.
1.1.9 Meaning of Financial Products and
Services in the banking sector
 Banking products and services refer to the various financial products and services
that a bank or financial institution offers to its customers. These include a wide
range of services such as current and savings accounts, credit and debit cards,
loans such as mortgages and auto loans, investment products like mutual funds
and stocks, insurance products, and online and mobile banking services.
 Banks may also offer other services such as foreign currency exchange, wire
transfers and direct deposit services. These products and services are designed to
help customers manage their money and reach their financial goals. They can be
used for everyday transactions, saving for the future, borrowing money, or
protecting assets.
 Overall, banking products/services are designed to meet the financial needs of
customers. Such services also provide easy access and help customers to save,
invest and grow their wealth. Some of such services also protects them from
financial loss.
 Different Banking Products and Services
 There are many different banking products and services available to customers. Some of the most common include:
 Current and Savings Accounts-These are basic accounts that allow customers to deposit money and withdraw it as needed.
Current accounts are typically used for everyday transactions, such as paying bills and making purchases. Savings accounts earn
interest on the money deposited. Savings accounts typically offer lower interest rates than other types of deposit account. Saving
are also more accessible and have fewer restrictions on withdrawals. Current accounts are designed for more frequent
transactions, and often come with a cheque book and debit card for easy access to funds
 Credit Cards-These are plastic cards that allow customers to borrow money up to a certain limit. Credit cards typically have a
monthly interest rate and an annual fee. Credit cards can also come with rewards, such as cash back or airline miles, for making
purchases.
 Magnetic Ink Character Recognition (MICR)-It is a technology used to process and sort large volumes of cheques, deposits and
other financial documents quickly and accurately. It uses special ink that contains iron oxide particles, which can be read by a
MICR reader.MICR technology is widely used by the banks to process cheques quickly and accurately. It has helped to reduce the
time and costs associated with manual cheque processing. It has increased the efficiency of the banking system overall. MICR
technology can also be used to process other financial documents such as deposit slips, money orders and government forms.
 Channel Banking-It is another service facility provided by the financial institutions. It refers to the various ways in which
customers can access and manage their accounts with a bank. This can include in-person visits to a branch, phone and internet
banking, and the use of automated teller machines (ATMs) and debit cards.
 Debit Card-A debit card is a payment card that deducts money directly from a consumer’s checking account to pay for a
purchase. Debit cards are linked to the customer’s checking account and can be used to withdraw cash, make purchases, and
transfer funds. They are similar to credit cards but instead of borrowing money, it is deducted from the account.
 Automated Teller Machine-An ATM (Automated Teller Machine) is a self-service electronic machine that allows customers to
withdraw cash, deposit money, check account balances, and transfer funds from one account to another. ATMs are typically
located in convenient locations, such as shopping centers and airports, and are available 24 hours a day. Many ATMs also provide
additional services such as bill payment, mobile phone top-up, and the ability to check account balances and recent transactions.
 Insurance Services-Banks may also offer insurance products, such as life insurance, health insurance, or car insurance. These
products help customers protect themselves and their assets in case of unexpected events.
 Online and Mobile Banking-Banks are now providing online and mobile banking services to customers which enables them to
access their accounts and perform transactions through internet and mobile phones.
 Demand Draft-It is a type of cheque that is guaranteed by the issuing bank. It is similar to a regular check, but it is guaranteed to
be paid, as the funds are withdrawn from the bank at the time the demand draft is issued. Demand drafts are typically used for
large value transactions, such as the purchase of real estate or the payment of taxes, as they provide a higher level of security
than a regular check.
 Traveler’s Cheque-It is a type of cheque that can be used as a form of payment when traveling. Traveler’s cheques are issued by
banks and financial institutions, and they can be used to withdraw cash or make purchases at merchants that accept them. They
are considered to be a safe form of currency as they can be replaced if lost or stolen. Travelers cheque is not used as frequently as
before due to the widespread use of credit and debit cards and online banking.
 Real Time Gross Settlement (RTGS)-It is a system for the real-time transfer of funds between banks. It is used for large value
transactions and is considered to be the most secure and efficient method of inter-bank funds transfer. The RTGS system is
operated by the central bank of a country, and it ensures that the transfer of funds takes place in real-time, meaning that the
funds are transferred and settled immediately.
 National Electronic Funds Transfer (NEFT)-It is an electronic funds transfer system that enables the transfer of funds between
banks in India. It is used for small-value transactions, and the transfer of funds takes place in batches, meaning that the funds are
transferred and settled in batches at regular intervals throughout the day.
 Structured Financial Messaging System (SFMS)-It is a messaging system that facilitates the exchange of financial messages
between banks and other financial institutions. It is used to transmit various types of financial information, such as payment
instructions, account information, and status updates. SFMS provides a standardized format for the messages and ensures that the
messages are transmitted in a secure and reliable manner.
 Foreign Exchange and Trade Services-Banks also provide foreign exchange services to the customers. Foreign exchange services
include selling and buying of foreign exchange, INR, LC, SWIFT transfer, Remittance services etc. LC and SWIFT transfer are
generally institutional services.
1.1.9.1 Asset Products – Types of Loans
and Advances
 Loans and Advances-It means any direct or indirect advance of funds
(including obligations as maker or endorser arising from discounting of
commercial/business paper) which are made to a person on the basis of an
obligation to repay the funds, or which is repayable from specific property
pledged by or on behalf of a person.
 For a bank, deposits taken from the customer are the liability and the loan
given to the customer is the asset.

