Module 1: Overview of Financial System

➢ Financial Market:

A Financial Market is a term meant for a business setup where different types of bonds and
securities trade are done at lower rates of transaction. It includes different kinds of financial
securities like bonds, shares, derivatives, and forex Markets, to name a few. To ensure that a
capitalist economy functions well, the Financial Market is very necessary as it helps in resource
allocation and creates liquidity for Businesses. The Financial Market ensures that the flow of
capital between investing and collecting parties is mobilized properly.

Understanding Financial Markets and Institutions:

Financial Markets help in smooth functioning of economies by allocating resources while also
creating liquidity for Business enterprises. Different types of financial holdings can be traded
in these Markets. A vital importance of Financial Markets is that it enforces informational
transparency to set efficient and appropriate Market prices.

Notably, macroeconomic factors like tax and other aspects often influence the Market values
of financial holdings which are not indicative of their intrinsic value. There are various types
of Financial Markets, the New York Stock Exchange is one of the biggest stock Markets on
this globe and this Financial Market records trade worth trillions of dollars everyday.

As an institution, Financial Markets aid in the flow of investments and savings. In turn, this
facilitates the growth of funds, which goes on to help in production of goods and services.
Another significance of Financial Markets is that it contributes to the demands of receivers,
investors and even that of a country’s economy. Different institutions which offer financial
holdings like mutual funds, insurances, pension, etc. combined with that of Financial Markets
which offer bonds and shares contribute to a nation’s economic growth.

Types of Financial Markets:

• Stock Markets- In this kind of Market, an organization makes a listing of its shares
which traders and investors buy and sell. Stock Marketing, through the usage of IPO
(Initial Public Offering), allows companies to increase their capital.

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 • Over The Counter Markets- It is a kind of decentralized Market, without fixed
geographical locations. Here, the trade is directly done between two parties instead of
an agent/broker. Most stock trading is done through exchanges.

• Bond Markets- The kind of securities that allow investors to borrow money from the
lender for a certain period of time, with a fixed interest rate is known as bonds. Bonds
are issued to aid Financial projects by different state and central government bodies,
municipal corporations, etc. Bonds are usually issued as bills and notes.

• Money Markets- This kind of Market trades in holdings with higher liquidities and is
relatively safer. In addition, the interest return is also cheaper. The capacity of trading
between organizations and traders is quite huge if viewed on the wholesale level.

• Derivative Markets- This is a kind of Market where a contract is signed between two
or more parties depending upon the Financial securities or assets. The worth of the
derivatives is derived from the primary source of security to which it is linked, thus
making it “secondary security”.

• Forex Market- Foreign Exchange Market, also called the Forex Market, is the kind of
Market that basically deals with currencies. As cash is the most liquid asset, Forex
Market has the highest liquidity of all Markets around the globe. Banks, commercial
organizations, and investment management firms comprise the majority of the Forex
Market.

Functions of Financial Market:

Financial Markets helps in mobilizing savings, determining and settling the prices of various
securities, providing liquidity to assets, and easing access to all types of traders. While studying
the functions of Financial Markets, students must take note of these aspects discussed below:

• Mobilising Funds: Among the diverse types of functions served by Financial Markets,
one of the most crucial functions is that of mobilisation of savings. Financial Markets
also utilise this savings investing it for productive use, thereby contributing to capital
and economic growth.

• Determination of Prices: Another vital function served by Financial Markets is that of

pricing different securities. Essentially, demand and supply in Financial Markets along
with its interaction between investors determine these pricing.

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 • Liquidity of Financial Holdings: Tradable assets must be provided with liquidity for
its smooth functioning and flow. This is another role of the Financial Market which
goes on to help in the functioning of a capitalist economy. It not only allows investors
to easily sell their securities and assets, but also allows them to easily convert them into
cash money.

• Ease of Access: Financial Markets also offer efficient trading since they bring traders
to the same Market. As a result, relevant parties do not have to spend any resource, be
it capital or time, to find interest buyers or sellers. Additionally, it also provides
necessary information related to trading, which also reduces the effort that interested
parties must put in to complete their trades.

Students must note, the importance of the Financial Market is undeniable in this global
economy. However, these Markets do not necessarily need a physical location and trading can
often be conducted online or via phone.

➢ Growth and Development of Financial Market and Financial reforms in India:

Financial sector plays a crucial role in the accumulation of capital and the production of goods
and services. In many developing nations, limited financial markets, instruments, and financial
institutions, as well as poorly defined legal systems, may make it costlier to raise capital and
may lower the return on savings or investments. They also help to facilitate the international
flow of funds between countries. The banking sector and the capital markets are assumed to be
the primary constituents of the financial sector. India that has taken several reform measures
and continues to do so to enhance the role of financial sector in the economic development and
better regulation so that markets are efficient.

The appointment of the Narasimhan Committee in 1991 set the guidelines that provided several
measures for reforms in the banking sector and the capital market. The prominent reforms in
the banking sector resulted in the deregulation of interest rates particularly, in term deposits
and reduction in the cash reserve ratio (CRR) from 25 to 6% and statutory liquidity ratio (SLR)
from 40 to 25% from the 1990s to the mid 2000s. To enhance competition, a number of foreign
and private banks were allowed to perform commercial banking and also foreign direct
investment was allowed up to 74%. The banks were also allowed to access the capital markets
to raise additional funds.

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Another important feature of the reforms is that, since 1991, a number of foreign banks and
private entrepreneurs are invited to commence banking operation in India. To enhance
competition, foreign direct investment up to 74 percent of ownership has been allowed in
private banks and up to 20 percent in nationalized banks. In addition, the limit for foreign
institutional investment in private banks is fixed at 49 percent. The numbers of foreign and
private banks operating in India have increased from 21 and 23 in 1991 to 33 and 30 in 2004,
respectively. In the liberalized regime, government equity in banks has been reduced and strong
banks have been allowed to access the capital market for raising additional capital

The reforms in the capital markets involved removal of prior approval of the government to
access capital market, an apex regulator Securities and Exchange Board of India (SEBI) was
formed in 1992 which would focus on regulating the capital markets and set the rules for it.
Foreign institutional investors were allowed to invest in India and the Indian firms were
allowed to access foreign markets to raise capital. Electronic trading was introduced with the
setting up of a competitive exchange called as the National Stock Exchange (NSE) alongside
the older Bombay Stock Exchange (BSE). The Indian stock markets till 1991 have remained
stagnant due to the rigid economic controls. After liberalization process, the Indian securities
market witnessed a flurry of Initial Public Offerings (IPOs). The market saw many new
companies spanning across different industry segments and business to access the capital
markets and register themselves in BSE/NSE.

Ahead this backdrop, it is interesting and relevant to understand the linkages between the
banking sector, capital markets, and economic growth in India. The findings therefore lend
weak support to the theoretical prediction that the stock market development would play an
important role in enhancing economic growth in India. Banking system reform, on the other
hand, appears to have promoted economic growth significantly. The results lend support to the
view that stock market development may not speed up economic growth process in the
developing countries. These results imply that in India stock markets are no substitutes for the
Banking sector, unlike in some emerging economies like Chile and Mexico. The further
implication that liberalization of the foreign portfolio flows in the Indian stock market since
1991 has not interacted with the real sector of the economy effectively. Rather, the volatility
of the foreign portfolio flows created some macroeconomic management problems for the
policymakers.

➢ Capital Market and its instrument:

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Capital markets commonly referred to as the stock markets have been in existence for centuries.
The British East India Company was the first company to invite the public to buy shares in the
company. Since then, over the years, markets have gone through tremendous changes. The way
the market works, the asset classes, the framework of the exchanges, and everything has been
evolving over time. The changes have been brought in gradually according to the convenience
of the investors and market participants. Also in order to prevent market participants to take
undue advantage of the information in order to gain monetary benefits, the Securities
Regulatory bodies over the world have surveillance methods for mitigation of such acts.

Types of Capital Market:

The capital market is mainly categorized into:

▪ Primary Market: The primary market mainly deals with new securities that are issued
in the stock market for the first time. Thus, it is also known as the new issue market.
The main function of the primary market is to facilitate the transfer of the newly issued
shared from the companies to the public. The main investors in this type of market are
financial institutions, banks, HNIs, etc.

▪ Secondary Market: It is the market where the trading of the securities actually takes
place, thus it is also referred to as the stock market. Here the buying and selling of
securities take place, The existing investors sell the securities and new investors by the
securities.

Features of Capital Market:

Here are the features of the Capital Market:

1. Serves as a link between Savers and Investment Opportunities:

The capital market serves as a crucial link between the saving and investment process as it
transfers money from savers to entrepreneurial borrowers.

2. Long term Investment:

It helps the investors to invest their hard-earned money in long-term investments.

3. Helps in Capital formation:

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The capital market offers opportunities for those investors who have a surplus amount of
money and want to park their money in some type of investment and also take the benefit of
the power of compounding.

4. Helps Intermediaries:

While transferring shares and money from one investor to another, it takes help from
intermediaries like brokers, banks, etc. thus helping them in conducting their business.

5. Rules and Regulations:

The capital markets operate under the regulation and rules of the Government thus making it a
safe place to trade.

Instruments of capital market:

Shares: The ownership capital of a company is divided into a number of indivisible units of a
fixed amount. These units are known as shares As per Section 43 of the Companies A 2013,
the share capital of a company limited by shares shall be of two kinds, namely Equity share
capital and Preference share capital.

Equity Shares

• The purpose of equity instruments issued by corporations is to raise funds for the firms.

• It is equity ownership that allows the holders of this stock to enjoy voting rights on
corporate matters.

• However, in case the company suffers heavy losses and ends up bankrupt, the holders
of the common stock are the last ones to get their money back after creditors,
bondholders, and holders of preferred stock.

Preference shares

• Preference shares are also a type of shares issued by a company that provides a
predetermined dividend to the holder unlike dividend to equity share holder where
shareholder gets dividend as per the profit earned.

• Although dividend on the preferred stock are larger but they do not get voting power
on the company matters.

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 • In case of liquidation of company, preference shareholders get to redeem their shares
before the holders of the common stock.

Sweat equity shares

• Sweat equity shares are equity shares issued by a company to its employees or directors
at a discount, or as a consideration for providing know-how or a similar value to the
company.

• Sweat equity is a form of compensation by the business to their owners and employees.
It is recognition of a partner's contribution to a project in the form of effort while
financial equity is the contribution in the form of capital.

Debentures: A debenture is a long-term debt instrument used by governments and large

companies to obtain funds. It is a certificate of agreement of loans which is given under the
company's stamp and carries an undertaking that the debenture holder will get a fixed return
(fixed on the basis of interest rates) and the principal amount whenever the debenture matures.
In contrast to equity capital, which is a variable income security, the debentures are fixed
income (i.e. in respect of interest) security with no voting rights. Debentures are generally
freely transferrable by the debenture holder.

Bonds: Bonds are debt instrument, that are issued by companies and government. Major issuers
of bonds are governments (Treasury bonds in US, gilts in the UK, Bunds in Germany) and
firms, which issue corporate bonds. Some corporate bonds are secured against assets of the
company that issued them, whereas other bonds are unsecured. By purchasing a bond, an
investor lends money for a fixed period of time at a predetermined interest rate. During this
period of time, investor receive a regular payment of interest semi-annually or annually. Issuing
a bond increase the debt burden of the bond issuer because contractual interest payments must
be paid to the borrowers.

➢ Money Market and its Instruments:

The term ‘Money Market’, according to the Reserve Bank of India, is used to define a market
where short-term financial assets are traded. These assets are a near substitute for money and
they aid in the money exchange carried out in the primary and secondary market. So,
essentially, the money market is an apparatus which facilitates the lending and borrowing of
short-term funds, which are usually for a duration of under a year. Short maturity period and

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high liquidity are two characteristic features of the instruments which are traded in the money
market. Institutions like commercial banks, non-banking finance corporations (NBFCs) and
acceptance houses are the components which make up the money market.

Types Of Money Market Instruments:

Treasury Bills: Treasury bills are issued by the Central government at a lesser price than their
face value. The interest earned by the buyer will be the difference of the maturity value of the
instrument and the buying price of the bill, which is decided with the help of bidding done via
auctions. Currently, there are 3 types of treasury bills issued by the Government of India via
auctions, which are 91-day, 182-day and 364-day treasury bills.

Certificate of Deposits: A Certificate of Deposit or CD, functions as a deposit receipt for

money which is deposited with a financial organization or bank. However, a Certificate of
Deposit is different from a Fixed Deposit Receipt.

Commercial Papers: Commercial Papers are can be compared to an unsecured short-term

promissory note which is issued by highly rated companies with the purpose of raising capital
to meet requirements directly from the market. CPs usually feature a fixed maturity period
which can range anywhere from 1 day up to 270 days.

Banker's Acceptance: Banker's Acceptance or BA is basically a document promising future

payment which is guaranteed by a commercial bank. Similar to a treasury bill, Banker’s
Acceptance is often used in money market funds and specifies the details of the repayment like
the amount to be repaid, date of repayment and the details of the individual to which the
repayment is due. Banker’s Acceptance features maturity periods ranging between 30 days up
to 180 days.

Repurchase Agreements: Repurchase Agreements, also known as Reverse Repo or simply as

Repo, loans of a short duration which are agreed upon by buyers and sellers for the purpose of
selling and repurchasing. These transactions can only be carried out between RBI approved
parties Repo / Reverse Repo transactions can be done only between the parties approved by
RBI.

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Basis Capital Market Money Market
Participants The participants in the capital market are Participation in the money market is by and
financial institutions, banks, corporate entities, large undertaken by institutional participants
foreign investors and ordinary retail investors such as the RBI, banks, financial institutions
from members of the public. and finance companies.
Instruments The main instruments traded in the capital The main instruments traded in the money
market are – equity shares, debentures, bonds, market are short term debt instruments such as
preference shares etc. T-bills, trade bills reports, commercial paper
and certificates of deposit.
Duration The capital market deals in medium- and long- Money market instruments have a maximum
term securities such as equity shares and tenure of one year, and may even be issued for
debentures. a single day.
Liquidity Capital market securities are considered liquid Money market instruments on the other hand,
investments because they are marketable on enjoy a higher degree of liquidity as there is
the stock exchanges. However, a share may formal arrangement for this. The Discount
not be actively traded, i.e. it may not easily Finance House of India (DFHI) has been
find a buyer established for the specific objective of
providing a ready market for money market
instruments.
Safety Capital market instruments are riskier both But the money market is generally much safer
with respect to returns and principal with a minimum risk of default. This is due to
repayment. Issuing companies may fail to the shorter duration of investing and also to
perform as per projections and promoters may financial soundness of the issuers, which
defraud investors. primarily are the government, banks and
highly rated companies.
Expected The investment in capital markets generally Because Money market is for short duration,
return yield a higher return for investors than the it doesn’t provide high return on investment.
money markets. The possibility of earnings is
higher if the securities are held for a longer
duration.

Module 2: New Issue Market/ Primary Market

➢ Primary Market:

In a primary market, securities are created for the first time for investors to purchase. New
securities are issued in this market through a stock exchange, enabling the government as well

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as companies to raise capital. 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 new
issue is determined by a concerned underwriter, which may or may not be a financial
institution. An underwriter also facilitates and monitors the new issue offering. Investors
purchase the newly issued securities in the primary market. Such a market is regulated by the
Securities and Exchange Board of India (SEBI). 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 includes notes, bills, government
bonds or corporate bonds as well as stocks of companies.