 A loan is an asset for the bank, as they earn interest income by providing
loans to the customers. Whereas, the bank has to pay interest on the deposit
made by the customers. Hence, it is a liability product for the bank.
 Mortgages-These are loans used to purchase a home. Mortgages are typically paid back over a period
of 15 to 30 years, and the interest rate on the loan can be fixed or adjustable. Mortgage loans are of
two types i.e. term loan and working capital loan. Term loan is a long term loan whereas working
capital loan is a short term mortgage loan.
 Auto Loans-These are loans used to purchase a vehicle. Auto loans are typically paid back over a
period of 3 to 5 years. The interest rate on the loan can be fixed or adjustable. Such loans adjust
and schedule the payment on a term basis, making it easier for individuals to purchase the vehicles.
 Personal Loans-These are unsecured loans that can be used for a variety of purposes, such as
consolidating debt or financing a home improvement project. This is a flexible loan provided by the
loan to the individual with good credibility or profile. Though banks do not consider collateral for
such loans, there is a thorough profiling of customers before discussing the loan.
 Gold Loans-These are a type of loan that uses gold as collateral. The borrower pledges a certain
amount of gold to the lender, usually a bank, and in return, the lender provides the borrower with a
loan. The value of the loan is determined by the value of the gold, which is determined by the
current gold market price. Gold loans are typically used for short-term financial needs such as
medical expenses, business expansion, or educational expenses. The interest rate on gold loans is
usually lower than other types of loans, as the gold serves as collateral.
 Education Loans-Education loans are used to fund higher education in India or abroad. They cover not just the
tuition fees of the educational institutions but also the accommodation and other living expenses borne by the
students during the course of study. But while education loans are typically unsecured in nature, lenders could ask
for collateral or guarantor to approve certain education loan applications involving high loan quantum.
 Agricultural Loans-Agricultural loans are available for different kinds of farming-related activities. Financial
institutions offer monetary aid to farmers all across the country.
 Flexi Loans-A flexi loan is a financing facility wherein the borrower avails of a certain amount and pays interest
only for the amount used.
 Credit Card Loans-Loans on credit card are linked to a user’s credit card account that may or may not be linked
to the card’s credit limit. The loan repayment EMIs are typically clubbed with the card’s monthly bill. While these
loans could be availed of quickly involving zero paperwork and used for any financial requirement, their interest
rates are typically much higher than personal loan rates. Thus, they should be used only as a last option and for as
low an amount as possible.
 Short-term Business Loans-Short-term business loans are unsecured loans that are useful for meeting the daily
expenses or diversification of a business, organisation or entity.
 Payday Loan-A payday loan is a short-time loan typically with a smaller ticket-size, wherein the lender gives the
loan at a higher rate of interest. The tenure of payday loans is generally shorter than personal loans.
 Overdraft-A bank overdraft allows eligible customers to withdraw money or make eligible transactions up to a
predefined limit even if their account balance is zero. The interest is charged only on the utlised overdraft
amount and not the entire overdraft limit. However, certain types like overdraft against FD and insurance policies
are considered secured loan options.
1.1.9.2 Liability Products - Types of deposits
 Savings Bank Account-As the name suggests this type of account is suitable for people who have a definite income and are looking
to save money. For example, the people who get salaries or the people who work as laborers. This type of account can be opened
with a minimum initial deposit that varies from bank to bank. Money can be deposited at any time in this account.Withdrawals can
be made either by signing a withdrawal form or by issuing a cheque or by using an ATM card. Normally banks put some restriction on
the number of withdrawal from this account. Interest is allowed on the balance of deposit in the account. The rate of interest on
savings bank account varies from bank to bank and also changes from time to time. A minimum balance has to be maintained in the
account as prescribed by the bank.
 Current Deposit Account-Big businessmen, companies, and institutions such as schools, colleges, and hospitals have to make
payment through their bank accounts. Since there are restrictions on the number of withdrawals from a savings bank account, that
type of account is not suitable for them. They need to have an account from which withdrawal can be made any number of times.
Banks
deposit open
while a current account for them. Like a savings bank account, this account also requires a certain minimum amount of
opening
eachthe account.
year as an On this deposit,the bank does not pay any interest on the balances. Rather the account holder pays a certain amount
also operational
allow charge.These accounts also have what we call the overdraft facility. For the convenience of the accountholders banks
withdrawal
specific customersof amounts in excess of the balance of the deposit. This facility is known as an overdraft facility. It is allowed to some
and up to a certain limit subject to previous agreement with the bank concerned.
 Fixed Deposit Account-Some bank customers may like to put away money for a longer time. Such deposits offer a higher interest
rate. If money is deposited in a savings bank account, banks allow a lower rate of interest. Therefore, money is deposited in a fixed
deposit account to earn interest at a higher rate.
fromThis type to
15 days of deposit account allows the deposit to be made of an amount for a specified period. This period of deposit may range
three In
maturity. years
thator more during which no withdrawal is allowed. However, on request, the depositor can encash the amount before its
case, banks give lower interest than what was agreed upon.
The interest
withdrawn or on a fixed deposit account can be withdrawn at certain intervals of time. At the end of the period, the deposit may be
renewed for a further period. Banks also grant a loan on the security of the fixed deposit receipt.
 Recurring Deposit Account-While opening the account a person has to agree to deposit a fixed amount once in a month for a
certain period. The total deposit along with the interest therein is payable on maturity. However, the depositor can also be allowed
to close the account before its maturity and get back the money along with the interest till that period.
1.1.10 Principles of sound lending.

 The sound principle of lending is not to sacrifice safety or liquidity for the sake of higher profitability. That
is to say that the banks should not grant advances to unsound parties with doubtful repaying capacity, even
if they are ready to pay a very high rate of interest.
 The 11 Principles of Sound Lending are as follows-
1. Purpose of Loan-Banks should analyze whether the purposes of the loan meet the scope and loan policies
of the bank. Banks also need to analyze and monitor whether the purpose of the loan will have the
sufficient cash flow to repay the loan amount.Technically, the purpose must be viable and able to cam
adequate profit for the borrower; else, the loan recovery may be difficult.
2. Safety-Safety should get the prior importance while sanctioning the loan. At maturity, the borrower may
be unable to repay the loan amount. Banks should not sacrifice safety for safety depends upon the the
quality of the security offered by the borrower and the repaying capacity and willingness of the borrower
to repay the principal amount of the loan along with interest.
3. Social Responsibility-The bank’s social responsibility is to meet the loan demand of the locality where it
operates its business. To increase goodwill, banks need to perform other social activities as well.
 Business Ethics-Though providing loans is the main source of a bank’s income, banks should not give loans for
immoral or unethical purposes like the establishment of brothels or illegal drug businesses.
 Spread And Risk Diversification-Bankers should minimize the portfolio risk by putting their funds in a different well-
thought portfolio; if banks invest in one customer/sector, risk will be increased.Bankers should distribute their
investments to different customers/ sectors. So, if it faces any problem in any sector, it can be covered by the profit
of another sector.
 National Interest-Loan activities must be maintained according to the national priorities upholding the rules and
regulations of the central bank and other bank regulatory authorities.Before sanctioning the loan, the bank should
consider the economic position of the country and government policy for the allocation of Inflation. 5-year planning
of government and tax principles dominate the loan decision of the banks.
 Recovery Possibility-The possibility of recovering the loan at maturity needs to be measured before sanctioning the
loan to the borrower. Recovery must be ensured before sanction.
 Liquidity-Liquidity is a must for loan operations. The banker should consider liquidity when sanctioning the Liquidity
to meet the depositors’ requirements, disburse sanctioned loans, and payments for recurring expenses.
 Profit And Profitability-Like other businesses, the bank’s main purpose is to maximize the difference between
providing interest on a deposit and the earned interest on the loan is the main criterion for making a traditional
profit.The interest rate should be cautiously determined. Clients will leave for other banks if the bank charges a
higher rate.If the rate is lower, it will be insufficient to cover the cost of the fund. So, setting the interest is not
easy; it would be performed by efficient and active personnel.
 Business Solvency-As a profitable institution, the bank needs to maintain its long-term solvency. Banks must be able
to meet the demand for deposits.For this, the bank needs to maintain a certain amount of reserve. On the other
hand, the loan amount should be sufficient to make a profit by satisfying the borrower’s demand and meeting other
expenses.
 1.1.11 Financial Services offered by banks and FIs.
The Different types of Financial Services offered by banks and FIs are-
 Banking-The financial services sector in India is anchored by the banking sector. Numerous banks from the public,
private, foreign, regional rural, and urban/rural cooperative sectors exist throughout the nation. Individual
banking, business banking, and loans are some of the financial services provided under this segment. The Reserve
Bank of India (RBI) oversees and maintains the liquidity, capitalization, and financial stability of the banking
system.
 Professional Advisory-In India, there is a strong presence of professional financial advising service providers who
offer a variety of services to both people and businesses, including investment due diligence, M&A counselling,
valuation, real estate consulting, risk consulting, and tax consulting. Numerous service providers, from small
domestic consulting firms to huge multinational corporations, provide these services. This is one of the more
common types of areas in financial services.
 Wealth Management-According to the clients' financial objectives, risk tolerance, and time horizons, financial
services offered within this segment include managing and investing customers' wealth across a variety of financial
instruments, encompassing real estate, commodities, loans, stock, mutual funds, insurance, derivatives, and
structured goods. Any finance enthusiast must also familiarise themself with the advantages of financial risk
management.
 Mutual Funds-Providers of mutual funds offer expert investment services for funds made up of several asset
classes, usually debt and equity-linked assets. Due to their typically lower risks, tax advantages, predictable
returns, and qualities of diversification, these products are particularly popular in India. Due to its popularity as a
low-risk wealth multiplier, the mutual fund market has seen double-digit growth in assets under management over
the last five years.
 Stock Market-The stock market segment offers a variety of equity-linked investment solutions for users of the National
Stock Exchange and Bombay Stock Exchange in India. Customers' returns are based on capital appreciation, which is growth
in the equity solution's value and/or dividends, as well as payments made by businesses to their investors.
 Treasury/Debt Instruments-Investments in bonds issued by governments and commercial organisations are among the
services provided in this category (debt). At the conclusion of the investment period, the bond issuer (borrower) gives the
investor fixed payments (interest) and principal repayment. Listed bonds, non-convertible debentures, capital-gain bonds,
GoI savings bonds, tax-free bonds, etc. are some examples of the different types of instruments in this area.
 Tax/Audit Consulting-This market encompasses a broad range of financial services in the areas of tax and auditing. Based on
the clientele they serve, businesses and individuals, this service domain can be divided into: individual tax (calculating tax
obligations, submitting tax returns, receiving tax-savings advice, etc.); Business tax (Determining tax liabilities, structuring
and analysing transfer prices, registering for GST, providing tax compliance advice, etc.). Services in the auditing sector
include statutory audits, internal audits, service tax audits, tax audits, process and transaction audits, risk audits, stock
audits, etc.
 Capital Restructuring-These services, which are largely provided to businesses, include changing capital structures (debt
and equity) in order to increase profitability or address emergencies like bankruptcies, volatile markets, liquidity shortages,
or hostile takeovers. In this market, complex deals, lender negotiations, rapid M&A, and capital raising are typical examples
of financial solutions. The types of financial solutions in this segment typically include structured transactions, lender
negotiations, accelerated M&A and capital raising.
 Portfolio Management-Through portfolio managers who assess and optimise investments for customers across a wide range
of assets, this segment offers a highly specialised and tailored variety of solutions that help clients achieve their financial
goals. These services are non-discretionary and broadly targeted at HNIs.
Thank You
 UNIT 5
Lending and Monitoring
Process
2.1 KYC Policy