Functions of Primary Market:

The functions of such a market are manifold –

1. New issue offer: The primary market organises offer of a new issue which had not been
traded on any other exchange earlier. Due to this reason, it is also called a New Issue
Market. Organising new issue offers involves a detailed assessment of project viability,
among other factors. The financial arrangements for the purpose include considerations of
promoters’ equity, liquidity ratio, debt-equity ratio and requirement of foreign exchange.
2. Underwriting services: Underwriting is an essential aspect while offering a new issue. An
underwriter’s role in a primary marketplace includes purchasing unsold shares if it cannot
manage to sell the required number of shares to the public. A financial institution may act
as an underwriter, earning a commission on underwriting. Investors rely on underwriters
for determining whether undertaking the risk would be worth its returns. It may so thus
happen that an underwriter ends up buying all the IPO issue, and subsequently selling it to
investors.
3. Distribution of new issue: A new issue is also distributed in a primary marketing sphere.
Such distribution is initiated with a new prospectus issue. It invites the public at large to
buy a new issue and provides detailed information on the company, issue, and involved
underwriters.

Types of Primary Market Issuance:

After the issuance of securities, investors can purchase such securities in various ways. There
are 5 types of primary market issues.

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1. Public issue: Public issue is the most common method of issuing securities of a company
to the public at large. It is mainly done via Initial Public Offering (IPO) resulting in
companies raising funds from the capital market. These securities are listed in the stock
exchanges for trading. A privately held company converts into a publicly-traded company
when its shares are offered to the public initially through IPO. Such public offer allows a
company to raise funds for expansion of business, improving infrastructure, and repay its
debts, among others. Trading in an open market also increases a company’s liquidity and
provides a scope for issuance of more shares in raising scope for issuance of more shares
in raising further capital for business.

The Securities and Exchange Board of India is the regulatory body that monitors IPO. As per
its guidelines, a requisite due enquiry is conducted for a company’s authenticity, and the
company is required to mention its necessary details in the prospectus for a public issue.

2. Private placement: When a company offers its securities to a small group of investors, it
is called private placement. Such securities may be bonds, stocks or other securities, and
the investors can be both individual and institutional. Private placements are easier to issue
than initial public offerings as the regulatory stipulations are significantly less. It also incurs
reduced cost and time, and the company can remain private. Such issuance is suitable for
start-ups or companies which are in their early stages. The company may place this issuance
to an investment bank or a hedge fund or place before ultra-high net worth individuals
(HNIs) to raise capital.
3. Preferential issue: A preferential issue is one of the quickest methods available to
companies for raising capital. Both listed and unlisted companies can issue shares or
convertible securities to a select group of investors. However, the preferential issue is
neither a public issue nor a rights issue. The shareholders in possession of preference shares
stand to receive the dividend before the ordinary shareholders are paid.
4. Qualified institutional placement: Qualified institutional placement is another kind of
private placement where a listed company issues securities in the form of equity shares or
partly or wholly convertible debentures apart from such warrants convertible to equity
shares and purchased by a Qualified Institutional Buyer (QIB). QIBs are primarily such
investors who have the requisite financial knowledge and expertise to invest in the capital
market. Some QIBs are – Foreign Institutional Investors registered with the Securities and
Exchange Board of India, Foreign Venture Capital Investors. Alternate Investment Funds,

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 Mutual Fund, Public Financial Institutions, Insurers, Scheduled Commercial Banks,
Pension Funds.

Issuance of qualified institutional placement is simpler than preferential allotment as the former
does not attract standard procedural regulations like submitting pre-issue filings to SEBI. The
process thus becomes much easier and less time-consuming.

5. Rights and bonus issues: Another issuance in the primary market is rights and bonus issue,
in which the company issues securities to existing investors by offering them to purchase
more securities at a predetermined price (in case of rights issue) or avail allotment of
additional free shares (in case of bonus issue). For rights issues, investors retain the choice
of buying stocks at discounted prices within a stipulated period. Rights issue enhances
control of existing shareholders of the company, and also there are no costs involved in the
issuance of these kinds of shares. For bonus issues, stocks are issued by a company as a
gift to its existing shareholders. However, the issuance of bonus shares does not infuse fresh
capital.

Advantages of Primary Market:

i. Companies can raise capital at relatively low cost, and the securities so issued in the
primary market provide high liquidity as the same can be sold in the secondary market
almost immediately.
ii. The primary market is an important source for mobilisation of savings in an economy.
Funds are mobilised from commoners for investing in other channels. It leads to
monetary resources being put into investment options.
iii. Chances of price manipulation in the primary market are considerably less when
compared to the secondary market. Such manipulation usually occurs by deflating or
inflating a security price, thereby deliberately interfering with fair and free operations
of the market.
iv. The primary market acts as a potential avenue for diversification to cut down on risk.
It enables an investor to allocate his/her investment across different categories
involving multiple financial instruments and industries.
v. It is not subject to any market fluctuations. The prices of stocks are determined before
an initial public offering, and investors know the actual amount they will have to invest.

Disadvantages of Primary Market:

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 i. There may be limited information for an investor to access before investment in an IPO
since unlisted companies do not fall under the purview of regulatory and disclosure
requirements of the Securities and Exchange Board of India.
ii. Each stock is exposed to varying degrees of risk, but there is no historical trading data
in a primary market for analysing IPO shares because the company is offering its shares
to the public for the first time through an initial public offering.
iii. In some cases, it may not be favourable for small investors. If a share is oversubscribed,
small investors may not receive share allocation.

➢ Methods of Flotation

Flotation is the process of issuing and selling shares to public investors. In other words, it is
when a company goes public and issues new shares to raise capital. It is a term commonly used
in the United Kingdom. Floating a company allows it to raise capital for the purpose of
acquiring external financing for equipment, research and development (R&D), or new projects
or to expand the business

1. Initial Public Offering (IPO): One way to float a company is to issue an initial public
offering (IPO), where a private company will go public by issuing shares for the first time.
Floating a company using an IPO typically involves an investment bank that undertakes the
underwriting process and determines the specific details of the IPO, such as the share price and
the number of shares to be issued.

Additionally, the investment bank will develop the investment prospectus required for the IPO
and go on a roadshow to promote the new stock offering to potential investors.

2. Offer through Sale: In addition to an IPO, a private company can pursue flotation by
offering securities for sale using an intermediary, such as a stockbroker. In this case, the
issuance of new shares is not available to the public. Usually, a company that pursues such a
flotation method is in its early stages of operations, or it wants to mitigate from issuing shares
to the public due to high flotation costs.

3. Rights Issue: A company can also be floated by issuing new shares that are available only
to a group of existing investors, who are given the opportunity to purchase new shares before
the shares officially get offered to the public.

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 4. Private Placement: A private placement is also another way to float a company. Under the
private placement, an intermediary would purchase securities from a company at a
predetermined price and sell these securities to certain individuals and institutional investors.
Again, it helps a company avoid incurring high flotation costs and raise more capital quicker
than pursuing an IPO.

Benefits of Flotation:

• Instead of using retained earnings, a company can raise more capital from external
sources by issuing new shares to fund capital projects, mergers/acquisitions, and other
costs.

• An IPO can be used to promote and raise more awareness about a company’s brand in
order to attract institutional investors.

• It establishes an exit strategy for venture capitalists to realize profits from their
investments.

Drawbacks of Flotation/ new issue market:

➢ A number of flotation costs are associated with issuing new shares. For example, there
are costs incurred with legal fees, underwriting fees, and other administrative expenses.

➢ The company’s share price will be subjected to market fluctuations and other
macroeconomic factors.

➢ It is required that public companies disclose their audited financial statements and
maintain investor relations. Additionally, there is more pressure for companies to
increase the transparency of their business operations.

➢ Issuing more shares will diversify ownership of the company (loss of control).

➢ Once a company goes public, the company will be subject to regulatory constraints and
management restrictions in order to comply with the securities commission.

o INTERMEDIARIES IN NEW ISSUE MARKET/ PRIMARY MARKET:

i. Merchant Bankers: Main activities of the merchant bankers are – determining the
composition of the capital structure, drafting of prospectus and application forms,
compliance with procedural formalities, appointment of registrars to deal with the share

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 application and transfer, listing of securities, arrangement of underwriting / sub
underwriting, placing of issues, selection of brokers, bankers to the issue, publicity and
advertising agents, printers and so on. Due to overwhelming importance of merchant
banker, it is now mandatory that merchant banker functioning as lead manager should
manage all public issues.
ii. Underwriters: They make a commitment to get the issue subscribed either by others or by
themselves. Though underwriting is not mandatory after April 1995, its organization is an
important element of primary market. Underwriters are appointed by the issuing companies
in consultation with the lead managers / merchant bankers to the issues.
iii. Bankers to an Issue: The bankers to an issue are engaged in activities such as acceptance
of applications along with application money from the investor in respect of capital and
refund of application money.
iv. Brokers to the Issue: Brokers are persons mainly concerned with the procurement of
subscription to the issue from the prospective investors. The appointment of brokers is not
compulsory and the companies are free to appoint any number of brokers. The managers to
the issue and the official brokers organize the preliminary distribution of securities and
procure direct subscription from as large or as wide a circle of investors as possible.
v. Debenture Trustees: A debenture trustee is a trustee for a trust deed needed for securing
any issue of debentures by a company. The main duties of a debenture trustee include the
following: i. Call for periodical report from the company. ii. Inspection of books of
accounts, records, registration of the company and the trust property to the extent necessary
for discharging claims. iii. Take possession of trust property, in accordance with the
provisions of the trust deed.
vi. Portfolio Managers: Portfolio manager are defined as persons who in pursuance of a
contract with clients, advise, direct, undertake on their behalf the management/
administration of portfolio of securities/ funds of clients. The term portfolio means the total
securities belonging to any person.

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S.NO. PRIMARY MARKET SECONDARY MARKET

1. A primary market is defined as the market On the other hand, the secondary market is defined as a
in which securities are created for first-time place where the issued shares are traded among investors.
investors.

2. The company issues the shares, and the There is no interference of the government or the
government interferes in the process. company.

3. The primary market is called as a new issue The secondary market is an aftermarket.
market.

4. The buying and selling of shares takes place The trading take place only among the investors.
among the investors and the companies.

5. The primary market provides finance to the The secondary market does not provide financing to the
companies who want expansion and companies.
growth.

6. Underwriters are involved in the Brokers are involved in the intermediary process.
intermediary process.

7. The prices in the primary market do not On the other hand, the prices fluctuate a lot in the
fluctuate, i.e., they are fixed. secondary market because of the demand and supply.

8. The products in a primary market are Shares, debentures, warrants, derivatives, etc., are the
limited, i.e., they include IPO and FPO. kind of products offered in the secondary market.

9. The purchase process happens directly in The company issuing the shares do not involve in the
the primary market. purchasing process.

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10. The frequency of buying and selling is On the other hand, the frequency of buying and selling is
limited, i.e., the investors can invest once in quite high, i.e., the investors can trade as many times as
the market. they wish to.

11. The companies issuing shares and The investors in the secondary market follow the rules
debentures have to follow all regulations. provided by the stock exchanges and the government.

12. The major disadvantage of the primary The major disadvantage of the secondary market is that
market is that it is very time-consuming and the investors can incur huge losses due to price
costly. fluctuation.

MODULE – III: SECONDARY MARKET/STOCK EXCHANGE

Meaning and Significance

Functions of Secondary Market
Recognition and organization of Stock exchange in India
Listing of Securities on the Stock Exchange (Advantages and Disadvantages)
Listing of Securities- Procedure, Rules and Regulations
Secondary Market Intermediaries- Stock brokers- their registration and functions, Sub-
brokers
Online Trading, BSE-BOLT System, Mobile Trading, ALGO Trading.

MEANING AND SIGNIFICANCE

Secondary market is an equity trading avenue in which already existing/pre- issued securities
are traded amongst investors. Secondary market could be either auction or dealer market. While
stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer
market. The significance of the secondary market lies in the fact that it provides liquidity to
securities issued in the primary market. Price discovery is another function performed by the
secondary market, because of which it is possible to discover the value of a security from the
quoted and traded transactions. So, basically is secondary market being where investors buy
and sell securities, they already own. The national exchanges, such as the New York Stock
Exchange (NYSE) and the NASDAQ, are secondary markets.

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Types of Secondary Market:

Secondary markets are primarily of two types – Stock exchanges and over-the-counter markets.

Stock exchange: Stock exchanges are centralized platforms where securities trading take
place, sans any contact between the buyer and the seller. National Stock Exchange (NSE) and
Bombay Stock Exchange (BSE) are examples of such platforms. Transactions in stock
exchanges are subjected to stringent regulations in securities trading. A stock exchange itself
acts as a guarantor, and the counterparty risk is almost non-existent. Such a safety net is
obtained via a higher transaction cost being levied on investments in the form of commission
and exchange fees.

Over-the-counter (OTC) market: Over-the-counter markets are decentralized, comprising

participants engaging in trading among themselves. OTC markets retain higher counterparty
risks in the absence of regulatory oversight, with the parties directly dealing with each other.
Foreign exchange market (FOREX) is an example of an over-the-counter market. In an OTC
market, there exists tremendous competition in acquiring higher volume. Due to this factor, the
securities’ price differs from one seller to another. Apart from the stock exchange and OTC
market, other types of secondary market include auction market and dealer market.

The former is essentially a platform for buyers and sellers to arrive at an understanding of the
rate at which the securities are to be traded. The information related to pricing is put out in the
public domain, including the bidding price of the offer. Dealer market is another type of
secondary market in which various dealers indicate prices of specific securities for a
transaction. Foreign exchange trade and bonds are traded primarily in a dealer market.

Advantages of Secondary Market:

▪ Investors can ease their liquidity problems in a secondary market conveniently. Like, an
investor in need of liquid cash can sell the shares held quite easily as a large number of
buyers are present in the secondary market.
▪ The secondary market indicates a benchmark for fair valuation of a particular company.
▪ Price adjustments of securities in a secondary market takes place within a short span in tune
with the availability of new information about the company.
▪ Investor’s funds remain relatively safe due to heavy regulations governing a secondary
stock market. The regulations are stringent as the market is a source of liquidity and capital
formation for both investors and companies.

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▪ Mobilization of savings becomes easier as investors’ money is held in the form of
securities.

Disadvantages of Secondary Market:

▪ Prices of securities in a secondary market are subject to high volatility, and such price
fluctuation may lead to sudden and unpredictable loss to investors.
▪ Before buying or selling in a secondary market, investors have to duly complete the
procedures involved, which are usually a time-consuming process.
▪ Investors’ profit margin may experience a dent due to brokerage commissions
▪ levied on each transaction of buying or selling of securities.
▪ Investments in a secondary capital market are subject to high risk due to the influence of
multiple external factors, and the existing valuation may alter within a span of a few
minutes.

FUNCTIONS OF SECONDARY MARKET

Some of the Important Functions of Stock Exchange/Secondary Market are listed below:

1. Economic Barometer: A stock exchange is a reliable barometer to measure the economic

condition of a country. Every major change in country and economy is reflected in the prices
of shares. The rise or fall in the share prices indicates the boom or recession cycle of the
economy. Stock exchange is also known as a pulse of economy or economic mirror which
reflects the economic conditions of a country.

2. Pricing of Securities: The stock market helps to value the securities on the basis of demand
and supply factors. The securities of profitable and growth-oriented companies are valued
higher as there is more demand for such securities. The valuation of securities is useful for
investors, government and creditors. The investors can know the value of their investment, the
creditors can value creditworthiness and government can impose taxes on value of securities.

3. Safety of Transactions: In stock market only, the listed securities are traded and stock
exchange authorities include the companies’ names in the trade list only after verifying the
soundness of company. The companies which are listed they also have to operate within the
strict rules and regulations. This ensures safety of dealing through stock exchange.