 loan monitoring refers to those activities lenders conduct to assess the risk of a
particular loan, once the initial underwriting steps are completed and the loan is booked.
 KYC means "Know Your Customer". It is a process by which banks obtain information
about the identity and address of the customers. This process helps to ensure that banks'
services are not misused.
 KYC process includes ID card verification, face verification, document verification
such as utility bills as proof of address, and biometric verification.
2.2 Prevention of Money Laundering Act, 2002: Offence of Money-Laundering, Obligation of Banking
Companies, Financial Institutions, and Intermediaries

 It is a known fact that money and crimes are interrelated. People commit crimes when money is
involved; simply put, such crimes are committed for economic gains. One of these offences is that
of money laundering.
 Money laundering is defined as the process by which an illegal fund, perhaps, black money,
obtained from illegal activities is disguised as legal money, which is eventually portrayed to be
white money. This is done by passing the funds through several channels (the process is discussed
in brief below). The money, thus laundered, is passed on through various phases of conversions
and transfers to achieve a sort of deceptive legality and to eventually reach a legally acceptable
institution, say for instance, a bank.
 The individuals committing the offence of money laundering want their money to move freely in
society without any threat that such money will eventually lead to the discovery of their
illegitimate activities. Not only this, but the money thus laundered helps them escape the clutches
of the police, as such funds are difficult to be confiscated by the authorities. With all such
aforementioned issues of illegal laundering of money, there was a dire need of enacting a
legislation to prevent such activities, and the Prevention of Money Laundering Act, 2002, was
enacted.
 Offence of money laundering (Section 3)
The definition of money laundering is exhaustive enough to cover most of the instances of converting black money into white.
The definition of money laundering is exhaustively covered under Section 3 of the PMLA. It says, a person is guilty of the
offence of money laundering if he/she is found to have, directly or indirectly:
 An attempt to indulge, or
 Consciously assisted, or
 With full knowledge is a party, or
 Has an involvement in one or more of the below processes or activities associated with proceeds of crime, namely:
 concealment, or
 possession, or
 acquisition, or
 use, or
 projecting as untainted property, or
 claiming as untainted property.
 In other words, any individual who has a direct or indirect involvement, or if he knowingly assists or is a part of the
activity that is connected to such a crime, including its concealment, possession, acquisition, or use, and projects or
declares it as untainted property, will be held guilty of the offence of money laundering.
Obligation of the banking companies, financial institutions and intermediaries

 Under Section 12, the financial institutions, banks and intermediaries have the following
obligations to observe:

 To maintain records of all transactions and amount as stated in the rules, irrespective of the fact
that such transactions were carried on in one go or there were series of transactions that had an
internal connection to each other when such series occur within a span of thirty days.
 To inform the director about any transaction within the allotted time.
 To verify the identity of the clients in the manner thus prescribed.
 To keep a record of all the documentation relating to identity of the clients and the beneficial
owners, along with keeping record of account files and business transactions relating to the clients.
 Further, every piece of information recorded, furnished, or verified as mentioned above must not
be revealed to the public at large. The records must be kept for a period of 5 years from the time
the transaction took place. The Central Government is given the authority to exempt any reporting
entity from reporting under Section 12.
 2.3 Securitization of Standard Assets
 Securitization is the process of transforming a group of income-producing assets into one investable security.
 Investors are paid the interest and principal payments from these securitized assets.
 Securitization increases liquidity and access to credit.
 However, the products created, asset-backed securities, have been accused of lacking transparency.
 Skeptics say securitization encourages banks and other lenders to not care about the quality of the loans that they
underwrite.
 Securitization usually happens in the following way:
1. The company holding the assets, otherwise known as the originator, gathers data on the loans or income-producing assets
that it no longer wants to service (they could be mortgages, personal loans, or something else). It then removes them from
its balance sheets and pools them into a reference portfolio.
2. The assets in the reference portfolio are sold to an entity such as a special-purpose vehicle (SPV), which turns them into a
security that the public can invest in. Each security represents a stake in the assets from the portfolio.
3. Investors buy the created securities in exchange for a specified rate of return. In most cases, the originator continues to
service the loans from the reference portfolio, collecting payments from the borrowers and then passing them on, minus a
fee, to the SPV or trustee. The generated cash flows are then paid to the investor.
Types of Securitization

Securitization is generally broken down into three types:

 Collateralized debt obligation (CDO): Holding a stake in a bunch of loans backed by

collateral gives the investor peace of mind, as it means there is something of value that
can be seized and sold off should the borrower default on payments.
 Pass-through securitization: A servicing intermediary collects the monthly payments
from issuers, deducts a fee, and then “passes through” what’s left to the holders of the
securities.
 Pay-through debt instrument: Under this structure, the investors don’t directly own
the underlying assets. This means that the issuer can change the cash flows and deviate
from what the underlying assets actually pay out.
Common Asset Types of Securitization?
Anything that generates an income stream can theoretically be securitized into a tradable, fungible item of monetary
value. Certain types of assets are more commonly turned into ABS, though. They include:
 Mortgages- Securitization, as we know it today, began with mortgages. A cluster of different home loans can be
combined into one large portfolio, separated into tranches, and sold off to investors as a type of bond-like product.
Buyers of these investments, otherwise known as mortgage-backed securities (MBS), pay whatever the going rate is
and, in return, get the interest and principal payments from the pool of mortgages in which they hold a stake.
 Auto Loans-Another common category of ABS is car financing. Similar to mortgages, auto loans are bundled, split
into various groups with different risk profiles, and sold as securities to investors. Owners of these securities then
inherit any payments attached to these assets, including monthly interest payments and principal payments.
 Credit Card Receivables-It’s also possible to buy a stake in money due on credit card balances. These types of ABS
don’t have fixed payment amounts, and new loans and changes can be added to the pool as balances are paid off.
Returns come in the form of interest, annual fees, and principal payments.
 Student Loans-The money that students borrow to go to college is commonly packaged into ABS. It’s possible to
invest in either student loans provided by the government and guaranteed by the U.S. Department of Education or,
for a slightly higher risk and potentially larger return, student loans from private sources, such as banks.
 Drawbacks of Securitization
For Investors
 When investing, guarantees are hard to come by. Netting decent returns usually requires taking on risk, and
things don’t always go according to plan. For example, if a debt is backed by collateral, you might think
there’s no way to lose. That’s not entirely true, though. It is possible that the asset used as collateral falls in
value or becomes difficult to offload.
 Moreover, with ABS, there’s always the risk that the borrowers repay debts early and interest payments fall
to the point where the investor earns less than inflation or what they could earn elsewhere.
For the Economy
 Several studies have concluded that securitization can lead to poor lending practices and, subsequently, lots
of people defaulting on their debts.
 The general view is that if banks can sell the loans they write and move them off their books without much
scrutiny, then they care less about the quality of those loans. Accepting more applications means making
more money. And if it turns out that the applicant can’t pay back what is owed, then someone else—the
investor—will pick up the tab anyway.
 This was a common issue in the run-up to the 2007–08 financial crisis. At one point, lots of unaffordable
mortgages were being doled out and then sold on to investors, who had no idea what they were holding.
2.4 Non-Performing Assets (NPA): Definition of NPA, Provisioning of Asset Category, Reporting for
NPA-effects of NPA on Profitability

 A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue
for a period of 90 days.
 Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.
1. Substandard assets: Assets which has remained NPA for a period less than or equal to 12 months.
2. Doubtful assets: An asset would be classified as doubtful if it has remained in the substandard category for a period
of 12 months.
3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little value that its continuance as a
bankable asset is
not warranted, although there may be some salvage or recovery value.”
 Non performing assets (NPAs) are a significant issue for the banking sector in India, affecting both public and
private sector banks. The primary reasons for NPAs are economic slowdown, fraud and wilful default, political
interference, inadequate credit appraisal, ineffective recovery mechanisms, and poor risk management. The level of
NPAs is higher in public sector banks than in private sector banks.
Provisioning of Asset Category
 Provision for Non Performing Assets means the banks keep aside a certain amount from
their profits in a particular quarter for NPAs. This is because this asset can turn into
losses in the future. Thus, by this method, banks can maintain a healthy book of
accounts by provisioning for bad assets. Moreover, banks make provisions based on the
NPA category, as mentioned above. Also, the provisions depend on the type of bank.
For instance, Tier-I and Tier-II banks have different provisioning norms.
 One can understand the NPA provisions by looking at the bank’s auditor’s report. As
per RBI, banks have to make their NPA numbers public from time to time. There are
two metrics that help to understand the NPA situation of the bank.
 Gross Non Performing Asset (GNPA): Gross Non Performing Asset is the absolute
amount that shows the total value of loans for a bank that are due within the 90 days
period in a particular quarter or financial year.
 Net Non Performing Asset (NNPA): Net Non Performing Asset shows the exact value
of NPAs after the bank makes specific provisions for it. It is arrived at by subtracting
the doubtful and unpaid assets from the gross NPA.
Reporting for NPA

 Nonperforming assets (NPAs) are recorded on a bank's balance sheet after a prolonged
period of non-payment by the borrower. NPAs place financial burden on the lender; a
significant number of NPAs over a period of time may indicate to regulators that the
financial fitness of the bank is in jeopardy.
 Effects of NPA on Profitability

 Increases in the level of NPAs adversely affect the working style and long-term stability
of public and private sector banks in the economy. Social Implications: NPAs have a
negative influence on the profitability of the banks as well as on the economic growth
of the country too.
 Rising NPAs undermine the bank’s image, making the public lose trust in banks. The
depositors may withdraw their deposits causing liquidity issues for banks.
 The lack of liquidity prevents banks from lending for other productive activities in the
economy. The curb in investments may slow down the economy leading to
unemployment, inflation, bear market, etc.
 To maintain their profit margins, banks will be forced to increase interest rates which
again hurt the economy.
COMPUTE THE AMOUNT OF PROVISIONS TO BE MADE IN THE P/L A/C. OF
A COMMERCIAL BANK FOR THE YEAR ENDED 31.3.2020:

Assets: ₹ in lakhs

i) Standard Assets (value of security ₹6000 lakhs) 7000

ii) Sub- standard Assets (value of security ₹2500 lakhs) 3000
iii) Doubtful Assets
a) For less than one year
(realizable value of security ₹600 lakhs) 1000
b) For more than one year but less than three years 500
(realizable value of security ₹300 lakhs)
c) For more than three years (no security) 400
iv) Loss Assets 100
 ASSETS

SUB STANDARD
STANDARD LOSS
2500 X 15% + DOUBTFUL
7000 X 0.4% 100 X 100%
500 X 25% ***
=28 =100
=375+125= 500
CALCULATION FOR PROVISIONING OF DOUBTFUL ASSETS:
A) 600 LAKHS SECURED- LESS THAN A YEAR- 600 X 25%= 150
B) 300 LAKHS SECURED- LESS THAN THREE YEARS- 300 X 40%=120
C) UNSECURED PORTION OF (A)- 400 + UNSECURED PORTION OF (B)- 200 +
UNSECURED PORTION OF (C)- 400 = 1000.
SO: 1000 X 100%= 1000

ANSWER: 28+500+100+150+120+1000= RS1898

LAKHS
COMPUTE THE AMOUNT OF PROVISIONS TO BE MADE IN
THE P/L A/C. OF A COMMERCIAL BANK FOR THE YEAR
ENDED 31.3.2020 ASSUMING THAT ALL THE ASSETS ARE
FULLY SECURED:

ASSETS: ₹ in lakhs

i) Standard Assets 5000

ii) Sub- standard Assets 4000
iii) Doubtful Assets
a) For one year 800
b) For three years 600
c) For more than three years 300
iv) Loss Assets 500
STANDARD ASSETS : 5000 X 0.4% = ₹ 20 LAKHS

SUB STANDARD ASSETS : 4000 X 15% = ₹ 600 LAKHS

DOUBTFUL ASSETS : 800 X 25% + 600 X 40% + 300 X 100% = ₹ 740 LAKHS

LOSS ASSETS : 500X 100% = ₹ 500 LAKHS

TOTAL= 20+600+740+500= RS 1860 LAKHS

2.5 Credit Appraisal Process

 Credit appraisal refers to assessing a particular loan application or proposal thoroughly to gauge
the repayment ability of the loan applicant. A lender conducts a credit appraisal chiefly to make
certain that the bank gets back the money that it lends to its customers.
 Whether one applies individually or as a corporate entity, a lender always conducts a detailed and
systematic credit appraisal process. The credit appraisal process before giving a loan to entities is
comprehensive as it appraises or evaluates management, market, technical, and financial elements.
 If a borrower has high creditworthiness, there is a high probability that his or her loan application
will be accepted by the bank. A credit appraisal is done to avoid the risk of default on loans.
 In the context of loans and credit, creditworthiness broadly refers to the financial character of a
particular individual. When a person applies for a loan, the lender will check this financial
character to get an idea of how the applicant treats his or her debts.
 The lender will check the borrower’s credit history. This will comprise checking his or her
repayment behaviour, time taken to pay different equated monthly installments (EMIs), how a
borrower has treated his or her different debt obligations, etc.
Factors Evaluated During a Credit Appraisal Process

 A lender’s credit appraisal process will typically check and evaluate the following important factors like-
Income,Age,Repayment ability,Work experience,Present and former loans,Nature of employment,Other monthly
expenses,Future liabilities,Previous loan records,Tax history,Financing pattern,Assets owned etc.