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4. Contributes to Economic Growth: In stock exchange securities of various companies are
bought and sold. This process of disinvestment and reinvestment helps to invest in most
productive investment proposal and this leads to capital formation and economic growth.

5. Spreading of Equity Cult: Stock exchange encourages people to invest in ownership

securities by regulating new issues, better trading practices and by educating public about
investment.

6. Providing Scope for Speculation: To ensure liquidity and demand of supply of securities
the stock exchange permits healthy speculation of securities.

7. Liquidity: The main function of stock market is to provide ready market for sale and
purchase of securities. The presence of stock exchange market gives assurance to investors that
their investment can be converted into cash whenever they want.

8. Better Allocation of Capital: The shares of profit-making companies are quoted at higher
prices and are actively traded so such companies can easily raise fresh capital from stock
market. The general public hesitates to invest in securities of loss-making companies. So, stock
exchange facilitates allocation of investor’s fund to profitable channels.

9. Promotes the Habits of Savings and Investment: The stock market offers attractive
opportunities of investment in various securities. These attractive opportunities encourage
people to save more and invest in securities of corporate sector rather than investing in
unproductive assets such as gold, silver, etc.

RECOGNITION AND ORGANIZATION OF STOCK EXCHANGE IN INDIA

The membership of stock exchanges initially comprised of individuals and partnership firms.
A number of financial institutions are now members of Indian exchanges. Over the years, stock
exchanges have been organized in various forms:

(a.) A company limited by shares

(b.) A company limited by guarantee

(a.) Limited by shares: "Limited by shares" means that the liability of the shareholders to
creditors of the company is limited to the capital originally invested, i.e. the nominal
value of the shares and any premium paid in return for the issue of the shares by the
company. A limited company may be “private” or “public”. A private limited

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 company's disclosure requirements are lighter, but its shares may not be offered to the
general public and therefore cannot be traded on a public stock exchange. This is the major
difference between a private limited company and a public limited company. Most
companies, particularly small companies, are private.
(b.) Limited by Guarantee: A company limited by guarantee does not have any shares or
shareholders (like the more common limited by shares structure) but is owned by guarantors
who agree to pay a set amount of money towards company debts. The personal finances of
the company’s guarantors are protected. They will only be responsible for paying company
debts up to the amount of their guarantees.

History of Recognizing Stock Exchanges in India:

Sh G.S. Patel Committee report in 1984 observed that, there is a growing feeling in the country
for a uniform organizational structure, created with uniform rules, bye-laws and regulations for
the governance of the stock exchanges. With precise powers, duties and responsibilities of
office bearers and members, it would serve the investment community better. The
establishment of stock exchanges with uniform organizational structure. along with uniform
rules, bye-laws and regulations will encourage competition among the stock exchanges. It will
also help in toning up the administrative and operative efficiency. The committee recommend
that whenever new stock exchanges are to be established hereafter, the government should
grant recognition, only to companies limited by guarantee. In case of existing stock exchanges,
which are association of persons and companies limited by shares they should also switch over
to new form by following the procedure laid down in companies Act 1956.

Management of Stock Exchanges in India:

The management of a stock exchange in India is vested in governing authority that has got
different nomenclatures at different stock exchange-like:

(i) Governing Board at stock exchange, Mumbai

(ii) Committee at Kolkata Stock Exchange.
(iii) Council of Management at Chennai Stock Exchange
(iv) Board of Directors at Delhi Stock Exchange

Constitution of India:

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Under the constitution of India (Article 246, Union list, Entry 48) the governing body of a
recognised stock exchange, in India has wide governmental and administrative power subject
to the government approval to make, amend or suspend the operation of the rules, bye-laws
and regulations of the stock exchange.

Composition of Governing body of Stock Exchange

It comprises of elected and nominated members headed by the president of look after the day
to-day working of the exchange. The managing committee has complete jurisdiction over the
members of the stock exchange and various subcommittees. Governing board of the stock
exchanges as the name may be generally comprised of elected brokers, SEBI nominees, RBI
nominees, and government and public representatives.

Membership, Organization and Management of Some Major Stock Exchange in India There
are 23 stock exchanges in India. But among these stock exchanges there are four famous stock
exchanges in India namely Bombay Stock Exchange (BSE) National Stock Exchange (NSE),
Over the Counter Exchange of India (OTCEI) and Inter-Connected Stock Exchange of India
(ICSEI).

BOMBAY STOCK EXCHANGE

Origin: The Bombay Stock Exchange (BSE) which was established in the year 1875, is one of
the oldest organized exchanges in the world.

Recognition: The Securities Contracts (Regulation) Act 1956, accord BSE its pre-eminent
position by granting it permanent recognition. In early 1995, the BSE finally put the automated
trading programmed in place.

Organizational Structure: Governing Board of Bombay Stock Exchange.

1) Executive Director (1)

2) Elected Directors (6)
3) SEBI Nominee (1)
4) RBI Nominee (1)
5) Public Representatives (5)

While the board deals with the broad policy issues, the executive committee, formed under the
Articles of Association and rules, manages the day-to-day affairs of the exchange.

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Committees in BSE

(a.) Executive Committee

(b.) Disciplinary Action Committee
(c.) Risk Management Committee
(d.) Committee on Trade Issues
(e.) Committee on Settlement Issues
(f.) Dispute Resolution Committee.

The day-to-day management of the stock exchange is delegated to the managing director who
is supported by a team of professional staff.

Bombay Stock Exchange v. Jaya Shah, 2004

Supreme Court has held that Bombay stock exchange, rules, byelaws and regulations although
are made under a statute, but having regard to the scheme as also the purport and object thereof,
have a statutory flavor. Byelaws are required to be made for regulation and control of contracts,
whereas rules relate to in general to the constitution and management of a stock exchange.
Hence, each stock exchange has its own bye laws.

Blue Blends Finance v. Securities and Exchange Board of India 2009

Trading in the scrip of ‘P’ company, whose shares were listed in BSE, was suspended with
effect from 10-9-2001. However, the appellants, promoters of the company, inter re executed
trades in the scrip of the company in 2006. The total shares traded among them constituted
44.22 percent of the share capital of the company. The appellants in terms of regulation 3(3)
were required to inform the BSE of their proposed transactions/acquisitions at least four days
prior to the date of the transactions. However, the informed the BSE about the same with a
delay of four days. The adjudicating officer held that the appellants were guilty of violating
regulation 3(3) and imposed penalty of Rs. 1 lakh on them.

National Stock Exchange of India

Corporate Structure of National Stock Exchange NSE is one of the first demutualized stock
exchange in the country, where the ownership and management of the exchange is completely
divorced from the right to trade on it. Though the impetus for its establishment came from
policy makers in the country, it has been set up as a public limited company, owner by the
leading institutional investors in the country.

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Board of Directors in NSE

(a.) Chairman (1)

(b.) Managing Director (1)
(c.) Deputy Managing Director (1)
(d.) Directors (15)
(e.) SEBI Nominee (1)
(f.) RBI Nominee (1)
(g.) Public Representatives (5)

The NSE model however, does not preclude, but in fact accommodates involvement support
and contribution of trading members in a variety of ways. Its Board comprises of senior
executives from promoter institutions, eminent professionals in the fields of law, economics,
accountancy, finance, taxation etc., public representatives, nominees of SEBI and one full time
executive of the Exchange.

While the Board deals with policy issues, decisions relating to market operations are delegated
by the Board to various committees constituted by it. Such committees include representatives
from trading members, professionals, the public and the management. The day-to-day
management of the exchange is delegated to the Managing Director who is supported by a team
of professional staff.

Committees in NSE

The Exchange has constituted various committees to advise it on areas such as good market
practices, settlement procedure, risk containment system etc. These committees are managed
by industry professionals, trading members, exchange staff as also representatives from the
market regulator. There are three committees in the NSE.

1. Executive Committee
2. Committee on Trade Related Issues (COTI)
3. Advisory Committee-Listing of Securities
i. Executive Committee: The main objective of the executive committee is to manage
the day-to-day operations of the exchange.
ii. Committee on Trade Issues (COTI): The main functions of the Committee on Trade
Issue are to provide guidance on trade related issues which crop up during the day- to-
day functioning of the exchange.

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 iii. Advisory Committee: Listing of Securities The main objectives of the Advisory
Committee is to advise NSE on various issues:
(a.) The suitability of the Companies for listing on the exchange within the parameters set
out by the listing agreement.
(b.) To ensure that the applicant company has complied with all the conditions set out in
the listing agreement as well as other formalities, SEBI regulations etc.
(c.) Systems and procedures to be adopted for listing of Securities.

Important Features of National Stock Exchange:

National Stock Exchange has some important features and characteristic for example:

1) NSE can provide capital to smaller stock exchanges.

2) At least 50% of the Board of directors of NSE should be professionals, who are non-
members.
3) It should have separate trading ring and time for creating active secondary market in debt
instruments.
4) Listing of medium sized companies should be encouraged.
5) There should be compulsory jobbers and market makers to ensure liquidity.
6) NSE should have well stocked library and research facilities on commercial basis.
7) Incorporation of NSE for providing better service in context of stock market.

LISTING OF SECURITIES ON THE STOCK EXCHANGE (ADVANTAGES AND

DISADVANTAGES)

Listing of Securities:

The inclusion of the name of a company in the official list of securities, which can be dealt
with in a stock exchange, is called listing. It implies the securities of a company to the trading
privileges on a stock exchange. By getting its securities listed, a company can create a favorable
impression in the mind of the investors about its financial soundness, profitability and the
marketability of its shares and other securities. At the same time, it should also be remembered
that listing would no way guarantee the earning capacity of the securities of issuing company.

Moreover, in India, the Central Government is also empowered under Sec. 21 of the Securities
Contracts (Regulation) Act to compel a public limited company to get its securities listed on
any recognized stock exchange, with a view to protect the broad interests of the investing

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public. Any company, which wants to get its shares listed, should apply to regional stock
exchange i.e., to the stock exchange nearest to its registered office. It may also get its shares
listed on other stock exchanges as well.

Objectives of Listing

According to S. C. Kuchhal, the main objectives of listing are the following:

1. Provision of ready marketability.

2. Imparting liquidity to the securities.
3. Provision of free negotiability.
4. Protection of the interests of the investors and the general public.

Advantages of Listing

The advantages of listing can be summarized under two heads namely:

1. 1.Advantages to the company management.

2. Advantages to the investors.

Advantages to the company management

1) It gives the management and the company a higher status and facilitates expansion
programmes.
2) Such companies can raise finance very easily.
3) Listed companies are eligible for certain fiscal advantages such as concessional rate of
income tax, benefits of carry forward and set off of losses of the earlier years etc.
4) Such companies are better placed while approaching the SEBI for its consent under any of
the provisions of the SEBI Act.
5) Listed companies are treated favorably by the financial institutions and commercial banks
when they approach them for short-term and long-term accommodations.

Advantages to the investors

a. Listing makes the securities more prestigious and enhances their marketability. Hence, the
holders of such securities can convert their holdings without any difficulty in times of need.
b. The security prices are regularly published in the financial newspapers and periodicals.
Hence, the investors can sell their holdings at the current market price.
c. Such securities generally fetch higher prices.

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d. Holders of listed securities are eligible for certain concessions in matters relating to Income
Tax, Wealth Tax etc. in their capacity as assesses.
e. Listed securities enjoy more public confidence. Hence, they have high collateral value. The
bankers will readily accept such securities for providing loans and other accommodations.
f. Listed companies should make a fair disclosure of certain information and so the investors
are given a reasonable opportunity of judging the merits of the concern.
g. Listed securities ensure safety to the funds of the investors.

Disadvantages of Listing:

1. Listing, however, is not free from defects. The procedure of listing has certain definite
limitations and disadvantages. Some of the inherent limitations of listing are given below:
2. Listing makes people depend upon share brokers, jobbers etc. Many of them are weak
speculators and frequently put their clients into difficulties. They create violent price
fluctuations.
3. Securities, which are unable to have a stable value, shall lose their prestige and fell down
in the esteem of the investors and bankers.
4. The management is also induced to show keen interest in the price movements for personal
gains. They may take advantage of their inside knowledge and indulge in speculation.
5. The free negotiability of securities enables a few interested persons to buy a substantial
portion of the securities and thereby capture the management of the company.
6. The company should furnish certain information in detail. Such a detailed disclosure may
even injure the prospects of the company.

These defects, however, are not incurable defects. Proper regulation may solve the problem to
a considerable extent. Sachar Committee also made a few solid recommendations to cure the
defects associated with listing. But no concrete measures were taken so far and the shareholders
still remain unprotected. Thus, there is a strong case for a thorough investigation into the
problem and formulation of suitable regulatory measures in this regard.

LISTING OF SECURITIES: PROCEDURE, RULES AND REGULATIONS

Listing requirements

A company which desires to list its shares in a stock exchange has to comply with the following
requirements:

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1. Permission for listing should have been provided for in the Memorandum of Association
and Articles of Association.
2. The company should have issued for public subscription at least the minimum prescribed
percentage of its share capital (49 percent).
3. The prospectus should contain necessary information with regard to the opening of
subscription list, receipt of share application etc.
4. Allotment of shares should be done in a fair and reasonable manner. In case of over
subscription, the basis of allotment should be decided by the company in consultation with
the recognized stock exchange where the shares are proposed to be listed.
5. The company must enter into a listing agreement with the stock exchange. The listing
agreement contains the terms and conditions of listing. It also contains the disclosures that
have to be made by the company on a continuous basis.

Minimum Public Offer: A company which desires to list its securities in a stock exchange,
should offer at least sixty percent of its issued capital for public subscription. Out of this sixty
percent, a maximum of eleven percent in the aggregate may be reserved for the Central
government, State government, their investment agencies and public financial institutions. The
public offer should be made through a prospectus and through newspaper advertisements. The
promoters might choose to take up the remaining forty percent for themselves, or allot a part
of it to their associates.

Fair allotment: Allotment of shares should be made in a fair and transparent manner. In case
of over subscription, allotment should be made in an equitable manner in consultation with the
stock exchange where the shares are proposed to be listed. In case, the company proposes to
list its shares in more than one exchange, the basis of allotment should be decided in
consultation with the stock exchange which is located in the place in which the company’s
registered office is located.

Listing Procedure:

The following are the steps to be followed in listing of a company’s securities in a stock
exchange:

1) The promoters should first decide on the stock exchange or exchanges where they want the
shares to be listed.

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2) They should contact the authorities to the respective stock exchange/ exchanges where they
propose to list.
3) They should discuss with the stock exchange authorities the requirements and eligibility
for listing.
4) The proposed Memorandum of Association, Articles of Association and Prospectus should
be submitted for necessary examination to the stock exchange authorities
5) The company then finalizes the Memorandum, Articles and Prospectus
6) Securities are issued and allotted.
7) The company enters into a listing agreement by paying the prescribed fees and submitting
the necessary documents and particulars.
8) Shares are then and are available for trading.

SECONDARY MARKET INTERMEDIARIES- STOCK BROKERS- THEIR

REGISTRATION AND FUNCTIONS, SUB-BROKERS

Intermediaries are the middlemen between any two parties that are partaking in a transaction.
These middlemen act as the bridge between them and help in exchanging necessary information
towards fulfilling the objective of a common goal. While buying and selling stocks seems like
a straightforward process, there needs to be a governing authority that ensures tight control to
keep malpractices and frauds at bay. Imagine reading about an IPO in the newspaper that
seems ideal, investing in it, and realizing that it was a scam The governing authority needs to
make sure that no such instances occur.