Credit Appraisal for Project Financing for Organisations

 If a lender is approached by a company for project financing or a loan, then the lender will need to consider
financial, technical, commercial, market, and managerial aspects of the organisation.
 Under credit appraisal, to evaluate financial aspects, the bank will have to check the organisation’s costs, expenses,
and estimated revenues in order to understand if the company will be able to repay the loan without any trouble.
 To assess technical aspects of a company, the bank will have to evaluate the nature of the business and the industry
or sector of the borrower. The lender will have to observe the company’s raw materials, capital, labour,
transportation, selling plans, etc.
 To evaluate the market of the borrower, the bank will have to evaluate its demand and supply. If the demand-supply
gap is high, then it is great news for the lender. This is because it indicates that the company will enjoy good sales
and hence, can repay the loan efficiently.
 The bank also needs to assess the managerial aspects of an organisation before giving a loan to them. The bank
should understand the goals, plans, and commitment of the company to the particular project. The organisation’s
management style and ways of handling subordinates should be observed by the lender.
2.6 Credit Recovery and Monitoring
 When a borrower is unable to repay a loan, the lending institution initiates a loan recovery process. RBI guidelines for loan
recovery ensure that the process is beneficial to the lender while also respecting the borrower's legal rights and obligations.When
a customer fails to make repayments on a loan, the bank takes action. Credit recovery may include:
a) Referring the matter to a specialist debt recovery team with the bank
b) An external debt collection agency employed on behalf of the bank.
c) Sell of property over which the bank holds security
d) Seeking a judgement from the courts to enforce the debts.
 Timely recovery of bank loans is important for various reasons and from variousperspectives:
 From the borrower's angle, the longer the delay in settlement, the outstanding liabilities of the borrower increase; the likely
penalties can also increase withtime.
 From the bank's perspective, the longer the delay in recovery, they lose the chance to earn income in alternative investments, the
safety and collateral maylose value and hence may incur financial loss also. More importantly, the delays in recovery proceeds
can result in credit crunch within the bank and consequentfailure of the bank.
 From the society's angle, the productive assets are delayed, not producing value,not creating employment and income.
 From the government's perspective, if such loan losses cascade and switch intosystemic risk and endanger the financial and
economic stability, the tax payers'money will need to be spent for rescuing these banks, otherwise the depositors,meaning the
standard, general public will need to bear losses. Thus, from verymany perspectives, timely recovery of loans is critical for the
borrower, the bank,the society and therefore the government.
 Credit Monitoring
 Monitoring of the credit portfolio and individual accounts is essential in order to maintain the quality of the credit
portfolio of the bank in a sound condition. In line with the international practices, it is imperative for the banks to
implement prudential norms of income recognition and asset classification of the individual borrowing accounts in the
credit portfolio.On the basis of the record of recovery of interest and other payables in the borrowal account, the banks
classify the accounts as Standard, Sub-standard, Doubtful and Loss Assets. In the event of the borrower not servicing the
interest/installment and other payables for a period of maximum 90 days in a term loan account or an overdraft/cash
credit and other borrowal accounts remaining out of order for a period of more than 90 days, the account is classified as
Sub-standard.Thereafter, depending on the period of default by the borrower and availability of realisable security the
relative account is downgraded to doubtful or loss assets. The borrowal accounts in this situation are termed as Non-
Performing Assets (NPA).
The objectives of credit monitoring are to:
 (a) Ensure initial delivery or disbursement of credit after complying with the laid down procedures and conditions with
due precautions
 (b) Ensure that the credit assets remain in standard category
 (c) Endeavour up-gradation of identified weak accounts/watch list accounts and
 (d) Take necessary steps to prevent slippage of the accounts to sub-standard and NPA category
 2.7 SARFAESI Act, 2002: Asset Reconstruction Company- Establishment, functions
 The securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act
(SARFAESI Act) allows banks and other financial institutions for auctioning commercial or residential
properties to recover a loan when a borrower fails to repay the loan amount. Thus, the SARFAESI Act,
2002 enables banks to reduce their non-performing assets through recovery methods and reconstruction.
 SARFAESI Act is a law that allows Indian banks and financial institutions to sell or auction the
assets/properties of credit defaulters without any intervention from the courts.
 Under the SARFAESI Act, a Central Registry of Securitisation Asset Reconstruction and Security Interest
(CERSAI) is also constituted. CERSAI is a completely online central registry of security interests. CERSAI
was created to check the frauds, where multiple loans are taken from different banks using teh same assets
as collateral.
 The latest amendment of Sarfaesi Act, 2002 states that “an act of regulating securitization and
reconstruction of various financial assets and enforcement of security interest and in providing for a central
database of security interests that are specifically created on the rights of property, and for those matters
connected therewith or incidental thereto.”
 The major objectives of the Sarfaesi act 2002 are as follows:
 Rapid or efficient recovery of the NPAs - non-performing assets of the financial institutions and banks.
 Allows financial institutions and banks to auction the residential and commercial properties when a
borrower becomes a defaulter and does not repay his/her loan.
 Asset Reconstruction Company- Establishment, functions

 Asset reconstruction companies (ARCs) is a type of finance company in India. They

were formed as part of steps taken by the Government to clean up the balance sheets of
banks and financial institutions and help revive the credit and investment cycle in India.
The ARC industry was born out of the Recapitalization and Financial Services Industry
Development Act 2002. The Act gave an opportunity to banks, insurance companies,
and financial institutions that have been into losses for some time, or are facing
temporary capital problems.

 Asset Reconstruction Company is a new concept in the Indian financial system. The
company has been formed by pooling of non-performing assets (NPAs) of various
Banks/Financial Institutions. The ARC has to be incorporated as a non-banking finance
company (NBFC). It can be set up by Indian or foreign individuals, companies,
corporations, and Public Sector Undertakings.
Functions of Asset Reconstruction Company

 Acquisition of financial assets (as defined u/s 2(L) of SARFAESI Act, 2002)
 Change or takeover of Management / Sale or Lease of Business of the Borrower
 Rescheduling of Debts
 Enforcement of Security Interest (as per section 13(4) of SARFAESI Act, 2002)
 Settlement of dues payable by the borrower
2.8 Regulatory mechanism, NCLT, Establishment, functions

 NCLT was formed based on the recommendations of the Justice Eradi Committee
that was related to insolvency and winding up of companies in India.
 As of now, the Ministry of Corporate Affairs has 15 NCLT benches.
 Each Bench is headed by a President, 16 judicial members, and 9 technical
members. The current and the first President of the NCLT is Justice MM Kumar.
 The National Company Law Appellate Tribunal (NCLAT) is a tribunal which was
formed by the government under Section 410 of the Companies Act, 2013. NCLAT
is responsible for hearing appeals from the orders of the National Company Law
Tribunal.
 Decisions taken by the NCLT can be appealed to the National Company Law
Appellate Tribunal (NCLAT). The decisions of the NCLAT can be appealed to the
Supreme Court on a point of law.
NCLT-Functions