Stock brokers

Under Section 2(gb) of the 1992 regulations, "stock broker" means a person having trading
rights in any recognized stock exchange and includes a trading member. Stock brokers deal
with secondary markets for the sale and purchase of securities such as stocks and bonds.
Brokers are the people who deal in shares and whose business includes the procuring of
subscribers for shares. They are basically intermediaries in the secondary market and are
middlemen between the investors and stock exchanges.

Responsibilities of Stock Broker

1. Maintain proper book of accounts and records as per the Chapter IV regulations of SEBI
(Stock Broker) Regulations.
2. Investment advisory & consultancy.
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 3. Display of integrity & discipline (fairness) towards the clients.
4. Not commit breach of trust by sharing confidential details with the clients.
5. Issuance of Contract Notes.
6. Execution of orders placed by clients in an effective manner.
7. Commission & brokerage must be earned on specified levels & models established.

Types of Stock-Brokers

1. Full-Service Stockbroker: A full-service stockbroker offers a variety of financial services.

They employ research departments providing analyst recommendations and access to initial
public offerings (IPOs), financial planning, banking services, and asset management.

2. Discount Stockbroker: Discount stockbrokers provide financial products, access to mutual

funds, banking products, and other services. The services they offer are limited in comparison
to full-service stockbrokers. They are more beneficial to swing traders and day traders who are
more active. They generally also provide more research tools and trading options than full-
service platforms.

3. Online Stockbroker: They offer services to active day traders with the minimal commission.
Online stockbrokers offer direct access platforms with capabilities of routing and charting, and
access to multiple exchanges, market makers, and electronic communication networks (ECN).
They offer the advantages of access and speed.

Eligibility Criteria for Registration as Stock Broker

The Board shall take into account for considering the grant of a certificate all matters relating
to buying, selling, or dealing in securities and in particular the following, namely, whether the
stock broker –

(a.) is eligible to be admitted as a member of a stock exchange;

(b.) has the necessary infrastructure like adequate office space, equipment’s and man power to
effectively discharge his activities; -
(c.) has any past experience in the business of buying, selling or dealing in securities; - is
subjected to disciplinary proceedings under the rules, regulations and byelaws of a stock
exchange with respect to his business as a stock-broker involving either himself for any of
his partners, directors or employees; -
(d.) is a fit and proper person.

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 Sub-Brokers

Sub-brokers are authorized people who create a bridge between the investor and the
stockbroker. A "sub-broker" is similar to an agent to investors and is not a stock exchange
trading participant but assists in dealing with shares on the stockbroker’s behalf. Sub-brokers
are investment experts who assist investors by carrying out the transactions, helping in after-
sales, and providing them with sound investment advice.

Functions of Sub-Broker

The role of the sub-broker is vital in the smooth investment process for investors and added
business for stockbrokers. The functions of sub-broker are as follows:

The role of sub-broker for the stockbroker

1. Business development: One of the primary functions of a sub-broker is to find new

investors. Sub-brokers help the stockbroker to maximise business in the area by adding new
customers and helping them invest in the stock market.
2. Document Verification: Sub-brokers work closely with the stockbroker to verify the
transaction documents of the clients. It allows stockbrokers to ensure a transparent
investment process and avoid financial mistakes in their business process.
3. Quality of deals: For a stockbroker, a quality deal is when the investor has no problems in
the investing process, makes recurring investments and feels satisfied with the overall
process. Sub-brokers ensure that the stockbrokers are presented in the best light possible
and offer their services.
4. Assistance in sales: The sub-broker issues sales notes for every sale made by the customer.
It details the date of the transaction, the invested amount and the company name. The
assistance allows stockbrokers to cross-check the transaction and mitigate the risk of any
mistakes.

The Role of Sub-broker for Customers/Clients

1. Account setup: The sub-broker helps customers in opening their Demat account and
verifying other required documents. They also inform them about ways to manage their
accounts and monitor investments.
2. Facilitates Investment: One of the main functions of the sub-broker is to facilitate
customers to make informed investments. As sub-brokers have extensive knowledge of the

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 capital markets they provide research-based investment recommendations to their
customers.
3. Point of contact: The sub-broker is also like a customer service executive. They work as a
single point of contact for the customer in case they need assistance with anything related
to investments.

Eligibility Criteria for Registration as Sub-Broker

The eligibility criteria for registration as a sub-broker shall be as follows, namely:

A. the applicant is not less than 21 years of age;

B. the applicant has not been convicted of any offence involving fraud or dishonesty;
C. the applicant has at least passed 12th standard equivalent examination from an
institution recognized by the Government;
D. The applicant is a fit and proper person". Provided that the Board may relax the
educational qualifications on merits having regard to the applicant's experience.
E. In the case of partnership firm or a body corporate the partners or directors, as the case
may be, shall comply with the requirements contained in clauses (a) to (c) of sub-
regulation (i).

ONLINE TRADING, BSE-BOLT SYSTEM, MOBILE TRADING, ALGO TRADING.

Online trading has become very popular in the last couple of years because of the convenience
of case and use. Numerous companies have gone online to meet their customers’ demands,
enabling them to trade when they want and how they want to. Trading has existed for as long
as we can remember and when we talk about it. We are referring to trade as in financial
dealings. Trading is the buying and selling of goods and services, but in the current context, it
is the buying and selling of financial services, including securities, through world Wide Web.

BSE provides online trading system known as BOLT and NSE’s online trading system is
known as NEAT (National Exchange for Automated Trading).

Safety Measures

Before investing online in share market, investors must take some safety measures such as:

a) Investor should never share his password with anyone and must change it at periodic
intervals

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b) Operating an online trading account from cyber cafes should be avoided
c) The default password provided by broker should be changed
d) Check for confirmation after placing an order
e) Investor should always ensure that sufficient securities are available in his account
f) Regular payment of margins should be made to avoid blocking of account

Opening an online trading account: In order to trade online in stock market, one needs to
open an online trading account with the registered broker. You could also check the reviews of
brokers and choose accordingly. To open an online trading account in India you need a proof
of identity and residence.

National Stock Exchange - NSE Online Trading System

NSE's (National Stock Exchange) trading system is known as NEAT (National Exchange for
Automated Trading). It is a fully automated screen-based trading system, which enables
brokers and trading members around India to trade simultaneously. NEAT has replaced the
'ring' and brokers no longer congregate on the floor of the exchange trade. An investor is thus
able to buy or sell securities through the brokers connected to NEAT network. The trading
software selected by NSE is in use by several exchanges around the world. The
telecommunications network is the backbone of its trading system designed to provide
continuous availability to the brokers. It is one of the largest interactive VSAT (Very Small
Aperture Terminals) based stock exchanges in the world. Broker- to -broker is through online
terminals. The terminals of the brokers on the wholesale debt market are linked to the central
computer. The brokers on the capital market trade through a satellite network that is owned,
operated and managed by NSE using VSAT (Very Small Aperture Terminals) technology.

BSE Online Trading System ‘BOLT’

Bombay stock exchange (BSE) switched over from the open outcry trading system to a fully
automated computerized mode of trading known as BSE online Trading (BOLT) system in
1995. This system which is both order and quote driven was commissioned on 14 March 1995
and in May 1995 it was introduced for all the securities listed on BSE. It started with screen-
based trading and in September 1997, switched over to direct online access facility. In the
initial stage. BOLT was available to brokers of BSE based in Mumbai through leased lines.

Objectives of Bolt

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1. Automatic order matching and faster execution of traders
2. Eliminate the subjectivity of the existing trading system
3. Facilitate more efficient procession
4. Handle growing volumes easily
5. Increase market transparency

Salient features

1. The system allows complete transparent mode for each order execution.
2. Trading hours been increased, under the open-outcry system trading was linked to two
hours.
3. Processing speed coupled with extended trading hours has ensured that most orders get
executed on daily basis.
4. Orders are matched in less than one-tenth of second.

Mobile trading

Mobile trading system is financial software for Smartphones that enables investors to make
their buy or sell from a mobile phone that has internet connectivity. The application helps the
investors to do their financial tasks from anywhere and anytime. The penetration of
Smartphones and internet usage has made more and more people use this application.
Performance of the application depends on the quality of the app.

The shift from desktop computers and other trading terminals to mobile trading applications
have been largely driven by the ease of placing orders with an active eye on the portfolio
according to the current market prices. Almost all the brokerage houses have their own mobile
trading applications which are being monitored by the in-house technical teams. The challenges
of online trading such as cost of computer hardware and software, restricted mobility of laptops
and desktops and lack of knowledge to operate the system made way for mobile trading.

Mobile trading: (Benefits)

1. Ease of placing orders: Market orders can be placed effortlessly on mobile trading
applications as compared to desktop terminals. No need to start up the big machines again
and again.
2. Live market data & portfolio: Mobile trading applications facilitate live market data
including stock indices, shares, currencies, commodities, derivatives, etc. The existing

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 portfolio can be reviewed on the mobile itself in no time. A user can take a brief idea about
the performance of the portfolio and the underlying assets.
3. Notification facility: Mobile trading applications do have the notification and alerts facility
which works independently from the SMS alerts sent by the exchanges, brokerages and
custodians. The notification facility keeps a user updated with the latest developments in
the portfolio and recommendations given by the brokerages.
4. Live related news: With the help of mobile trading applications, a customer can also track
live news related to a specific development or associated with a stock.
5. Research reports: Mobile trading applications also provide quick and easy access to the
research reports which are generated by the respective brokerage houses or firms.
6. Historical charts & analysis: Several premium mobile trading applications also provide
the facilities of historical stock prices, indices data and analytical tools on the mobile
trading applications.

Mobile trading: (limitations)

1. Restricted access: A large number of mobile trading applications have restricted access
which implies that there can be a number of barriers such as unavailability of derivative
products, currency products and data of international stock indices.
2. Smaller screen size: small screen size is a big drawback for the users. A trading platform
usually contains a bunch of details which can’t be viewed with ease on a smaller screen.
However, this problem has been reducing steadily with the introduction of larger screen
sizes and trading applications for tablets.
3. Mobile connectivity: Connectivity on the mobile trading platform is another big issue as
the wireless signals may disrupt in remote areas and a number of hilly locations. A
disturbance in the mobile network at the time of placing an order may lead to a partial loss
of funds being transferred to the exchange or the brokerage firm.
4. Slow speed: Other than the high-end smartphones, most of the budget smartphones don’t
have a fast processor due to which the normal operations on the phone progress with slow
speeds. The lower processing speeds of the smartphone can lead to delay in placing the
orders as compared to the desktop terminals.

ALGO Trading

Algorithmic trading (also called automated trading, black-box trading, or algo-trading) uses a
computer program that follows a defined set of instructions (an algorithm) to place a trade. The

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trade, in theory, can generate profits at a speed and frequency that is impossible for a human
trader. The defined sets of instructions are based on timing, price, quantity, or any mathematical
model. Apart from profit opportunities for the trader, algo-trading renders markets more liquid
and trading more systematic by ruling out the impact of human emotions on trading activities.

Algorithmic Trading in Practice

Suppose a trader follows these simple trade criteria:

Buy 50 shares of a stock when its 50-day moving average goes above the 200-day moving
average. (A moving average is an average of past data points that smooths out day-to-day
price fluctuations and thereby identifies trends.)
Sell shares of the stock when its 50-day moving average goes below the 200-day moving
average.

Using these two simple instructions, a computer program will automatically monitor the stock
price (and the moving average indicators) and place the buy and sell orders when the defined
conditions are met. The trader no longer needs to monitor live prices and graphs or put in the
orders manually. The algorithmic trading system does this automatically by correctly
identifying the trading opportunity.

Benefits of Algorithmic Trading

Algo-trading provides the following benefits:

Trades are executed at the best possible prices.

Trade order placement is instant and accurate (there is a high chance of execution at the
desired levels).
Trades are timed correctly and instantly to avoid significant price changes.
Reduced transaction costs.
Simultaneous automated checks on multiple market conditions.
Reduced risk of manual errors when placing trades.
Algo-trading can be back tested using available historical and real-time data to see if it is a
viable trading strategy.
Reduced the possibility of mistakes by human traders based on emotional and
psychological factors.

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 Module 4

SEBI

Sebi is a statutory regulatory body established on the 12th of April, 1992. It monitors and
regulates the Indian capital and securities market while ensuring to protect the interests of the
investors, formulating regulations and guidelines.

Background

▪ Before SEBI came into existence, Controller of Capital Issues was the regulatory
authority; it derived authority from the Capital Issues (Control) Act, 1947.

▪ In April, 1988 the SEBI was constituted as the regulator of capital markets in India
under a resolution of the Government of India.

▪ Initially SEBI was a non statutory body without any statutory power.

▪ It became autonomous and given statutory powers by SEBI Act 1992.

▪ The headquarters of SEBI is situated in Mumbai. The regional offices of SEBI are
located in Ahmedabad, Kolkata, Chennai and Delhi.

Organizational Structure of SEBI

The members of the Security and Exchange Board of India are:

• The Chairman who is appointed by the Union Government of India.

• Two members who are selected from the officers of the Union Finance Ministry.

• One member who is appointed from the Reserve Bank of India.

• The other five members are appointed by the Union Government of India, out of
five three must be whole-time members.

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Dr. S.A. Dave was the first Chairman of SEBI who was appointed on 10th April 1988.

Functions of SEBI

SEBI basically protects the interest of the investors in the security market, promotes the
development of the security market and regulates the business. The functions of the Security
and Exchange Board of India can primarily be categorized into three parts:

• Protective Function

Protective functions are used to protect the interest of investors and other financial participants.
These functions are:

• Prevent Insider Trading: When the people working in the market like director,
promoters or employees working in the company starts to buy or sell the securities
because they have access to the confidential price which results in affecting the price
of the security is known as insider trading. SEBI restricted companies to buy their
own shares from the secondary market and SEBI also regulates regular check-ups
to prevent insider trading and avoid malpractices.

• Checks price rigging: The malpractices which create unreasonable fluctuations in

the price of the securities with the help of increasing or decreasing the market price
of stocks which results in an immense loss for the investors or traders are known as
price rigging. To prevent price rigging, SEBI keeps active surveillance on the factors
which can promote price rigging.

• Promotes fair trade practices: SEBI established rules and regulations and a certain
code of conduct in the securities market to restrict fraudulent and unfair trade
practices.

• Providing awareness/financial education for investors: SEBI conducts seminars

both online and offline to educate the investors about insights into the financial
market and money management.

• Regulatory Function

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Regulatory functions are generally used to check the functioning of the financial business in
the market. They establish rules to regulate the financial intermediaries and corporates for the
efficiency of the market. These functions are:

• SEBI designed guidelines and code of conduct for efficient working of financial
intermediaries and corporate.

• Established rules for taking over a company.

• Conducts regular inquiries and audits of stock exchanges.

• Regulates the process of mutual funds.

• Registration of brokers, sub-brokers, and merchant bankers is controlled by SEBI.

• Levying of fees is regulated by SEBI.

• Restrictions on private placement.

• Development Function

The development functions are the steps taken by SEBI to improve the security of the market
through technology. The functions are:

• By providing training sessions to the intermediaries of the market.

• By promoting fair trading and restrictions on malpractices of any kind.

• By introducing the DEMAT format.

• By promoting self-regulating organizations.

• By introducing online trading through registered stock brokers.

• By providing discount brokerage.

Power of SEBI

Quasi-Judicial

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SEBI is allowed to conduct hearings and can pass judgments on unethical cases and fraudulent
trade practices. This feature of SEBI helps to protect transparency, accountability, reliability,
and fairness in the capital market.

Quasi-Legislative

SEBI is allowed to draft legislatures with respect to the capital market. SEBI drafts rules and
regulations to protect the interests of the investors. For eg: SEBI LODR or Listing Obligation
and Disclosure Requirements. This helps in consolidating and streamlining the provisions of
existing listing agreements for several segments of the financial market like equity shares. This
helps in protecting the market from malpractices and fraudulent trading activities happening at
the bay.

Quasi-Executive

SEBI covers the implementation of the legislation. They are allowed to file a complaint against
any person who violates their rules and regulations. They also have the power to inspect all the
books and records to check for wrongdoings.

Insider Trading
The prohibition imposed by Regulation 3 of PIT Regulations is as follows:
• On insiders from dealing in securities while they possess unpublished price sensitive
information;
• On insiders from counselling or communicating such unpublished price sensitive
information to any other individual except in the ordinary course of employment,
business or profession or under any other law.
Prohibition is also imposed on procuring the unpublished and price-sensitive information in
circumstances other than ordinary course of employment, business or profession or under any
other law

Prohibition of manipulative and deceptive devices, insider trading and substantial

acquisition of securities or control.
No person shall directly or indirectly--
(a) use or employ, in connection with the issue, purchase or sale of any securities listed or
proposed to be listed on a recognised stock exchange, any manipulative or deceptive device or

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contrivance in contravention of the provisions of this Act or the rules or the regulations made
thereunder;

(b) employ any device, scheme or artifice to defraud in connection with issue or dealing in
securities which are listed or proposed to be listed on a recognised stock exchange;

(c) engage in any act, practice, course of business which operates or would operate as fraud or
deceit upon any person, in connection with the issue, dealing in securities which are listed or
proposed to be listed on a recognised stock exchange, in contravention of the provisions of this
Act or the rules or the regulations made thereunder;

(d) engage in insider trading;

(e) deal in securities while in possession of material or non-public information or communicate

such material or non-public information to any other person, in a manner which is in
contravention of the provisions of this Act or the rules or the regulations made thereunder;

(f) acquire control of any company or securities more than the percentage of equity share capital
of a company whose securities are listed or proposed to be listed on a recognised stock
exchange in contravention of the regulations made under this Act.]

Securities Appellate Tribunal (SAT)

Securities Appellate Tribunal is a statutory body developed under the provisions of Section
15K of the Securities and Exchange Board of India Act. Securities Appellate Tribunal was
mainly established to hear an appeal against the order passed by the SEBI (Securities and
Exchange Board of India) or by an adjudicating officer under the SEBI Act. In this article,
we look at the Securities Appellate Tribunal (SAT) in detail.

Composition of Securities Appellate Tribunal (SAT)

Securities Appellate Tribunal (SAT) would consist of the following:

• One presiding Officer

• Other members

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Presiding Officer

The Central Government will appoint the presiding Officer of Securities Appellate Tribunal in
discussion with the chief justice of India or nominee. The person so appointed as the presiding
OfficerOfficer should meet with the following requirements:

• The retired or sitting judge of the supreme court

• The retired or sitting judge of the high court
• The retired or sitting judge of the high court, who has completed at least seven years of
service as a judge in a high court.

Members

The Central Government will appoint the two members of the Securities Appellate Tribunal.
The member so appointed should possess the following qualities:

• The member should be capable of dealing with problems related to the securities
market.
• The member should possess qualification and experience related to corporate law,
securities laws, economics, finance or accountancy.

Tenure

Presiding Officer: The tenure for Presiding Officer will be five years from the date of
appointment or re-appointment.

Members: The tenure for the member will be five years from the date of appointment or re-
appointment.

Power of Securities Appellate Tribunal (SAT)

The Securities Appellate Tribunal (SAT) will have the same powers as vested in a civil court
under the code of civil procedure while trying a suit, with respect of the following matters
namely:

• Enforce and summon the attendance of any person

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 • Require the discovery and production of documents
• Receive evidence on affidavits
• Issue commissions for the examination of the documents or witnesses
• Dismiss an application for default or deciding it ex-parte
• Set aside any order or dismissal of any application for default or any other order passed
by it ex-parte
• Any other matter as and when prescribed.

Who can make an appeal?

Every person aggrieved by order of the Securities and Exchange Board of India or adjudicating
officer is liable to make an appeal to the Securities Appellate Tribunal (SAT).

Note: No appeal can be made to the Securities Appellate Tribunal (SAT) against any order
made with the consent of the parties.

Time Limit

• Every appeal to the Securities Appellate Tribunal should be filed within 45 days from
the day on which a copy of the order passed by the Securities and Exchange Board of
India or adjudicating office is received.
• The Securities Appellate Tribunal may allow an appeal after the expiry of the specified
period of 45 days if the reason for not filing the appeal with the said period is satisfied.
• The appeal should be made in three copies along with the additional copies for each
additional appeal, and that should be signed by the authorised person.
• On receipt of the appeal, the Securities Appellate Tribunal may confirm, modify or set
aside the order appealed against and such appeal should be disposed of within 6 months
from the date of receipt of such appeal.

Appear before SAT

As per the SEBI Act, any authorised person is a Company Secretary, Chartered Accountant
(CA), Cost Accountant or Legal Practitioner can appear before Securities Appellate Tribunal
(SAT).

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Appeal against the orders of SAT

• Every person aggrieved by any order or decision of Securities Appellate Tribunal can
file an appeal to the supreme court. Also, the appeal only can be made on any question
of law.
• The appeal should be made within 60 days from the date of receiving a copy of the
order or decision of Securities Appellate Tribunal. However, the supreme court may
further allow a period of 60 days for making an appeal, if it satisfied that the applicant
was prevented from filing the appeal within the first 60 days due to sufficient cause.

Procedure for Appeal

An appeal should be presented in the prescribed form by any aggrieved person in the registry
of the appellate tribunal within whose jurisdiction falls or can be sent by registered post
addressed to the Registrar. The appeal sent by post should be presented in the registry on the
same date on which it was received in the registry.

SEBI v. Sahara India Real estate

In this case, in July 2015, SEBI canceled Sahara MF’s registration with the reasoning that it
was not “fit and proper” to carry out the business. Further SEBI ordered the operations to be
transferred to another fund house. It also directed to cancel the registration of Sahara MF’s
when the six-month period had expired.

Sebi had also canceled the portfolio management license of a Sahara, sometime before. In
pursuance of the following order issued by SEBI, Sahara MF approached the Securities
Appellate Tribunal. The appellants were, the Sahara Asset Management Co, Sahara Mutual
Fund and Sahara India Financial Corporation.

SAT granted six weeks to the appellants to approach the Supreme Court. After this, the Sahara
MF filed an appeal in the Supreme Court which was dismissed in October 2017 by the apex
court. Thereafter, Sebi directed Sahara MF to strictly obey the timelines specified in the order
passed in July 2015. But the SAT allowed Sahara to withdraw its appeal and to file a fresh
appeal as it has the liberty to do so.

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IPO AND GREEN SHOE OPTION

Most of us who invest in stocks of a company know what is an IPO (initial public offering).
An IPO is the first sale of a stock or share by a company to the public. Companies offering an
IPO are sometimes new, young companies, or companies which have been around for many
years and have finally decided to go public.

Before investing in an IPO, we go through the offer document of the company to know more
about it. A listed company is legally bound to abide by commitments made in the document.
Besides providing information about the company's competitive strengths, industry regulation,
corporate structure, main objects, subsidiary details, risk factors, etc, the offer document also
mentions a technical word called “Green shoe option”.

Over-allotment option

The green shoe option allows companies to intervene in the market to stabilise share prices
during the 30-day stabilisation period immediately after listing. This involves purchase of
equity shares from the market by the company-appointed agent in case the shares fall below
issue price.

The green shoe option is exercised by a company making a public issue. The issuer company
uses green shoe option during IPO to ensure that the shares price on the stock exchanges does
not fall below the issue price after issue of shares.

Green shoe is a kind of option which is primarily used at the time of IPO or listing of any stock
to ensure a successful opening price. Any company when decides to go public generally prefers
the IPO route, which it does with the help of big investment bankers also called underwriters.
These underwriters are responsible for making the public issue successful and find the buyers
for company’s shares. They are paid a certain amount of commission to do this work.

Green shoe option is a clause contained in the underwriting agreement of an IPO. The green
shoe option is also often referred to as an over-allotment provision. It allows the underwriting
syndicate to buy up to an additional 15% of the shares at the offering price if public demand
for the shares exceeds expectations and the stock trades above its offering price.

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From an investor's perspective, an issue with green shoe option provides more probability of
getting shares and also that post listing price may show relatively more stability as compared
to market.

Origin of the Greenshoe

The term "greenshoe" came from the Green Shoe Manufacturing Company (now called Stride
Rite Corporation), founded in 1919. It was the first company to implement the greenshoe clause
into their underwriting agreement.

In a company prospectus, the legal term for the greenshoe is "over-allotment option", because
in addition to the shares originally offered, shares are set aside for underwriters. This type of
option is the only means permitted by the US Securities and Exchange Commission (SEC) for
an underwriter to legally stabilise the price of a new issue after the offering price has been
determined. The SEC introduced this option to enhance the efficiency and competitiveness of
the fund raising process for IPOs.

Green shoe option in India

Green shoe options or over-allotment options were introduced by the Securities and Exchange
Board of India (SEBI) in 2003 to stabilise the aftermarket price of shares issued in IPOs.

WHAT IS 'FPO'

Definition: FPO (Follow on Public Offer) is a process by which a company, which is already
listed on an exchange, issues new shares to the investors or the existing shareholders, usually
the promoters. FPO is used by companies to diversify their equity base.

Description: A company uses FPO after it has gone through the process of an IPO and decides
to make more of its shares available to the public or to raise capital to expand or pay off debt.

Common Conditions for Public Issues and Rights Issues4. General conditions
(1) Any issuer offering specified securities through a public issue or rights issue shall satisfy
the conditions of this Chapter at the time of filing draft offer document with the Board (unless
Stated otherwise in this Chapter) and at the time of registering or filing the final offer document
with the Registrar of Companies or designated stock exchange, as the case may be.

(2) No issuer shall make a public issue or rights issue of specified securities:

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 (a) if the issuer, any of its promoters, promoter group or directors or persons in control
of the issuer are debarred from accessing the capital market by the Board;

(b) if any of the promoters, directors or persons in control of the issuer was or also is a
promoter, director or person in control of any other company which is debarred from
accessing the capital market under any order or directions made by the Board;

(c) if the issuer of convertible debt instruments is in the list of wilful defaulters
published by the Reserve Bank of India or it is in default of payment of interest or
repayment of principal amount in respect of debt instruments issued by it to the public,
if any, for a period of more than six months;

(d) unless it has made an application to one or more recognised stock exchanges for
listing of specified securities on such stock exchanges and has chosen one of them as
the designated stock exchange:

Provided that in case of an initial public offer, the issuer shall make an application for
listing of the specified securities in at least one recognised stock exchange having
nationwide trading terminals;

(e) unless it has entered into an agreement with a depository for dematerialisation of
specified securities already issued or proposed to be issued;

(f) unless all existing partly paid-up equity shares of the issuer have either been fully
paid up or forfeited;

(g) unless firm arrangements of finance through verifiable means towards seventy-five
per cent. of the Stated means of finance, excluding the amount to be raised through the
proposed public issue or rights issue or through existing identifiable internal accruals,
have been made.

Eligibility Criteria for IPO Application As Mandated By SEBI

Profit Norms
SEBI has mandated the following criteria based on the company's profitability for any company
desirous of issuing an IPO.

• The company should have at least Rs 3 crore in net tangible assets in each of the
previous three years. Out of this 3 crore amount, not more than 50% should be cash or
cash equivalent like money in an account, cash receivable or investment accounts.

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 However, if the Initial Public Offer is being made through offer through sale, this
restriction of 50% on monetary assets is not applicable.

• The company should have a net worth of at least one crore rupees in each of the previous
three years.

• The company should have an average operating profit of at least fifteen crore rupees
(pre-tax) in each of any three years among the previous 5 years.

• If the company has taken a new name, then 50% of the total revenue earned in the
previous one year should have come from the activity performed by the company after
assuming the new name.

• The total value of the issue size of the IPO by the company should not be more than 5
times the net worth of the company before the issue of the IPO.

Non-Profitability routes
• SEBI ensures that legitimate companies are not held back due to the stringent
profitability norms, thus to provide the necessary flexibility to these companies to
access the primary market, SEBI provides the QIB route.

• In the QIB route, the IPO must be issued through the book building method and out of
the entire offer, a minimum of 75% of the issue size should be allotted to the QIBs
(Qualified Institutional Buyers). The company issuing the IPO would be required to
refund the entire IPO subscription money if this minimum allotment requirement is not
attained.

Prerequisites Mandated by NSE and SEBI for IPO Application Apart from Eligibility
Norms
There are certain prerequisites mandated by the NSE and SEBI, which are apart from the
eligibility criteria, but these also need to be fulfilled by the company before it can issue the
IPO. These include:

Mandatory Prerequisites by NSE

The NSE requires the annual reports of the previous three financial years from any company
which desires to be listed on the stock exchange. The prerequisites include:

• The company should not have been referred to the NCLT (National Company Law
Tribunal) or NCLAT (National Company Law Appellate Tribunal).

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 • The company's net worth should not have been washed out by its losses, resulting in
negative net worth.
• The company should have a paid-up equity capital of not less than Rs. 10 crores. The
capitalisation on the equity being issues should not be less than Rs 25 crores.
• Promoters are individuals who have worked in the same line of business for at least
three years. They must also own at least 20% of the post-IPO equity share to be
considered a promoter. One person or many people can own this 20%.

Module 5

DEPOSITORY SYSTEM

To explain in simple terms a depository is a place where something is deposited for security
purposes. It could be a bank, a company or an institution that holds securities and facilitates
the exchange of the securities. The depository is an institution that is allowed to accept
monetary deposits from its customers.

The definition of depositories under the Depositories Act, 1996 is that a “depository” is a
company registered under the Companies Act, 1956. It would be granted a certificate of
registration under Section 12 subsection (1A) of Securities and Exchange Board of India Act
(SEBI), 1992. Hence the Depository becomes an organization like a central bank. The main
role of Depositories is to dematerialize the securities which mean converting the securities from
physical form to electronic form and enabling transactions in electronic form. The depository
needs to obtain a certificate of commencement of business from SEBI.

There are essentially four players in the depository system:

(i) The Depository

(ii) The Participant
(iii) The Beneficial Owner, and
(iv) The Issuer.

The Depository:

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A depository is a firm wherein the securities of an investor are held in electronic form and who
carries out the transactions of securities by means of book entry. The depository acts as a
defecto owner of the securities lodged with it for the limited purpose of transfer of ownership.
It functions as a custodian of securities of its clients. The name of the depository appears in the
records the issuer as the registered owner of securities.

At present there are two depositories in India:

(a) National Securities Depository Ltd. (NSDL), and

(b) (b) Central Depository Services (India) Ltd. (CDSL).

National Securities Depository Limited which commenced operations during November 1996
was promoted by IDBI, UTI and National Stock Exchange (NSE). Central Depository Services
(India) Limited commenced operations during February1999. It was promoted by Mumbai
Stock Exchange in association with Bank of Baroda, Bank of India, State Bank of India and
HDFC Bank.

The Participant:

A participant is an agent of the depository. He functions as a bridge between the depository

and the beneficial owners. He maintains the ownership records of every beneficial owner in
book entry form. Both the depository and the participant have to be registered with the
Securities and Exchange Board of India. SEBI grants necessary approval for the same only on
the satisfaction of the condition that adequate systems and safeguards are available in such
companies in order to ensure against manipulation of records and transactions.

The Beneficial Owner:

Beneficial owner means a person whose name is recorded as such with a depository. A
beneficial owner is the real owner of the securities who has lodged his securities with the
depository in the form of book entry. He has all the rights and liabilities associated with the
securities.