 All proceedings under the Companies Act such as arbitration, arrangements,

compromise, reconstruction, and winding up of the company will be disposed of by
the Tribunal.
 The NCLT is also the Adjudicating Authority for insolvency proceedings under the
Insolvency and Bankruptcy Code, 2016.
 In the above-mentioned subjects, no civil court will have jurisdiction.
 The NCLT has the authority to dispose of cases pending before the Board for
Industrial and Financial Reconstruction (BIFR), as well as, those pending under the
Sick Industrial Companies (Special Provisions) Act, 1985.
 Also to take up those cases pending before the Appellate Authority for Industrial
and Financial Reconstruction.
 It can also take up cases relating to the oppression and mismanagement of a
company.
Performance Measurement
and Basel Implementation
Roadmap
• Balance Sheet and Profit and Loss Account for the banks and FIs
• Asset-Liability Management
• CAMELS Model
• Risk-Based Supervision
• RBI Guidelines to Risk Management
• Basel Implementation in Indian Banks( Basel I, Basel II, Basel III)
Difference between Co.
& Bank B/S
Schedules in a Bank Balance Sheet
These indicate additional information as to how the balances are
calculated. Some of the main schedule in a bank balance sheet are:
• Capital
• Reserves and Surpluses
• Deposits
• Borrowings
• Other liabilities and provisions
• Cash on hand and Balance with Reserve Bank
• Investments
Asset-Liability Management
• Asset/liability management is the process of managing the use of
assets and cash flows to reduce the firm’s risk of loss from not paying
a liability on time. Well-managed assets and liabilities increase
business profits.
• A bank must pay interest on deposits and also charge a rate of
interest on loans. To manage these two variables, bankers track
the net interest margin or the difference between the interest paid on
deposits and interest earned on loans.
Asset-Liability Committee?
• An asset-liability committee (ALCO), also known as surplus management, is a supervisory
group that coordinates the management of assets and liabilities with a goal of earning
adequate returns. By managing a company's assets and liabilities, executives are able to
influence net earnings, which may translate into increased stock prices.
• One of the ALCO’s goals is ensuring adequate liquidity while managing the bank’s spread
between the interest income and interest expense.
• An ALCO at the board or management level provides important management
information systems (MIS) and oversight for effectively evaluating on- and off-balance-
sheet risk for an institution. Members incorporate interest rate risk and liquidity
consideration into a bank’s operating model.
• The bank's ALCO meetings are typically held every two weeks. Additional meetings may
be scheduled as needed. The ALCO has the authority to resolve matters submitted for
consideration if more than half of the members with the right to vote are present at the
committee meeting. A resolution is passed when more than half the members with the
right to vote are present and vote in favor of the resolution. ALCO’s resolutions are
binding on all bank employees.
CAMELS Model
• CAMELS is a recognized international rating system that bank supervisory authorities use in order to
rate financial institutions according to six factors represented by its acronym: capital adequacy, asset quality,
management, earnings, liquidity, and sensitivity.
• Supervisory authorities assign each bank a score on a scale for each factor. A rating of 1 is considered the
best, and a rating of 5 is considered the worst.
• Capital adequacy is a measure of a bank's ability to continue operations in the event its debtors do not repay
their loans.
• Asset quality is an assessment of a bank's risk based on its investment and loan portfolios and other assets.
• Management assessment determines whether an institution is able to properly react to financial stress.
• A bank's ability to produce earnings to be able to sustain its activities, expand, and remain
competitive is a key factor in rating its continued viability.
• To assess a bank's liquidity, examiners look at interest rate risk sensitivity, availability of assets that can easily
be converted to cash, dependence on short-term volatile financial resources, and asset and liability
management technical competence.
• Sensitivity covers how particular risk exposures can affect institutions.
Risk-Based Supervision
Risk Based Supervision(RBS) is defined as ‘a structured process which
identifies the most critical risks that face each bank and, through a
focused review by the supervisor, assesses the bank’s management of
those risks along with its financial vulnerability to potential adverse
experiences’

• https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=439
RBI Guidelines to Risk Management
• https://rbidocs.rbi.org.in/rdocs/notification/PDFs/9492.pdf
Basel I
Basel I, also known as the Basel Capital Accord, was formed in 1988. It was created
in response to the growing number of international banks and the increasing
integration and interdependence of financial markets. Regulators in several
countries were concerned that international banks were not carrying enough cash
reserves. Since international financial markets were deeply integrated at that time,
the failure of one large bank could cause a crisis in multiple countries.
According to Basel I, assets were classified into four categories based on risk
weights:
• 0% for risk-free assets (cash, treasury bonds)
• 20% for loans to other banks or securities with the highest credit rating
• 50% for residential mortgages
• 100% for corporate debt
Banks with a significant international presence were required to hold 8% of their
risk-weighted assets as cash reserves. International banks were guided to allocate
capital to lower-risk investments. Banks were also given incentives for investing
in sovereign debt and residential mortgages in preference to corporate debt.
Basel II
• Basel II, an extension of Basel I, was introduced in 2004. Basel II included
new regulatory additions and was centred around improving three key
issues – minimum capital requirements, supervisory mechanisms and
transparency, and market discipline.
• Basel II created a more comprehensive risk management framework. It did
so by creating standardized measures for credit, operational, and market
risk. It was mandatory for banks to use these measures to determine their
minimum capital requirements.
• A key limitation of Basel I was that the minimum capital requirements were
determined by looking at credit risk only. It provided a partial risk
management system, as both operational and market risks were ignored.
• Basel II created standardized measures for measuring operational risk. It
also focused on market values, instead of book values, when looking at
credit exposure. Additionally, it strengthened supervisory mechanisms and
market transparency by developing disclosure requirements to oversee
regulations. Finally, it ensured that market participants obtained better
access to information.
Basel III
• The Global Financial Crisis of 2008 exposed the weaknesses of the
international financial system and led to the creation of Basel III.
• Basel III identified the key reasons that caused the financial crisis. They
include poor corporate governance and liquidity management, over-
levered capital structures due to lack of regulatory restrictions, and
misaligned incentives in Basel I and II.
• Basel III strengthened the minimum capital requirements outlined in Basel I
and II. In addition, it introduced various capital, leverage, and liquidity ratio
requirements.
• Basel III included new capital reserve requirements and countercyclical
measures to increase reserves in periods of credit expansion and to relax
requirements during periods of reduced lending. Under the new guideline,
banks were categorized into different groups based on their size and overall
importance to the economy. Larger banks were subjected to higher reserve
requirements due to their greater importance to the economy.