The Issuer:

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The issuer is the company which issues the security. It maintains a register for recording the
names of the registered owners of securities, the depositories. These issuers send a list of
shareholders, who opt for the depository system, to the depositories.

Depository System In India

In April 1996 the Governing Board of SEBI approved the draft of SEBI (Depositories and
Participants) Regulations 1996. The Securities and Exchange Board of India notified these
regulations on May 16, 1996. The government of India in 1996 introduced in Lok Sabha the
Depository Bill to usher in scrip less trading and avoid “bad delivery, theft and forgery in share
transfer and settlement”.

National Securities Depositories Ltd. (NSDL) promoted by Industrial Development Bank of

India, Unit Trust of India and National Stock Exchange emerged as the first depository to be
registered in India. There was a great debate on central-versusmultiple depository system.
Ultimately multiple depository system became a choice. Considering the sheer size of the
network that would have to be established, a single organisation may not be able to handle it.
To have competition, multiple depository is a must. Subsequently, another depository emerged
on Indian scene i.e. Central Depository Services Limited (CDSL). It received a certificate of
commencement of business from SEBI on February 8, 1999. CDSL was set up with the
objective of providing convenient, dependable and secure depository services at affordable cost
to all market participants. All leading stock exchanges like the National Stock Exchange,
Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc have
established connectivity with CDSL.

Benefits of Depository System

The following are the benefits for the investors:

1. Bad deliveries are almost eliminated.

2. The risks associated with physical certificates such as loss, theft, mutilation of
certificate etc. are eliminated.
3. It eliminates handling of huge volumes of paper work.51

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 4. There is immediate transfer and registration of the securities (at the end of every
settlement cycle, which is 4 working days i.e. T+3) and you need not have to suffer
delays on account of processing time.
5. It leads to faster settlement cycle and faster realization of sale proceeds so the fund of
the investor is not tied up unnecessarily.
6. The system facilitates a faster disbursement of security holding benefits like rights
shares, bonus shares etc.
7. The stamp duty on transfer of securities, which is 0.25% of the consideration on transfer
of shares in physical form is not applicable.
8. Availability of periodical status report to investors on their holding and transactions is
disseminated by the depository.

Dematerialisation

It is the conversion of the physical share and debenture certificates to an electronic form.
Managing investment in shares and securities becomes much easier when all physical
certificates are present in the dematerialised form. It reduces the chances of forgery and fraud
that had become rampant when electronic entries were unavailable. In the case of
dematerialisation, the electronic records are stored at a depository. In India, the National
Securities Depository Limited (NSDL) and Central Depository Services (India) Ltd (CDSL)
are the authorized depositories.

Rematerialisation

Any investor who has already converted the securities and debenture certificates to electronic
formats has the option of changing them to physical form once again. People opt for
rematerialisation to avoid paying for the maintenance charge of a Demat account that has only
1 or 2 shares. It is the process of converting all securities in the electronic form to physical
certificates. You will need to fill out a Remat Request Form (RRF) and approach
the Depository Participant (DP) with it.

Comparison Parameters Dematerialisation Rematerialisation

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 The transformation of physical
Conversion of the electronic records of the
Meaning certificates of shares and
share to paper (physical) form
debentures to electronic form
Dematerialised shares do not They possess distinct numbers issued by the
Identification Of Shares
have a distinct number RTA
All transactions take place in All transactions post-rematerialisation take
Transaction Mode
electronic formats only place physically
The Depository participant
Account Maintenance The company is in charge of account
(NSDL or CDSL) is in charge of
Authority maintenance
the account maintenance
The annual charges for
No maintenance charges are necessary for
Maintenance Costs maintenance vary between Rs.
physical certificates
500 and Rs. 1000
Threat of forgery and fraud to physical
Security Threats to the digital form are low
paperwork is higher
Dematerialisation is an easy
Rematerialisation is a complex process that
process. It is a ubiquitous part of
Difficulty takes a long time. It is difficult and may
share trading; almost every
require expert assistance
investor has experienced once

9. Dematerialisation and rematerialisation processes are the diametric opposites of each

other. In simple words, rematerialisation reverses the results of dematerialisation.

Certificate of Commencement of Business

The Board shall take into account for considering grant of certificate of commencement of
business, the following points, namely, whether

a) The depository has a net worth of not less than rupees one hundred crore;
b) The bye-laws of the depository have been approved by the Board;
c) The automatic data processing systems of the depository have been protected against
unautharised access, alteration, destruction, disclosure or dissemination of records and
data:

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 d) the network through which continuous electronic means of communications are
established between the depository, participants, issuers and issuer’s agents is secure
against unauthorised entry or access;
e) The depository has established standard transmission and encryption formats for
electronic communications of data between the depository, participants, issuers and
issuers’ agents;
f) the physical or electronic access to the premises, facilities, automatic data processing
systems, data storage sites and facilities including back up sites and facilities and to the
electronic data communication network connecting the depository, participants, issuers
and issuer’s agents is controlled, monitored and recorded;
g) the depository has a detailed operations manual explaining all aspects of its functioning,
including the interface and method of transmission of information between the
depository,- issuers, issuers’ agents, participants and beneficial owners;
h) the depository has established adequate procedures and facilities to ensure that its
records are protected against loss or destruction and arrangements have been made for
maintaining back up facilities at a location different from that of the depository;
i) the depository has made adequate arrangements including insurance for indemnifying
the beneficial owners for any loss that may be caused to such beneficial owners by the
wrongful act, negligence or default of the depository or its participants or of any
employee of the depository or participant; and
j) The grant of certificate of commencement of business is in the interest of investors in
the securities market.

SEBI (Depositories and Participants) Regulations, 1996

Board (SEBI) grants a certificate of registration to a depository subject to the following

conditions, namely:

a) the depository shall pay the registration fee specified within fifteen days of receipt of
intimation from the Board;
b) the depository shall comply with the provisions of the Act, the Depositories Ordinance,
the bye-laws, agreements and these regulations;
c) the depository shall not carryon any activity other than that of a depository unless the
activity is incidental to the activity of the depository;

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 d) the sponsor shall, at all times, hold at least fifty one per cent of the equity capital of the
depository and the balance of the equity capital of the depository shall be held by its
participants;
e) no participant shalf at any time, hold more than five per cent of the equity capital of the
depository;
f) If any information previously submitted by the depository or the sponsor to the Board
is found to be false or misleading in any material particular, or if there is any change in
such information, the depository shall forthwith inform the Board in writing;
g) the depository shall redress the grievances of the participants and the beneficial owners
within thirty days of the date of receipt of any complaint from a participant or a
beneficial owner and keep the Board informed about the number and the nature of
redressals:
h) The depository shall make an application for commencement of business under
regulation 14 within one year from the date of grant of certificate of registration under
this regulation; and
i) The depository shall amend its bye-laws as directed by SEBI

Rights and obligations of Depositories, Participants, Issuers and Beneficial Owners are
given below:

1. Agreement between Depository and Participant:

A depository shall enter into an agreement with one or more participants as its agent in the
prescribed form (Sec. 4).

2. Services of Depository:
Any person, through a participant, may enter into an agreement, in the specified form with any
depository for availing its services (Sec. 5).

3. Surrender of Certificate of Security:

(a) Any person who has entered into an agreement with the depository will have to surrender
the certificate of security, for which he seeks to avail the services of a depository, to the issuer;
(b) The issuer, on receipt of certificate of security shall cancel the certificate of security and
substitute in its records the name of the depository as a registered owner in respect of that

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security and inform the depository accordingly; and (c) the depository, thereafter will enter the
name of that person in its records, as the beneficial owner (Sec. 6).

4. Registration of Transfer of Securities with Depository:

Every depository shall, on receipt of intimation from a participant, register the transfer of
security in the name of the transferee. Further, if a beneficial owner or a transferee of any
security seeks to have custody of such security, the depository shall inform the issuer
accordingly (Sec. 7).

5. Options to Receive Security Certificate or Hold Securities with Depository:

Every person subscribing to securities offered by an issuer shall have the option either to
receive the security certificates or hold securities with a depository (Sec. 8).

6. Securities in Depositories to be in Fungible Form:

All securities held by a depository shall be dematerialised and shall be in a fungible form (Sec.
9).

7. Rights of Depositories and Beneficial Owner:

A depository shall be deemed to be the registered owner for the purposes of effecting transfer
of ownership of security on behalf of a beneficial owner. The depository as a registered owner
shall not have any voting rights or any other rights in respect of securities held by it. The
beneficial owner shall be entitled to all the rights and benefits and be subjected to all the
liabilities in respect of his securities held by a depository (Sec. 10).

8. Register of Beneficial Owner:

Every depository shall maintain a register and an index of beneficial owners in the manner
provided in Section 150, Section 151 and Section 152 of the Companies Act, 1956 (Sec. 11).

9. Pledge or Hypothecation of Securities Held in a Depository:

A beneficial owner may with the previous approval of the depository, create a pledge or
hypothecation in respect of a security owned by him through a depository.

Every beneficial owner shall give intimation of such pledge or hypothecation to the depository
and such depository shall thereupon make entries in its records accordingly (Sec. 12).

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10. Furnishing of Information and Records by Depository and Issuer:
Every depository is required to furnish to the issuer information about the transfer of securities
in the name of beneficial owners at such intervals and in such manner as may be specified by
the bye-laws. Every issuer also has to make available to the depository copies of the relevant
records in respect of securities held by such depository (Sec. 13).

11. Option to opt out in Respect of any Security:

If a beneficial owner seeks to opt out of a depository in respect of any security, he shall inform
the depository accordingly who will make appropriate entries in its records and shall inform
the issuer (Sec. 14).

12. Depositories to Indemnify Loss in Certain Cases:

The depository shall have to indemnify any loss caused to the beneficial owner due to its
negligence or of the participant. Where the loss due to the negligence of the participant is
indemnified by the depository, the depository shall have the right to recover the same from
such participant.

13. Systems and Procedures:

Every depository shall have systems and procedures which will enable it to co-ordinate with
the issuer or its agent, and the participants, to reconcile the records of ownership of securities
with the issuer or its agent, as the case may be, and with participants, on a daily basis.
(Regulation 30 of SEBI)

14. Internal monitoring, review and evaluation of systems and controls:

Every depository shall have adequate mechanisms for the purposes of reviewing, monitoring
and evaluating the depository’s controls, systems, procedures and safeguards.

15. External monitoring, review and evaluation of systems and controls:

Every depository shall cause an inspection of its controls, systems, procedures and safeguards
to be carried out annually and forward a copy of the report to the SEBI.

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 Module-6: Credit Rating and Evolution of Risk

Concept, Scope and Significance

Benefit to investors

Regulatory framework

Credit rating agencies in India and their process

CONCEPT, SCOPE AND SIGNIFICANCE

A credit rating is a quantified assessment of the creditworthiness of a borrower in general terms

or with respect to a particular debt or financial obligation. A credit rating can be assigned to
any entity that seeks to borrow money - an individual, corporation, state or provincial authority,
or sovereign government.

Definition: Credit rating is an analysis of the credit risks associated with a financial instrument
or a financial entity. It is a rating given to a particular entity based on the credentials and the
extent to which the financial statements of the entity are sound, in terms of borrowing and
lending that has been done in the past.

Meaning of a credit rating agency: A credit rating agency is a private company that looks at
the credit worthiness of a large-scale borrower, such as a company or country. It effectively
ranks the borrower on their ability to pay off their loan.

A credit rating agency (CRA, also called a ratings service) is a company that assigns credit
ratings, which rate a debtor's ability to pay back debt by making timely principal and interest
payments and the likelihood of default. An agency may rate the creditworthiness of issuers of
debt obligations, of debt instruments, and in some cases, of the servicers of the underlying debt,
but not of individual consumers. The debt instruments rated by CRAs include government
bonds, corporate bonds, CDs, municipal bonds, preferred stock, and collateralized securities,
such as mortgage- backed securities and collateralized debt obligations.

Characteristics of Credit Rating:

1. Assessment of issuer's capacity to repay. It assesses issuer's capacity to meet its financial
obligations i.e., its capacity to pay interest and repay the principal amount borrowed.

2. Based on data. A credit rating agency assesses financial strength of the borrower on the
financial data.

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3. Expressed in symbols. Ratings are expressed in symbols e.g. AAA, BBB which can be
understood by a layman too.

4. Done by expert. Credit rating is done by expert of reputed, accredited institutions.

5. Guidance about investment-not recommendation. Credit rating is only a guidance to

investors and not recommendation to invest in any particular instrument.

Functions/Importance of Credit Rating:

1. It provides unbiased opinion to investors. Opinion of good credit rating agency is unbiased
because it has no vested interest in the rated company.

2. Provide quality and dependable information. Credit rating agencies employ highly
qualified, trained and experienced staff to assess risks and they have access to vital and
important information and therefore can provide accurate information about
creditworthiness of the borrowing company.

3. Provide information in easy-to-understand language. Credit rating agencies gather

information, analyses and interpret it and present their findings in easy-to-understand
language that is in symbols like AAA, BB, C and not in technical language or in the form
of lengthy reports.

4. Provide information free of cost or at nominal cost. Credit ratings of instruments are
published in financial newspapers and advertisements of the rated companies. The public
has not to pay for them. Even otherwise, anybody can get them from credit rating agency
on payment of nominal fee. It is beyond the capacity of individual investors to gather such
information at their own cost.

5. Helps investors in taking investment decisions. Credit ratings help investors in assessing
risks and taking investment decision.

6. Disciplines corporate borrowers. When a borrower gets higher credit rating, it increases its
goodwill and other companies also do not want to lag behind in ratings and inculcate
financial discipline in their working and follow ethical practice to become eligible for good
ratings, this tendency promotes healthy discipline among companies.

7. Formation of public policy on investment. When the debt instruments have been rated by
credit rating agencies, policies can be laid down by regulatory authorities (SEBI, RBI)
about eligibility of securities in which funds can be invested by various institutions like

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 mutual funds, provident funds trust etc. For example, it can be prescribed that a mutual
fund cannot invest in debentures of a company unless it has got the rating of AAA.

BENEFIT TO INVESTORS

BENEFITS OF CREDIT RATING

Credit rating offers many advantages which can be classified into:

A. Benefits to investors.

B. Benefits to the rated company.

C. Benefits to intermediaries.

D. Benefits to the business world.

Benefits To Investors:

1. Assessment of risk. The investor through credit rating can assess risk involved in an
investment. A small individual investor does not have the skills, time and resources to
undertake detailed risk evaluation himself. Credit rating agencies who have expert
knowledge, skills and manpower to study these matters can do this job for him. Moreover,
the ratings which are expressed in symbols like AAA, BB etc. can be understood easily by
investors.

2. Information at low cost. Credit ratings are published in financial newspapers and are
available from rating agencies at nominal fees. This way the investors get credit
information about borrowers at no or little cost.

3. Advantage of continuous monitoring. Credit rating agencies do not normally undertake

rating of securities only once. They continuously monitor them and upgrade and downgrade
the ratings depending upon changed circumstances.

4. Provides the investors a choice of Investment. Credit ratings agencies helps the investors
to gather information about creditworthiness of different companies. So, investors have a
choice to invest in one company or the other.

5. Ratings by credit rating agencies is dependable. A rating agency has no vested interest
in a security to be rated and has no business links with the management of the issuer
company. Hence ratings by them are unbiased and credible.

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Benefits to the Rated Company:

Ease in borrowings.

Borrowing at cheaper rates.

Facilitates growth.

Recognition of lesser-known companies.

Adds to the goodwill of the rated company.

Imposes financial discipline on borrowers.

Greater information disclosure.

Benefits to Intermediaries:

1. Merchant bankers' and brokers' job made easy. In the absence of credit rating, merchant
bankers or brokers have to convince the investors about financial position of the borrowing
company. If a borrowing company's credit rating is done by a reputed credit agency, the task
of merchant bankers and brokers becomes much easy.

Benefits to the Business World:

1. Increase in investor population. If investors get good guidance about investing the money
in debt instruments through credit ratings, more and more people are encouraged to invest
their savings in corporate debts.

2. Guidance to foreign investors. Foreign collaborators or foreign financial institutions will

invest in those companies only whose credit rating is high. Credit rating will enable them
to instantly identify the position of the company.

REGULATORY FRAMEWORK

In India, CRAs are regulated by the Securities Exchange Board of India SEBI. SEBI was one
of the first regulators globally, to put forth a comprehensive framework for the regulation of
CRAs through the SEBI (Credit Rating Agencies) Regulations, 1999 (‘CRA Regulations’).

The CRA Regulations cover the following areas:

1. Registration: Broadly, the CRA Regulations require that CRAs should be companies
promoted by persons who have experience in the field of credit rating i.e., by financial

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 institutions or by persons who have a net-worth of more than 100 crore rupees. CRAs need
to have a minimum net-worth of 5 crore rupees, and adequate infrastructure, professionals
and employees to carry on the activity of issuing credit ratings. Additionally, registration
would only be granted if it registering the applicant is in the interest of investors and the
securities market.

2. Obligations: The CRA Regulations envisage that CRAs need to carry out their activities
in accordance with the terms of their engagement with the issuer, and the baseline principles
in the Regulations. CRAs have to comply with the Code of Conduct prescribed by SEBI,
which requires that they discharge their duties with integrity, professional competence,
independence and confidentiality. In addition, CRAs are required to monitor their rating
throughout the lifetime of the securities rated and carry-on periodic reviews of their rating
as well.

3. Disclosure: The CRA Regulations require CRAs to maintain and disclose their ratings in
a specified manner. They require that CRAs should maintain copies of their rating notes,
ratings issued, terms of engagement, records of decisions of rating committees and fees
charged for ratings for at least five years.

4. Conflict of interest: The Regulations attempt to reduce conflicts of interest. They require
that CRAs may not rate securities that are issued by their promoters or their associates. In
addition, CRAs must also maintain an arm’s length relationship between credit rating
activities and other activities.

5. Accountability and Enforcement: The Regulations require that CRAs should have an
internal audit, submit information to SEBI whenever required, and be open to inspection
and investigation by SEBI. They also specify that CRAs may be held liable for any
contravention under the SEBI Act, or any of the Rules or Regulations as specified in them.
Alternatively, they may be held liable under Chapter V of the Securities and Exchange
Board of India (Intermediaries) Regulations, 2008.

Till 2008, the regulatory framework for CRAs did not undergo any significant changes.
However, in the aftermath of the global financial crisis, in which CRAs were considered
complicit, a ‘Committee on Comprehensive Regulation for Credit Rating Agencies’ was
constituted to review the regulatory framework. The Committee concluded that “prima facie,
there is no immediate concern about the operations and activities of CRAs in India even in the
context of the recent financial crisis. However, there is a need to strengthen the existing

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regulations by learning the appropriate lessons from the current crisis.” Thereafter, SEBI has
introduced several changes to the regulatory framework for CRAs.

In 2010, SEBI issued circulars overhauling its regulatory framework, on taking note of the
pivotal role of CRAs in the financial markets and the importance of transparency by CRAs.
SEBI issued circulars laying down detailed requirements for the internal audit of CRAs and
prescribing enhanced disclosures to be made by CRAs. SEBI required CRAs to disclose default
matrices of securities as well as preserve explanatory notes for each rating or surveillance
conducted by them.

Thus far, SEBI regulated only the rating of debt securities. However, CRAs rated a vast variety
of instruments, including bank loans, overdraft facilities, letters of credit. All of these rating
activities remained unregulated. However, in 2012, SEBI issued a circular stating that that
CRAs would “follow the applicable requirements pertaining to rating process and methodology
and its records, transparency and disclosures, avoidance of conflict of interest, code of conduct,
etc., as prescribed in the Regulations and circulars issued by SEBI from time to time” for rating
of other instruments as well.

In 2016, SEBI issued a circular laying down guidelines to enhance the standards followed by
CRAs and improve transparency in their policies. This circular requires CRAs to publicly
disclose their rating criteria and rating processes, standardise press releases for rating actions,
disclose rating both in case of non-acceptance by issuers and non-cooperation by issuers and
disclose a delay in periodic review of ratings. In addition, the circular requires CRAs to impose
accountability on rating analysts, and improve the functioning and evaluation of rating
committees. Despite the consistent strengthening of the regulatory regime in India, some
concerns regarding the regulation of CRAs persist. These will be explored in the next chapter.

CREDIT RATING AGENCIES IN INDIA AND THEIR PROCESS

There are 6 credit rating agencies which are registered with SEBI. These are CRISIL, ICRA,
CARE, Fitch India, Brickwork Ratings, and SMERA.

1. Credit Rating and Information Services of India Limited (CRISIL)

• It is India’s first credit rating agency which was incorporated and promoted by the erstwhile
ICICI Ltd, along with UTI and other financial institutions in 1987.

• After 1 year, i.e., in 1988 it commenced its operations

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• It has its head office in Mumbai.

• It is India’s foremost provider of ratings, data and research, analytics and solutions, with a
strong track record of growth and innovation.

• It delivers independent opinions and efficient solutions.

• CRISIL’s businesses operate from 8 countries including USA, Argentina, Poland, UK,
India, China, Hong Kong and Singapore.

• CRISIL’s majority shareholder is Standard & Poor’s.

• It also works with governments and policy-makers in India and other emerging markets in
the infrastructure domain.

2. Investment Information and Credit rating agency (ICRA)

• The second credit rating agency incorporated in India was ICRA in 1991.

• It was set up by leading financial/investment institutions, commercial banks and

financial services companies as an independent and professional investment
Information and Credit Rating Agency.

• It is a public limited company.

• It has its head office in New Delhi.

• ICRA’s majority shareholder is Moody’s.

3. Credit Analysis & Research Ltd. (CARE)

• The next credit rating agency to be set up was CARE in 1993.

• It is the second-largest credit rating agency in India.

• It has its head office in Mumbai.

• CARE Ratings is one of the 5 partners of an international rating agency called ARC
Ratings.

4. ONICRA

• It is a private sector agency set up by Onida Finance.

• It has its head office in Gurgaon.

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 • It provides ratings, risk assessment and analytical solutions to Individuals, MSMEs and
Corporates.

• It is one of only 7 agencies licensed by NSIC (National Small Industries Corporation)

to rate SMEs.

• They have Pan India Presence with offices over 125 locations.

CREDIT RATING PROCESS

In India credit rating is done mostly at the request of the borrowers or issuer companies. The
borrower or issuer company requests the credit rating agency for assigning a ranking to the
proposed instrument. The process followed by most of the credit rating agencies is as follows:

1. Agreement. An agreement is entered into between the rating agency and the issuer company.
It covers details about terms and conditions for doing the rating.

2. Appointment of analytical team. The rating agency assigns the job to a team of experts. The
team usually comprises of two analysts who have expert knowledge in the relevant business
area and is responsible for carrying out rating.

3. Obtaining information. The analytical team obtains the required information from the client
company and studies company's financial position, cash flows, nature and basis of competition,
market share, operating efficiency arrangements, managements track cost structure, selling and
distribution record, power (electricity) and labour situation etc.

4. Meeting the officials. To obtain clarifications and understanding the client's business the
analytical team visits and interacts with the executives of the client.

5. Discussion about findings. After completion of study of facts and their analysis by the
analytical team the matter is placed before the internal committee (which comprises of senior
analysts) an opinion about the rating is taken.

6. Meeting of the rating committee. The findings of internal committee are referred to the
“rating committee" which generally comprises of a few directors and is the final authority for
assigning ratings.

7. Communication of decision. The rating decided by the rating committee is communicated to

the requesting company.

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8. Information to the public. The rating company publishes the rating through reports and the
press.

9. Revision of the rating. Once the issuer company has accepted the rating, the rating agency
is under an obligation to monitor the assigned rating. The rating agency monitors all ratings
during the life of the instrument.

Module- 7: Other Instruments

Mutual Funds: Definition, Types, Importance, Risk involved, Net Asset Value (NAV)

Overview of SEBI (Mutual Funds) Regulation, 1996.

Venture Capital- meaning and definition, significance, Indian Venture Capital Industries

Instruments Issued Outside Indian- FCCBs, GDRs, ADRs, ECBs.

MUTUAL FUNDS: DEFINITION, TYPES, IMPORTANCE, RISK INVOLVED, NET

ASSET VALUE (NAV)

Mutual Funds

A mutual fund is a investment which is made of a pool of funds collected from many investors
for the purpose of investing in securities such as stocks, bonds, money market instruments and
similar assets. Mutual funds are operated by Money managers who invest the funds capital and
attempt to produce capital gains and income for the fund investors. In simple words, a mutual
fund collects savings from small investors, invest them in govt. And other corporate security
and earn income through interest and dividends besides capital gains. It works on the principle
of small drops of chattel making a big ocean.

So, a mutual fund is nothing but a form of collective investment. It is formed by the coming
together of a no. of investors who transfer their surplus funds to a professionally qualified
organization to manage it. To get the surplus funds from investors, the fund adopts a simple
technique. Each fund is divided into small fraction called Unite of equal values. Each investor
is allocated unite in proportion to his size of investment. Thus, every investor, whether big or
small, will have a share in the fund and can enjoy the white portfolio held by the fund.

Features of Mutual Funds:

i. A mutual fund belongs to those who have contributed to that fund and their fund
lies in hands of investors.

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 ii. Since all member can’ take the parts in the management of fund, it is left in the
hands of investment professionals who ear a fee for their services.

iii. The pool of funds collected is invested to the portfolio of marketable securities.
Generally, investment portfolio mutual fund is created a/c to the objective of the
fund. For example, a Sectoral mutual fund invests its mutual fund in a specific
sector like I.T. Sector, Oil sector, etc.

However, the SEBI (Mutual Funds) Regulation, 1993 defines a mutual fund as a fund
established in the form of a trust by sponsor, to raise monies by trustee through sale of units by
public under one or more scheme for investing in securities in accordance with these
regulations.

Types/Classification of Mutual Funds

i. On the basis of execution & operation.

ii. On the basis of yield and investment pattern.

On the basis of execution and operation

Mutual funds can be again divided into close ended fund and open-ended fund.

1. Close ended funds: - Under this scheme the corpus of the funds and its duration prefixed.
In other words, the corpus of the fund and no. of units are determined in advance. Once the
subscription reaches, the predetermined level, the entry of investor is closed after the expiry
of fixed period, the entire corpus is disinvested and the proceeds are distributed to the
various unit holders in proportion to their holding. Thus, the fund suggests to be the fund
after the final distribution.

Features of close ended fund

The period/target amount of the fund is definite and fixed before hand.

Once the period is over or the target is reached, the door is closed for the investors.
They can’t purchase any more units.

These units are publicly traded through stock exchange and generally there is no
purchase facility by the fund.

The main objective of this fund is capital …………….

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 The whole fund is available for the entire duration of the scheme and there will not be
any redemption demands before its maturity.

At the time of redemption, the entire investment relating to a closed ended scheme is
liquidated and the proceeds are distributed among the unit holders.

From the investors point of view, it may attract more tax, since the entire capital
appreciation is realized in at one stage itself.

2. Open ended funds: - It is just opposite of close ended fund. Under this scheme, the size/
period of fund is not pre-determined. The investors are far to buy and sell any no. of units
at any point of time. For instance, the unit scheme of the Unit Trust of India is an open-
ended fund both in terms of period and target amount. Anybody can buy this unit and sell
it also at any time at his discretion. So, the main features are as below:

1. There is complete flexibility with regard to once investment or disinvestment. In other

words, there is free entry and exit of investors in an open-ended fund. There is no time
limit. The investor can join in and come out from the fund whoever he/she will desire.

2. These units are not publicly traded but the fund is ready to repurchase them an resell
them at any time.

3. The investor is offered instant liquidity in the sense that the units can be sold on any
working day. In fact, the fund operates just like a bank account where one can get cash
across the counter for any no. of units sold.

4. The main objective of this fund is income generation. The investors get dividend, rights
or bonus shoes as rewards for their investments.

5. The fund manager has to be very careful in managing the investments because he has
to meet the redemption demands at any time made during the life of the scheme.

Income Funds (Features)

The investors are assured of regular income at periodic intervals. For example, Half-
yearly or yearly.

The main objective of this type of fund to declare regular dividends and not
capital………….

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 The pattern of investment oriented towards high- and fixed-income yielding securities
like debentures and boards etc

This is absolutely suitable to the old and retired people who may not have any regular
income.

It concerns itself with short run..............Only.

Pure Growth Funds/ Growth Oriented Funds (Features):

The growth-oriented funds aim at meeting the investor’s need for capital appreciation.

The investment strategies therefore confirm to the fund objective by investing the fund
predominantly on equities with high growth potential.

The fund tries to get capital appreciation by taking much risks and investing on risk
bearing equities and high growth equity shares.

The fund may declare dividend but its principal objective is only capital appreciation.

This fund is best suitable to salaried and business people who have high risk bearing
capacity and ability to defer liquidity.

Balanced Funds/ Income-Cum-Growth Fund:

It is nothing but a combination of both income and growth funds. It aims at distributing regular
income as well as capital appreciation. This achieved by balancing the investments between
the high growth equity shares and also fixed income earning securities.

Specialized Funds:

Besides the above funds, a large no. of specialized funds is in existence abroad. They offer
special schemes so as to meet the specific needs of specific categories of people like pensioners,
widows, etc. For example- Japan Fund, South Korea Fund, etc. Infact, these funds open the
door for foreign investors to invest on the domestic securities of these countries.

Money Market Mutual Funds:

These funds are basically open-ended mutual funds and as such they have all the features of
the open-ended fund. But they invest in highly liquid and safe securities like commercial paper,
banker acceptances, certificates of deposits treasury bill etc. There funds are a new concept in
India and RBI has already laid down certain stringent regulations in this regard.

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IMPORTANCE OF MUTUAL FUNDS:

1. Channelizing Savings for investment: - Mutual Funds Act as a vehicle in galvanizing the
savings of the people by offering various schemes suitable to various classes of customers for
development of the economy as a whole. In the absence of the mutual funds, these savings
would have remained idle. Thus, the whole economy benefits due to the cost efficient and
optimum use and allocation of scarce financial and real resources in the economy for its speedy
development.

2. Offering wide Portfolios Investment: - Small and medium investors may face difficulties
when they invest in these stock exchange directly. But these investors can enjoy the wide
portfolio of the investment held by the mutual funds. The fund diversifies its risks by investing
on a large variety of shares and bonds which cannot be done by small and medium investors.
This is in accordance with maxim “Not to lay all eggs in one basket”.

3. Providing better yields: - The pulling of the funds from a large no. of customers enables the
fund to have large funds at its disposal. Due to these large fund, mutual funds are able to buy
cheaper and sell dearer then the small and medium investors. So, they provide better yields to
their customers. They also enjoy the economics of large scale and can reduce the cost of capital
market appreciation. The transaction cost of large investments are definitely lower than that of
small investors.

4. Rendering expertise investment service at low cost: - The management of the fund is
generally assigned to professionals who are well trained and have adequate experience in field
if investments. The investment decision of these professionals are always backed by informed
judgment and experience. So, investors are assured of quality services in their best interest.

5. Providing Research Service: - A mutual fund is able to command vast resources and hence
it is possible for it to have an in-depth study and carry out research on corporate securities.
Each fund maintains a large research team which constantly analyzes the companies and
industries and recommends the fund to buy or sell a particular share.

6. Offering Tax Benefits: - Certain funds offer tax benefits to its customers. Thus, apart from
dividends, interests and capital appreciations, investors also stand to get the benefit of tax
concession.

7. Introducing Flexible Investment Schedule: - Some mutual funds have permitted the investors
to exchange their units from one scheme to another and this flexibility is a great boon to

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investors. Income units can be exchanged for growth units depending upon the performance of
the funds. One cannot derive such flexibility in any other investments.

8. Providing greater affordability and liquidity: - Even a very small investor can afford to invest
in mutual funds. They provide an attractive and cost-efficient alternative to direct purchase of
shares.

9. Simplified Record Keeping: - An investor with just an investment in 500 shares or so in 3 or

4 companies has to keep proper records of dividend payments, bonus issues, price movements,
purchase/sale instruction, brokerage & other related items. This is very laborious task because
record keeping is biggest problem for small and medium investors but mutual fund can relief
them from these problems.

10. Reducing the marketing cost of new issues: - The mutual funds help to reduce the marketing
cost of new issues. The promoters used to allocate a major share of Initial Public Offering (IPO)
to the mutual funds and thus they are saved from the marketing cost of such issues.

Risk in Mutual Funds:

1. Market Risks: - In general, there are certain risks associated with every kind of investment
share. These are called as Market Risks. The market risk can be reduced but cannot be
completely eliminated even by a good investment management. The price of shares are subject
to wide price fluctuations depending upon market conditions over which nobody has any
control. Moreover, each and every economy has to pass through various cycles like boom,
recession, slump, recovery. These various phases may affect the market condition to a great
extent.

2. Scheme Risks: - There are certain risk inherent in the scheme itself. It all depends upon
nature of the scheme. For example, in a pure growth scheme, risks are greater. It is obvious
because if one expects more return, as in case of growth scheme, he or she has to take more
risks.

3. Investment Risks: - Whether the mutual fund makes money I shares or losses depends upon
the investment expertise of the asset management company. If the investment advice does
wrong, then the funds have to suffer a lot.

4. Business Risks: - The corpus of mutual fund might have been invested in a company share.
If the business of that company suffers any setback, it cannot declare any dividend. It can even

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go to the extent of winding up of its business. Though the mutual fund can tackle such risk, yet
its income paying capacity is affected.

5. Political Risks: - Successive government bring with them new economic ideologies and
policies. It’s often said that many economic divisions are politically motivated. Changes in
government bring in the risk of uncertainty which every player in the financial service industry
has to face. So, Mutual Funds are also in the category.

Net Asset Value (NAV)

Mutual fund net asset value (NAV) represents a fund's per share market value. It is the price at
which investors buy (bid price) fund shares from a fund company and sell them (redemption
price) to a fund company. A fund's NAV is calculated by dividing the total value of all the cash
and securities in a fund's portfolio, less any liabilities, by the number of shares outstanding.

Understanding Mutual Fund NAV

A NAV computation is undertaken once at the end of each trading day based on the closing
market prices of the portfolio's securities. The formula for a mutual fund's NAV calculation is
straightforward:

NAV = (Assets - Liabilities) / Total number of outstanding shares

For example, let's say a mutual fund has $45 million invested in securities and $5 million in
cash for total assets of $50 million. The fund has liabilities of $10 million. As a result, the fund
would have a total value of $40 million.

The total value figure is important to investors because it is from here that the price per unit of
a fund can be calculated. By dividing the total value of a fund by the number of outstanding
units, you are left with the price per unit—the form of measurement in which NAV is usually
quoted. As such, the price of a mutual fund is updated around the same time as the NAVPS.
Building on our previous example, if the fund had 4 million shares outstanding, the price-per-
share value would be $40 million divided by 4 million, which equals a NAV of $10 per share.

Mutual Fund NAV vs. Stock Prices

The NAV pricing system for the trading of shares of mutual funds differs significantly from
that of common stocks or equities, which are issued by companies and listed on a stock
exchange.

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A company issues a finite number of equity shares through an initial public offering (IPO), and
possibly subsequent additional offerings, which are then traded on exchanges such as the New
York Stock Exchange (NYSE). The prices of stocks are set by market forces or the supply and
demand for the shares. The value or pricing system for stocks is based solely on market
demand.

On the other hand, a mutual fund's value is determined by how much is invested in the fund as
well as the costs to run it, and its outstanding shares. However, the NAV doesn't provide a
performance metric for the fund. Because mutual funds distribute virtually all their income and
realized capital gains to fund shareholders, a mutual fund's NAV is relatively unimportant in
gauging a fund's performance. Instead, a mutual fund is best judged by its total return, which
includes how well the underlying securities have performed as well as any dividends paid

OVERVIEW OF SEBI (MUTUAL FUNDS) REGULATION, 1996.

Investors looking to invest in mutual funds must be aware of rules and regulations that govern
the Indian mutual fund sector – SEBI guidelines for mutual funds. In India, the SEBI MF
Regulations of 1996 govern the working of mutual funds. These guidelines treat mutual funds
like Public Trusts that fall under the Indian Trust Act of 1982. For handling mutual funds and
ensuring accountability on the trustees, the guidelines specify a three-tier set up comprising of
the fund managers, the investors, and the representatives.

General Guidelines for Mutual Funds

For proper functioning of mutual funds and for ensuring proper protection of investors, the
following guidelines have been framed by govt. of India: -

(a.) General Guidelines

i. Money market mutual funds would be regulated by RBI while other mutual funds
would be regulated by SEBI.

ii. Mutual Fund shall be established in the form of trust under the Indian Trust Act and
authorized for business by SEBI. Mutual Funds shall be operated only by separately
established asset management company.

(b.)Business Activity

i. Both asset management company and trustee should be treated as two separate
legal entities.

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 ii. Asset Management Companies should not be permitted to take any other
business activity except mutual funds.

iii. One asset management company cannot act as the assert management company
for another mutual fund.

(c.) Schemes

i. Each scheme of a mutual fund must be compulsorily registered with the SEBI
before it is floated in the market.

ii. The minimum size of the fund should be 20 crore in the case of each closed ended
scheme and it should be 50 crores for each open ended scheme.

iii. For each scheme, there should be a separate and responsible fund manager.

(d.)Investment Norms

i. Mutual fund should invest only in transferable securities either in the capital
market or money market or security debt.

ii. The mutual fund shall not invest more than 5% of its corpus for any scheme in
any company’s share.

iii. No scheme should invest in any other scheme under the same asset management
company.

(e.) Disclosure and Reporting

i. The SEBI is given wide powers to call for any information regarding the
operation of mutual funds.

ii. Every mutual fund is required to send its copies of duly audited, annual
statement of accounts, 6 monthly audited accounts quarterly statements of
movement in net asset to the SEBI.

iii. The SEBI can lay down the accounting policy, the format and contents of
financial statement and other reports.

VENTURE CAPITAL- MEANING AND DEFINITION, SIGNIFICANCE, INDIAN

VENTURE CAPITAL INDUSTRIES

Meaning of Venture Capital:

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Venture Capital is long term risk capital to finance high technology projects which involves
risk but at the same time strong potential for growth venture capital pull their resources
including managerial activities to assist new entrepreneurs in the early years of the project.
Once the project reaches the stage of profitability, they sell their equity holdings at a high
premium.

Features of Venture Capital:

Venture Capital is usually in the form of an equity participation. It may also take the form
of convertible debt or long-term loan.

Investment is made only in high risk but high growth potential project.

Venture Capital is available only for commercialization of new ideas or new technology
and not for enterprises in trading, broking, financial services, agency or research and
development.

Venture Capital joins the entrepreneur as a co-promoter a share the risk and rewards of
enterprise.

There is continuous involvement in business after making an investment by investors.

Once the Venture has reached the full potential, the venture capitalist disinvests his holding
either to the promoters or in the market. The basic objective of investment is not profit but
capital appreciation at the time of disinvestment.

Venture Capital is not just injection of money but also an input needed to setup the firm,
design its marketing strategy and organize and manage it.

Investment is usually made in small and medium scale enterprises.

Scope Of Venture Capital:

Venture Capital may take different forms at different stages of project. There are 4 successive
stages of development of a project. Financial Institution and banks usually start financing at
2nd and 3rd stage but rarely from the first stage. But Venture Capitalist provide finance even
from the first stage of idea formulation. However, the various stages in the financing of venture
capital are as below:

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1. Development of an idea/seed finance- In the initial stage venture capitalist provide seed
capital for translating idea into business proposition. At this stage investigation is made in depth
which normally takes a year or more.

2. Implementation Stage/Start-up Finance- When the firm is set up to manufacture a product

or provide a service start-up finance is provided by the venture capitalist.

3. Fledging Stage/Additional Finance- In the third stage the firm has made some head way and
entered the stage of manufacturing a product but faces teething problems.

4. Establishment Stage/Establishment Finance- It needs further financing for expansion and

diversification so that it can reap economies of scale and attain stability. At the end of the
establishment stage the firm is listed on the stock exchange and at this point the venture
capitalist disinvest their shareholdings through available exist routes.

Importance Of Venture Capital

1. Advantages to the investing public- The investing public will be able to reduce risk
significantly against unscrupulous management. The investors do not have any means to ensure
that the affairs of the business are conducted prudently. The venture fund having
representatives on the board of directors of the company would overcome it.

2. Advantages to the promoters- The venture capitalist act as business partners who share the
reverse as well as the risks. The venture capitalist provides strategic, operational, tactical and
financial advice based on past experience with other companies in similar situations. The
venture capitalist help in recruitment of personnel improving relationship with international
markets, co-investment with other venture capital firms and in decision making.

3. General Advantages- A developed venture capital institutional setup reduces the time lag
between a technological innovation and its commercial exploitation. It helps in developing new
processes or products in conducive atmosphere free from dead weight of corporate
bureaucracy, which helps in exploiting its full potential. Venture Capital firms also serves as
an intermediary between investors looking for high returns for their money and entrepreneurs
in search of needed capital for their start-ups.

Indian Venture Capital Industries

1. Kalaari Capital; Kalaari Capital, founded in 2006 in Bengaluru by Vani Kola. It focuses on
technology-related companies in India. Till now it has made more than 92 investments across

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3 funds and witnessed more than 15 exits from companies like Myntra and Snapdeal. It has
also made a partial exit from Zivame. Kalaari Capital manages $650 Million in assets under
management. It boasts of a strong advisory team in Bangalore investing in the early stage.
Kalaari is passionate about investing in entrepreneurs who are poised to be tomorrow's global
leaders. This firm had funded $290 Million in 2015, which was the largest fund by anIndian
VC at that time.

2. Matrix Partners: Matrix Partners is a US-based private equity investment firm focused on
venture capital investments. The firm invests in seed and early-stage companies in the United
States and India. It mainly concentrates on the software, communications, semiconductors, data
storage, Internet, or wireless sectors. Matrix has invested in Apple Computer, Alteon Web
Systems, and Office Club. It is said to have nearly $4 Bn as assets under management (AUM).
The company has invested in more than 549 companies throughout the world with its second
fund. Online gaming platform Zupee raised $10 Million in a funding round led by US-based
growth equity firm West Cap Group and existing investor Matrix Partners India.

Other Industries

3. Nexus Venture Partners

4. Indian Angel Network

15. Omidyar Network India

INSTRUMENTS ISSUED OUTSIDE INDIAN- FCCBs, GDRs, ADRSs, ECBs.

Foreign Currency Convertible Bonds (FCCB): Foreign currency convertible bond (FCCB)
is a convertible bond issued by an issuer company in a country whose currency different from
its own currency. A company can raise funds in the form of foreign currency by this instrument.
FCCB are bonds issued in accordance with the scheme defined by Ministry of Finance,
Government of India.

Salient features of FCCB:

The bonds are issued in a currency different from that of the issuing country for the purpose
of fundraising.

FCCBs can be subscribed by a non- resident in foreign currency

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 They collectively act like debt and equity instruments whereby regular payment of interest
and a principal payment on maturity is made.

At the same time, these bonds also give the bondholder the choice to convert them into
ordinary shares, either in whole or in part.

Global Depository Receipts (GDR): GDR equity shares are denominated in dollar and
tradable on a stock exchange in Europe or USA. For example, a GDR of $100 may comprise
of 2 equity shares of $50 each amounting to whatever the prevailing exchange rate is.

Main features of GDR:

GDR represents certain number of equity shares denominated in dollar terms

The issuer collects the proceeds in foreign currency

GDRs are traded on stock exchanges of Europe and USA

And funds are raised from foreign capital market of the USA and Europe

All shares to be issued are deposited with an intermediary called ‘depository’ located in the
listing country

The Depository issues a receipt against these shares

Each receipt has a fixed number of shares usually 2 or 4

The shares issued to the depository may be in physical possession of another

Intermediary called ‘custodian’ who acts as depositor’s agent.

The equity shares registered in the name of depository are then issued in form of GDR to
the investors of that foreign country

The GDR does not appear in the books of the issuing company

ADR or GDR holders do not have voting rights and therefore not bound by strict definition
of foreign ownership

Two-way fungibility is permitted in GDRs whereby they are freely convertible into Shares
and back into GDRs without restriction to the extent of the original issue size.

The issue of GDR is governed by international laws

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 Since GDR is also denominated in rupees, hence, GDR does not carry any exchange risk
as its face value is protected against the exchange risk

GDRs are listed at Luxembourg and traded at two other stock exchanges namely,

The OTC market in London and in the USA by private placement

NRIs and foreign residents can buy GDR by using their regular share trading account

American Depository Receipts (ADR): Devised in the late 1920s to help Americans invest
in overseas securities. The main reason for introducing ADRs were the complexities involved
in buying shares in foreign countries and the difficulties associated with trading at different
prices and currency values.

GDR v/s ADR:

There is not much different between GDR and ADR. Few of the differences includes-
GDR can be issued in the USA and other European countries. It is listed on the stock
exchanges of USA and Luxembourg.

Whereas, ADRs are denominated in US dollars, issued and traded on USA USA stock
exchange only.

Procedural Requirements for a GDR/ADR:

Legal and accounting due diligence on Issuer in lines of the GAAP accounting principles
accepted in the US

Authorization by the shareholders

Application for listing the additional shares on the Indian Stock Exchange

Filing

Facilitate and arrange Legal and Accounting Due Diligence on the Issuer

Approval of the Foreign Investment Promotion Board (‘FIPB’)

External commercial borrowing (ECBs): are loans in India made by non-resident lenders in
foreign currency to Indian borrowers. They are used widely in India to facilitate access to
foreign money by Indian corporations and PSUs (public sector undertakings). ECBs include
commercial bank loans, buyers' credit, suppliers' credit, securitized instruments such as floating
rate notes and fixed rate bonds etc., credit from official export credit agencies and commercial

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borrowings from the private sector window of multilateral financial Institutions such as
International Finance Corporation (Washington), ADB, AFIC, CDC, etc.

ECBs cannot be used for investment in stock market or speculation in real estate. The DEA
(Department of Economic Affairs), Ministry of Finance, Government of India along with
Reserve Bank of India, monitors and regulates ECB guidelines and policies. Most of these
loans are provided by foreign commercial banks and other institutions. During the 2012,
contribution of ECBs was between 20 and 35 percent of the total capital flows into India. Large
number of Indian corporate and PSUs have used the ECBs as sources of investment.

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